CAVCO INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 30, 2019APRIL 2, 2022
TABLE OF CONTENTS
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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. Headquartered in Phoenix, Arizona, the Company designswe design and producesproduce factory-built homes primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. The Company isWe are one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments,shipments. Our products are marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood and Lexington. The Company isMidCountry. We are also a leading producer of park model RVs, vacation cabins and systems-builtfactory-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand. Cavco'sstructures. Our finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Our insurance subsidiary, Standard Casualty Co.Company ("Standard Casualty"), provides property and casualty insurance primarily to owners of manufactured homes. The terms "Cavco," "us," "we," "our," the "Company," and any other similar terms refer to Cavco Industries, Inc. and its consolidated subsidiaries, unless otherwise indicated in this Annual Report on Form 10-K ("Annual Report").
On September 24, 2021, we purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore"), including its six manufacturing facilities and two wholly-owned retail locations. The addition of Commodore expanded our geographic reach into the Northeast U.S. and enhanced our presence in the Midwest and Mid-Atlantic markets. It also expanded our reach to modular home customers, as their home production is generally split between manufactured and modular housing. Implementation of best practices of the Company and Commodore are expected to create efficiency improvements across our operations. In addition to our proven existing processes we can bring to the Commodore operations, we believe Commodore has developed and implemented advanced manufacturing technologies that will lead to improvements to Cavco's operations. Commodore also participates in commercial lending operations with its dealers, and we have continued most of these programs after acquisition. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition.
CountryPlace originates and services single-family, conforming and non-confirming residential mortgages and home-only loans, and services, for itself and others, conforming land-home mortgages, non-conforming mortgages and home-only loans.others. CountryPlace is authorized by the U.S. Department of Housing and Urban Development ("HUD") to directly endorse Federal Housing Administration ("FHA") Title I and Title II mortgage insurance, is an approved lender with the U.S. Department of Veteran Affairs ("VA") and the U.S. Department of Agriculture ("USDA") under its Single Family Housing Guaranteed Loan Program, is approved by the GNMA to issue GNMA-insured mortgage-backed securities and is authorized to sell mortgages to, and service mortgages for, the FNMA and the FHLMC. A conforming mortgage or loan is one that conforms to the guidelines of a Government-Sponsored Enterprise ("GSE"), such as Fannie Mae, Freddie Mac or a government agency, such as FHA; a non-conforming mortgage or loan does not conform to these guidelinesguidelines. For further information relating to consumer loans receivable (see Note 6 to the Consolidated Financial Statements).
Standard Casualty, is located in Texas, specializes in homeowner property and is primarily a specialty writer ofcasualty insurance products for the manufactured home physical damage insurance. Standard Casualtyhousing industry and holds insurance licenses in multiple states; however, a significant portion of its writings occur instates, primarily serving the Texas, Arizona, New Mexico and New Mexico.Nevada markets. In addition to writing direct policies, Standard Casualty assumes and cedes reinsurance in the ordinary course of business (see Note 14 to the Consolidated Financial Statements).
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See Note 23 to the Consolidated Financial Statements for financial information regarding the Company's business segments, factory-built housing and financial services, which are also discussed below.
Business Strategies
Our operations are generally managed on a decentralized basis with oversight from the home office. This decentralization enables our operators the flexibility to adapt to local market demand, be more customer focused and have the autonomy to make swift decisions, while still being held accountable for operational and financial performance.
Our marketing efforts are focused on providing manufactured homes that are customizable and appeal to a wide range of home buyers, on a regional basis, in the markets we serve. OurThe primary focus demographics for our products are entry-level and move-up buyers and persons age 55 and older. The CompanyWe also marketsmarket to special niches such as subdivision developers and second home or vacation home buyers.
We focus on developing and maintaining the resources necessary to meet our customer’scustomer's desire for varied and unique specifications in an efficient factory production environment. This enables us to attract distributors and consumers who desire the flexibility the custom home building process provides but who also seek the value and affordability created by building a home on a factory production line.
Products
A majority of our products are constructed in accordance with the National Manufactured Home Construction and Safety Standards promulgated by HUD ("HUD code"). The CompanyWe also buildsbuild park model RVs, 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. Park model RVs are less than 400 square feet in size, primarily used as vacation dwellings and seasonal living, and placed in planned communities, recreational home parks and resorts. We also produce a wide variety of modular homes, which include single and multi-modulemulti-section ranch, split-level and Cape Cod style homes, as well as twotwo- and three storythree-story homes, multi-family units and commercial modular structures, including apartment buildings, condominiums, hotels, workforce housing, schools and housing for U.S. military troops (e.g., barracks). Commercial buildings are constructed in the same facilities in which the residential homes are built using similar assembly line processes and techniques. These commercial projects are generally engineered to the purchaser's specifications. The buildings are transported to the customer's site in the same manner as residential homes and are often set by crane and finished at the site.
Each home typically contains a living room, dining area, kitchen, one to five bedrooms and one or more bathrooms, is equipped with central heat and hot water systems, kitchen appliances, floor coverings and window treatments. Upgrades can include fireplaces, central air conditioning, tile roofs, high ceilings, skylights, hardwood floors, custom cabinetry, granite countertops and eco-friendly elements. The CompanyWe also offersoffer a variety of structural, decorative and decorativeenergy efficient customizations to meet the home buyer's specifications.
With manufacturing facilities strategically positioned across the nation, we utilize local market research to design homes to meet the demands of our customers. The Company hasWe have the ability to react and modify floor plans and designs to consumers' specific needs. By offering a full range of homes from entry-level models to large custom homes and with the ability to engineer designs in-house, we can accommodate a wide spectrum of customer requests.
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We regularly introducesintroduce new floor plans and options to appeal to changing trends in different regions of the country. Cavco hasWe have developed engineering systems which,that, through the use of computer-aided technology, permit customization of homes and assist with product development and enhancement. We work with a variety of partners to meet the expanding range of housing needs, including a home buyer's private land, planned neighborhoods, recreational or resort properties and workforce accommodations for agriculture and industry.
Once the manufactureda factory-built home is built at our factories,facilities, it is then generally transported by independent trucking companies either to a retail sales center, planned community, housing development, work site or the home buyer's site. Distributors, or other independent installers utilized by us for homes sold through our Company-owned retail stores, 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 manufactured homes are designed to be transportable, cost considerations causeresult in very few to bebeing moved from their original site after installation.
Factory-built Housing Segment
Manufacturing Operations. Our manufacturing facilities employ from 113between approximately 100 to 397350 employees each. Most of our homes are constructed in one or more floor sections or modules on a permanently affixed steel or wood support chassis. Each section 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 enables us to produce quality homes in less time and at a lower cost per square foot than building homes on individual sites.
Manufactured housing is a regional business and the primary geographic market for a typical manufacturing facility is within a cost effective shipping radius of 350 miles. Each of our manufacturing facilities serves multiple distributors and a number of one-time purchasers. Because homes are produced to fill existing wholesale orders, our factories generally do not carry finished goods inventories, except for homes awaiting delivery. Materials used in our homebuilding operations are mainly standard items carried by major suppliers and consist of wood, wood products, steel, gypsum wallboard, windows, doors, fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, aluminum, appliances and electrical items. Fluctuations in the cost of materials and labor may affect gross margins from home sales to the extent that costs cannot be efficiently matched to the home sales price. We continue to monitor and react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such product pricing increases may lag behind the escalation of such costs.
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From time to time and to varying degrees, the Companywe may experience shortages in the availability of materials and/or labor in the markets served. Availability of these inputs has not caused significant production halts in the current period, but we have experienced periodic shutdowns in other periods and shortages of primary building materials have caused production inefficiencies as we have needed to change processes in response to the delay in materials. These shortages may also result in extended order backlogs, delays in the delivery of homes and reduced gross margins from home sales.
It is difficult to manage itspredict the future of housing demand, employee availability, our supply chain or the Company's performance and operations. We continue to focus on developing production growth opportunities by working to improve our production capabilities and processes and adjusting product offerings. We strive to balance the production levels capacity and workforce size based uponwith the demand for our product offerings to maximize efficiencies. Maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand, and we face a major challenge in overcoming hiring difficulties in the current market demand.environment. However, we are continually reviewing wage rates of our production employees and have established other monetary incentive and benefit programs to ensure competitive compensation. We are also working to more extensively use online recruiting tools, update our recruitment brochures, enhance our training programs and improve the constrained labor market is a key challengeappearance and appeal of our manufacturing facilities to this process. In addition,improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. Although we continue to experience hiring challenges and other inefficiencies from building material supply disruptions, we have implemented higher product pricingreduced our total open production positions needed by nearly 25% over the past year, bringing our total average plant capacity utilization rate to offset rising input costs, including laborexceeding 80% during the fourth fiscal quarter of 2022, which is above pre-pandemic levels.
Distribution. We sold 16,697, 14,214 and material price increases, although large backlogs may cause deferred realization of the full benefits of these surcharges.
As of March 30, 2019,April 2, 2022, there were a total of 3845 Company-owned retail centers,stores, located in Oregon, Arizona, Nevada, New Mexico, Texas, Indiana, Oklahoma, Florida and Florida. ThirtyNew York. Thirty-one of the Company-owned retail stores are located in Texas. Our Company-owned sales centersretail stores are generally located on main roads or highways with high visibility, each having 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 most often custom order a home to be built at one of our manufacturing facilities, or they may purchase a home from the inventory of homes maintained at the retail location,locations, including a model home. Model homes may be displayed in a residential setting with sidewalks and landscaping. Each sales center usually employs a manager and one to five salespersons, who are compensated through a combination of salary and commission. The CompanyWe internally financesfinance home inventories at Company-owned retail centers.stores.
As of March 30, 2019, the CompanyApril 2, 2022, we had a network of independent distribution points,distributors, of which 13%9% were in Arizona, 10%8% in Texas, 9%7% each in California, 7% in Florida and 7%North Carolina and 6% each in Georgia and Oregon, based on the quantity of wholesale shipments during fiscal 2019.year 2022. The remaining 54%50% were in 3941 other states and Canada. As is common in the industry, our independent distributors typically sell homes produced by other manufacturers in addition to those produced by the Company.we produce. Some independent distributors operate multiple sales outlets. No independent distributor accounted for 10% or more of our factory-built housing revenue during any fiscal year within the three-year period ended March 30, 2019.April 2, 2022.
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We continually seeksseek to increase wholesale shipments by growing sales at existing independent distributors and by identifying new independent distributors to sell our homes. The Company providesWe provide comprehensive sales and product training, either physically or virtually, to independent retail sales associates, including providing opportunities to visit our manufacturing facilities to discuss and 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 at trade shows and support our distributors through the distribution of floor plan literature, brochures, decor selection displays, point of sale promotional material and internet-based marketing assistance.
Independent distributors frequently finance a portion of their home purchases through wholesale floor plan financing arrangements. In most cases, the Company receiveswe receive a deposit or a commitment from the distributor's lender for each home ordered. The CompanyWe then manufacturesmanufacture the home and shipsship it at the distributor's expense. Payment is due from the lender upon shipment of the product. For a description of wholesale floor plan financing arrangements used by independent distributors and our obligations in connection with these arrangements, see "Financing —Commercial"Company Provided Financing — Commercial Financing" below.
Warranties. Cavco provides We provide the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. Nonstructural components of a cosmetic nature are generally warranted for 120 days from the date of delivery, except in specific cases where state laws require longer warranty terms. OurThe warranty does not extend to installation and setup of the home, as the distributor is generally responsible for these activities. Appliances, floor coverings, roofing and certain other components are warranted by their original manufacturer for various lengths of time.
Financial Services Segment
Finance. The Company providesWe provide a source of retail home buyer financing on competitive terms through our subsidiary, CountryPlace. CountryPlace offersWe offer conforming mortgages,and non-conforming mortgages and home-only loans to purchasers of numerous brands of factory-built homes sold by Company-owned retail sales centersstores and certain independent distributors, builders, communities and developers. CountryPlace isWe are authorized to directly endorse FHA Title I and Title II mortgage insurance, isare an approved lender with the VA and the USDA under its Single Family Housing Guaranteed Loan Program, isare approved to issue GNMA-insured mortgage-backed securities and isare authorized to sell mortgages to, and service mortgages for, Fannie Mae and Freddie Mac. Most loans originated through CountryPlaceby us are sold to investors. CountryPlace also providesinvestors, and we provide various loan servicing functions for non-affiliated entities under contract.
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Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced for Ginnie Mae and Freddie Mac, and home-only loans serviced for certain other investors, we must remit scheduled monthly principal and/or interest payments and principal curtailments regardless of whether monthly mortgage payments are collected from borrowers. Ginnie Mae permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments. Through fiscal year 2022, monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors; however, mandatory extended forbearance under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and certain other regulations related to COVID-19 could negatively impact cash obligations in the future.
We believe that providing financing alternatives improves our responsiveness to the financing needs of prospective home buyers and provides the Company withpresents opportunities for additional sources of loan origination and servicing revenues. CountryPlace hasWe have expanded itsour home-only lending programs in recent years, partially with the support of independent third partythird-party financiers. Home-only loans and non-conforming mortgages originated are either sold outright, grouped and sold as a pool of loans, or held for investment.
Insurance. Standard Casualty, located in Texas, specializes in homeowner property and casualty insurance products for the manufactured housing industry. Standard Casualty is located in Texasindustry and holds insurance licenses in multiple states, primarily serving the Texas, Arizona, and New Mexico and Nevada markets. In addition to writing direct policies, Standard Casualty assumeswe assume and cedescede reinsurance in the ordinary course of business. In Texas, policies are written through one affiliated managing general agent, whichwhich produces allall premiums, and through local agents, most of which are manufactured home distributors. All business outside the state of Texas is written on a direct basis through local agents.
Company Provided Financing
Consumer Financing. Sales of factory-built homes are significantly affected by the availability and cost of consumer financing. There are three basic types of consumer financing in the factory-built housing industry: conforming mortgage loans which comply with the requirements of FHA, VA, USDA or GSEs; non-conforming mortgages for purchasers of the home and the land on which the home is placed; and personal property loans (often referred to as home-only or chattel loans) for consumers where the home is the sole collateral for the loan (generally HUD code homes).
Limited secondary market availability for non-conforming mortgages and home-only personal property loans secured by manufactured homes continue to constrain industry growth. We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loans and non-conforming mortgage portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities. We also develop and invest in home-only lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders.
We also work independently and with industry trade associations to encourage favorable legislative and GSE action to address the financing needs of buyers of affordable homes. Federal law requires GSEs to implement the "Duty to Serve" requirements specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. In April 2022, Fannie Mae and Freddie Mac released their Underserved Markets Plans for 2022-2024 that describe, with specificity, the actions they would take over the three-year period to fulfill the "Duty to Serve" obligation. As with prior plans, the 2022-2024 plans offer enhanced mortgage loan products for manufactured homes titled as real property, including Fannie Mae's "MH Advantage" and Freddie Mac's "ChoiceHome" programs that began in the latter part of calendar year 2018. Although some progress has been made with these programs, meaningful positive impact in the form of increased home orders has yet to be realized. The plans do not include purchases of home-only loans during the three-year timeframe. Expansion of the secondary market for home-only loans through GSEs could support further demand for housing as lending options would likely become more available to home buyers.
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Commercial Financing. Certain of our wholesale factory-built housing sales to independent distributors are 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 distributor 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 Cavco, as the manufacturer of the home, to enter into a separate repurchase agreement with the financial institution that, upon default by the distributor and under certain other circumstances, obligates the Companyus to repurchase the financed home at declining prices over the term of the repurchase agreement (which, in most cases, is 18 to 3624 months). The price at which the Companywe may be obligated to repurchase a home under these agreements is based upon the amount financed, 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 $77.1$141.0 million and $74.2 million as of March 30, 2019.April 2, 2022 and April 3, 2021, respectively. The increase is the result of higher home sales price, increased units under these programs and the addition of Commodore. The risk of loss under these agreements is spread over many distributors and is further reduced by the resale value of the homes.homes that we obtain upon the execution of a repurchase.
Industry Overview
General. Manufactured housing provides an alternative 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 20182021 calendar year, manufactured housing wholesale shipments of homes constructed in accordance with the HUD code accounted for an estimated 13.5%12.2% of all new single-family homes sold.
According to data reported by the Manufactured Housing Institute, ("MHI"), industry home shipments continue to improve, increasing to approximately 97,000 HUDapproximately 106,000 HUD code manufactured homes were shipped during calendar year 2018,2021, compared to the 93,00094,000 shipped during calendar 2017year 2020 and 81,00095,000 shipments in 2016. Annual2019. Prior to 2019, annual shipments havehad increased each year since calendar year 2009 when 50,000 HUD code manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD code manufactured homes have improved in recent years, the industry continues to operate at relatively low levels compared to historical shipment statistics.
Home Buyer Demographics. The Company believes We believe the segmentsector of the housing market in which manufactured housing is most competitive includes consumers from diverse backgrounds with household incomes under $40,000 with diverse careers and increased levels of education.$40,000. This segment has a high representation of persons age 55 and older, as well as young single persons and young married couples, as well as persons age 55 and older.couples. The low cost of a fully-equipped manufactured home compared to a site builtsite-built alternative is attractive to these consumers. Persons in rural areas and those who presently live in manufactured homes also make up a significant portion of the demand for new manufactured housing. Innovative engineering and design, as well as efficient production techniques, continue to position manufactured homes to meet the demand for affordable housing in rural markets and manufactured housing communities. The markets for affordable factory-built housing are very competitive, as well as cyclical and seasonal. The industry is sensitive to employment levels, consumer confidence, the availability of financing and general economic conditions.
"First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that wereare particularly affected by a periodperiods of persistently low employment rates and underemployment. However, the Company believes that employment rates among these groups are strong. Additionally, improving consumerConsumer confidence is evidentespecially important among manufactured home buyers interested in our products for seasonal or retirement living that may have been previously concerned about financial stability, and now appear to be less hesitant to commit to a new home purchase. The Company believes robust salesliving.
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The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. TheAccording to World Bank, the U.S. adult population is estimated to expand by approximately 12.09.1 million between 20192022 and 2024.2027. Young adults born from 1976 to 1995, often referred to as Gen Y or Millennials, represent a large segment of the population. Late-stage Gen Y is approximately 2.9 million people larger than the next age category born from 1966 to 1975, Gen X, and is considered to be in the peak home-buying years. Gen Y represents primepopulation who are generally first-time home buyers who may be attracted by the affordability, product diversity and location flexibility of factory-built homes. The age 55 and older category is reported to be the fastest growing segment of the U.S. population. This group is similarly interested in the value proposition; however, they are also motivated by the energy efficiency and low maintenance requirements of systems-builtfactory-built homes and by the lifestyle offered by planned communities that are specifically designed for homeowners that fall into this age group.
Competition
The manufactured housing industry is highly competitive at both the wholesale and retail levels, with competition based on several factors including price, product features, reputation for service and quality, depth of distribution, promotion,promotion, merchandising and the terms of retail customer financing. We compete with approximately 34more than 30 other producers of manufactured homes. In addition, manufactured homes, competeas well as with new and existing apartments, townhouses and condominiums as well asand site-built homes.
There are a number of other national manufacturers competing for a significant share of the manufactured housing market in the United States, including Clayton Homes, Inc. and Skyline Champion Corporation, and theywhich may possess greater financial, manufacturing, distribution and marketing resources.resources than us.
The market for homeownershomeowners' insurance is highly competitive. Standard Casualty competes principally in property and casualty insurance for owners of manufactured homes with companies such as National Lloyds and American Modern Insurance. The CompanyInsurance, which may be larger and offer broader types of insurance allowing them to be more aggressive in their underwriting standards. Standard Casualty remains competitive in price, breadth of product offerings, product features, customer service, claim handling and use of technology.
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, oralso referred to as the Home Construction Act. In 1976, HUD issued regulations under the Home Construction Act establishing comprehensive national construction standards. In 1994, the codes were amended and expanded to, among other things, address specific requirements for homes destined for geographic areas subject to severe weather conditions. 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 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 RVs are not subject to HUD regulations, but we believe that our park model RVs meet all presentare in substantial compliance with the standards of the American National Standards Institute.
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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 affectimpact 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 distributor or other person installing the home.
Certain warranties the Company issueswe issue, including our principal homeowners' warranties, may be subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act ("Magnuson-Moss(the "Magnuson-Moss Warranty Act"), which regulates the descriptions of warranties on consumer products. In the case of warranties subject to the Magnuson-Moss Warranty Act, the Company iswe are subject to a number of additional regulatory requirements. For example, warranties that are subject to the Magnuson-Moss Warranty Act must be included in a single easy-to-read document that is generally made available prior to purchase. The Magnuson-Moss Warranty 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 Magnuson-Moss Warranty 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 require manufactured home producers and distributors to post bonds to ensure the satisfaction of consumer warranty claims.
