UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 27,December 26, 2020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-08822
CAVCO INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Delaware | | | 56-2405642 | |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
| | | | |
3636 North Central Ave, Ste 1200 | | | | |
| Phoenix | Arizona | 85012 | |
(Address of principal executive offices, including zip code) | | | | |
(602) 256-6263
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.01 | CVCO | The Nasdaq Stock Market LLC |
| | (Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☒ | Accelerated Filer | ☐ |
Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
Emerging Growth Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 24, 2020, 9,180,229January 22, 2021, 9,192,237 shares of the registrant's Common Stock, $.01 par value, were outstanding.
CAVCO INDUSTRIES, INC.
FORM 10-Q
June 27,December 26, 2020
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
ASSETS | ASSETS | (Unaudited) | | | ASSETS | (Unaudited) | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 270,547 | | | $ | 241,826 | | Cash and cash equivalents | $ | 327,487 | | | $ | 241,826 | |
Restricted cash, current | Restricted cash, current | 19,600 | | | 13,446 | | Restricted cash, current | 12,802 | | | 13,446 | |
Accounts receivable, net | Accounts receivable, net | 38,171 | | | 42,800 | | Accounts receivable, net | 40,932 | | | 42,800 | |
Short-term investments | Short-term investments | 16,374 | | | 14,582 | | Short-term investments | 16,966 | | | 14,582 | |
Current portion of consumer loans receivable, net | Current portion of consumer loans receivable, net | 44,830 | | | 32,376 | | Current portion of consumer loans receivable, net | 42,091 | | | 32,376 | |
Current portion of commercial loans receivable, net | Current portion of commercial loans receivable, net | 13,628 | | | 14,657 | | Current portion of commercial loans receivable, net | 15,649 | | | 14,657 | |
Current portion of commercial loans receivable from affiliates, net | Current portion of commercial loans receivable from affiliates, net | 803 | | | 766 | | Current portion of commercial loans receivable from affiliates, net | 3,363 | | | 766 | |
Inventories | Inventories | 106,396 | | | 113,535 | | Inventories | 110,624 | | | 113,535 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 37,642 | | | 42,197 | | Prepaid expenses and other current assets | 55,805 | | | 42,197 | |
Total current assets | Total current assets | 547,991 | | | 516,185 | | Total current assets | 625,719 | | | 516,185 | |
Restricted cash | Restricted cash | 335 | | | 335 | | Restricted cash | 335 | | | 335 | |
Investments | Investments | 30,506 | | | 31,557 | | Investments | 35,485 | | | 31,557 | |
Consumer loans receivable, net | Consumer loans receivable, net | 44,129 | | | 49,928 | | Consumer loans receivable, net | 39,501 | | | 49,928 | |
Commercial loans receivable, net | Commercial loans receivable, net | 20,097 | | | 23,685 | | Commercial loans receivable, net | 16,563 | | | 23,685 | |
Commercial loans receivable from affiliates, net | Commercial loans receivable from affiliates, net | 9,481 | | | 7,457 | | Commercial loans receivable from affiliates, net | 4,171 | | | 7,457 | |
Property, plant and equipment, net | Property, plant and equipment, net | 77,326 | | | 77,190 | | Property, plant and equipment, net | 78,493 | | | 77,190 | |
Goodwill | Goodwill | 75,090 | | | 75,090 | | Goodwill | 75,090 | | | 75,090 | |
Other intangibles, net | Other intangibles, net | 14,923 | | | 15,110 | | Other intangibles, net | 14,550 | | | 15,110 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 18,378 | | | 13,894 | | Operating lease right-of-use assets | 16,659 | | | 13,894 | |
Total assets | Total assets | $ | 838,256 | | | $ | 810,431 | | Total assets | $ | 906,566 | | | $ | 810,431 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 34,658 | | | $ | 29,924 | | Accounts payable | $ | 25,176 | | | $ | 29,924 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 142,193 | | | 139,930 | | Accrued expenses and other current liabilities | 186,026 | | | 139,930 | |
Current portion of secured credit facilities and other | Current portion of secured credit facilities and other | 2,205 | | | 2,248 | | Current portion of secured credit facilities and other | 2,140 | | | 2,248 | |