A variety of laws affect the financing of the homes manufactured by the Company.we manufacture. The Federal Consumer Credit Protection Act ("Truth-in-Lending(the "Truth-in-Lending Act" or "TILA") and Regulation Z promulgated thereunder require written disclosure of information relating to such financing, including the amount of the annual percentage interest rate and theany finance charge.charges. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act ("RESPA") and Regulation X promulgated thereunder require certain disclosures regarding the nature and costs of real estate settlements. The Consumer Financial Protection Bureau ("CFPB") has adopted or proposed various Trade Regulation Rules dealing with unfair credit and collection practices and the preservation of consumers' claims and defenses. Direct loans and mortgage loans eligible for inclusion in a Ginnie Mae security are subject to the credit underwriting requirements of the FHA.FHA, USDA or VA. A variety of state laws also regulate the form of financing documents and the allowable deposits, finance charge and fees chargeable pursuant to financing documents. The Fair Debt Collection Practices Act, implemented by Regulation F, applies to certain loans and contracts that we service for certain investors and prohibits debt collectors from engaging in harassment or abuse, making false or misleading representations, or engaging in unfair practices in debt collection.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank(the "Dodd-Frank Act") was passed into law. The Dodd-Frank Act was a sweeping piece of legislation designed to reform credit and lending practices after the global credit crisis of 2008. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act ("Dodd-Frank(the "Dodd-Frank Reform Act") was signed into law. The Dodd-Frank Reform Act revises portions of the Dodd-Frank Act, reduces the regulatory burden on smaller financial institutions, including eliminating certain provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE(the "SAFE Act"), and protects consumer access to credit.. With the elimination of certain provisions of the SAFE Act, manufactured housing distributors can now assist home buyers with securing financing for the purchase of homes; however, they may not assist in negotiating the financing terms. This has enabled buyers to more easily findfacilitated access to financing and makemakes the overall home buying experience smoother.smoother for the consumer.
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Certain CFPB mortgage finance rules required under the Dodd-Frank Act, and modified by the Dodd-Frank Reform Act, apply to consumer credit transactions secured by a dwelling, which include real property mortgages and home-only loans secured by manufactured homes. These rules defined standards for origination of "Qualified Mortgages,"a Qualified Mortgage ("QM"), established specific requirements for lenders to prove borrowers' ability to repay loans and outlined the conditions under which Qualified MortgagesQMs are subject to safe harbor limitations on liability to borrowers. The rules also establish interest rates and other cost parameters for determining which Qualified MortgagesQMs fall under safe harbor protection. Among other issues, Qualified MortgagesQMs with interest rates and other costs outside the limits are deemed "rebuttable" by borrowers and expose the lender and its assignees (including investors in loans, pools of loans and instruments secured by loans or loan pools) to possible litigation and penalties.
The CFPB issued a final rule, effective June 30, 2021, with mandatory compliance as of October 1, 2022, which expands the definition of a General QM and gives lenders more leeway to determine a borrower's likelihood of repayment. Under the original QM rule, the ratio of the consumer's total monthly debt to total monthly income could not exceed 43% for a loan to be considered a QM. In December 2020, the Bureau issued a QM Final Rule which amended Regulation Z by replacing the original debt ratio-based QM definition with a limit based on loan pricing, among other changes to the definition.
The original QM rule also defined a temporary category of QMs, commonly known as the GSE Patch, which includes mortgages that are eligible to be purchased or guaranteed by either of the GSEs while operating under the federal conservatorship. Under the original QM rule, the GSE Patch was set to expire on July 1, 2021. However, the CFPB extended the mandatory compliance date of the new General QM rule beyond July 1, 2021. Nonetheless, some lenders originating loans for sale to the GSEs elected to no longer originate general QM loans with debt-to-income ratios in excess of 43% or GSE Patch QM loans for borrower applications received on or after July 1, 2021.
While many manufactured homes are currently financed with agency-conforming mortgages in which the ability to repay is verified, and interest rates and other costs are within the safe harbor limits established under the CFPB mortgage finance rules, certain loans to finance the purchase of manufactured homes, especially home-only loans and non-conforming land-home loans,mortgages, may fall outside the safe harbor limits. The rules have caused some lenders to curtail underwriting such loans, and some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. As a result, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, compliance with the law and ongoing rule implementation has caused lenders to incur additional costs to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. Failure to comply with these regulations, changes in these or other regulations, or the imposition of additional regulations, could affect our earnings, limit our access to capital and have a material adverse effect on our business and results of operations.
The CFPB rules amending the TILA and RESPA expanded the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 ("HOEPA"), revised and expanded the tests for coverage under HOEPA, and imposed additional restrictions on mortgages that are covered by HOEPA. As a result, certain manufactured home loans are subject to HOEPA limits on interest rates and fees. Loans with rates or fees in excess of the limits are deemed High"High Cost MortgagesMortgages" and provide additional protections for borrowers, including with respect to determining the value of the home. MostBased on our experience, we believe that most loans for the purchase of manufactured homes have been written at rates and fees that would not appear to be considered High Cost Mortgages under the new rule. Although some lenders may continue to offer loans that are now deemed High Cost Mortgages, the rate and fee limits appear to have deterred some lenders from offering loans to certain borrowers and may continue to make them reluctant to enter into loans subject to the provisions of HOEPA. As a result, some prospective buyers of manufactured homes may be unable to secure financing necessary to complete manufactured home purchases.
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The Dodd-Frank Act amended provisions of TILA to require rules for appraisals on principal residences securing higher-priced mortgage loans ("HPML"). Certain loans secured by manufactured homes, primarily home-only loans, could be considered HPMLs. Among other things, the rules require creditors to provide copies of appraisal reports to borrowers prior to loan closing. To implement these amendments, the CFPB adopted the HPML Appraisal Rule, effective December 30, 2014, andclosing, although loans secured solely by newa manufactured homes werehome and not land are exempt from the rule until July 18, 2015.HPML appraisal requirement so long as the lender provides the home buyer with alternative information about the home value in one of three allowable forms. While it's not possible to determine the magnitude of these changes, are still being determined, some prospective home buyers may be deterred from completing a manufactured home purchase as a result of the disclosure of the appraised values.value.
The Dodd-Frank Act also required integrating disclosures provided by lenders to borrowers under TILA and RESPA. The final rule became effective October 3, 2015. The TILA-RESPA Integrated Disclosure ("TRID") mandated extensive changes to the mortgage loan closing process and necessitated significant changes to mortgage origination systems.
Regulation C of the Home Mortgage Disclosure Act ("HMDA") enacted in 1975 requires certain financial institutions, including non-depository institutions, to collect, record, report and disclose information about their mortgage lending activity. The data-related requirements in the HMDA and Regulation C are used to identify potential discriminatory lending patterns and enforce anti-discrimination statutes. The Dodd-Frank Act transferred rulemaking authority for HMDA to the CFPB, effective in 2011. It also amended the HMDA to require financial institutions to report additional data points and to collect, record and report additional information. The CFPB issued a final rule amending Regulation C, which became effective on January 1, 2018. Regulation C generally applies to consumer-purpose, closed-end loans and open-end lines of credit that are secured by a dwelling. Non-depository financial institutions are subject to Regulation C if they originate at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years. Violations of Regulation C, including incomplete, inaccurate or omitted data, are subject to administrative sanctions, including civil money penalties, and compliance can be enforced by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, HUD or the CFPB.
On March 27, 2020, the CARES Act was signed into law. While the CARES Act contains a variety of provisions, including, among other things, unemployment benefit expansion and emergency funding of public health care initiatives, it also grants forbearance rights and foreclosure protection to borrowers with loans purchased by a GSE or insured by FHA, USDA or VA. Borrowers with these federally backed mortgage loans who are experiencing hardship due to the COVID-19 pandemic may request forbearance for 6 months, regardless of delinquency status. Forbearance may be extended for an additional 6 months at the borrower's request, and they may request up to two additional three-month extensions, for a maximum of 18 months of total forbearance. The Housing and Economic Recoveryfederal foreclosure moratorium expired on July 31, 2021; however mortgage servicers were precluded from proceeding with foreclosure until January 1, 2022. Effective August 31, 2021, the CFPB published rules to help homeowners pursue loss mitigation options with mortgage servicers to avoid foreclosure. These rules allowed mortgage servicers to offer certain streamlined loss mitigation options. The FHA allowed for an extension of the foreclosure-related eviction moratorium for foreclosed borrowers through September 30, 2021. When the eviction moratorium for federally backed loans ended, mortgage servicers could only proceed with foreclosures if borrowers had abandoned their properties or had not responded to mortgage servicers' efforts to assist with loss mitigation options. On February 18, 2022, President Biden extended the national emergency declaration for the COVID-19 pandemic beyond March 1, 2022.
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The Treasury Department issued guidance regarding the Homeowner Assistance Fund ("HAF"), which was established under section 3206 of the American Rescue Plan Act of 2008 requires2021. The HAF was established to mitigate financial hardships associated with the COVID-19 pandemic by providing funds to eligible state agencies for the purpose of preventing homeowner mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services and displacements of homeowners experiencing financial hardship after January 21, 2020, through qualified expenditures related to mortgages and housing. Eligible state agencies participating in HAF are responsible for the selection and qualification of borrowers to receive HAF funds.
Numerous state and local governments also issued temporary emergency orders recommending or mandating that mortgage servicers accommodate borrowers experiencing hardship due to the COVID-19 pandemic. These emergency orders include a variety of provisions, including payment forbearance, waiver of late fees on past due payments, restrictions on reporting payment status to credit reporting agencies and moratorium on debt collection activities, foreclosures and evictions. We have implemented practices and adjusted policies to comply accordingly.
The GSEs require that seller/servicers such as CountryPlace maintain minimum levels of capital and liquidity to facilitate a secondary market for mortgagesbe eligible to service single-family mortgage loans guaranteed or owned by the GSEs. The current eligibility requirements became effective on housing for very low, low and moderate-income families in under-served markets, including manufactured housing.December 31, 2015. On January 30, 2017, the31, 2020, Federal Housing Finance Agency ("FHFA") initially released its "Servicer Eligibility 2.0" proposed enhancements to the requirements for public input, and on February 24, 2022, FHFA issued a revised proposal for public input. The proposed requirements establish a minimum level of tangible net worth that distinguishes between Ginnie Mae and Fannie Mae and Freddie Mac loan servicing, and include a fixed base capital requirement as well as an incremental charge that reflects the volume and risk of a seller/servicer's servicing portfolio. The final eligibility requirements are expected to be in effect as of December 31, 2022. Although the proposed eligibility requirements are not yet final and may change prior to their effective date, CountryPlace has evaluated the proposal and believes that its capital and liquidity are such that it will continue to satisfy the requirements as currently proposed once in effect.
On April 19, 2021, the CFPB issued an interim final rule, specifyingeffective November 30, 2021, amending Regulation F to require debt collectors to provide written notice to certain consumers of their protections under the scopeCenter for Disease Control and Prevention's eviction moratorium order of GSE activities thatMarch 29, 2021. The interim final rule also prohibits certain communications methods and content and places limits on debt collectors' attempts to communicate with consumers who are eligibleobligated to receive credit for compliance withrepay debt, attorneys representing them or related parties.
Standard Casualty's insurance operations are regulated by the "Duty to Serve" rule after January 2018. On December 18, 2017, both GSEs published their final Underserved Markets Plans for activities for the years beginning January 1, 2018, and continuing through 2020. Both GSE plans include initiatives to facilitate increased purchases of real property mortgages with manufactured homes under their existing single-family programs that began in the latter part of calendar 2018 and small-scale pilot programs for home-only loans secured by manufactured housing towards the end of calendar year 2019.
state insurance departments where it underwrites its policies. Our sale of insurance products isproduct sales are subject to various state insurance laws and regulations, which govern allowable charges and other insurance practices. Standard Casualty's insurance operations are regulated by the state insurance boards where it underwrites its policies. Underwriting, premiums, investments and capital reserves (including dividend payments to stockholders) are subject to the rules and regulations of these state agencies.
Governmental authorities have the power to enforce compliance with applicable regulations and violations may result in the payment of fines, the entry of injunctions or both. Although we believe that our operations are in substantial compliance with the requirements of all applicable laws and regulations, these requirements have generally become more stringent in recent years. Accordingly, we are unable to predict the ultimate cost of compliance with all applicable laws and enforcement policies.
Seasonality
The housing industry is generally subject to seasonal fluctuations based on new home buyer purchasing patterns. Demand for our core new home products typically peaks each spring and summer before declining in the winter, consistent with the overall housing industry, although this pattern was partially interruptedbecame distorted during the winter of fiscal years 2018 and 2017, when the Company produced a limited number of disaster-relief homes for the Federal Emergency Management Agency ("FEMA").COVID-19 pandemic. Diversification among the Company’sour product lines and operations have served tohas partially offset the extentimpact of any seasonal fluctuations. Additionally, demand patterns for park model RVs, cabins and homes used primarily for retirement or seasonal living partially offset general housing seasonality.
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CountryPlace realizes no seasonal impacts from its mortgage servicing operations. However, the mortgage subsidiary does experience minimal seasonal fluctuation in its mortgage origination activities as a resultbecause of the time needed for loan application approval processes and subsequent home loan closing activities. Revenue for the insurance subsidiaryStandard Casualty is also not substantially impacted by seasonality, as it recognizes revenue from policy sales ratably over each policy's term year. However, the insurance subsidiary iswe are subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity in Texas where most of itsour policies are underwritten. Where applicable, lossesLosses from catastrophic events are somewhat limited by reinsurance contracts in place as part of the Company'sour loss mitigation structure.
Our workforce is made up of this event caused high homeowners' insurance claim volume inland and in non-flood plain areas. The insurance subsidiary's catastrophic reinsurance contracts served to limit financial exposure to a pre-established retention amount of $1.5 million; however, these contracts also carried the requirement for the Company to pay additional premiums in order to reinstate reinsurance coverage for the remainder of calendar year 2017, further adding to costs incurred as a result of the hurricane.
As part of our relationshipcommitment to focus on safety, our Safety Now program builds safety awareness and provides training and incentives to create a "safety first" culture throughout our manufacturing operations. In addition to improved safety training, especially for our newest associates, elements of this program include encouraging employee suggestions for a safer workplace, enhanced safety signage and reward programs for teams with the lowest safety incident rates and those with the most improved safety records.
We also have a number of internal programs and campaigns to enhance the culture and capability of our workforce. Driven by our aspiration to make a difference by focusing on excellence, we are executing our SPARK initiative, which is designed to improve the onboarding experience of our team members and drive retention. Our IGNITION program provides leadership training to new managers and other employees is good.in supervisory roles to enhance communication and other critical management skills to improve the oversight and motivation of other employees. This training includes increasing technical skills, improving professional skills, expanding technology experience and educating on safety and security protocols, to name a few.
We have a multi-channel bi-lingual compliance training initiative so that our team members will understand our commitment to, and their responsibility for, maintaining high standards of integrity in the workplace. The program has been rolled out through our learning management system, with each new and existing team member being provided the same training.
We intend to be an employer of choice. To that end, we consistently assess the current landscape and labor market to refine our total rewards programs. We also monitor our progress in raising the incomes of our lowest wage earners so they can achieve success for themselves and their families. In addition, we have started a program called Homes for Our Own. This program generally involves education and financial assistance for employees aspiring to own their own home. We strive to help employees understand the home buying process, from getting financially ready to buy and maintain a home to how the actual process works.
More information on the above programs and more can be found in our Corporate Responsibility Report, published on our website.
Available Information
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ITEM 1A. RISK FACTORS
Business and Operational Risks
The impact of local or national emergencies, including the COVID-19 pandemic, can adversely affect our financial results, condition and prospects, including such impacts from state and federal regulatory action that restricts our ability to operate our business in the ordinary course and impacts on (i) customer demand and the availability of financing for our products, (ii) our supply chain and the availability of raw materials for the manufacture of our products, (iii) the availability of labor and the health and safety of our workforce and (iv) our liquidity and access to the capital markets
Severe weather conditions, natural disasters, hostilities and social unrest, terrorist activities, health epidemics or pandemics or other local or national emergencies (both ones quickly resolved and ones that endure over long periods of time) can adversely affect consumer spending and confidence levels and supply availability and costs, as well as local operations in impacted markets, all of which can affect our financial results, condition and prospects. Our sales of affordable homes are largely dependent on the ability of consumers to obtain financing for the purchase of a home. Consumer financing is dependent on a number of economic factors, including the employment status of borrowers, which may be adversely affected by local or national emergencies. Consumer confidence is also an important factor to support home purchases and is subject to the adverse effects of an emergency situation. Our products are produced in a manner that is considered labor-intensive and requires a consistent and available workforce, which may be adversely affected by a large-scale decline in public health conditions or other emergencies.
As it relates to the COVID-19 pandemic, our normal operations were constrained by actions we took to maintain a safe working environment for our employees, including compliance with mandated social distancing and other governmental requirements. Factory capacity utilization levels fell accordingly as the result of increased employee absenteeism and the pandemic impacts to our supply chain. Our primary suppliers are domestic, while also depending on materials originating from overseas. The ability of suppliers to fulfill orders on our behalf under pre-existing terms is dependent upon their particular circumstances, including those related to the COVID-19 pandemic. The magnitude of the COVID-19 pandemic, including the extent of any continuing impact on our business, financial position, results of operations or liquidity, which could be material, cannot be reasonably estimated at this time because of the continuing fluidity of the situation. It will depend on the duration and evolution of the pandemic, potential business disruptions and the overall impact on the national economy and consumer behavior.
National emergencies like the COVID-19 pandemic may also have the effect of heightening many of the other risks described below in this Item 1A or elsewhere in this Annual Report, such as: risks related to the successful completion of our growth and expansion goals; risks related to the ability of borrowers to make payments on their mortgages or loans and our ability to exercise remedies in such cases, including as a result of government restrictions on the exercise of such remedies; risks related to economic downturns, declining consumer confidence and other market forces and reduced demand for our products or buyers' ability to get financing for the purchase of our products; risks related to depressed home prices and elevated unemployment; risks related to the availability of labor and the pricing and availability of raw materials; risks related to our ability to remain in compliance with increasing levels of government regulation while maintaining economic and profitable operations; risks related to our ability to maintain adequate internal controls; and risks related to stock price fluctuations.
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The Company's results of operations can be adversely affected by labor shortages and the pricing and availability of transportation or 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. This includes 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 patterns or restrictions. An overall labor shortage or a lack of skilled or unskilled labor could cause significant increases in costs or delays in construction of homes, which could have a material adverse effect upon our revenue and results of operations.
As our homes are transported by independent third-party transportation companies, shortages or increased transportation costs from rising fuel prices could have an adverse impact to our operations.
Our results of operations can also be affected by the pricing and availability of raw materials. Key building materials include wood and wood products, gypsum wallboard, steel, windows, appliances, insulation and other petroleum-based products. There can be no assurance that sufficient supplies of these and other raw materials will continue to be available to us. Sudden increases in price or lack of availability of raw materials can be caused by natural disaster, regulation or other market forces, as has occurred in recent years. We have experienced production halts from shortages of primary building materials in the past, and although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases may lag behind the escalation of material costs.
Excessive health and safety incidents relating to our operations could be costly to the Company
Home construction is inherently dangerous. While safety is a top priority, any failure in health and safety performance may result in additional health and workers' compensation costs or penalties for non-compliance with relevant regulatory requirements, which may result in difficulty attracting labor or a negative impact to our reputation.
Some of the Company's manufacturing production employees are represented by unions, and failure to negotiate reasonable collective bargaining agreements may result in strikes, work stoppages or substantially higher ongoing labor costs
Certain manufacturing production employees (approximately 7% of our total employees) are represented by unions and are covered by collective bargaining agreements, which expire in April 2023 and February 2024. Wages, health and welfare benefits, work rules and other issues have historically been negotiated in a reasonable amount of time and have previously not resulted in any extended work stoppages. However, if we are unable to negotiate acceptable new agreements, it could result in worker strikes, loss of business, disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which would have an adverse effect on our business and results of operations.
Increases in the rate of cancellations of home sales orders could have an adverse effect on the Company's business
Our backlog reflects home sales orders with our distributors and home buyers for homes that have not yet been delivered. Distributors and home buyers may cancel orders prior to production without penalty. If there is a downturn in the housing market, or if financing becomes less available or more expensive to obtain with higher interest rates, more distributors and homebuyers may cancel their agreements of sale with us, which would have an adverse effect on our business and results of operations.
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The Company may not be able to successfully integrate past or future acquisitions to attain the anticipated benefits and such acquisitions may adversely impact the Company's liquidity
We have acquired industry competitors in the past and may consider additional strategic acquisitions if such opportunities arise. Prior acquisitions and any other acquisitions that we may considerbe considered in the future involve a number of risks, including the diversion of our management's attention from ourthe existing business for those transactions that we complete, or possible adverse effects on our operating results and liquidity during the integration process. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage the operations or employees of past or future acquisitions. During the integration stage of an acquisition, we also may not be able to maintain uniform standards, controls, procedures and policies, which may lead to financial losses.
If CountryPlace's customers are unable to repay their loans, CountryPlacewe may be adversely affected. CountryPlace makesWe make loans to borrowers that it believeswe believe are creditworthy based on its underwriting guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including, but not limited to: national, regional and local economic conditions; changes or weakness in specific industry segments; natural hazard risks affecting the region in which the borrower resides; and employment, financial or unexpected life circumstances.
If CountryPlace's customers do not repay their loans, CountryPlacewe may repossess or foreclose on the secured property in order to liquidate itsthe loan collateral and minimize losses. The homes and land securing the loans are subject to fluctuating market values and proceeds realized from liquidating repossessed or foreclosed property are highly susceptible to adverse movements in collateral values. Home price depreciation and elevated levels of unemployment may result in additional defaults and exacerbate actual loss severities upon collateral liquidation.
Some of the loans CountryPlace has originatedwe originate or may originate in the future may not have a liquid market, or the market may contract rapidly and the loans may become illiquid. Although CountryPlace offerswe offer loan products and prices itsprice our loans at levels that it believeswe believe are marketable at the time of credit application approval, market conditions for itssuch loans may deteriorate rapidly and significantly. CountryPlace'sOur ability to respond to changing market conditions is affected by credit approval and funding commitments it makeswe make in advance of loan completion. In this environment, it is difficult to predict the types of loan products and characteristics that may be susceptible to future market curtailments and tailor our loan offerings accordingly. As a result, no assurances can be given that the market value of our loans will not decline in the future, or that a market will continue to exist for loan products.
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Standard Casualty specializes in homeowner property and Standard Insurance Agency specialize incasualty insurance products for the manufactured housing industry, primarily serving the Texas, Arizona, and New Mexico and Nevada markets. Property and casualty insurance companies are subject to certain risk-based capital requirements usually in accordance with model rules as specified by the National Association of Insurance Commissioners. Under thosethese requirements, the amount of capital and surplus maintained by a property and casualty insurance company is determined based on its various risk factors.
Certain of Standard Casualty'sour premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualtyus with increased capacity to write larger risks. Standard Casualty remainsWe remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty'sour assumed reinsurance is with one entity. Further, Standard Casualty'sour policies in force may be subject to numerous risks, including geographic concentration, adverse selection, home deterioration, unusual weather events and regulation. Although claim amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses up to policy maximums, subject to certain conditions, significant losses may be realized and our results of operations and financial condition could be adversely affected.
Information technology failures or cyber incidents could harm ourthe Company's business
In March 2019, the Companywe suffered a cyber incident and attack to itsour computer networks. The Company immediately retained outside legal counsel along with forensic experts to assist with the investigation, restoration and remediation of the incident as well as legal compliance. The cyber incident and attack resulted in impairment of certain of the Company’s business operations for up to a two-week period of time. Although the Company believes many of the costs and expenses itwe incurred relatingrelated to this March 2019 incident arewere covered by insurance, towe could in the extent anyfuture suffer a cyber incident that could result in material costs and losses that are not covered by insurance, itwhich could have ana material adverse effect on our results of operations and financial condition.
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Failure to maintain the security of personally identifiable information could adversely affect the Company.
In connection with our business, we collect and retain personally identifiable information (e.g., information regarding our customers, suppliers and employees), and there is an expectation that we will adequately protect that information. A significant theft, loss or fraudulent use of the personally identifiable information we maintain, or of our data, by cyber-criminals or others could adversely impact our reputation and could result in significant costs, fines or litigation.
The Company's participation in certain financing programs for the purchase of its products by industry distributors and consumers may expose the Company to additional risk of credit loss, which could adversely impact its liquidity and results of operations
We are exposed to risks associated with the creditworthiness of certain independent distributors, builders, developers, community owners, inventory financing partners and home buyers, many of whom may be adversely affected by the volatile conditions in the economy and financial markets. These conditions could result in financial instability or other adverse effects, the consequences of which could include delinquencies by customers who purchase our products under special financing initiatives and the deterioration of collateral values. In addition, losses may be incurred if the collateral cannot be recovered or is liquidated at prices insufficient to recover recorded commercial loan notes receivable balances. The realization of any of these factors may adversely affect our cash flow, profitability and financial condition.
The Company's results of operations could be adversely affected by significant warranty and construction defect claims on factory-built housing
In the ordinary course of business, we are subject to home warranty and construction defect claims. We record a reserve for estimated future warranty costs relating to homes sold based upon an assessment of historical claim experience. Construction defect claims may arise significantly after product completion. Although we maintain general liability insurance and reserves for such claims, there can be no assurance that warranty and construction defect claims will remain at current levels or that such reserves will continue to be adequate. Additionally, the cost of insurance has increased significantly in recent years. If we are not able to maintain current levels of coverage, or if warranty and construction defect claims exceed current levels, our results of operations or financial condition could be adversely effected.
Products supplied to the Company or work done by subcontractors can expose the Company to risks that could adversely affect its business
We sometimes rely on subcontractors to perform certain processes such as home setup or warranty work. In some cases, subcontractors may use improper processes or defective materials, which could result in the need for us to perform repairs on homes. In addition, although we expect all of our employees, officers and directors to comply at all times with all applicable laws, rules and regulations, there may be instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable laws, regulations or governmental guidelines. When we learn of practices that do not comply with applicable laws, regulations or guidelines, we move actively to stop the non-complying practices as soon as possible. However, regardless of the steps we take after we learn of improper practices, we can in some instances be subject to fines or other governmental penalties and our reputation can be injured due to the practices having taken place.
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The Company has contingent repurchase obligations related to wholesale financing provided to industry distributors
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 distributors, which provide that we will be obligated, under certain circumstances, to repurchase homes sold to distributors in the event of a default by a distributor under floor plan financing arrangements. 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). Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount of contingent obligations under such repurchase agreements was approximately $141.0 million as of April 2, 2022, before 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. In addition, the ability to recover losses on homes repurchased could be at risk in a declining price environment.
A write-off of all or part of the Company's goodwill could adversely affect its results of operations and financial condition
As of April 2, 2022, 9% of our total assets consisted of goodwill, all of which is attributable to our factory-built housing segment. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other ("ASC 350"), goodwill is tested annually for impairment. If goodwill becomes impaired, such impairment is charged as an expense in the period in which it occurs. 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 expected to be derived from our manufacturing operations will be substantially reduced.
If the Company is unable to establish or maintain relationships with its independent distributors who sell the Company's homes, revenue could decline
During fiscal year 2022, approximately 83% of our sales of factory-built homes were to independent distributors. As is common in the industry, independent distributors may also sell homes produced by competing manufacturers. We may not be able to establish relationships with new independent distributors or maintain good relationships with independent distributors that sell our homes. Even if we do establish and maintain relationships with independent distributors, these distributors are not obligated to sell our homes exclusively and may choose to sell competitors' homes. The independent distributors with whom we have relationships can cancel these relationships on short notice. In addition, these distributors 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 distributors in one or more of our markets, revenue in those markets could decline.
The Company's business and operations are concentrated in certain geographic regions, which could be impacted by market declines
Our operations are concentrated in certain states, most notably Texas, California, Florida, Arizona and Oregon. Due to the concentrated nature of the operations, there could be instances where these regions are negatively impacted by economic, natural or population changes that could, in turn, negatively impact our results of operations more than other companies that are more geographically dispersed.
We operate 26 homebuilding production lines located in the Northwest, Southwest, South, Southeast, Midwest and Mid-Atlantic regions. We have a significant presence in Texas with factories in the cities of Austin, Ft. Worth, Seguin and Waco. Further, of the 45 Company-owned retail stores, 31 are located in Texas.
Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. We have loan contracts secured by factory-built homes located in 26 states, including Texas, Florida, New Mexico, Oklahoma and Alabama. Standard Casualty also specializes in writing contracts for the manufactured housing industry, primarily serving the Texas, Arizona, New Mexico and Nevada markets.
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The Company's income tax provision and other tax liabilities may be insufficient if taxing authorities initiate and are successful in asserting tax positions that are contrary to the Company's position.
In the normal course of business, we are audited by various federal, state and local authorities regarding income tax matters. Significant judgment is required to determine our provision for income taxes and our liabilities for federal, state, local and other taxes. Although we believe our approach to determining the appropriate tax treatment is supportable and in accordance with tax laws and regulations and relevant accounting literature, it is possible that the final tax authority will take a position that is materially different than ours. As each audit is conducted, adjustments, if any, are recorded in our consolidated financial statements in the period determined. Such differences could have a material adverse effect on our income tax provision or benefit, or other tax reserves, and, consequently, on our results of operations, financial position or cash flows.
A prolonged delay by Congress and the President to approve budgets or continuing appropriation resolutions to facilitate the operations of the federal government could delay the completion of home sales and/or cause cancellations, and thereby negatively impact the Company's deliveries and revenues
Congress and the President may not timely approve budgets or appropriation legislation to facilitate the operations of the federal government. As a result, many federal agencies have historically and may again cease or curtail some activities. The affected activities include issuance of HUD certification labels to manufacturers, Internal Revenue Service verification of loan applicants' tax return information and approvals by the FHA and other government agencies to fund or insure mortgage loans under programs that these agencies operate. As a number of our home buyers use these programs to obtain financing to purchase homes, and many lenders, including CountryPlace, require ongoing coordination with these and other governmental entities to originate home loans, a prolonged delay in the performance of their activities could prevent prospective qualified buyers from obtaining the loans they need to complete such purchases, which could lead to delays or cancellations of home sales. These and other affected governmental bodies could cause interruptions in various aspects of our business and investments. Depending on the length of disruption, such factors could have a material adverse impact on our consolidated financial statements.
Industry and Economic Risks
Tightened credit standards, curtailed lending activity by home-only lenders and increased government lending regulations continue to constrainedconstrain the consumer financing market which could continue to restrict sales of ourthe Company's homes
Consumers who buy our manufactured homes have historically secured retail financing from third-party lenders. Home-only financing is at timesusually more difficult to obtain than financing for site-built homes. 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.
Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt ourthe business. The GSEs and the FHA play significant roles in insuring or purchasing home mortgages and creating or insuring investment securities secured by home mortgages that are either sold to investors or held in their portfolios. These organizations provide significant liquidity to the secondary market. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that alter the roles of these organizations in the housing finance market, could affect the ability of our customers to obtain mortgage loans or could increase mortgage interest rates, fees and credit standards, which could reduce demand for our homes and/or the loans that the Company originateswe originate and adversely affect our results of operations.
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Some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. As a result, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, enhanced regulatory and compliance costs could force lenders to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. Failure to comply with such regulations, changes in these or other regulations, or the imposition of additional regulations, could affect our earnings, limit our access to capital and have a material adverse effect on ourthe business and results of operations.
An increase in interest rates could reduce potential buyers' ability or desire to obtain financing with which to buy homes and adversely affect the Company's business or financial results.
The Federal Reserve Board has recently raised its benchmark rate, with further increases possible. Increases in interest rates could significantly increase the cost of owning a new home, which usually reduces the number of potential buyers who can afford, or are willing, to purchase homes we build. This could adversely impact demand for our homes and the ability of potential customers to obtain financing, adversely affecting our business, financial condition and operating results.
Availability of wholesale financing for industry distributors continues to be limited to a few floor plan lenders and lending limits continuemay be reduced from time to be reducedtime which can negatively affect distributor demand
Manufactured housing distributors 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. The Company'sOur independent distributors rely primarily on 21st Mortgage Corporation and smaller national and regional lending institutions that specialize in providing wholesale floor plan financing to manufactured housing distributorrs.distributors. Floor plan financing providers could further reduce their levels of floor plan lending. Reduced availability of floor plan lending negatively affects the inventory levels of our independent distributors, the number of retail sales center locations and related wholesale demand, and adversely affects the availability of, and access to, capital on an ongoing basis.
The Company is exposed to risks associated with the creditworthiness of certain independent distributors, builders, developers, community owners, inventory financing partners and home buyers, many of whom may be adversely affected by the volatile conditions in the economy and financial markets. These conditions could result in financial instability or other adverse effects, the consequences of which could include delinquencies by customers who purchase our product under special financing initiatives and the deterioration of collateral values. In addition, losses may be incurred if the collateral cannot be recovered or is liquidated at prices insufficient to recover recorded commercial loan notes receivable balances. The realization of any of these factors may adversely affect our cash flow, profitability and financial condition.
As a participant in the homebuilding industry, the Company iswe are subject to market forces beyond our control. These market forces include employment levels, employment growth, interest rates, consumer confidence, home input supply availability, land availability and development costs, suppliers impacted by global conflicts, apartment and rental housing vacancy levels, inflation, deflation 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 revenue,revenues, earnings or financial position.
The cyclical and seasonal nature of the manufactured housing industry causes ourthe Company's 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 home buyers, the availability of wholesale financing for distributors, 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.
22
The manufactured housing industry is highly competitive, and increased competition may result in lower revenue
The manufactured housing industry is highly competitive. Competition at both the manufacturing and retail levels is based upon severalmany factors, including price, product features, reputation for service and quality, merchandising, terms of distributor promotional programs and the terms of retail customer financing. Numerous companies produce manufactured homes in our markets. Certain of our manufacturing competitors also have their own retail distribution systems and consumer finance and insurance operations. In addition, there are many independent manufactured housing retail locations in most areas where the Company haswe have retail operations. We believe that where wholesale floor plan financing is available, it is relatively easy for new distributors 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 the Company iswe are unable to compete effectively in this environment, our factory-built housing revenuerevenues could be reduced.
If the manufactured housing industry is not able to secure favorable local zoning ordinances ourare not adopted or if local zoning ordinances become further restricted, the Company's revenue could decline and ourits 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 are not adopted or become further restricted, our revenue could decline and ourthe business, results of operations and financial condition could be adversely affected.
The Company is subject to extensive regulation affecting the production and sale of manufactured housing, which could adversely affect ourits profitability
A variety of federal, state and local laws and regulations affect the production and sale of manufactured housing. Please refer to the section above under the heading "Business - Government Regulation" for a description of many of these laws and regulations. The Company'sOur failure to comply with such laws and regulations could expose itus to a wide variety of sanctions, including closing one or more manufacturing facilities. Regulatory matters affecting our operations are under regular review by governmental bodies and the Companywe cannot predict what effect, if any, new laws and regulations would have on itus or the manufactured housing industry. Failure to comply with applicable laws or regulations or the passage in the future of new and more stringent laws, may adversely affect the Company'sour financial condition or results of operations.
The Company may face risks related to the potential outcomes of the SEC subpoenas,litigation, including potential penalties, expense, the use of significant management time and attention potential litigation or regulatory action and potential reputational damage that the Company may suffer as a result of the matters under investigationlitigation
As disclosed in Part I, Item 3, Legal Proceedings, on August 20,since 2018, we have been cooperating with an investigation by the Company received a subpoena fromenforcement staff of the SEC's Division of Enforcement requesting certain documents relating to, among other items,SEC regarding trading in personal and Company accounts directed by the stock of another public company. On October 1, 2018, the SEC sent a subpoena for documents and testimony toCompany's former Chairman of the Board of Directors, President and Chief Executive Officer, Joseph Stegmayer, regarding similar issues. In addition, on November 9, 2018 and March 18, 2019,Stegmayer. On September 2, 2021, the SEC filed a civil complaint in the United States District Court District of Arizona, naming the Company, received subpoenas that contained duplicate document requests from Mr. Stegmayer's subpoena as well as requests for more information on the same matter. At this time, the Company believes thatalong with Mr. Stegmayer tradedand the Company's former Chief Financial Officer. The case is currently in certain publicly traded stock in his personal accounts as well as in accounts held by the Company at a time when the Company had agreed to refrain from such trading.discovery phase of litigation.
23
Losses not covered by our Director and Officer ("D&O") insurance may be large, which could adversely impact ourthe Company's financial performance
The loss of any of the Company's executive officers, senior leadership or business operations managers or a significant number of operating employees could reduce its ability to execute its business strategy and could have a material adverse effect on its business and results of operations
We are dependent to a significant extent upon the efforts of our executive officers, senior leaders and business operations managers. The loss of the services of one or more of these individuals could impair our ability to execute our business strategy and have a material adverse effect upon our business, financial condition and results of operations. Also, the loss of a significant number of operating employees and our ability to hire qualified replacements could have a material adverse effect on our business. We currently have no key person life or other insurance for our executive officers.
The Company's 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 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.
Certain provisions of the Company's organizational documents could delay or make more difficult a change in control of the Company
Certain provisions of the Company's restated certificate of incorporation and restated bylaws could delay or make more difficult transactions involving a change of control, and may have the effect of entrenching the current management or possibly depressing the market price of the Company's common stock. For example, the Company's 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.
ITEM1B. UNRESOLVED STAFF COMMENTS
None.
24
ITEM2. PROPERTIES
The following table sets forth certain information with respect to ourthe Company's core properties:
| Location | Date of Commencement of Operations | Owned / Leased | Square Feet | |||||||||||||||||
| Active manufacturing facilities: | ||||||||||||||||||||
| Millersburg, Oregon | 1995 | Owned | 169,000 | |||||||||||||||||
| Woodburn, Oregon | 1976 | Owned | 221,000 | |||||||||||||||||
| Riverside, California | 1960 | Owned | 107,000 | |||||||||||||||||
| Nampa, Idaho | 1957 | Owned | 171,000 | |||||||||||||||||
| Goodyear, Arizona | 1993 | Leased | 250,000 | |||||||||||||||||
| Phoenix, Arizona | 1978 | Owned | 79,000 | |||||||||||||||||
| Austin, Texas | 1981 | Owned | 181,000 | |||||||||||||||||
| Fort Worth, Texas | 1993 | Owned | 121,000 | |||||||||||||||||
| Seguin, Texas | 2006 | Owned | 129,000 | |||||||||||||||||
| Waco, Texas | 1971 | Owned | 132,000 | |||||||||||||||||
| Montevideo, Minnesota | 1982 | Owned | 305,000 | |||||||||||||||||
| Dorchester, Wisconsin | 1975 | Leased | 160,000 | |||||||||||||||||
| Nappanee, Indiana | 1971 | Owned | 341,000 | |||||||||||||||||
| Goshen, Indiana | 1972 | Owned | 163,000 | |||||||||||||||||
| Lafayette, Tennessee | 1996 | Owned | 149,000 | |||||||||||||||||
| Moultrie, Georgia | 2003 | Owned | 230,000 | |||||||||||||||||
| Douglas, Georgia | 1988 | Owned | 142,000 | |||||||||||||||||
| Shippenville, Pennsylvania (1) | 1972 | Owned | 162,000 | |||||||||||||||||
| Shippenville, Pennsylvania (2) | 1988 | Owned | 164,000 | |||||||||||||||||
| Emlenton, Pennsylvania | 2004 | Owned | 126,000 | |||||||||||||||||
| Martinsville, Virginia | 1969 | Owned | 132,000 | |||||||||||||||||
| Rocky Mount, Virginia | 1995 | Owned | 137,000 | |||||||||||||||||
| Cherryville, North Carolina | 1973 | Owned | 254,000 | |||||||||||||||||
| Ocala, Florida | 1984 | Owned | 91,000 | |||||||||||||||||
| Plant City, Florida | 1981 | Owned | 87,000 | |||||||||||||||||
| Component and supply facilities: | ||||||||||||||||||||
| Martinsville, Virginia | 1972 | Owned | 192,000 | |||||||||||||||||
| Nappanee, Indiana | 1971 | Leased | 77,000 | |||||||||||||||||
| Inactive manufacturing facilities: | ||||||||||||||||||||
| Glendale, Arizona | Owned | 118,000 | ||||||||||||||||||
| Hamlet, North Carolina | Owned | 184,000 | ||||||||||||||||||
| Plant City, Florida | Owned | 94,000 | ||||||||||||||||||
| Administrative and other locations: | ||||||||||||||||||||
| Phoenix, Arizona | Leased | 15,000 | ||||||||||||||||||
| Addison, Texas | Leased | 24,000 | ||||||||||||||||||
| Plano, Texas | Leased | 11,000 | ||||||||||||||||||
| New Braunfels, Texas | Owned | 9,000 | ||||||||||||||||||
| Elkhart, Indiana | Leased | 23,000 | ||||||||||||||||||
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| Location | Date of Commencement of Operations | Owned / Leased | Square Feet | ||||
| Active manufacturing facilities: | |||||||
| Millersburg, Oregon | 1995 | Owned | 169,000 | ||||
| Woodburn, Oregon | 1976 | Owned | 221,000 | ||||
| Nampa, Idaho | 1957 | Owned | 171,000 | ||||
| Riverside, California | 1960 | Owned | 107,000 | ||||
| Goodyear, Arizona | 1993 | Leased | 250,000 | ||||
| Phoenix, Arizona | 1978 | Owned | 79,000 | ||||
| Austin, Texas | 1981 | Owned | 181,000 | ||||
| Fort Worth, Texas | 1993 | Owned | 121,000 | ||||
| Seguin, Texas | 2006 | Owned | 129,000 | ||||
| Waco, Texas | 1971 | Owned | 132,000 | ||||
| Montevideo, Minnesota (2 plants) | 1982 | Owned | 305,000 | ||||
| Nappanee, Indiana | 1971 | Owned | 341,000 | ||||
| Lafayette, Tennessee | 1996 | Owned | 149,000 | ||||
| Lexington, Mississippi | 2004 | Leased | 119,800 | ||||
| Martinsville, Virginia | 1969 | Owned | 132,000 | ||||
| Rocky Mount, Virginia | 1995 | Owned | 137,000 | ||||
| Douglas, Georgia | 1988 | Owned | 142,000 | ||||
| Ocala, Florida | 1984 | Owned | 91,000 | ||||
| Plant City, Florida | 1981 | Owned | 87,000 | ||||
| Component and supply facilities: | |||||||
| Martinsville, Virginia | 1972 | Owned | 192,000 | ||||
| Nappanee, Indiana | 1971 | Leased | 77,000 | ||||
| Inactive manufacturing facilities: | |||||||
| Lexington, Mississippi | Leased | 109,300 | |||||
| Plant City, Florida | Owned | 94,000 | |||||
| Administrative and other locations: | |||||||
| Phoenix, Arizona | Leased | 15,000 | |||||
| Addison, Texas | Leased | 24,000 | |||||
| New Braunfels, Texas | Owned | 9,000 | |||||
ITEM3. LEGAL PROCEEDINGS
ITEM4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM5. 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 ("Nasdaq") under the symbol CVCO.
As of May 17, 2019,20, 2022, the Company had 626537 stockholders of record and approximately 16,00022,450 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.
In the past two fiscal years, the Company haswe have not paid any dividends on ourthe Company's common stock. The payment of dividends to ourCompany stockholders is subject to the discretion of ourthe Board of Directors, and various factors may prevent us from paying dividends. Such factors include ourCompany cash requirements and liquidity and the requirements of state, corporate and other laws.