Total current liabilities | Total current liabilities | 179,056 | | | 172,102 | | Total current liabilities | 213,342 | | | 172,102 | |
Operating lease liabilities | Operating lease liabilities | 15,398 | | | 10,743 | | Operating lease liabilities | 13,827 | | | 10,743 | |
Secured credit facilities and other | Secured credit facilities and other | 12,307 | | | 12,705 | | Secured credit facilities and other | 10,847 | | | 12,705 | |
Deferred income taxes | Deferred income taxes | 7,488 | | | 7,295 | | Deferred income taxes | 6,809 | | | 7,295 | |
Stockholders' equity: | Stockholders' equity: | | Stockholders' equity: | |
Preferred stock, $0.01 par value; 1,000,000 shares authorized; NaN shares issued or outstanding | Preferred stock, $0.01 par value; 1,000,000 shares authorized; NaN shares issued or outstanding | — | | | — | | Preferred stock, $0.01 par value; 1,000,000 shares authorized; NaN shares issued or outstanding | 0 | | | 0 | |
Common stock, $0.01 par value; 40,000,000 shares authorized; Outstanding 9,177,064 and 9,173,242 shares, respectively | 92 | | | 92 | | |
Common stock, $0.01 par value; 40,000,000 shares authorized; Outstanding 9,192,237 and 9,173,242 shares, respectively | | Common stock, $0.01 par value; 40,000,000 shares authorized; Outstanding 9,192,237 and 9,173,242 shares, respectively | 92 | | | 92 | |
Additional paid-in capital | Additional paid-in capital | 252,672 | | | 252,260 | | Additional paid-in capital | 255,664 | | | 252,260 | |
Retained earnings | Retained earnings | 371,085 | | | 355,144 | | Retained earnings | 405,835 | | | 355,144 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 158 | | | 90 | | Accumulated other comprehensive income | 150 | | | 90 | |
Total stockholders' equity | Total stockholders' equity | 624,007 | | | 607,586 | | Total stockholders' equity | 661,741 | | | 607,586 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 838,256 | | | $ | 810,431 | | Total liabilities and stockholders' equity | $ | 906,566 | | | $ | 810,431 | |
See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Net revenue | Net revenue | | $ | 254,801 | | | $ | 264,042 | | Net revenue | $ | 288,772 | | | $ | 273,722 | | | $ | 801,549 | | | $ | 806,439 | |
Cost of sales | Cost of sales | | 199,478 | | | 203,744 | | Cost of sales | 229,534 | | | 213,867 | | | 633,447 | | | 627,819 | |
Gross profit | Gross profit | | 55,323 | | | 60,298 | | Gross profit | 59,238 | | | 59,855 | | | 168,102 | | | 178,620 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | 35,323 | | | 35,264 | | Selling, general and administrative expenses | 35,414 | | | 36,844 | | | 106,190 | | | 108,191 | |
Income from operations | Income from operations | | 20,000 | | | 25,034 | | Income from operations | 23,824 | | | 23,011 | | | 61,912 | | | 70,429 | |
Interest expense | Interest expense | | (196) | | | (486) | | Interest expense | (177) | | | (490) | | | (567) | | | (1,278) | |
Other income, net | Other income, net | | 1,876 | | | 2,814 | | Other income, net | 2,243 | | | 2,211 | | | 5,821 | | | 10,198 | |
Income before income taxes | Income before income taxes | | 21,680 | | | 27,362 | | Income before income taxes | 25,890 | | | 24,732 | | | 67,166 | | | 79,349 | |
Income tax expense | Income tax expense | | (5,006) | | | (6,080) | | Income tax expense | (6,189) | | | (3,834) | | | (15,742) | | | (16,284) | |
Net income | Net income | | $ | 16,674 | | | $ | 21,282 | | Net income | $ | 19,701 | | | $ | 20,898 | | | $ | 51,424 | | | $ | 63,065 | |
| Comprehensive income: | Comprehensive income: | | | Comprehensive income: | |
Net income | Net income | | $ | 16,674 | | | $ | 21,282 | | Net income | $ | 19,701 | | | $ | 20,898 | | | $ | 51,424 | | | $ | 63,065 | |
Reclassification adjustment for securities sold or matured | Reclassification adjustment for securities sold or matured | | 26 | | | 2 | | Reclassification adjustment for securities sold or matured | (13) | | | 15 | | | 20 | | | 17 | |
Applicable income taxes | Applicable income taxes | | (5) | | | (1) | | Applicable income taxes | 3 | | | (3) | | | (4) | | | (4) | |
Net change in unrealized position of investments held | Net change in unrealized position of investments held | | 59 | | | 111 | | Net change in unrealized position of investments held | (6) | | | (14) | | | 56 | | | 126 | |