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of the Publicly Announced Program | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program | ||||||||||||||||||||||
| January 2, 2022 to February 5, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| February 6, 2022 to March 5, 2022 | — | — | — | — | ||||||||||||||||||||||
| March 6, 2022 to April 2, 2022 | 115,200 | 264.52 | 115,200 | 38,960 | ||||||||||||||||||||||
| 115,200 | 115,200 | |||||||||||||||||||||||||
Subsequent to fiscal 2022 year end, we utilized the remaining $39 million under this program. On May 25, 2022, the Company's Board of Directors approved another $100 million stock repurchase program to date.under the same terms and conditions as the previous plan.
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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 30, 2019,April 2, 2022, with that of the Nasdaq Composite Index and the Nasdaq US Small CapiShares U.S. Home Construction Index.ETF. The comparison assumes $100 (with reinvestment of all dividends) was invested on March 29, 2014,April 1, 2017, in Cavco common stock and in each of the foregoing indices.
CAVCO INDUSTRIES, INC.
| 4/1/2017 | 3/31/2018 | 3/30/2019 | 3/28/2020 | 4/3/2021 | 4/2/2022 | |||||||||||||||
| Cavco Industries, Inc. | $ | 100 | $ | 149 | $ | 101 | $ | 128 | $ | 200 | $ | 209 | ||||||||
| Nasdaq Composite Index | $ | 100 | $ | 119 | $ | 131 | $ | 127 | $ | 228 | $ | 241 | ||||||||
| iShares U.S. Home Construction ETF | $ | 100 | $ | 124 | $ | 111 | $ | 97 | $ | 221 | $ | 192 | ||||||||
| 3/29/2014 | 3/28/2015 | 4/2/2016 | 4/1/2017 | 3/31/2018 | 3/30/2019 | |||||||||||||
| Cavco Industries, Inc. | $ | 100 | $ | 95 | $ | 119 | $ | 148 | $ | 221 | $ | 149 | ||||||
| Nasdaq Composite Index | $ | 100 | $ | 118 | $ | 118 | $ | 142 | $ | 170 | $ | 186 | ||||||
| Nasdaq US Small Cap Home Construction Index | $ | 100 | $ | 102 | $ | 80 | $ | 100 | $ | 129 | $ | 107 | ||||||
ITEM 6. SELECTED FINANCIAL DATA
28
| Year Ended | |||||||||||||||||||
| March 30, 2019 | March 31, 2018 | April 1, 2017 | April 2, 2016 | March 28, 2015 | |||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||
| Income Statement Data: | |||||||||||||||||||
| Net revenue | $ | 962,746 | $ | 871,235 | $ | 773,797 | $ | 712,352 | $ | 566,659 | |||||||||
| Cost of sales | 757,040 | 690,555 | 615,760 | 567,907 | 440,523 | ||||||||||||||
| Net income | $ | 68,622 | $ | 61,502 | $ | 37,955 | $ | 28,541 | $ | 23,817 | |||||||||
| Net income per share | |||||||||||||||||||
| Basic | $ | 7.56 | $ | 6.82 | $ | 4.23 | $ | 3.21 | $ | 2.69 | |||||||||
| Diluted | $ | 7.40 | $ | 6.68 | $ | 4.17 | $ | 3.15 | $ | 2.64 | |||||||||
| Weighted average shares outstanding: | |||||||||||||||||||
| Basic | 9,080,878 | 9,024,437 | 8,976,064 | 8,889,731 | 8,854,359 | ||||||||||||||
| Diluted | 9,268,737 | 9,201,706 | 9,105,743 | 9,046,347 | 9,015,779 | ||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Total assets | $ | 725,216 | $ | 674,780 | $ | 607,316 | $ | 553,835 | $ | 502,582 | |||||||||
| Total current liabilities | 174,008 | 176,329 | 140,216 | 125,089 | 101,471 | ||||||||||||||
| Total securitized financings and other | 34,140 | 59,812 | 57,991 | 61,171 | 66,960 | ||||||||||||||
| Total stockholders’ equity | 529,588 | 457,106 | 394,408 | 353,226 | 320,154 | ||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Annual Report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. In general, all statements included or incorporated in this Annual Report that are not historical in nature are forward-looking. These may include statements about ourthe Company's plans, strategies and prospects under the headings "Business," and "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 typically included, for example, in discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; our liquidity and financial resources; our outlook with respect to the Company and the manufactured housing business in general; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations,operations; economic conditions and consumer confidence, ourconfidence; increasing interest rates; potential acquisitions, strategic investments and other expansions; operational and legal risks,risks; how the Companywe may be affected by the COVID-19 pandemic or any other pandemic or outbreak; labor shortages and the pricing and availability of raw materials; governmental regulations and legal proceedings, the expected effect of certain risks and uncertainties on our business,proceedings; the availability of favorable consumer and wholesale manufactured home financing, market interest rates and our investments,financing; and the ultimate outcome of our commitments and contingencies.
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" referpertain to the Notes to the Company's Consolidated Financial Statements.
Although we continue to beexperience hiring challenges and other inefficiencies from building material supply disruptions, we have reduced our total open production positions needed by nearly 25% over the past year, bringing our total average plant capacity utilization rate to exceeding 80% during the fourth fiscal quarter of 2022, which is above pre-pandemic levels.
29
While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand, and we face challenges in overcoming labor-related difficulties in the current environment to increase home production. We continually review the wage rates of our production employees and have established other monetary incentive and benefit programs, with a key challengegoal of providing competitive compensation. We are also working to this process. The Company believesmore extensively use web-based recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. We believe our ability to recruit the workforce we need to help meet the overall need for affordable manufactured homes remains strong.housing continues to improve.
In the financial services segment, we continue to assist customers in need by servicing existing loans and insurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations. Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced for Ginnie Mae and Freddie Mac, and home-only loans serviced for certain other investors, we must remit scheduled monthly principal and/or interest payments and principal curtailments regardless of whether monthly mortgage payments are collected from borrowers. Ginnie Mae permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments. Through fiscal year 2022, monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors; however, mandatory extended forbearance under the CARES Act and certain other regulations related to COVID-19 could negatively impact cash obligations in the future.
30
The insurance subsidiary is subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity in Texas where most of its policies are underwritten. Where applicable, losses from catastrophic events are somewhat limitedmitigated by reinsurance contracts in place as part of the Company'sour loss mitigation structure.
Results of Operations
Fiscal Year 20192022 Compared to Fiscal Year 20182021
Net Revenue.
Net revenue consisted of the following for fiscal years 20192022 and 2018, respectively (dollars in thousands):2021, respectively:
| Year Ended | |||||||||||||||||||||||
| ($ in thousands, except revenue per home sold) | April 2, 2022 | April 3, 2021 | Change | ||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Factory-built housing | $ | 1,556,283 | $ | 1,037,889 | $ | 518,394 | 49.9 | % | |||||||||||||||
| Financial services | 70,875 | 70,162 | 713 | 1.0 | % | ||||||||||||||||||
| $ | 1,627,158 | $ | 1,108,051 | $ | 519,107 | 46.8 | % | ||||||||||||||||
| Total homes sold | 16,697 | 14,214 | 2,483 | 17.5 | % | ||||||||||||||||||
| Net factory-built housing revenue per home sold | $ | 93,207 | $ | 73,019 | $ | 20,188 | 27.6 | % | |||||||||||||||
| Year Ended | ||||||||||||||
| March 30, 2019 | March 31, 2018 | $ Change | % Change | |||||||||||
| Net revenue: | ||||||||||||||
| Factory-built housing | $ | 905,726 | $ | 815,519 | $ | 90,207 | 11.1 | % | ||||||
| Financial services | 57,020 | 55,716 | 1,304 | 2.3 | % | |||||||||
| $ | 962,746 | $ | 871,235 | $ | 91,511 | 10.5 | % | |||||||
| Total homes sold | 14,389 | 14,537 | -148 | (1.0 | )% | |||||||||
| Net factory-built housing revenue per home sold | $ | 62,946 | $ | 56,100 | $ | 6,846 | 12.2 | % | ||||||
In the factory-built housing segment, a rising materialthe increase in Net revenue was primarily due to higher legacy home selling prices, which provided $302.0 million, and labor input cost environment resulted inhigher legacy home sales volume from increased factory capacity utilization, which contributed $39.4 million. The higher home prices were primarily driven by product price increases, and to a lesser extent a shift toward more multi-section homes. Home sales prices duringvolume also increased from the most recent fiscal year. In addition the Company produced somewhat larger homes with more amenities. Current year revenue also includes $24.9of Craftsman Homes, LLC and Craftsman Homes Development, LLC (together, "Craftsman") and Commodore, which provided $13.8 million or 3.1% of the year-over-year increase, related to subcontracted pass-through services, which are now recognized on a gross basis rather than net of associated costs. In theand $166.7 million, respectively. These increases were partially offset by the prior year the Company produced disaster-relief units for FEMA during the third and fourth quartersperiod containing an extra week of production, given the fiscal year. The prior year results also include approximately $14.8 million of home sales revenue recognized from early commercial loan payoffs received under Cavco's wholesale lending programs.calendar.
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers ("Wholesale") and sales of homes to consumers by Company-owned retail centersstores ("Retail"). Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Changes to the proportion of home sales among theseour distribution channels between reporting periods impacts the overall net revenue per home sold. For the twelve months ended March 30, 2019, the Companyfiscal 2022, we sold 11,80613,888 homes Wholesale and 2,5832,809 Retail versus 12,13711,225 homes Wholesale and 2,4002,989 homes Retail in the comparable prior year period. Further, fluctuationsyear. Our homes are constructed in one or more floor sections ("modules") which are then installed on the customer's site. Fluctuations in net factory-built housing revenue per home sold are also partially the result of changes in product mix, which results fromthe number of modules per home, buyer tastes and preferences as they selectthe selection of different home types/models as well asand optional home upgrades, when purchasing the home.creating changes in product mix. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Our productProduct prices are also periodically adjusted for the cost and availability of raw materials included in, and labor used to produce, each home. For these reasons, we have experienced, and expect to continue to experience, volatility in overall net factory-built housing revenue per home sold.The table below presents the mix of modules and homes sold for the fiscal years 2022 and 2021, respectively:
31
| Year Ended | |||||||||||||||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Change | |||||||||||||||||||||||||||||||||
| Modules | Homes | Modules | Homes | Modules | Homes | ||||||||||||||||||||||||||||||
| HUD code homes | 24,497 | 14,136 | 20,948 | 12,339 | 16.9 | % | 14.6 | % | |||||||||||||||||||||||||||
| Modular homes | 3,569 | 1,742 | 2,009 | 945 | 77.7 | % | 84.3 | % | |||||||||||||||||||||||||||
| Park model RVs | 819 | 819 | 930 | 930 | (11.9) | % | (11.9) | % | |||||||||||||||||||||||||||
| 28,885 | 16,697 | 23,887 | 14,214 | 20.9 | % | 17.5 | % | ||||||||||||||||||||||||||||
Financial services segment revenue increased 1.0% primarily due to $4.5 million from higher premium revenue from a greater number ofmore insurance policies in force in the current year, $1.5 million in greater loan servicing income and $1.1 million in net higher interest income on loans held for investment,proceeds from home loan sales. These increases were partially offset by $3.8 million in lower interest income earned on securitizedthe acquired consumer loan portfolios that continue to amortize.amortize and $2.6 million in lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio.
Gross Profit.
Gross profit consisted of the following for fiscal years 20192022 and 2018, respectively (in thousands):2021, respectively:
| Year Ended | |||||||||||||||||||||||
| ($ in thousands) | April 2, 2022 | April 3, 2021 | Change | ||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Factory-built housing | $ | 372,250 | $ | 199,604 | $ | 172,646 | 86.5 | % | |||||||||||||||
| Financial services | 36,499 | 39,373 | (2,874) | (7.3) | % | ||||||||||||||||||
| $ | 408,749 | $ | 238,977 | $ | 169,772 | 71.0 | % | ||||||||||||||||
| Gross profit as % of Net revenue: | |||||||||||||||||||||||
| Consolidated | 25.1 | % | 21.6 | % | N/A | 3.5 | % | ||||||||||||||||
| Factory-built housing | 23.9 | % | 19.2 | % | N/A | 4.7 | % | ||||||||||||||||
| Financial services | 51.5 | % | 56.1 | % | N/A | (4.6) | % | ||||||||||||||||
| Year Ended | ||||||||||||||
| March 30, 2019 | March 31, 2018 | $ Change | % Change | |||||||||||
| Gross profit: | ||||||||||||||
| Factory-built housing | $ | 172,136 | $ | 149,015 | $ | 23,121 | 15.5 | % | ||||||
| Financial services | 33,570 | 31,665 | 1,905 | 6.0 | % | |||||||||
| $ | 205,706 | $ | 180,680 | $ | 25,026 | 13.9 | % | |||||||
| Gross profit as % of net revenue: | ||||||||||||||
| Consolidated | 21.4 | % | 20.7 | % | N/A | 0.7 | % | |||||||
| Factory-built housing | 19.0 | % | 18.3 | % | N/A | 0.7 | % | |||||||
| Financial services | 58.9 | % | 56.8 | % | N/A | 2.1 | % | |||||||
32
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consisted of the following for fiscal years 20192022 and 2018, respectively (in thousands):2021, respectively:
| Year Ended | |||||||||||||||||||||||
| ($ in thousands) | April 2, 2022 | April 3, 2021 | Change | ||||||||||||||||||||
| Selling, general and administrative expenses: | |||||||||||||||||||||||
| Factory-built housing | $ | 186,278 | $ | 130,498 | $ | 55,780 | 42.7 | % | |||||||||||||||
| Financial services | 19,975 | 19,654 | 321 | 1.6 | % | ||||||||||||||||||
| $ | 206,253 | $ | 150,152 | $ | 56,101 | 37.4 | % | ||||||||||||||||
| Selling, general and administrative expenses as % of Net revenue: | 12.7 | % | 13.6 | % | N/A | (0.9) | % | ||||||||||||||||
| Year Ended | ||||||||||||||
| March 30, 2019 | March 31, 2018 | $ Change | % Change | |||||||||||
| Selling, general and administrative expenses: | ||||||||||||||
| Factory-built housing | $ | 105,095 | $ | 91,058 | $ | 14,037 | 15.4 | % | ||||||
| Financial services | 16,473 | 15,849 | 624 | 3.9 | % | |||||||||
| $ | 121,568 | $ | 106,907 | $ | 14,661 | 13.7 | % | |||||||
| Selling, general and administrative expenses as % of Net revenue: | 12.6 | % | 12.3 | % | N/A | 0.3 | % | |||||||
Selling, general and administrative expenses in the factory-built housing segment increased from higher salary and incentive compensation expense on improved earnings. Current year Selling, general and administrative expenses also include $2.1 million in legal and other expenses related to the Company's internal investigation and response to the SEC inquiry and $2.8 million from the premium amortization related to the additional D&O insurance purchased during the current fiscal year. Total premiums paid for these policies were $15.3 million and the Company expects to incur approximately $2.1 million per quarter from the amortization of these policy premiums through the second quarter of fiscal year 2021.
As a percentage of Net revenue, Selling, general and administrative expenses increased from the SEC and D&O costs discussed previously. Excluding these items, Selling, general and administrative expenses as a percent of net revenue decreasedimproved 90 basis points from better overhead utilization.utilization of fixed costs on higher sales.
Interest Expense.
Interest expense was $3.4$0.7 million in both fiscal year 20192022 and $4.4 million in fiscal year 2018.
Other Income, net.
33
Income Before Income Taxes.
Income before income taxes consisted of the following for fiscal years 20192022 and 2018, respectively (in thousands):2021, respectively:
| Year Ended | |||||||||||||||||||||||||||||||||||||
| Year Ended | |||||||||||||||||||||||||||||||||||||
| March 30, 2019 | March 31, 2018 | $ Change | % Change | ||||||||||||||||||||||||||||||||||
| ($ in thousands) | ($ in thousands) | April 2, 2022 | April 3, 2021 | Change | |||||||||||||||||||||||||||||||||
| Income before income taxes: | Income before income taxes: | ||||||||||||||||||||||||||||||||||||
| Factory-built housing | $ | 72,959 | $ | 66,636 | $ | 6,323 | 9.5 | % | Factory-built housing | $ | 197,282 | $ | 78,937 | $ | 118,345 | 149.9 | % | ||||||||||||||||||||
| Financial services | 13,717 | 11,887 | 1,830 | 15.4 | % | Financial services | 14,707 | 17,975 | (3,268) | (18.2) | % | ||||||||||||||||||||||||||
| $ | 86,676 | $ | 78,523 | $ | 8,153 | 10.4 | % | $ | 211,989 | $ | 96,912 | $ | 115,077 | 118.7 | % | ||||||||||||||||||||||
Income Tax Expense.
Income tax expense was $18.1$14.2 million, resulting in an effective tax rate of 20.8%6.7% for the fiscal year ended March 30, 2019,April 2, 2022, compared to income tax expense of $17.0$20.3 million and an effective rate of 21.7%20.9% for the fiscal year ended MarchApril 3, 2021. The lower effective tax rate in the current year period primarily relates to $35.7 million in estimated non-recurring net tax credits related to the sale of energy efficient homes between fiscal year 2018 and fiscal third quarter 2022, available under the Internal Revenue Code §45L, offset by an increase in income before income taxes. The tax credit for energy efficient homes expired in its current form as of December 31, 2018.
2021.
Fiscal Year 20182021 Compared to Fiscal Year 20172020
See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 20182021 Annual Report on Form 10-K.
Liquidity and Capital Resources
We believe that cash and cash equivalents at March 30, 2019,April 2, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future. The Company maintainsWe maintain cash in U.S. Treasury money market funds and other money market funds, some of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to ourthe Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on the Company'sour liquidity and capital resources in the event of such a transaction.resources. Because of the Company'sour sufficient cash position, the Company haswe have not historically sought external sources of liquidity, with the exception of certain credit facilities for ourthe home-only lending programs. However,Regardless, depending on our operating results and strategic opportunities, we may needchoose to seek additional or alternative sources of financing.financing in the future. 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.resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco Industries, Inc. or its legal subsidiaries. We believe that stockholders’stockholders' equity at ourthe insurance subsidiary remains sufficient and we do not believe that itsthe ability to pay ordinary dividends to Cavco Industries, Inc. will be restricted per state regulations.
34
The following is a summary of ourthe Company's cash flows for fiscal years 20192022 and 2018, respectively (in thousands):2021, respectively:
| Year Ended | |||||||||||||||||
| ($ in thousands) | April 2, 2022 | April 3, 2021 | $ Change | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of the fiscal year | $ | 339,307 | $ | 255,607 | $ | 83,700 | |||||||||||
| Net cash provided by operating activities | 144,224 | 114,031 | 30,193 | ||||||||||||||
| Net cash used in investing activities | (159,102) | (23,349) | (135,753) | ||||||||||||||
| Net cash used in financing activities | (65,095) | (6,982) | (58,113) | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of the fiscal year | $ | 259,334 | $ | 339,307 | $ | (79,973) | |||||||||||
| Year Ended | |||||||||||
| March 30, 2019 | March 31, 2018 | Change | |||||||||
| Cash, cash equivalents and restricted cash at beginning of fiscal year | $ | 199,258 | $ | 144,839 | $ | 54,419 | |||||
| Net cash provided by operating activities | 32,836 | 58,966 | (26,130 | ) | |||||||
| Net cash used in investing activities | (5,815 | ) | (4,671 | ) | (1,144 | ) | |||||
| Net cash (used in) provided by financing activities | (26,410 | ) | 124 | (26,534 | ) | ||||||
| Cash, cash equivalents and restricted cash at end of fiscal year | $ | 199,869 | $ | 199,258 | $ | 611 | |||||
Consumer loan originations increased $3.6decreased $2.6 million to $130.0$159.0 million during the year ended March 30, 2019,April 2, 2022, from $126.4$161.6 million during the year ended March 31, 2018, primarily from increased home lending activity at CountryPlace.April 3, 2021. Proceeds from the sale of consumer loans provided $131.1$184.8 million in cash, compared to $119.3$167.1 million in the previous year, a net increase of $11.8$17.7 million. The increase is primary from timing of loan originations and related sales to the GSEs.
Net cash used in financing activities for the year ended April 2, 2022 was primarily related to common stock repurchases and higher interest rates. Unfavorable changesthe payments of the secured term loans, which have been paid in these factors may have material negative effectsfull as of January 1, 2022, partially offset by proceeds received from the exercise of stock options. Net cash used in financing activities for the year ended April 3, 2021 was mainly for the payments of tax liabilities on our resultsthe exercise of operationsstock options and financial condition. See Part I, Item IA, "Risk Factors."payments on secured financings.
We enter into commercial loan agreements with certain distributors of our products under which the Company provides funds for Wholesale purchases. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes. TheIn addition, we enter into commercial loan arrangements with certain distributors of our products under which the Company hasprovides funds for wholesale purchases. We have also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities (seecommunities. For additional information regarding our commercial loans receivable, see Note 7 to the Consolidated Financial Statements).Statements. Further, the Company has investedwe invest in and developeddevelop home-only loan pools and lending programs to attract third-party financier interest in order to grow sales of new homes through traditional distribution points.
See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources" in the Company's 20182021 Annual Report on Form 10-K for a discussion of changes in liquidity between fiscal years 20182021 and 2017.
35
| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Debt obligations: | |||||||||||||||||||
| Securitized financings and other borrowings, including interest (1) | $ | 33,368 | $ | 19,788 | $ | 2,781 | $ | 2,702 | $ | 8,097 | |||||||||
| Operating lease obligations | 8,322 | 2,292 | 3,586 | 1,783 | 661 | ||||||||||||||
| Capital lease obligations | 1,181 | 766 | 146 | 146 | 123 | ||||||||||||||
| Total contractual obligations | $ | 42,871 | $ | 22,846 | $ | 6,513 | $ | 4,631 | $ | 8,881 | |||||||||
Critical Accounting PoliciesEstimates
Our discussion and analysis of ourthe Company's financial condition and results of operations areis based upon ourits Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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 itsWe base these 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. See "Forward-Looking Statements" above.
Warranties. The Company provides the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. The Company records a liability for estimated future warranty costs relating to homes sold, based upon our assessment of historical experience factors. Factors used in the estimation of the warranty liability Estimates include the estimated amountnumber of homes still under warranty, including homes in distributor inventories, homes purchased by consumers still within the one-year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home.
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 basis 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 FASB ASC 740, 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. At March 30, 2019, the Company evaluated itsApril 2, 2022, based on historical profits earned and forecasted taxable profits, andwe determined that all deferred tax assets, except for certain state net operating loss deferred tax assets, all other deferred tax assets would be utilized in future periods. Additionally, the overall state income tax rate is based on income apportionment by state, which is estimated using prior year results, along with expected current year impacts.
Goodwill and Other Intangibles. GoodwillWe evaluate the fair value of reporting units and indefinite-lived intangibles are tested annuallywhen we record an impairment loss on goodwill. During the fourth quarter of fiscal year 2022 we conducted our annual goodwill impairment test and no impairment charges were recorded. The estimated fair values of our two reporting units exceeded their carrying values at the date of their most recent estimated fair value determination. However, estimated fair values would need to decrease by over 450% for there to be indicators of impairment. OurThe fair value evaluation of intangible assets acquired includes the use of acceptable valuation approaches utilizing unobservable inputs, which may lead to a high level of uncertainty. These Level 3 inputs relate to forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of royalty and discount rates. The analysis depends upon a number of judgments, estimates and assumptions. Accordingly, such testing is subject to uncertainties, which could cause the fair value to fluctuate from period to period.
Other Matters
Impact of Inflation. Sudden At the end of the period, inflation was the highest in the U.S. in over 30 years. Our ability to maintain certain levels of gross margin can be adversely impacted by sudden increases in specific costs, such as the increases in material and labor,labor. In addition, measures used to combat inflation, such as well as price competition, can affect our ability to efficiently increase our selling prices and may adversely impact our results of operations. The Company was able to successfully increase homes sales pricesincreases in fiscal 2019; however, general material and labor inflation didinterest rates, could also have an adverse impact on our profitability.the ability of home buyers to obtain affordable financing. We can give no assurance that inflation will not affect our profitability in the future.future profitability.
See Note 1 to the Consolidated Financial Statements for a discussion of recently issued orand adopted accounting pronouncements.
36
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. The CompanyWe may from time to time be exposed to interest rate risk inherent in our financial instruments, but iswe are not currently subject to foreign currency or commodity price risk. The Company managesWe manage exposure to these market risks through our regular operating and financing activities.
| ($ in thousands) | Reduction in Fair Value | ||||
| Consumer loans receivable | $ | 2,592 | |||
| Commercial loans receivable | 421 | ||||
| Securitized financings | 883 | ||||
| Reduction in Fair Value | |||
| Consumer loans receivable | $ | 3,246 | |
| Commercial loans receivable | $ | 740 | |
| Securitized financings | $ | 928 | |
In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs")we issue IRLCs to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlaceus to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace iswe are also subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. As of March 30, 2019, CountryPlaceApril 2, 2022, we had outstanding IRLCs with a notional amount of $14.7$51.7 million recorded at fair value in accordance with FASB ASC 815, Derivatives and Hedging. The estimated fair values of IRLCs are based on quoted market values and are recorded in Prepaid expenses and other current assets, for net favorable positions, or Accrued expenses and other current liabilities, for net unfavorable positions, in the Consolidated Balance Sheets. The fair value of IRLCs is based on the value of the underlying loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage orof IRLCs that will result in closed loans. The initial and subsequent changes in the value of IRLCs are a component of current income. Assuming CountryPlace’sthe level of IRLCs is held constant, a 1% (100 basis points) increase in average interest rates would decrease the fair value of CountryPlace’sthe obligations by approximately $55,000.$88,000.
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.
37
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
The Company carried out an evaluation, under the supervision and with the participation of ourthe Company's management, including ourits President and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of ourits disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, ourthe Company's President and Chief Executive Officer and its Chief FinancialAccounting Officer concluded that, as of the end of the period covered in this report, ourApril 2, 2022, its disclosure controls and procedures were effective.
Management's Report on Internal Controls Over Financial Reporting
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 (2013 framework)("2013 framework"). Based on management's evaluation under the criteria in the 2013 framework, management concluded that the Company's internal control over financial reporting was effective as of March 30, 2019.April 2, 2022.
The scope of management's assessment of the effectiveness of internal control over financial reporting did not include the internal controls of Craftsman or Commodore, which are included in the 2022 consolidated financial statements of Cavco Industries, Inc. since the acquisition dates of July 4, 2021 and September 24, 2021, respectively, and which comprised approximately 17% of total assets and 11% of net revenues as of and for the year ended April 2, 2022, respectively.
The effectiveness of the Company's internal control over financial reporting as of March 30, 2019,April 2, 2022 has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
38
Changes in Internal Control over Financial Reporting
There have been no changes in ourthe Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended March 30, 2019,April 2, 2022, which hashave materially affected, or isare reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cavco Industries, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Cavco Industries, Inc. and subsidiaries' (the Company) internal control over financial reporting as of March 30, 2019,April 2, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 30, 2019,April 2, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheetsconsolidated balance sheets of the Company as of March 30, 2019April 2, 2022 and March 31, 2018,April 3, 2021, and the related Consolidated Statementsconsolidated statements of Comprehensive Income, Stockholders' Equitycomprehensive income, stockholders' equity and Cash Flowsredeemable noncontrolling interest, and cash flows for each of the three fiscal years in the period ended March 30, 2019,April 2, 2022, and the related notes of the Company and our report dated May 28, 201931, 2022 expressed an unqualified opinion.
As described in Management's Report on Internal Controls Over Financial Reporting, management has excluded Craftsman and Commodore from its assessment of internal control over financial reporting as of April 2, 2022, because they were acquired by the Company in purchase business combinations in the second fiscal quarter of 2022. We have also excluded Craftsman and Commodore from our audit of internal control over financial reporting. Craftsman and Commodore are subsidiaries whose total assets and net income represent approximately 17% and 11%, respectively, of the related consolidated financial statement amounts as of and for the year ended April 2, 2022.
Basis for Opinion
The Company'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 in the accompanying Management's Report on Internal ControlControls Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
40
Definition and Limitations of Internal Control Over Financial Reporting
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.
| /s/ RSM US LLP | |||||
| Phoenix, Arizona | |||||
| May | |||||
41
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company has a Code of EthicsConduct that applies to all directors, officers and employees of the Company. A copy of the Company's Code of EthicsConduct is located on the Company's website at www.cavco.com or will be mailed, at no charge, upon request submitted to MickyMickey R. Dragash, Secretary, Cavco Industries, Inc., 3636 North Central Avenue, Suite 1200, Phoenix, Arizona, 85012. If the Company makes any amendment to, or grants any waivers of, a provision of the Code of EthicsConduct that applies to its principal executive officer, principal financial officer or 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 at www.cavco.com.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of March 30, 2019,April 2, 2022, with respect to ourthe Company's compensation plans and individual compensation arrangements under which ourthe Company's 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.
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||||||||||
| Equity compensation plans approved by stockholders | 230,614 | $ | 131.53 | 283,208 | |||||||||||||
| Equity compensation plans not approved by stockholders | — | — | — | ||||||||||||||
| Total | 230,614 | $ | 131.53 | 283,208 | |||||||||||||
42
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (a) | Weighted- Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||
| Equity compensation plans approved by stockholders | 411,111 | $ | 102.71 | 296,669 | |||||
| Equity compensation plans not approved by stockholders | — | — | — | ||||||
| Total | 411,111 | $ | 102.71 | 296,669 | |||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
43
PART IV
ITEM 15. EXHIBITS, 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.
Copies of any of the exhibits referred to below will be furnished at no cost to security holders who make a written request to Mickey R. Dragash, Secretary, Cavco Industries, Inc., 3636 North Central Avenue, Suite 1200, Phoenix, Arizona, 85012 or via the Company website (www.cavco.com).
Exhibit Number | Exhibit | Filed/Furnished Herewith or Incorporated by Reference | |||||||||
| Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | |||||||||||
| Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 | |||||||||||
| Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2015 | |||||||||||
| Exhibit 3.1 to the Periodic Report on Form 8-K filed on | |||||||||||
| Exhibit 4.1 to the Annual Report on Form 10-K for the fiscal year ended March 28, 2020 | |||||||||||
| Exhibit 10.6 to the Registration Statement on Form 10/A (File No. 000-08822) filed by Cavco on May 30, 2003 | |||||||||||
| Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010 | |||||||||||
| Exhibit A to the Corporation's Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed by the Company with the Securities and Exchange Commission on May 23, 2005 | |||||||||||
| Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010 | |||||||||||
| Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2015 | |||||||||||
| Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012 | |||||||||||
| Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2016 | |||||||||||
| Exhibit 10.1 to the Current Report on Form 8-K filed on January 8, 2019 | |||||||||||
| Filed herewith | |||||||||||
| Exhibit 10.1 to the Current Report on Form 8-K filed on April 2, 2019 | |||||||||||
| Exhibit 10.6 to the Current Report on Form 8-K filed on April 2, 2019 | |||||||||||
| Exhibit 10.3.6 to the Annual Report on Form 10-K for the fiscal year ended March 28, 2020 | |||||||||||
44
| Exhibit Number | Exhibit | Filed/Furnished Herewith or Incorporated by Reference | |||||||||
| Current Report on Form 8-K filed on August 10, 2021 | |||||||||||
| Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2021 | |||||||||||
| Exhibit 10.3.8 to the Annual Report on Form 10-K for the fiscal year ended March 28, 2020 | |||||||||||
| Current Report on Form 8-K filed on June 27, 2019 | |||||||||||
| Current Report on Form 8-K filed on July | |||||||||||
| Exhibit 10.5 to Current Report on Form 8-K filed on April 2, 2019 | |||||||||||
| Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 2021 | |||||||||||
| Exhibit 10.6 to the Annual Report on Form 10-K for the fiscal year ended March 28, 2020 | |||||||||||
| Exhibit 10.3 to the Current Report on Form 8-K filed on July 26, 2021 | |||||||||||
| Filed herewith | |||||||||||
| Filed herewith | |||||||||||
| Filed herewith | |||||||||||
| Filed herewith | |||||||||||
| Furnished herewith | |||||||||||
| 101.INS | Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||
| Inline XBRL Taxonomy Extension Schema | |||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||||||||||
| 104 | Cover Page Interactive Data File- the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||||||
| * | 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. | ||||
ITEM 16. FORM 10-K SUMMARY
45
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 31, 2022 | |||||||
| /s/ William C. Boor | ||||||||
| William C. Boor | ||||||||
| 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/ William C. Boor | Director, President and Chief Executive Officer | May 31, 2022 | |||||||||
| William C. Boor | (Principal Executive Officer) | ||||||||||
| /s/ | Executive Vice President, | ||||||||||
| Chief Financial Officer & Treasurer | May | ||||||||||
| (Principal Financial | |||||||||||
| /s/ Paul W. Bigbee | Chief Accounting Officer | May 31, 2022 | |||||||||
| Paul W. Bigbee | (Principal Accounting Officer) | ||||||||||
| /s/ Steven G. Bunger | Chairman of the Board of Directors | May | |||||||||
| Steven G. Bunger | |||||||||||
| /s/ Susan L. Blount | Director | May | |||||||||
| Susan L. Blount | |||||||||||
| /s/ David A. Greenblatt | Director | May | |||||||||
| David A. Greenblatt | |||||||||||
| /s/ Richard A. Kerley | Director | May | |||||||||
| Richard A. Kerley | |||||||||||
| /s/ Steven W. Moster | Director | May 31, 2022 | |||||||||
| Steven W. Moster | |||||||||||
| /s/ Julia W. Sze | Director | May 31, 2022 | |||||||||
| Julia W. Sze | |||||||||||
46
CAVCO INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Cavco Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheetsconsolidated balance sheets of Cavco Industries, Inc. and its subsidiaries (the Company) as of March 30, 2019April 2, 2022 and March 31, 2018, andApril 3, 2021, the related Consolidated Statementsconsolidated statements of Comprehensive Income, Stockholders' Equitycomprehensive income, stockholders' equity and Cash Flowsredeemable noncontrolling interest, and cash flows for each of the three fiscal years in the period ended March 30, 2019,April 2, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 30, 2019April 2, 2022 and March 31, 2018,April 3, 2021, and the results of its operations and its cash flows for each of the three fiscal years in the period ended March 30, 2019,April 2, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 30, 2019,April 2, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 28, 201931, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Acquisition of The Commodore Corporation – Valuation of Acquired Customer-Related Intangibles, Trademarks, and Trade Names
As described in Note 22 to the consolidated financial statements, the Company completed the acquisition of certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation for $146.2 million on September 24, 2021. The Company accounted for this transaction under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $12.5 million, and resulting goodwill of $21.3 million. As described in Note 1 to the consolidated financial statements, to value the identified intangible assets, which consist of customer-related intangibles, trademarks, and trade names, the Company used the income approach, which is a method of using discounted cash flows to value intangible assets. The process requires management to make significant assumptions regarding the estimates that would be used by a market participant, which include, where applicable, forecast of future cash flows and pre-tax income, forecasted revenue growth rates, royalty rates, and discount rates.
We identified the valuation of customer-related intangibles, trademarks, and trade names acquired as a critical audit matter as there was a high degree of auditor judgment and increased audit effort when performing audit procedures to evaluate the reasonableness of significant estimates and assumptions utilized in management’s intangible asset valuation processes.
Our audit procedures related to the significant estimates and assumptions, including forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of the royalty rates and discount rates, for acquired intangible assets included the following, among others:
•We obtained an understanding of the relevant controls related to the valuation of the intangible assets, including management’s controls over forecasts of future revenues, cash flows and future pre-tax income, as well as the selection of the royalty rates and discount rates, and tested such controls for design and operating effectiveness.
•We evaluated the reasonableness of management’s forecasts of future cash flows and pre-tax income by comparing the projections to historical results and certain peer companies.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, royalty rates and discount rates utilized by management by:
–Testing the source information underlying the determination of the royalty rates and discount rates by comparing it to independent sources and verifying that it reflects the nature and characteristics of underlying assets being valued;
–Testing the mathematical accuracy of the calculations; and
–Developing a range of independent estimates for the discount rates and comparing those to the discount rates selected by management.
| /s/ RSM US LLP | |||||
| RSM US LLP | |||||
| Firm ID: 49 | |||||
| We have served as the Company's auditor since 2015. | |||||
| Phoenix, Arizona | |||||
| May | |||||
F-3
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| March 30, 2019 | March 31, 2018 | April 2, 2022 | April 3, 2021 | |||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 187,370 | $ | 186,766 | Cash and cash equivalents | $ | 244,150 | $ | 322,279 | |||||||||
| Restricted cash, current | 12,148 | 11,228 | Restricted cash, current | 14,849 | 16,693 | |||||||||||||
| Accounts receivable, net | 40,701 | 35,043 | Accounts receivable, net | 96,052 | 47,396 | |||||||||||||
| Short-term investments | 12,620 | 11,866 | Short-term investments | 20,086 | 19,496 | |||||||||||||
| Current portion of consumer loans receivable, net | 30,058 | 31,096 | Current portion of consumer loans receivable, net | 20,639 | 37,690 | |||||||||||||
| Current portion of commercial loans receivable, net | 15,234 | 5,481 | Current portion of commercial loans receivable, net | 32,272 | 14,568 | |||||||||||||
| Current portion of commercial loans receivable from affiliates, net | Current portion of commercial loans receivable from affiliates, net | 372 | 4,664 | |||||||||||||||
| Inventories | 116,203 | 109,152 | Inventories | 243,971 | 131,234 | |||||||||||||
| Assets held for sale | 3,061 | — | ||||||||||||||||
| Prepaid expenses and other current assets | 44,654 | 27,961 | Prepaid expenses and other current assets | 71,726 | 57,779 | |||||||||||||
| Total current assets | 462,049 | 418,593 | Total current assets | 744,117 | 651,799 | |||||||||||||
| Restricted cash | 351 | 1,264 | Restricted cash | 335 | 335 | |||||||||||||
| Investments | 32,137 | 33,573 | Investments | 34,933 | 35,010 | |||||||||||||
| Consumer loans receivable, net | 56,727 | 63,855 | Consumer loans receivable, net | 29,245 | 37,108 | |||||||||||||
| Commercial loans receivable, net | 27,772 | 11,120 | Commercial loans receivable, net | 33,708 | 20,281 | |||||||||||||
| Commercial loans receivable from affiliate, net | Commercial loans receivable from affiliate, net | 2,214 | 4,801 | |||||||||||||||
| Property, plant and equipment, net | 63,484 | 63,355 | Property, plant and equipment, net | 164,016 | 96,794 | |||||||||||||
| Goodwill and other intangibles, net | 82,696 | 83,020 | ||||||||||||||||
| Goodwill | Goodwill | 100,993 | 75,090 | |||||||||||||||
| Other intangibles, net | Other intangibles, net | 28,459 | 14,363 | |||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | 16,952 | 16,252 | |||||||||||||||
| Total assets | $ | 725,216 | $ | 674,780 | Total assets | $ | 1,154,972 | $ | 951,833 | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY | LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 29,305 | $ | 23,785 | Accounts payable | $ | 43,082 | $ | 32,120 | |||||||||
| Accrued liabilities | 125,181 | 126,500 | ||||||||||||||||
| Current portion of securitized financings and other | 19,522 | 26,044 | ||||||||||||||||
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 250,304 | 203,133 | |||||||||||||||
| Current portion of secured financings and other | Current portion of secured financings and other | 784 | 1,851 | |||||||||||||||
| Total current liabilities | 174,008 | 176,329 | Total current liabilities | 294,170 | 237,104 | |||||||||||||
| Securitized financings and other | 14,618 | 33,768 | ||||||||||||||||
| Operating lease liabilities | Operating lease liabilities | 13,158 | 13,361 | |||||||||||||||
| Secured financings and other | Secured financings and other | 10,836 | 10,335 | |||||||||||||||
| Deferred income taxes | 7,002 | 7,577 | Deferred income taxes | 5,528 | 7,393 | |||||||||||||
| Redeemable noncontrolling interest | Redeemable noncontrolling interest | 825 | — | |||||||||||||||
| Stockholders' equity: | Stockholders' equity: | |||||||||||||||||
| Preferred stock, $0.01 par value; 1,000,000 shares authorized; No shares issued or outstanding | — | — | Preferred stock, $0.01 par value; 1,000,000 shares authorized; No shares issued or outstanding | — | — | |||||||||||||
| Common stock, $0.01 par value; 40,000,000 shares authorized; Outstanding 9,098,320 and 9,044,858 shares, respectively | 91 | 90 | ||||||||||||||||
| Common stock, $0.01 par value; 40,000,000 shares authorized; Issued 9,292,278 and 9,241,256 shares, respectively | Common stock, $0.01 par value; 40,000,000 shares authorized; Issued 9,292,278 and 9,241,256 shares, respectively | 93 | 92 | |||||||||||||||