Applicable income taxes | Applicable income taxes | | (12) | | | (23) | | Applicable income taxes | 1 | | | 3 | | | (12) | | | (26) | |
Comprehensive income | Comprehensive income | | $ | 16,742 | | | $ | 21,371 | | Comprehensive income | $ | 19,686 | | | $ | 20,899 | | | $ | 51,484 | | | $ | 63,178 | |
| Net income per share: | Net income per share: | | | Net income per share: | |
Basic | Basic | | $ | 1.82 | | | $ | 2.34 | | Basic | $ | 2.14 | | | $ | 2.29 | | | $ | 5.60 | | | $ | 6.91 | |
Diluted | Diluted | | $ | 1.80 | | | $ | 2.31 | | Diluted | $ | 2.12 | | | $ | 2.25 | | | $ | 5.54 | | | $ | 6.81 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | | | | Weighted average shares outstanding: | | | | | | | |
Basic | Basic | | 9,174,182 | | | 9,102,685 | | Basic | 9,190,254 | | | 9,138,202 | | | 9,182,491 | | | 9,120,241 | |
Diluted | Diluted | | 9,264,661 | | | 9,217,599 | | Diluted | 9,295,553 | | | 9,293,941 | | | 9,285,238 | | | 9,259,203 | |
See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| | | Three Months Ended | | | Nine Months Ended |
| | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 |
OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | | | |
Net income | Net income | $ | 16,674 | | | $ | 21,282 | | Net income | $ | 51,424 | | | $ | 63,065 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 1,613 | | | 1,240 | | Depreciation and amortization | 4,735 | | | 4,208 | |
Provision for credit losses | Provision for credit losses | (884) | | | 213 | | Provision for credit losses | (1,082) | | | 138 | |
Deferred income taxes | Deferred income taxes | 406 | | | (69) | | Deferred income taxes | (272) | | | 1,407 | |
Stock-based compensation expense | Stock-based compensation expense | 945 | | | 630 | | Stock-based compensation expense | 2,935 | | | 2,268 | |
Non-cash interest income, net | Non-cash interest income, net | (2,186) | | | (359) | | Non-cash interest income, net | (2,984) | | | (1,134) | |
Gain on sale of property, plant and equipment, net | 289 | | | — | | |
Loss (gain) on sale or retirement of property, plant and equipment, net | | Loss (gain) on sale or retirement of property, plant and equipment, net | 220 | | | (3,416) | |
Gain on investments and sale of loans, net | Gain on investments and sale of loans, net | (4,982) | | | (4,031) | | Gain on investments and sale of loans, net | (14,964) | | | (11,801) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | 4,629 | | | (1,252) | | Accounts receivable | 1,868 | | | 2,196 | |
Consumer loans receivable originated | Consumer loans receivable originated | (47,356) | | | (37,586) | | Consumer loans receivable originated | (124,058) | | | (121,637) | |
Proceeds from sales of consumer loans | Proceeds from sales of consumer loans | 39,271 | | | 37,625 | | Proceeds from sales of consumer loans | 122,597 | | | 117,127 | |
Principal payments received on consumer loans receivable | Principal payments received on consumer loans receivable | 3,261 | | | 2,176 | | Principal payments received on consumer loans receivable | 10,720 | | | 7,816 | |
Inventories | Inventories | 7,139 | | | (2,329) | | Inventories | 2,911 | | | 11,567 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 7,128 | | | 4,321 | | Prepaid expenses and other current assets | 10,913 | | | (676) | |
Commercial loans receivable | Commercial loans receivable | 2,556 | | | (3,682) | | Commercial loans receivable | 6,444 | | | 487 | |
Accounts payable and accrued expenses and other current liabilities | Accounts payable and accrued expenses and other current liabilities | 7,189 | | | (1,381) | | Accounts payable and accrued expenses and other current liabilities | 20,159 | | | (3,295) | |
Net cash provided by operating activities | Net cash provided by operating activities | 35,692 | | | 16,798 | | Net cash provided by operating activities | 91,566 | | | 68,320 | |
INVESTING ACTIVITIES | INVESTING ACTIVITIES | | | | INVESTING ACTIVITIES | | | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (1,856) | | | (2,063) | | Purchases of property, plant and equipment | (5,816) | | | (6,487) | |
| Proceeds from sale of property, plant and equipment and assets held for sale | 5 | | | 42 | | |
Payments for acquisition, net | | Payments for acquisition, net | 0 | | | (15,937) | |
Proceeds from sale of property, plant and equipment | | Proceeds from sale of property, plant and equipment | 118 | | | 73 | |
Purchases of investments | Purchases of investments | (1,160) | | | (2,110) | | Purchases of investments | (14,056) | | | (4,648) | |
Proceeds from sale of investments | Proceeds from sale of investments | 3,116 | | | 2,662 | | Proceeds from sale of investments | 14,656 | | | 8,126 | |
Net cash provided by (used in) investing activities | 105 | | | (1,469) | | |
Net cash used in investing activities | | Net cash used in investing activities | (5,098) | | | (18,873) | |
FINANCING ACTIVITIES | FINANCING ACTIVITIES | | | | FINANCING ACTIVITIES | | | |
Payments for exercise of stock options | (533) | | | (1,252) | | |
Proceeds from exercise of stock options | | Proceeds from exercise of stock options | 469 | | | 226 | |
Proceeds from secured financings and other | Proceeds from secured financings and other | 64 | | | 75 | | Proceeds from secured financings and other | 64 | | | 76 | |
Payments on securitized financings and other | Payments on securitized financings and other | (453) | | | (997) | | Payments on securitized financings and other | (1,984) | | | (19,360) | |
Net cash used in financing activities | Net cash used in financing activities | (922) | | | (2,174) | | Net cash used in financing activities | (1,451) | | | (19,058) | |
Net increase in cash, cash equivalents and restricted cash | Net increase in cash, cash equivalents and restricted cash | 34,875 | | | 13,155 | | Net increase in cash, cash equivalents and restricted cash | 85,017 | | | 30,389 | |
Cash, cash equivalents and restricted cash at beginning of the fiscal year | Cash, cash equivalents and restricted cash at beginning of the fiscal year | 255,607 | | | 199,869 | | Cash, cash equivalents and restricted cash at beginning of the fiscal year | 255,607 | | | 199,869 | |
Cash, cash equivalents and restricted cash at end of the period | Cash, cash equivalents and restricted cash at end of the period | $ | 290,482 | | | $ | 213,024 | | Cash, cash equivalents and restricted cash at end of the period | $ | 340,624 | | | $ | 230,258 | |
Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | | | | Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes | Cash paid for income taxes | $ | 2,536 | | | $ | 4,512 | | Cash paid for income taxes | $ | 13,111 | | | $ | 15,901 | |
Cash paid for interest | Cash paid for interest | $ | 127 | | | $ | 289 | | Cash paid for interest | $ | 371 | | | $ | 604 | |
Supplemental disclosures of noncash activity: | Supplemental disclosures of noncash activity: | | | | Supplemental disclosures of noncash activity: | | | |
GNMA loans eligible for repurchase | | GNMA loans eligible for repurchase | $ | 21,366 | | | $ | 2,442 | |
Right-of-use assets recognized | Right-of-use assets recognized | $ | 5,559 | | | $ | 13,043 | | Right-of-use assets recognized | $ | 5,692 | | | $ | 14,322 | |
Operating lease obligations incurred | Operating lease obligations incurred | $ | 5,559 | | | $ | 13,505 | | Operating lease obligations incurred | $ | 5,692 | | | $ | 14,347 | |
See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc. and its subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these financial statements include all adjustments, including normal recurring adjustments, that the Company believes are necessary to fairly state the results for the periods presented. Certain prior period amounts have been reclassified to conform to current period classification. The Company hasWe have evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC, and there were no subsequent events requiring disclosure. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company'sour 2020 Annual Report on Form 10-K for the year ended March 28, 2020 filed with the SEC on May 27, 2020 ("Form 10-K").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements ("Notes"). The uncertainty created by the novel coronavirus COVID-19 ("COVID-19") havehas made such estimates more difficult and subjective. Accordingly,Due to that and other uncertainties, actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31st of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31st. The Company's current fiscal year will end on April 3, 2021.2021 and will include 53 weeks.