| Treasury stock, at cost; 241,773 and 6,600 shares, respectively | Treasury stock, at cost; 241,773 and 6,600 shares, respectively | (61,040) | (1,441) | |||||||||||||||
| Additional paid-in capital | 249,447 | 246,197 | Additional paid-in capital | 263,049 | 253,835 | |||||||||||||
| Retained earnings | 280,078 | 209,381 | Retained earnings | 628,756 | 431,057 | |||||||||||||
| Accumulated other comprehensive income (loss) | (28 | ) | 1,438 | |||||||||||||||
| Accumulated other comprehensive (loss) income | Accumulated other comprehensive (loss) income | (403) | 97 | |||||||||||||||
| Total stockholders' equity | 529,588 | 457,106 | Total stockholders' equity | 830,455 | 683,640 | |||||||||||||
| Total liabilities and stockholders' equity | $ | 725,216 | $ | 674,780 | ||||||||||||||
| Total liabilities, redeemable noncontrolling interest and stockholders' equity | Total liabilities, redeemable noncontrolling interest and stockholders' equity | $ | 1,154,972 | $ | 951,833 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements
F-4
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
| Year Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | March 28, 2020 | |||||||||||||||
| Net revenue | $ | 1,627,158 | $ | 1,108,051 | $ | 1,061,774 | |||||||||||
| Cost of sales | 1,218,409 | 869,074 | 831,256 | ||||||||||||||
| Gross profit | 408,749 | 238,977 | 230,518 | ||||||||||||||
| Selling, general and administrative expenses | 206,253 | 150,152 | 145,611 | ||||||||||||||
| Income from operations | 202,496 | 88,825 | 84,907 | ||||||||||||||
| Interest expense | (702) | (738) | (1,495) | ||||||||||||||
| Other income, net | 10,195 | 8,825 | 9,567 | ||||||||||||||
| Income before income taxes | 211,989 | 96,912 | 92,979 | ||||||||||||||
| Income tax expense | (14,247) | (20,266) | (17,913) | ||||||||||||||
| Net income | 197,742 | 76,646 | 75,066 | ||||||||||||||
| Less: net income attributable to redeemable noncontrolling interest | 43 | — | — | ||||||||||||||
| Net income attributable to Cavco common stockholders | $ | 197,699 | $ | 76,646 | $ | 75,066 | |||||||||||
| Comprehensive income | |||||||||||||||||
| Net income | $ | 197,742 | $ | 76,646 | $ | 75,066 | |||||||||||
| Reclassification adjustment for securities sold | (17) | 19 | 18 | ||||||||||||||
| Applicable income taxes | 4 | (4) | (4) | ||||||||||||||
| Net change in unrealized position of investments held | (616) | (10) | 132 | ||||||||||||||
| Applicable income taxes | 129 | 2 | (28) | ||||||||||||||
| Comprehensive income | 197,242 | 76,653 | 75,184 | ||||||||||||||
| Less: comprehensive income attributable to redeemable noncontrolling interest | 43 | — | — | ||||||||||||||
| Comprehensive income attributable to Cavco common stockholders | $ | 197,199 | $ | 76,653 | $ | 75,184 | |||||||||||
| Net income per share attributable to Cavco common stockholders | |||||||||||||||||
| Basic | $ | 21.54 | $ | 8.34 | $ | 8.22 | |||||||||||
| Diluted | $ | 21.34 | $ | 8.25 | $ | 8.10 | |||||||||||
| Weighted average shares outstanding: | |||||||||||||||||
| Basic | 9,178,593 | 9,189,052 | 9,129,639 | ||||||||||||||
| Diluted | 9,264,153 | 9,293,134 | 9,268,784 | ||||||||||||||
| Year Ended | |||||||||||
| March 30, 2019 | March 31, 2018 | April 1, 2017 | |||||||||
| Net revenue | $ | 962,746 | $ | 871,235 | $ | 773,797 | |||||
| Cost of sales | 757,040 | 690,555 | 615,760 | ||||||||
| Gross profit | 205,706 | 180,680 | 158,037 | ||||||||
| Selling, general and administrative expenses | 121,568 | 106,907 | 101,231 | ||||||||
| Income from operations | 84,138 | 73,773 | 56,806 | ||||||||
| Interest expense | (3,444 | ) | (4,397 | ) | (4,443 | ) | |||||
| Other income, net | 5,982 | 9,147 | 2,918 | ||||||||
| Income before income taxes | 86,676 | 78,523 | 55,281 | ||||||||
| Income tax expense | (18,054 | ) | (17,021 | ) | (17,326 | ) | |||||
| Net income | $ | 68,622 | $ | 61,502 | $ | 37,955 | |||||
| Comprehensive income: | |||||||||||
| Net income | $ | 68,622 | $ | 61,502 | $ | 37,955 | |||||
| Reclassification adjustment for net loss (gains) realized in income | 74 | (1,538 | ) | (372 | ) | ||||||
| Applicable income taxes (benefit) | (15 | ) | 574 | 149 | |||||||
| Net change in unrealized appreciation of investments | 122 | 1,249 | 493 | ||||||||
| Applicable income taxes | (26 | ) | (233 | ) | (173 | ) | |||||
| Comprehensive income | $ | 68,777 | $ | 61,554 | $ | 38,052 | |||||
| Net income per share: | |||||||||||
| Basic | $ | 7.56 | $ | 6.82 | $ | 4.23 | |||||
| Diluted | $ | 7.40 | $ | 6.68 | $ | 4.17 | |||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 9,080,878 | 9,024,437 | 8,976,064 | ||||||||
| Diluted | 9,268,737 | 9,201,706 | 9,105,743 | ||||||||
See accompanying Notes to Consolidated Financial Statements
F-5
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Dollars in thousands)
| Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury Stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss) income | Total | Redeemable Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 30, 2019 | 9,098,320 | $ | 91 | $ | — | $ | 249,447 | $ | 280,078 | $ | (28) | $ | 529,588 | $ | — | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 75,066 | — | 75,066 | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | — | 118 | 118 | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock incentive plans | 74,922 | 1 | — | (1,068) | — | — | (1,067) | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 3,881 | — | — | 3,881 | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 28, 2020 | 9,173,242 | $ | 92 | $ | — | $ | 252,260 | $ | 355,144 | $ | 90 | $ | 607,586 | $ | — | |||||||||||||||||||||||||||||||||||
| Cumulative effect of implementing ASU 2016-13, net | — | — | — | — | (733) | — | (733) | — | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 76,646 | — | 76,646 | — | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net | — | — | — | — | — | 7 | 7 | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock incentive plans | 68,014 | — | — | (2,817) | — | — | (2,817) | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 4,392 | — | — | 4,392 | — | ||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | — | (1,441) | — | — | — | (1,441) | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, April 3, 2021 | 9,241,256 | $ | 92 | $ | (1,441) | $ | 253,835 | $ | 431,057 | $ | 97 | $ | 683,640 | $ | — | |||||||||||||||||||||||||||||||||||
| Initial value of noncontrolling interest upon transaction | — | — | — | — | — | — | — | 1,235 | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 197,699 | — | 197,699 | 43 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | (500) | (500) | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock incentive plans | 51,022 | 1 | — | 4,155 | — | — | 4,156 | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 5,059 | — | — | 5,059 | — | ||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | — | (59,599) | — | — | — | (59,599) | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | — | (375) | ||||||||||||||||||||||||||||||||||||||||||
| Subsequent change in redemption value | — | — | — | — | — | — | — | (78) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, April 2, 2022 | 9,292,278 | $ | 93 | $ | (61,040) | $ | 263,049 | $ | 628,756 | $ | (403) | $ | 830,455 | $ | 825 | |||||||||||||||||||||||||||||||||||
| Stockholders' Equity | ||||||||||||||||||||||
| Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||
| Balance, April 2, 2016 | 8,927,989 | $ | 89 | $ | 241,662 | $ | 110,186 | $ | 1,289 | $ | 353,226 | |||||||||||
| Net income | — | — | — | 37,955 | — | 37,955 | ||||||||||||||||
| Reclassification adjustment for net gains realized in income, net | — | — | — | — | (223 | ) | (223 | ) | ||||||||||||||
| Unrealized gain on available-for-sale securities, net | — | — | — | — | 320 | 320 | ||||||||||||||||
| Stock option exercises and associated tax benefits | 66,979 | 1 | 1,004 | — | — | 1,005 | ||||||||||||||||
| Stock-based compensation | — | — | 2,125 | — | — | 2,125 | ||||||||||||||||
| Balance, April 1, 2017 | 8,994,968 | 90 | 244,791 | 148,141 | 1,386 | 394,408 | ||||||||||||||||
| Net income | — | — | — | 61,502 | — | 61,502 | ||||||||||||||||
| Cumulative effect of implementing ASU 2016-09 | 52 | 52 | ||||||||||||||||||||
| Cumulative effect of implementing ASU 2018-02 | (314 | ) | 314 | — | ||||||||||||||||||
| Reclassification adjustment for net gains realized in income, net | — | — | — | — | (964 | ) | (964 | ) | ||||||||||||||
| Unrealized gain on available-for-sale securities, net | — | — | — | — | 702 | 702 | ||||||||||||||||
| Stock option exercises and associated tax benefits | 49,890 | — | (915 | ) | — | — | (915 | ) | ||||||||||||||
| Stock-based compensation | — | — | 2,321 | — | — | 2,321 | ||||||||||||||||
| Balance, March 31, 2018 | 9,044,858 | 90 | 246,197 | 209,381 | 1,438 | 457,106 | ||||||||||||||||
| Net income | — | — | — | 68,622 | — | 68,622 | ||||||||||||||||
| Cumulative effect of implementing ASU 2016-01 | — | — | — | 1,621 | (1,621 | ) | — | |||||||||||||||
| Cumulative effect of implementing ASC 606 | — | — | — | 454 | — | 454 | ||||||||||||||||
| Reclassification adjustment for net losses realized in income, net | — | — | — | — | 59 | 59 | ||||||||||||||||
| Unrealized gain on available-for-sale securities, net | — | — | — | — | 96 | 96 | ||||||||||||||||
| Stock option exercises and associated tax benefits | 53,462 | 1 | (115 | ) | — | — | (114 | ) | ||||||||||||||
| Stock-based compensation | — | — | 3,365 | — | — | 3,365 | ||||||||||||||||
| Balance, March 30, 2019 | 9,098,320 | $ | 91 | $ | 249,447 | $ | 280,078 | $ | (28 | ) | $ | 529,588 | ||||||||||
See accompanying Notes to Consolidated Financial Statements
F-6
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Year Ended | Year Ended | |||||||||||||||||||||||||||
| March 30, 2019 | March 31, 2018 | April 1, 2017 | April 2, 2022 | April 3, 2021 | March 28, 2020 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | OPERATING ACTIVITIES | |||||||||||||||||||||||||||
| Net income | $ | 68,622 | $ | 61,502 | $ | 37,955 | Net income | $ | 197,742 | $ | 76,646 | $ | 75,066 | |||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||
| Depreciation and amortization | 4,698 | 4,026 | 3,687 | Depreciation and amortization | 11,017 | 6,324 | 5,783 | |||||||||||||||||||||
| Provision for credit losses | 562 | 422 | 792 | Provision for credit losses | (325) | (1,193) | 1,348 | |||||||||||||||||||||
| Deferred income taxes | (762 | ) | (4,258 | ) | 278 | Deferred income taxes | (1,732) | 326 | 261 | |||||||||||||||||||
| Stock-based compensation expense | 3,365 | 2,321 | 2,125 | Stock-based compensation expense | 5,059 | 4,392 | 3,881 | |||||||||||||||||||||
| Non-cash interest income, net | (953 | ) | (1,011 | ) | (1,161 | ) | Non-cash interest income, net | (1,629) | (3,312) | (1,411) | ||||||||||||||||||
| Incremental tax benefits from option exercises | — | — | (2,398 | ) | ||||||||||||||||||||||||
| Gain on sale of property, plant and equipment, net | (53 | ) | (77 | ) | (62 | ) | ||||||||||||||||||||||
| (Gain) loss on sale or retirement of property, plant and equipment, net | (Gain) loss on sale or retirement of property, plant and equipment, net | (220) | 116 | (3,409) | ||||||||||||||||||||||||
| Gain on investments and sale of loans, net | (9,207 | ) | (14,544 | ) | (7,179 | ) | Gain on investments and sale of loans, net | (18,364) | (22,037) | (10,977) | ||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions | Changes in operating assets and liabilities, net of acquisitions | |||||||||||||||||||||||||||
| Accounts receivable | (5,684 | ) | (4,118 | ) | (372 | ) | Accounts receivable | (27,268) | (4,597) | (1,442) | ||||||||||||||||||
| Consumer loans receivable originated | (129,990 | ) | (126,404 | ) | (116,662 | ) | Consumer loans receivable originated | (158,988) | (161,562) | (157,090) | ||||||||||||||||||
| Proceeds from sales of consumer loans | 131,117 | 119,345 | 104,446 | Proceeds from sales of consumer loans | 184,849 | 167,067 | 159,632 | |||||||||||||||||||||
| Principal payments on consumer loans receivable | 12,945 | 12,664 | 10,944 | |||||||||||||||||||||||||
| Principal payments received on consumer loans receivable | Principal payments received on consumer loans receivable | 11,553 | 14,126 | 10,632 | ||||||||||||||||||||||||
| Inventories | (7,051 | ) | (13,425 | ) | 958 | Inventories | (73,804) | (17,699) | 8,250 | |||||||||||||||||||
| Prepaid expenses and other current assets | (12,942 | ) | 5,799 | (4,552 | ) | Prepaid expenses and other current assets | (28,309) | 6,380 | 6,683 | |||||||||||||||||||
| Commercial loans receivable | (26,543 | ) | 9,400 | (373 | ) | Commercial loans receivable | 6,415 | 1,825 | (1,914) | |||||||||||||||||||
| Accounts payable and accrued liabilities | 4,712 | 7,324 | 17,365 | |||||||||||||||||||||||||
| Accounts payable and accrued expenses and other current liabilities | Accounts payable and accrued expenses and other current liabilities | 38,228 | 47,229 | 6,444 | ||||||||||||||||||||||||
| Net cash provided by operating activities | 32,836 | 58,966 | 45,791 | Net cash provided by operating activities | 144,224 | 114,031 | 101,737 | |||||||||||||||||||||
| INVESTING ACTIVITIES | INVESTING ACTIVITIES | |||||||||||||||||||||||||||
| Purchases of property, plant and equipment | (7,636 | ) | (8,386 | ) | (5,295 | ) | Purchases of property, plant and equipment | (18,653) | (25,537) | (14,340) | ||||||||||||||||||
| Payments for Lexington Homes, net | — | (1,638 | ) | — | ||||||||||||||||||||||||
| Payments for acquisitions, net | Payments for acquisitions, net | (141,429) | — | (15,937) | ||||||||||||||||||||||||
| Proceeds from sale of property, plant and equipment and assets held for sale | 125 | 474 | 145 | Proceeds from sale of property, plant and equipment and assets held for sale | 1,329 | 240 | 6,541 | |||||||||||||||||||||
| Purchases of investments | (7,337 | ) | (12,537 | ) | (10,930 | ) | Purchases of investments | (12,799) | (17,518) | (11,699) | ||||||||||||||||||
| Proceeds from sale of investments | 9,033 | 17,416 | 9,018 | Proceeds from sale of investments | 12,450 | 19,466 | 10,192 | |||||||||||||||||||||
| Net cash used in investing activities | (5,815 | ) | (4,671 | ) | (7,062 | ) | Net cash used in investing activities | (159,102) | (23,349) | (25,243) | ||||||||||||||||||
| FINANCING ACTIVITIES | FINANCING ACTIVITIES | |||||||||||||||||||||||||||
| Payments for exercise of stock options | (114 | ) | (915 | ) | (1,393 | ) | ||||||||||||||||||||||
| Incremental tax benefits from exercise of stock options | — | — | 2,398 | |||||||||||||||||||||||||
| Proceeds from (payments for) exercise of stock options | Proceeds from (payments for) exercise of stock options | 4,156 | (2,817) | (1,067) | ||||||||||||||||||||||||
| Proceeds from secured financings and other | 392 | 9,079 | 4,270 | Proceeds from secured financings and other | 106 | 64 | 227 | |||||||||||||||||||||
| Payments on securitized financings and other | (26,688 | ) | (8,040 | ) | (8,231 | ) | ||||||||||||||||||||||
| Net cash (used in) provided by financing activities | (26,410 | ) | 124 | (2,956 | ) | |||||||||||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | 611 | 54,419 | 35,773 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 199,258 | 144,839 | 109,066 | |||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 199,869 | $ | 199,258 | $ | 144,839 | ||||||||||||||||||||||
| Payments on secured financings and other | Payments on secured financings and other | (9,383) | (2,788) | (19,916) | ||||||||||||||||||||||||
| Payments for common stock repurchases | Payments for common stock repurchases | (59,599) | (1,441) | — | ||||||||||||||||||||||||
| Distributions to noncontrolling interest | Distributions to noncontrolling interest | (375) | — | — | ||||||||||||||||||||||||
| Net cash used in financing activities | Net cash used in financing activities | (65,095) | (6,982) | (20,756) | ||||||||||||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | Net (decrease) increase in cash, cash equivalents and restricted cash | (79,973) | 83,700 | 55,738 | ||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of the fiscal year | Cash, cash equivalents and restricted cash at beginning of the fiscal year | 339,307 | 255,607 | 199,869 | ||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of the fiscal year | Cash, cash equivalents and restricted cash at end of the fiscal year | $ | 259,334 | $ | 339,307 | $ | 255,607 | |||||||||||||||||||||
| Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | |||||||||||||||||||||||||||
| Cash paid during the year for income taxes | $ | 19,912 | $ | 17,266 | $ | 18,106 | Cash paid during the year for income taxes | $ | 31,415 | $ | 19,469 | $ | 18,839 | |||||||||||||||
| Cash paid during the year for interest | $ | 2,302 | $ | 2,910 | $ | 3,402 | Cash paid during the year for interest | $ | 451 | $ | 468 | $ | 736 | |||||||||||||||
| Supplemental disclosures of noncash financing activity: | ||||||||||||||||||||||||||||
| Assets acquired under capital lease | $ | — | $ | 1,749 | $ | — | ||||||||||||||||||||||
| Capital lease obligations incurred | $ | — | $ | 1,225 | $ | — | ||||||||||||||||||||||
| Supplemental disclosures of noncash activity: | Supplemental disclosures of noncash activity: | |||||||||||||||||||||||||||
| Change in GNMA loans eligible for repurchase | Change in GNMA loans eligible for repurchase | $ | (16,238) | $ | 18,339 | $ | 3,634 | |||||||||||||||||||||
| Right-of-use assets recognized | Right-of-use assets recognized | $ | 4,414 | $ | 5,985 | $ | 18,498 | |||||||||||||||||||||
| Operating lease obligations incurred | Operating lease obligations incurred | $ | 4,414 | $ | 5,985 | $ | 18,523 | |||||||||||||||||||||
| Fair value of assets acquired under finance lease | Fair value of assets acquired under finance lease | $ | 7,158 | $ | — | $ | — | |||||||||||||||||||||
| Finance lease obligations incurred | Finance lease obligations incurred | $ | 6,351 | $ | — | $ | — | |||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
F-7
CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation. These Consolidated Financial Statements include the accounts of Cavco Industries, Inc. and its consolidated subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco"). All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior period amountsWe have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date of March 30, 2019,April 2, 2022, through the date of the filing of this report with the Securities and Exchange Commission (the "SEC") and there were no disclosable subsequent events.events. In addition, references throughout to numbered "Notes" refer to these Notes to Consolidated Financial Statements, unless otherwise stated.
Nature of Operations. Headquartered in Phoenix, Arizona, the Company designswe design and producesproduce factory-built homes which are sold tohousing products primarily distributed through a network of independent distributors located throughout the continental United States, as well as through Company-owned retail sales locationsstores which offer the Company'sour homes to retail customers. Our financial services groupsegment is comprised ofof: a mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), which is an approved Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") seller/servicer and a Government National Mortgage Association ("Ginnie Mae" or "GNMA") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Also included is ourhomes; and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"), which provides property and casualty insurance primarily to owners of manufactured homes.
Fiscal Year. The Company utilizesoperates on a 52-53 week fiscal year ending on the Saturday nearest to March 31st of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31. Fiscal years 2019, 201831st. The current fiscal year ended on April 2, 2022 and 2017 eachincludes 52 weeks, whereas fiscal year 2021 consisted of 53 weeks and fiscal year 2020 consisted of 52 weeks.
Accounting Estimates. Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. ActualDue to uncertainties, actual results could differ from the estimates and assumptions used in preparation of the consolidated financial statements.
Factory-Built Housing Revenue Recognition - Wholesale. Revenue from homes sold to independent distributors, builders, communities and developers is generally recognized when the home is shipped, at which time title passes and it is probable that substantially all of the consideration will be received. Homes sold to independent distributors are generally either paid upon shipment or floor plan financed by the independent distributor through standard industry financing arrangements, which can include repurchase agreements. Manufacturing sales financed under floor plan arrangements that include repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 16).
Some of the Company'sour independent distributors operate multiple sales outlets. No independent distributor accounted for 10% or more of our factory-built housing revenue during any fiscal year within the three-year period ended March 30, 2019.April 2, 2022.
Factory-Built Housing Revenue Recognition - Retail. Sales by Company-owned retail locationsstores are generally recognized when the customer has entered into a legally binding sales contract, the home is delivered and permanently located at the customer's site, the home is accepted by the customer, title has transferred and funding is probable.
Financial Services Revenue Recognition. Premium amounts collected on policies issued and assumed by Standard Casualty are amortized on a straight-line basis into Net revenue over the life of the policy. Premiums earned are net of reinsurance ceded. Policy acquisition costs are also amortized in Cost of sales over the life of the policy. Insurance agency commissions received from third-party insurance companies are recognized as revenue upon execution of the insurance policy where the Company hasas we have no future or ongoing obligation.obligation with respect to such policies.
F-8
Interest income on consumer loans receivables is recognized in Net revenue. Upon acquisition of the previously securitized loan portfolios (the "Acquisition Date"), managementwe evaluated the existing consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probablethe probability that CountryPlacewe would be unableable to collect all amounts due according to the loans' contractual terms. The CompanyWe also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The CompanyWe determined the excess of the loan pool's scheduled contractual principal and contractual interest payments over the undiscounted expected cash flows expected as of the Acquisition Date as an amount that is not accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans iswas accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest incomeWe adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") on March 29, 2020. Upon adoption, we determined that $1.7 million of the existing purchase discount for such consumer loans receivable is recognized in Net revenuewas related to credit factors and was reclassified to the allowance for loan losses upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will continue to be accreted into interest income over the life of the loans (see Note 6).
For loans originated by CountryPlace and held for sale, loan origination fees and gains or losses on sales are recognized in Net revenue upon title transfer of the loans. CountryPlace providesWe provide third-party servicing of mortgages and earns servicingearn servicing fees each month based on the aggregate outstanding balances. Servicing fees are recognized in Net revenue when earned.
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'sOur cash equivalents are primarily comprised of U.S. Treasury and other money market funds and other money market funds,depository accounts, some of which are in excess of Federal Deposit Insurance Corporation insured limits.