The Company operatesWe operate principally in 2 segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designsWe design and buildsbuild a wide variety of affordable manufactured homes, modular homes and park model RVs through 20 homebuilding production lines located throughout the United States, which are sold to a network of independent distributors, community owners and developers and through the Company's 39our 40 Company-owned retail stores. OurThe financial services segment is comprised of a finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association and Federal Home Loan Mortgage Corporation seller/servicer and a Government National Mortgage Association ("GNMA") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Standard Casualty provides property and casualty insurance primarily to owners of manufactured homes.
Recently Issued or Adopted Accounting Standards.
On March 29, 2020, the Companywe adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments and requires a forward-looking impairment model based on expected losses rather than incurred losses. We adopted the standard by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for the applicable prior periods. The cumulative effect of the changes made to our consolidated balance sheet at March 29, 2020 for the adoption of ASU 2016-13 was $733,000, net of taxes. The application of ASU 2016-13 increased our allowance for loan losses by $435,000 for commercial loans receivable and $528,000 for non-acquired consumer loans receivable. It had an insignificant impact to our allowance for credit losses for Accounts receivable, net.
The Company adopted ASU 2016-13 was adopted using the prospective transition approach for acquired consumer loans receivable assets that were previously accounted for under FASB Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). The CompanyWe determined that $1.7 million of the existing purchase discount for acquired consumer loans was related to credit factors and was reclassified to the allowance for loan loss upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will be accreted into interest income over the life of the loans.
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. 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.
For a description of other significant accounting policies we used by the Company in the preparation of itsour Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements included in the Form 10-K.
2. Revenue from Contracts with Customers
The following table summarizes customer contract revenues disaggregated by reportable segment and the source of revenue for the three months ended June 27, 2020 and June 29, 2019 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | |
| | | | | June 27, 2020 | | June 29, 2019 |
Factory-built housing | | | | | | | |
U.S. Housing and Urban Development code homes | | | | | $ | 189,446 | | | $ | 202,479 | |
Modular homes | | | | | 20,783 | | | 19,407 | |
Park model RVs | | | | | 13,722 | | | 12,861 | |
Other (1) | | | | | 14,139 | | | 14,021 | |
Net revenue from factory-built housing | | | | | 238,090 | | | 248,768 | |
Financial services | | | | | | | |
Insurance agency commissions received from third-party insurance companies | | | | | 770 | | | 1,155 | |
Other (2) | | | | | 15,941 | | | 14,119 | |
Net revenue from financial services | | | | | 16,711 | | | 15,274 | |
Total Net revenue | | | | | $ | 254,801 | | | $ | 264,042 | |
(1) Other factory-built housing revenue from ancillary products and services including used homes, freight and other services. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Factory-built housing | | | | | | | |
U.S. Housing and Urban Development code homes | $ | 222,684 | | | $ | 208,966 | | | $ | 609,853 | | | $ | 619,001 | |
Modular homes | 26,059 | | | 24,508 | | | 67,325 | | | 63,327 | |
Park model RVs | 8,296 | | | 10,219 | | | 31,045 | | | 34,831 | |
Other | 13,783 | | | 13,413 | | | 41,656 | | | 41,405 | |
Net revenue from factory-built housing | 270,822 | | | 257,106 | | | 749,879 | | | 758,564 | |
Financial services | | | | | | | |
Insurance agency commissions received from third-party insurance companies | 840 | | | 783 | | | 2,387 | | | 2,212 | |
Other | 17,110 | | | 15,833 | | | 49,283 | | | 45,663 | |
Net revenue from financial services | 17,950 | | | 16,616 | | | 51,670 | | | 47,875 | |
Total Net revenue | $ | 288,772 | | | $ | 273,722 | | | $ | 801,549 | | | $ | 806,439 | |
(2) Other financial services revenue includes consumer finance and insurance revenue that is not within the scope of ASU 2014-09, Revenue from Contracts with Customers ("Topic 606").
3. Restricted Cash
Restricted cash consisted of the following (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Cash related to CountryPlace customer payments to be remitted to third parties | Cash related to CountryPlace customer payments to be remitted to third parties | $ | 18,739 | | | $ | 12,740 | | Cash related to CountryPlace customer payments to be remitted to third parties | $ | 11,889 | | | $ | 12,740 | |
Other restricted cash | Other restricted cash | 1,196 | | | 1,041 | | Other restricted cash | 1,248 | | | 1,041 | |
| | $ | 19,935 | | | $ | 13,781 | | | $ | 13,137 | | | $ | 13,781 | |
Corresponding amounts for customer payments to be remitted to third parties are recorded in Accounts payable and Accrued expenses and other current liabilities for customer payments and deposits, respectively.payable.