Restricted Cash. Restricted cash primarily represents cash related to CountryPlace customer payments to be remitted to third parties and deposits received from retail customers required to be held in trust accounts. The CompanyThese funds cannot access restricted cashbe accessed for general operating purposes (see Note 3)3).
Accounts Receivable. The Company extends We extend competitive credit terms on a customer-by-customer basis in the normal course of business, and its accounts receivable are subject to normal industry risk. The Company reviewsrisk, with many requiring a cash deposit with a sales order or payment upon delivery of a home. We review accounts receivable for estimated losses that may result from customers' inability to pay. As of March 30, 2019April 2, 2022 and March 31, 2018, the company had April 3, 2021, there were no allowance allowances for doubtful accounts.
Investments. Management determines the appropriate classification of its investment securities at the time of purchase. The Company'sOur investments include marketable debt and equity securities. On April 1, 2018, the Company adopted FASB ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which, among other things, removed the available-for-sale designation of marketable equity securities and requires the changesnon-marketable equity investments. Changes in unrealized net holding gains and losses on equity securities to beare reported in earnings instead of recording these amounts in Accumulated other comprehensive income/loss ("AOCI") on the Consolidated Balance Sheets.earnings. Unrealized net holding gains and losses on available-for-sale debt securities continue to beare recorded in AOCI onAccumulated other comprehensive income (loss) ("AOCI") in the Consolidated Balance Sheets. Realized gains and losses from the sale of securities are determined using the specific identification method (see Note 4)4).
Consumer Loans Receivable. Consumer loans receivable consistsconsist primarily of manufactured housing loans originated by CountryPlace (securitized, held(held for investment or held for sale) and construction advances on mortgages. The fair value of consumer loans receivable held on the Acquisition Date was calculated as of that date, as determined by the present value of expected future cash flows, with no allowance for loan loss recorded.
Loans held for investment consist of loan contracts collateralized by the borrowers' homes and, in some instances, related land. Construction loans in progress are stated at the aggregate amount of cumulative funded advances. Loans held for sale are loans that, at the time of origination, are originated with the intent to resell to investors with which the Company has pre-existing purchase agreements, such as Fannie Mae and Freddie Mac, or to sell as part of a Ginnie Mae insured pool of loans and consist of loan contracts collateralized by single-family residential mortgages. Loans held for sale are stated at the lower of cost or market on an aggregate basis.
F-9
Combined land and home loansmortgages are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises ("GSEs") and those that are non-conforming. In most instances, the Company's loansour mortgages are secured by a first-lien position and are provided for the consumer purchase of a home. Unsecuritized consumerConsumer loans held for investment include home-only personal property loans originated under the Company'sour home-only lending programs. Accordingly, the Company classifies itswe classify our loans receivable as follows: conforming mortgages, non-conforming mortgages home-only loans and otherhome-only loans.
In measuring credit quality within each segment and class, the Company useswe use commercially available credit scores (such as FICO®). At the time of each loan's origination, the Company obtainswe obtain credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, the Company useswe use the mid-point of the available credit scores or, if only two scores are available, the Company useswe use the lower of the two. The Company doesWe do not update credit bureau scores after the time of origination.
Commercial Loans Receivable. The Company's Our commercial loans receivable balance consists of amounts loaned by the Company under commercial loan programs for the benefit of our independent distributors and community operators' home purchasing needs. Under the terms of certain programs, the Company haswe have entered into direct commercial loan arrangements with independent distributors and community operators wherein the Company provideswe provide funds to purchase home inventory or homes for placement in communities. Interest income on commercial loans receivable is recognized asin Other income, net in the Consolidated Statements of Comprehensive Income on an accrual basis.
Allowance for Loan Losses. ASU 2016-13 requires a forward-looking impairment model based on expected losses rather than incurred losses. The primary portion of the allowance for loan losses reflects the Company'sour judgment of the incurred loss exposure on our consumer loans receivable. As of April 2, 2022, we had an allowance for loan losses of $2.1 million. Our allowance for loan losses as of April 3, 2021 was $3.2 million (see Note 6).
Another portion of the allowance for loan losses relates to our commercial loans receivablereceivables as of the end of the reporting period. The allowance for loan losses is developed at a portfolio level. A range of probable losses is calculated and the Company makes a determination of the best estimate within the range of loan losses. The Company hasWe have historically been able to resell repossessed homes, thereby mitigating loss experience.exposure. If a default occurs and collateral is lost, the Company iswe are exposed to loss of the full value of the home loan. IfTo determine the Company determinesappropriate level of the allowance for loan loss, we collectively evaluate loans based on their terms and duration. In addition to the allowance calculated under ASU 2016-13, if we determine that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan losses. The CompanyWe recorded allowance for loan losses of $180,000$1.0 million and $42,000$816,000 at March 30, 2019April 2, 2022 and March 31, 2018,April 3, 2021, respectively, related to commercial loans receivable (see Note 7)7).
Inventories. Raw material inventories are valued at the lower of cost (first-in, first-out method) or market.market, using the first in, first out method. 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 life of each asset. Estimated useful lives for significant classes of assets are as follows: buildings and improvements, 10 to 39 years; and machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. The Company sellsWe sell miscellaneous property, plant and equipment in the normal course of business.
Asset Impairment. The CompanyWe periodically evaluatesevaluate the carrying value of long-lived assets to be held and used and held for sale for impairment 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 value of the long-lived asset.asset group. Fair 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 primarily determined in a similar manner, except that the fair values are primarily based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose. The Company recognized noThere were 0 impairment losses recognized in fiscal years 2019, 20182022, 2021 or 20172020.
F-10
Goodwill and Other Intangibles. We account for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In the fair value evaluation of intangible assets acquired, there are significant estimates and assumptions, including forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of the royalty rates and discount rates. The Company accountsexcess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We account for goodwill and other intangible assets in accordance with the provisions of FASB ASCAccounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other. As such, the Company testswe test goodwill annually for impairment. The Company has identified two2 reporting segments: factory-built housing and financial services. As of March 30, 2019,April 2, 2022, all of the Company'sour goodwill is attributable to itsthe factory-built housing reporting segment. Certain intangibles are considered indefinite-lived and others are finite-lived and are amortized over their useful lives. Finite-lived intangibles are amortized over 3 to 15 years on a straight-line basis and are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Indefinite-lived intangible assets are assessed annually for impairment first by making a qualitative assessment, and if necessary, performing a quantitative assessment and recording an impairment charge if the fair value of the asset is less than its carrying amount.
Warranties. The Company provides We provide retail home buyers, builders or developers with a one-year year warranty for manufacturing defects from the date of sale to the retail customer. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. Estimated warranty costs are accrued in 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 distributor inventories, homes purchased by consumers still within the one-year year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home.
Freight. Substantially all freight costs are recovered from our distributors and are included in Net revenue. Freight charges of $41.5 million, $29.3 million and $30.9 million were recognized in fiscal years 2022, 2021 and 2020, respectively.
Reserve for Repurchase Commitment. The Company is We are contingently liable under terms of repurchase agreements with the financial institutions providingthat provide inventory financing forto certain distributors of itsour products. These arrangements, which are customary in the industry, provide for the lender a guarantee that we will repurchase ofour products sold to distributors in the event of default by the distributor. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The risk of loss under these agreements is spread over numerous distributors. Thedistributors and the repurchase price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 3624 months) and the risk of loss is, further reduced by the resale value of repurchased homes. The Company appliesWe apply FASB ASC 460, Guarantees ("ASC 460") and FASB ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for itsour liability for repurchase commitments. Under the provisions of ASC 460, 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 for each repurchase arrangement under the provisions of ASC 450-20, based on historical information available, as a reduction to revenue. 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 distributor will default and an ASC 450-20 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. 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 distributor sells the home. Changes in the reserve are recorded as an adjustment to Net revenue. See Note 16 for further discussion.
F-11
Reserve for Property-LiabilityProperty Casualty Insurance Claims and Claims Expense. Standard Casualty establishes reserves for claims and claims expense on reported and unreported claims of insured losses. Standard Casualty's reservingOur reserve process takes into account known facts and interpretations of circumstances and factors, including Standard's experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix, contractual terms, changes in law and regulation, judicial decisions and economic conditions. In the normal course of business, Standard Casualtywe may also supplement itsour claims processes by utilizing third party adjusters, appraisers, engineers, inspectors and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process. The applicable reserve balance was $6.7$8.1 million and $7.5 million as of March 30, 2019,April 2, 2022 and April 3, 2021, respectively, of which $4.0$3.8 million and $3.7 million related to incurred but not reported ("IBNR") losses.losses, respectively.
Insurance. The Company is We are self-insured for a significant portion of itsour general and products liability, auto liability, health, property and workers' compensation liability coverage. 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 IBNR claims.losses. A reserve for products liability is actuarially determined and reflected in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets. The determination of claims and expenses and the appropriateness of the related liabilities are regularly reviewed and updated.
Advertising. Advertising costs are expensed as incurred and were $837,000 in fiscal year 2019, $1.1$1.4 million in fiscal year 2018 and $1.0 million2022, $807,000 in fiscal year 2017.
Fair Value of Financial Instruments. Our financial instruments consist of cash and 2017cash equivalents, restricted cash, accounts receivable, investments, consumer loans receivable, commercial loans receivable, accounts payable, certain accrued expenses and other current liabilities and secured credit facilities and other financings.
In accordance with FASB ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), respectively.fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
| Level 1 – | Quoted prices in active markets for identical assets or liabilities. | ||||
| Level 2 – | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||||
| Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | ||||
The carrying amount of cash and cash equivalents approximates fair value because their maturity is less than three months. The carrying amounts of restricted cash, accounts receivable, accounts payable and certain accrued expenses and other current liabilities approximate fair value due to the short-term maturity of the amounts. See Note 19 for the fair values of our other financial instruments and the inputs used.
Income Taxes. The Company accounts We account for income taxes pursuant to FASB ASC 740, Income Taxes ("ASC 740") and providesprovide 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.
F-12
The calculation of tax liabilities involves considering uncertainties in the application of complex tax regulations. The Company recognizesWe recognize liabilities for anticipated tax audit issues based on the Company'sour 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.of derecognition. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. The Company usesWe use a two-step approach to evaluate uncertain tax positions. This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be recognized in the Consolidated Financial Statements.
Other Income, net. Other income primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivables and earned on cash balances, gains and losses on the sale of corporate investments, interest related to commercial loan receivable balances, interest income earned on cash balances and gains and losses or impairment on property, plant and equipment or assets held for sale or sold.and impairment of such assets, if necessary.
Stock-Based Compensation. The Company applies the fair value recognition provisions of FASB ASC 718, Compensation—Stock Compensation ("ASC 718"), using the Black-Scholes-Merton option-pricing model. The determination of. Stock-based compensation is measured based on the fair value of stock optionsthe award on the date of grant using this option-pricing modeland the corresponding expense 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 volatilityrecognized over the expected termperiod during which an employee is required to provide service in exchange for the award. Stock-based compensation expense is classified in the same line item of our Consolidated Statements of Comprehensive Income as other payroll-related expenses specific to the employee. Compensation expense related to service-based restricted stock units ("RSUs") is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense related to performance-based RSUs is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards the risk-free interest rate and expected dividends. The Company uses(i.e., a graded vesting basis).
We use historical data to estimate pre-vesting option forfeitures and recordsrecord stock-based compensation cost, using the straight-line attribution method, only for those awards that are expected to vest.
Redeemable Noncontrolling Interest. We have a 70% interest in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as "Craftsman" or the "Entities"). See Note 22 for a description of the transaction. As a result, we consolidate the Entities while recognizing a noncontrolling interest for the remaining third party ("Craftsman Seller") ownership.
An additional 20% of the remaining equity of Craftsman is to be purchased on December 31, 2023 by us for cash. As mandatory redemption of this ownership interest is required, the fair value of this portion of the noncontrolling interest is recorded in the long-term liabilities section of the Consolidated Balance Sheet within Secured financings and other. In each reporting period hereafter, until purchased by the Company, the mandatorily redeemable noncontrolling interest is adjusted to its current redemption value, based on a predetermined formula. Adjustments in the redemption value to the mandatorily redeemable noncontrolling interest are recorded to Interest expense.
The Craftsman Seller can require us to purchase their remaining 10% ownership ("Put Right"), after December 31, 2023, for an amount specified in the Craftsman Purchase Agreement that is designed to approximate fair value. Likewise, we can require the Craftsman Seller to sell us their remaining 10% ownership ("Call Right") based on the same timing as described above for the Put Right. As redemption of this remaining ownership is not a current obligation, the fair value of this portion of the noncontrolling interest is classified as a temporary equity mezzanine item between liabilities and stockholders' equity in the Consolidated Balance Sheets as Redeemable noncontrolling interest. The amount of income attributable to this noncontrolling interest is included on the face of the Consolidated Statements of Comprehensive Income.
Accumulated Other Comprehensive Income.Income (loss). AOCI is comprised of unrealized gains and losses on available-for-sale debt securities (see Note 4)4), and is presented net of tax. Prior to the adoption of ASU 2016-01, as discussed above, AOCI included unrealized gains and losses on both debt and equity securities. Accumulated unrealized loss on available-for-sale debt securities at the end of fiscal year 20192022 was $35,000$510,000 before tax, with an associated tax amount of $7,000,$107,000, resulting in a net unrealized loss of $28,000. Unrealized gain on available-for-sale investments for fiscal year 2018 was $1.9 million, offset by tax effect of $493,000, for a net unrealized gain of $1.4 million.$403,000. Unrealized gain on available-for-sale investmentsdebt securities for fiscal year 20172021 was $2.2 million before tax,$123,000, with an associated tax amount of $835,000, resulting in$26,000, for a net unrealized gain of $1.4 million.$97,000.
F-13
Treasury Stock. We record repurchases of our common stock as treasury stock at cost. As we do not have a formal retirement plan for the shares acquired, and the ultimate disposition has not yet been decided, we show the cost of the acquired stock separately as a deduction from equity.
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 stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method (see Note 18)18).
Recently Issued or Adopted Accounting Pronouncements. In May 2014, the FASB issued ASC 606, which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 using the modified retrospective method for contracts that were not completed as of April 1, 2018, and recorded a reduction of $600,000 to Accrued liabilities and a corresponding increase to Retained earnings related to gross margin on home sales that were previously deferred for the cumulative effect of the adoption. Prior periods were not restated. There were no significant changes to processes or internal controls as a result of the adoption of ASC 606. See Note 2 for additional information.
| March 30, 2019 | March 31, 2018 | April 1, 2017 | |||||||||
| Cash and cash equivalents | $ | 187,370 | $ | 186,766 | $ | 132,542 | |||||
| Restricted cash, current | 12,148 | 11,228 | 11,573 | ||||||||
| Restricted cash | 351 | 1,264 | 724 | ||||||||
| $ | 199,869 | $ | 199,258 | $ | 144,839 | ||||||
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
2. Revenue from Contracts with Customers
Site Improvements on Retail Sales. Under previous guidance, the Company recordedWe recognize sales of subcontracted ancillary services, such as preparation of the home site or other exterior enhancements, net of associated costs.enhancements. Such services are provided as a convenience to the customer. As the Company iswe are involved in the selection of subcontractors, under FASB ASC 606, Revenue from Contracts with Customers, we have concluded that it is appropriate to recognize the sale of these ancillary services on a gross basis. The revenues associated with these programs for fiscal years 2019, 20182022, 2021 and 20172020 were $24.9$43.9 million, $21.2$41.1 million and $18.8$30.0 million, respectively.
Additional Items. Expected consideration, and therefore revenue, reflects reductions for returns, allowances and other incentives, some of which may be contingent on future events. Additionally, the Company'sour volume rebates are accrued at the time of sale and are recorded as a reduction of Net revenue.
In customer contracts for retail sales of manufactured homes, consideration includes certain state and local excise taxes billed to customers when those taxes are levied directly upon us by the taxing authorities. Expected consideration excludes sales and other taxes collected on behalf of taxing authorities. The Company electsWe elect to treat consideration for freight performed as a fulfillment activity. Therefore, Net revenue includes consideration for freight and other fulfillment activities performed prior to the customer obtaining control of the goods.
Practical Expedients and Exemptions. The CompanyExemptions. We generally expensesexpense sales commissions when incurred because the amortization period would be one yearone-year or less. These costs are recorded within Selling, general and administrative expenses. In addition, the Company doeswe do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one yearone-year or less.
Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue.(in thousands). All revenue from customers is recognized at a point in time, either when the customer takes delivery or when a third-party insurance contract is executed, as more fully discussed above. Other items included in our consolidated revenues are primarily related to financial services, including manufactured housing consumer finance and insurance, which are not within the scope
F-14
Contents
| Fiscal year ended March 30, 2019 | |||
| Factory-built housing | |||
| U.S. Housing and Urban Development code homes | $ | 727,950 | |
| Modular homes | 90,636 | ||
| Park model RVs | 38,057 | ||
| Other (1) | 49,083 | ||
| Net revenue from factory-built housing | 905,726 | ||
| Financial services | |||
| Insurance agency commissions received from third-party insurance companies | 3,065 | ||
| Other | 53,955 | ||
| Net revenue from financial services | 57,020 | ||
| Total Net revenue | $ | 962,746 | |
| April 2, 2022 | April 3, 2021 | March 28, 2020 | |||||||||||||||
| Factory-built housing | |||||||||||||||||
| U.S. Housing and Urban Development code homes | $ | 1,335,904 | $ | 842,515 | $ | 813,074 | |||||||||||
| Modular homes | 117,817 | 91,896 | 84,498 | ||||||||||||||
| Park model RVs | 42,219 | 46,862 | 46,427 | ||||||||||||||
| Other | 60,343 | 56,616 | 55,341 | ||||||||||||||
| 1,556,283 | 1,037,889 | 999,340 | |||||||||||||||
| Financial services | |||||||||||||||||
| Insurance agency commissions received from third-party insurance companies | 4,055 | 3,102 | 3,352 | ||||||||||||||
| All other sources | 66,820 | 67,060 | 59,082 | ||||||||||||||
| 70,875 | 70,162 | 62,434 | |||||||||||||||
| $ | 1,627,158 | $ | 1,108,051 | $ | 1,061,774 | ||||||||||||
| March 30, 2019 | |||||||||||
| Consolidated Balance Sheet | As Reported | Adjustments | Balance without ASC 606 Adoption | ||||||||
| Accrued liabilities | $ | 125,181 | $ | 1,750 | $ | 126,931 | |||||
| Total current liabilities | 174,008 | 1,750 | 175,758 | ||||||||
| Deferred income taxes | 7,002 | (461 | ) | 6,541 | |||||||
| Retained earnings | 280,078 | (1,289 | ) | 278,789 | |||||||
| Total stockholders' equity | 529,588 | (1,289 | ) | 528,299 | |||||||
| Fiscal year ended March 30, 2019 | |||||||||||
| Consolidated Statement of Comprehensive Income | As Reported | Adjustments | Balance without ASC 606 Adoption | ||||||||
| Net revenue | $ | 962,746 | $ | (32,420 | ) | $ | 930,326 | ||||
| Cost of sales | 757,040 | (31,047 | ) | 725,993 | |||||||
| Gross profit | 205,706 | (1,373 | ) | 204,333 | |||||||
| Selling, general and administrative expenses | 121,568 | (289 | ) | 121,279 | |||||||
| Income from operations | 84,138 | (1,084 | ) | 83,054 | |||||||
| Income before income taxes | 86,676 | (1,084 | ) | 85,592 | |||||||
| Income tax expense | (18,054 | ) | 250 | (17,804 | ) | ||||||
| Net income | 68,622 | (834 | ) | 67,788 | |||||||
3. Restricted Cash
Restricted cash consistsconsisted of the following (in thousands):
| March 30, 2019 | March 31, 2018 | April 2, 2022 | April 3, 2021 | |||||||||||||||
| Cash related to CountryPlace customer payments to be remitted to third parties | $ | 10,426 | $ | 9,180 | Cash related to CountryPlace customer payments to be remitted to third parties | $ | 13,857 | $ | 16,049 | |||||||||
| Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders | 634 | 1,311 | ||||||||||||||||
| Other restricted cash | 1,439 | 2,001 | Other restricted cash | 1,327 | 979 | |||||||||||||
| $ | 12,499 | $ | 12,492 | 15,184 | 17,028 | |||||||||||||
| Less current portion | Less current portion | (14,849) | (16,693) | |||||||||||||||
| $ | 335 | $ | 335 | |||||||||||||||
Corresponding amounts for customer payments to be remitted to third parties are recorded in accounts payableAccounts payable.
The following table provides a reconciliation of Cash and accrued liabilities for customer paymentscash equivalents and deposits.Restricted cash reported within the Consolidated Balance Sheets to the combined amounts shown in the Consolidated Statements of Cash Flows (in thousands):
| April 2, 2022 | April 3, 2021 | March 28, 2020 | |||||||||||||||
| Cash and cash equivalents | $ | 244,150 | $ | 322,279 | $ | 241,826 | |||||||||||
| Restricted cash | 15,184 | 17,028 | 13,781 | ||||||||||||||
| $ | 259,334 | $ | 339,307 | $ | 255,607 | ||||||||||||
F-15
4. Investments
Investments consistconsisted of the following (in thousands):
| April 2, 2022 | April 3, 2021 | ||||||||||
| Available-for-sale debt securities | $ | 17,760 | $ | 14,946 | |||||||
| Marketable equity securities | 16,780 | 17,600 | |||||||||
| Non-marketable equity investments | 20,479 | 21,960 | |||||||||
| 55,019 | 54,506 | ||||||||||
| Less short-term investments | (20,086) | (19,496) | |||||||||
| $ | 34,933 | $ | 35,010 | ||||||||
| March 30, 2019 | March 31, 2018 | ||||||
| Available-for-sale debt securities | $ | 13,408 | $ | 16,181 | |||
| Marketable equity securities | 11,073 | 10,405 | |||||
| Non-marketable equity investments | 20,276 | 18,853 | |||||
| $ | 44,757 | $ | 45,439 | ||||
The following tables summarize the Company'samortized cost and fair value of our investments in available-for-sale debt securities, gross unrealized gains and losses and fair value, aggregated by investment categorysecurity type are shown in the table below (in thousands):
| April 2, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Residential mortgage-backed securities | $ | 1,668 | $ | 2 | $ | (57) | $ | 1,613 | |||||||||||||||
| State and political subdivision debt securities | 10,100 | 38 | (232) | 9,906 | |||||||||||||||||||
| Corporate debt securities | 6,502 | 1 | (262) | 6,241 | |||||||||||||||||||
| $ | 18,270 | $ | 41 | $ | (551) | $ | 17,760 | ||||||||||||||||
| March 30, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| U.S. Treasury and government debt securities | $ | 300 | $ | — | $ | (3 | ) | $ | 297 | ||||||
| Residential mortgage-backed securities | 6,625 | 3 | (119 | ) | 6,509 | ||||||||||
| State and political subdivision debt securities | 4,883 | 117 | (17 | ) | 4,983 | ||||||||||
| Corporate debt securities | 1,635 | 3 | (19 | ) | 1,619 | ||||||||||
| $ | 13,443 | $ | 123 | $ | (158 | ) | $ | 13,408 | |||||||
| April 3, 2021 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Residential mortgage-backed securities | $ | 2,787 | $ | 30 | $ | (13) | $ | 2,804 | |||||||||||||||
| State and political subdivision debt securities | 7,239 | 125 | (19) | 7,345 | |||||||||||||||||||
| Corporate debt securities | 4,797 | 11 | (11) | 4,797 | |||||||||||||||||||
| $ | 14,823 | $ | 166 | $ | (43) | $ | 14,946 | ||||||||||||||||
F-16
| March 31, 2018 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| U.S. Treasury and government debt securities | $ | 300 | $ | — | $ | (7 | ) | $ | 293 | ||||||
| Residential mortgage-backed securities | 7,654 | — | (155 | ) | 7,499 | ||||||||||
| State and political subdivision debt securities | 6,377 | 109 | (149 | ) | 6,337 | ||||||||||
| Corporate debt securities | 2,081 | 1 | (30 | ) | 2,052 | ||||||||||
| $ | 16,412 | $ | 110 | $ | (341 | ) | $ | 16,181 | |||||||
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities havehad been in a continuous unrealized loss position (in thousands):
| April 2, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 1,048 | $ | (45) | $ | 289 | $ | (12) | $ | 1,337 | $ | (57) | |||||||||||||||||||||||
| State and political subdivision debt securities | 3,884 | (164) | 1,246 | (68) | 5,130 | (232) | |||||||||||||||||||||||||||||
| Corporate debt securities | 5,215 | (231) | 598 | (31) | 5,813 | (262) | |||||||||||||||||||||||||||||
| $ | 10,147 | $ | (440) | $ | 2,133 | $ | (111) | $ | 12,280 | $ | (551) | ||||||||||||||||||||||||
| March 30, 2019 | |||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. Treasury and government debt securities | $ | — | $ | — | $ | 297 | $ | (3 | ) | $ | 297 | $ | (3 | ) | |||||||||
| Residential mortgage-backed securities | 1,066 | (9 | ) | 5,206 | (110 | ) | 6,272 | (119 | ) | ||||||||||||||
| State and political subdivision debt securities | 353 | — | 2,319 | (17 | ) | 2,672 | (17 | ) | |||||||||||||||
| Corporate debt securities | 243 | (8 | ) | 1,073 | (11 | ) | 1,316 | (19 | ) | ||||||||||||||
| $ | 1,662 | $ | (17 | ) | $ | 8,895 | $ | (141 | ) | $ | 10,557 | $ | (158 | ) | |||||||||
| April 3, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 927 | $ | (6) | $ | 450 | $ | (7) | $ | 1,377 | $ | (13) | |||||||||||||||||||||||
| State and political subdivision debt securities | 3,013 | (19) | — | — | 3,013 | (19) | |||||||||||||||||||||||||||||
| Corporate debt securities | 2,153 | (10) | 249 | (1) | 2,402 | (11) | |||||||||||||||||||||||||||||
| $ | 6,093 | $ | (35) | $ | 699 | $ | (8) | $ | 6,792 | $ | (43) | ||||||||||||||||||||||||
| March 31, 2018 | |||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. Treasury and government debt securities | $ | 293 | $ | (7 | ) | $ | — | $ | — | $ | 293 | $ | (7 | ) | |||||||||
| Residential mortgage-backed securities | 3,185 | (52 | ) | 3,909 | (103 | ) | 7,094 | (155 | ) | ||||||||||||||
| State and political subdivision debt securities | 2,224 | (40 | ) | 2,180 | (109 | ) | 4,404 | (149 | ) | ||||||||||||||
| Corporate debt securities | 1,384 | (12 | ) | 367 | (18 | ) | 1,751 | (30 | ) | ||||||||||||||
| $ | 7,086 | $ | (111 | ) | $ | 6,456 | $ | (230 | ) | $ | 13,542 | $ | (341 | ) | |||||||||
The amortized cost and fair value of the Company'sour investments in available-for-sale debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
| March 30, 2019 | April 2, 2022 | |||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||
| Due in less than one year | $ | 1,265 | $ | 1,258 | Due in less than one year | $ | 3,300 | $ | 3,302 | |||||||||
| Due after one year through five years | 2,954 | 2,927 | Due after one year through five years | 11,394 | 10,901 | |||||||||||||
| Due after five years through ten years | — | — | Due after five years through ten years | 1,261 | 1,281 | |||||||||||||
| Due after ten years | 2,599 | 2,714 | Due after ten years | 647 | 663 | |||||||||||||
| Mortgage-backed securities | 6,625 | 6,509 | Mortgage-backed securities | 1,668 | 1,613 | |||||||||||||
| $ | 13,443 | $ | 13,408 | $ | 18,270 | $ | 17,760 | |||||||||||
F-17
We recognize unrealized gains and losses on marketable equity securities from changes in market prices during the period as a component of earnings in the Consolidated Statements of Comprehensive Income. See Note 1 for further discussion. Net investment gains and losses on marketable equity securities for fiscal years 2019, 20182022, 2021 and 20172020 were as follows (in thousands):
| Year Ended | |||||||||||
| March 30, 2019 | March 31, 2018 | April 1, 2017 | |||||||||
| Marketable equity securities: | |||||||||||
| Unrealized net losses on securities held at the end of the period | $ | (291 | ) | $ | — | — | |||||
| Net losses during fiscal 2019 on securities sold in fiscal 2019 | (64 | ) | — | — | |||||||
| Gross realized gains | — | 5,962 | 1,118 | ||||||||
| Gross realized losses | — | (203 | ) | (370 | ) | ||||||
| Total net (loss) gain on marketable equity securities | $ | (355 | ) | $ | 5,759 | $ | 748 | ||||
| Year Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | March 28, 2020 | |||||||||||||||
| Marketable equity securities: | |||||||||||||||||
| Net gain (loss) recognized during the period | $ | 2,160 | $ | 8,515 | $ | (2,264) | |||||||||||
| Less: Net (gains) losses recognized on securities sold during the period | (551) | (2,191) | 232 | ||||||||||||||
| Unrealized gains (losses) recognized during the period on securities still held | $ | 1,609 | $ | 6,324 | $ | (2,032) | |||||||||||
5. Inventories
Inventories consistconsisted of the following (in thousands):
| April 2, 2022 | April 3, 2021 | ||||||||||
| Raw materials | $ | 95,929 | $ | 54,336 | |||||||
| Work in process | 30,638 | 19,149 | |||||||||
| Finished goods | 117,404 | 57,749 | |||||||||
| $ | 243,971 | $ | 131,234 | ||||||||
| March 30, 2019 | March 31, 2018 | ||||||
| Raw materials | $ | 33,701 | $ | 36,124 | |||
| Work in process | 12,212 | 13,670 | |||||
| Finished goods and other | 70,290 | 59,358 | |||||
| $ | 116,203 | $ | 109,152 | ||||
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
| April 2, 2022 | April 3, 2021 | ||||||||||
| Loans held for investment, previously securitized | $ | 26,014 | $ | 31,949 | |||||||
| Loans held for investment | 14,771 | 18,690 | |||||||||
| Loans held for sale | 8,500 | 15,587 | |||||||||
| Construction advances | 3,547 | 13,801 | |||||||||
| 52,832 | 80,027 | ||||||||||
| Deferred financing fees and other, net | (833) | (2,041) | |||||||||
| Allowance for loan losses | (2,115) | (3,188) | |||||||||
| 49,884 | 74,798 | ||||||||||
| Less current portion | (20,639) | (37,690) | |||||||||
| $ | 29,245 | $ | 37,108 | ||||||||
F-18
| March 30, 2019 | March 31, 2018 | ||||||
| Loans held for investment (at Acquisition Date) | $ | 44,375 | $ | 51,798 | |||
| Loans held for investment (originated after Acquisition Date) | 20,580 | 21,183 | |||||
| Loans held for sale | 11,288 | 12,830 | |||||
| Construction advances | 12,883 | 11,088 | |||||
| Consumer loans receivable | 89,126 | 96,899 | |||||
| Deferred financing fees and other, net | (1,926 | ) | (1,551 | ) | |||
| Allowance for loan losses | (415 | ) | (397 | ) | |||
| Consumer loans receivable, net | $ | 86,785 | $ | 94,951 | |||
| March 30, 2019 | March 31, 2018 | ||||||
| (in thousands) | |||||||
| Consumer loans receivable held for investment – contractual amount | $ | 100,595 | $ | 120,096 | |||
| Purchase discount: | |||||||
| Accretable | (36,672 | ) | (44,481 | ) | |||
| Non-accretable difference | (19,502 | ) | (23,711 | ) | |||
| Less consumer loans receivable reclassified as other assets | (46 | ) | (106 | ) | |||
| Total acquired consumer loans receivable held for investment, net | $ | 44,375 | $ | 51,798 | |||
| March 30, 2019 | March 31, 2018 | ||||
| Prepayment rate | 17.1 | % | 16.0 | % | |
| Default rate | 1.1 | % | 1.2 | % | |
| April 2, 2022 | April 3, 2021 | ||||||||||
| Allowance for loan losses at beginning of period | $ | 3,188 | $ | 1,767 | |||||||
| Impact of adoption of ASU 2016-13 | — | 2,276 | |||||||||
| Change in estimated loan losses, net | (541) | (655) | |||||||||
| Charge-offs | (532) | (201) | |||||||||
| Recoveries | — | 1 | |||||||||
| Allowance for loan losses at end of period | $ | 2,115 | $ | 3,188 | |||||||
| Year Ended | |||||||
| March 30, 2019 | March 31, 2018 | ||||||
| Balance at the beginning of the period | $ | 44,481 | $ | 56,686 | |||
| Additions | — | — | |||||
| Accretion | (7,588 | ) | (8,453 | ) | |||
| Reclassifications to nonaccretable discount | (221 | ) | (3,752 | ) | |||
| Balance at the end of the period | $ | 36,672 | $ | 44,481 | |||
The consumer loans held for investment havehad the following characteristics:
| April 2, 2022 | April 3, 2021 | ||||||||||
| Weighted average contractual interest rate | 8.32 | % | 8.26 | % | |||||||
| Weighted average effective interest rate | 9.21 | % | 9.34 | % | |||||||
| Weighted average months to maturity | 151 | 162 | |||||||||
| March 30, 2019 | March 31, 2018 | ||||
| Weighted average contractual interest rate | 8.49 | % | 8.57 | % | |
| Weighted average effective interest rate | 9.11 | % | 9.34 | % | |
| Weighted average months to maturity | 163 | 168 | |||
The following table is a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands):
| April 2, 2022 | April 3, 2021 | ||||||||||
| Current | $ | 49,546 | $ | 76,378 | |||||||
| 31 to 60 days | 1,202 | 508 | |||||||||
| 61 to 90 days | 41 | 21 | |||||||||
| 91+ days | 2,043 | 3,120 | |||||||||
| $ | 52,832 | $ | 80,027 | ||||||||
The following table disaggregates CountryPlace's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the timeand fiscal year of origination (in thousands):
| April 2, 2022 | |||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | |||||||||||||||||||||||||||||||||||
| Prime- FICO score 680 and greater | $ | 8,155 | $ | 1,615 | $ | 2,371 | $ | 1,339 | $ | 853 | $ | 20,485 | $ | 34,818 | |||||||||||||||||||||||||||
| Near Prime- FICO score 620-679 | 1,661 | 1,274 | 1,413 | 1,976 | 617 | 9,266 | 16,207 | ||||||||||||||||||||||||||||||||||
| Sub-Prime- FICO score less than 620 | 45 | 20 | 52 | — | — | 1,318 | 1,435 | ||||||||||||||||||||||||||||||||||
| No FICO score | — | — | — | 26 | — | 346 | 372 | ||||||||||||||||||||||||||||||||||
| $ | 9,861 | $ | 2,909 | $ | 3,836 | $ | 3,341 | $ | 1,470 | $ | 31,415 | $ | 52,832 | ||||||||||||||||||||||||||||
F-19
| March 30, 2019 | |||||||||||||||||||||||
| Consumer Loans Held for Investment | |||||||||||||||||||||||
Securitized 2005 | Securitized 2007 | Unsecuritized | Construction Advances | Consumer Loans Held For Sale | Total | ||||||||||||||||||
| Asset Class | |||||||||||||||||||||||
| Credit Quality Indicator (FICO® score) | |||||||||||||||||||||||
| Home-only loans | |||||||||||||||||||||||
| 0-619 | $ | 401 | $ | 245 | $ | 266 | $ | — | $ | — | $ | 912 | |||||||||||
| 620-719 | 8,448 | 5,996 | 10,266 | — | — | 24,710 | |||||||||||||||||
| 720+ | 9,090 | 5,419 | 8,436 | — | 617 | 23,562 | |||||||||||||||||
| Other | 47 | — | 390 | — | — | 437 | |||||||||||||||||
| Subtotal | 17,986 | 11,660 | 19,358 | — | 617 | 49,621 | |||||||||||||||||
| Conforming mortgages | |||||||||||||||||||||||
| 0-619 | — | — | 83 | — | 460 | 543 | |||||||||||||||||
| 620-719 | — | — | 2,202 | 8,061 | 6,885 | 17,148 | |||||||||||||||||
| 720+ | — | — | 684 | 4,822 | 3,326 | 8,832 | |||||||||||||||||
| Subtotal | — | — | 2,969 | 12,883 | 10,671 | 26,523 | |||||||||||||||||
| Non-conforming mortgages | |||||||||||||||||||||||
| 0-619 | 78 | 344 | 991 | — | — | 1,413 | |||||||||||||||||
| 620-719 | 994 | 4,008 | 2,687 | — | — | 7,689 | |||||||||||||||||
| 720+ | 1,238 | 2,053 | 369 | — | — | 3,660 | |||||||||||||||||
| Other | — | — | 214 | — | — | 214 | |||||||||||||||||
| Subtotal | 2,310 | 6,405 | 4,261 | — | — | 12,976 | |||||||||||||||||
| Other Loans | — | — | 6 | — | — | 6 | |||||||||||||||||
| $ | 20,296 | $ | 18,065 | $ | 26,594 | $ | 12,883 | $ | 11,288 | $ | 89,126 | ||||||||||||
| March 31, 2018 | |||||||||||||||||||||||
| Consumer Loans Held for Investment | |||||||||||||||||||||||
Securitized 2005 | Securitized 2007 | Unsecuritized | Construction Advances | Consumer Loans Held For Sale | Total | ||||||||||||||||||
| Asset Class | |||||||||||||||||||||||
| Credit Quality Indicator (FICO® score) | |||||||||||||||||||||||
| Home-only loans | |||||||||||||||||||||||
| 0-619 | $ | 465 | $ | 354 | $ | 330 | $ | — | $ | — | $ | 1,149 | |||||||||||
| 620-719 | 10,102 | 7,107 | 8,587 | — | 245 | 26,041 | |||||||||||||||||
| 720+ | 10,594 | 6,410 | 11,285 | — | 155 | 28,444 | |||||||||||||||||
| Other | 49 | — | 403 | — | — | 452 | |||||||||||||||||
| Subtotal | 21,210 | 13,871 | 20,605 | — | 400 | 56,086 | |||||||||||||||||
| Conforming mortgages | |||||||||||||||||||||||
| 0-619 | — | — | 156 | 141 | 179 | 476 | |||||||||||||||||
| 620-719 | — | — | 2,137 | 6,428 | 6,479 | 15,044 | |||||||||||||||||
| 720+ | — | — | 199 | 4,519 | 5,663 | 10,381 | |||||||||||||||||
| Other | — | — | 116 | — | 109 | 225 | |||||||||||||||||
| Subtotal | — | — | 2,608 | 11,088 | 12,430 | 26,126 | |||||||||||||||||
| Non-conforming mortgages | |||||||||||||||||||||||
| 0-619 | 82 | 405 | 1,047 | — | — | 1,534 | |||||||||||||||||
| 620-719 | 1,120 | 4,378 | 3,093 | — | — | 8,591 | |||||||||||||||||
| 720+ | 1,348 | 2,526 | 395 | — | — | 4,269 | |||||||||||||||||
| Other | — | — | 282 | — | — | 282 | |||||||||||||||||
| Subtotal | 2,550 | 7,309 | 4,817 | — | — | 14,676 | |||||||||||||||||
| Other loans | — | — | 11 | — | — | 11 | |||||||||||||||||
| $ | 23,760 | $ | 21,180 | $ | 28,041 | $ | 11,088 | $ | 12,830 | $ | 96,899 | ||||||||||||
| April 3, 2021 | |||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | |||||||||||||||||||||||||||||||||||
| Prime- FICO score 680 and greater | $ | 18,250 | $ | 3,575 | $ | 1,718 | $ | 971 | $ | 1,959 | $ | 23,375 | $ | 49,848 | |||||||||||||||||||||||||||
| Near Prime- FICO score 620-679 | 10,227 | 2,744 | 1,794 | 1,364 | 500 | 10,401 | 27,030 | ||||||||||||||||||||||||||||||||||
| Sub-Prime- FICO score less than 620 | 348 | 53 | — | — | 84 | 1,579 | 2,064 | ||||||||||||||||||||||||||||||||||
| No FICO score | 576 | — | 28 | — | — | 481 | 1,085 | ||||||||||||||||||||||||||||||||||
| $ | 29,401 | $ | 6,372 | $ | 3,540 | $ | 2,335 | $ | 2,543 | $ | 35,836 | $ | 80,027 | ||||||||||||||||||||||||||||
Loan contracts secured by collateral that is geographically concentrated collateral could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. As of March 30, 2019, 44% of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas and 12% is concentrated in Florida. As of March 31, 2018, 44%April 2, 2022, 39% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 11%17% was concentrated in Florida. No otherAs of April 3, 2021, 35% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 20% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the principal balance of the consumer loanloans receivable as of March 30, 2019April 2, 2022 or March 31, 2018.April 3, 2021.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home lessless the estimated costs to sell. At repossession, the fair value of the collateral is determined based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is chargedrecorded to the allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $1.5 million$499,000 as of March 30, 2019April 2, 2022 and March 31, 2018,$518,000 as of April 3, 2021, and are included in PrepaidPrepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $1.5$1.1 million and $1.1 million as of March 30, 2019April 2, 2022 and March 31, 2018, respectively.April 3, 2021.
7. Commercial Loans Receivable and Allowance for Loan Losses
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent distributors, communitiescommunity owners and developers; and (ii) amounts loaned by the Company under participation financing programs.
Commercial loans receivable, net consistconsisted of the following, by class of financing notes receivable (in thousands):
| April 2, 2022 | April 3, 2021 | ||||||||||
| Loans receivable | $ | 69,693 | $ | 45,377 | |||||||
| Allowance for loan losses | (1,011) | (816) | |||||||||
| Deferred financing fees, net | (116) | (247) | |||||||||
| 68,566 | 44,314 | ||||||||||
| Less current portion of commercial loans receivable (including from affiliates), net | (32,644) | (19,232) | |||||||||
| $ | 35,922 | $ | 25,082 | ||||||||
F-20
| March 30, 2019 | March 31, 2018 | ||||||
| Direct loans receivable | $ | 42,899 | $ | 16,368 | |||
| Participation loans receivable | 495 | 275 | |||||
| Allowance for loan losses | (180 | ) | (42 | ) | |||
| Deferred financing fees, net | (208 | ) | — | ||||
| $ | 43,006 | $ | 16,601 | ||||
The commercial loans receivable balance hashad the following characteristics:
| March 30, 2019 | March 31, 2018 | April 2, 2022 | April 3, 2021 | |||||||||||||
| Weighted average contractual interest rate | 5.7 | % | 4.6 | % | Weighted average contractual interest rate | 6.4 | % | 6.4 | % | |||||||
| Weighted average months to maturity | 7 | 6 | ||||||||||||||
| Weighted average months outstanding | Weighted average months outstanding | 9 | 11 | |||||||||||||