The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported within the Consolidated Balance Sheets to the combined amounts shown on the Consolidated Statements of Cash Flows (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | June 29, 2019 | | March 30, 2019 | | December 26, 2020 | | March 28, 2020 | | December 28, 2019 | | March 30, 2019 |
Cash and cash equivalents | Cash and cash equivalents | $ | 270,547 | | | $ | 241,826 | | | $ | 199,820 | | | $ | 187,370 | | Cash and cash equivalents | $ | 327,487 | | | $ | 241,826 | | | $ | 216,882 | | | $ | 187,370 | |
Restricted cash, current | Restricted cash, current | 19,600 | | | 13,446 | | | 12,853 | | | 12,148 | | Restricted cash, current | 12,802 | | | 13,446 | | | 13,026 | | | 12,148 | |
Restricted cash | Restricted cash | 335 | | | 335 | | | 351 | | | 351 | | Restricted cash | 335 | | | 335 | | | 350 | | | 351 | |
Cash, cash equivalents and restricted cash per statement of cash flows | Cash, cash equivalents and restricted cash per statement of cash flows | $ | 290,482 | | | $ | 255,607 | | | $ | 213,024 | | | $ | 199,869 | | Cash, cash equivalents and restricted cash per statement of cash flows | $ | 340,624 | | | $ | 255,607 | | | $ | 230,258 | | | $ | 199,869 | |
4. Investments
Investments consisted of the following (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Available-for-sale debt securities | Available-for-sale debt securities | $ | 13,975 | | | $ | 14,774 | | Available-for-sale debt securities | $ | 16,673 | | | $ | 14,774 | |
Marketable equity securities | Marketable equity securities | 11,611 | | | 9,829 | | Marketable equity securities | 13,987 | | | 9,829 | |
Non-marketable equity investments | Non-marketable equity investments | 21,294 | | | 21,536 | | Non-marketable equity investments | 21,791 | | | 21,536 | |
| | $ | 46,880 | | | $ | 46,139 | | | 52,451 | | | 46,139 | |
Less current portion | | Less current portion | (16,966) | | | (14,582) | |
| | | $ | 35,485 | | | $ | 31,557 | |
The Company's investmentsInvestments in marketable equity securities consist of investments in the common stock of industrial and other companies.
As of June 27,December 26, 2020 and March 28, 2020, non-marketable equity investments included contributions of $15.0 million to equity-method investments in community-based initiatives that buy and sell the Company'sour homes and provide home-only financing to residents of certain manufactured home communities. Other non-marketable equity investments included investments in other distribution operations.
The Company records investments in fixed maturity securities classified as available-for-sale at fair value and records the difference between fair value and cost in Accumulated other comprehensive income.
The following tables summarize the Company'sour available-for-sale debt securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
| | | June 27, 2020 | | | December 26, 2020 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 4,637 | | | $ | 65 | | | $ | (31) | | | $ | 4,671 | | Residential mortgage-backed securities | $ | 5,209 | | | $ | 45 | | | $ | (17) | | | $ | 5,237 | |
State and political subdivision debt securities | State and political subdivision debt securities | 4,426 | | | 155 | | | — | | | 4,581 | | State and political subdivision debt securities | 6,156 | | | 151 | | | (1) | | | 6,306 | |
Corporate debt securities | Corporate debt securities | 4,713 | | | 24 | | | (14) | | | 4,723 | | Corporate debt securities | 5,117 | | | 15 | | | (2) | | | 5,130 | |
| | $ | 13,776 | | | $ | 244 | | | $ | (45) | | | $ | 13,975 | | | $ | 16,482 | | | $ | 211 | | | $ | (20) | | | $ | 16,673 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 28, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Residential mortgage-backed securities | $ | 5,400 | | | $ | 69 | | | $ | (26) | | | $ | 5,443 | |
State and political subdivision debt securities | 4,239 | | | 134 | | | (3) | | | 4,370 | |
Corporate debt securities | 5,021 | | | 5 | | | (65) | | | 4,961 | |
| | | | | | | |
| $ | 14,660 | | | $ | 208 | | | $ | (94) | | | $ | 14,774 | |
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position (in thousands):
| | | June 27, 2020 | | | December 26, 2020 |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | | | Less than 12 Months | | 12 Months or Longer | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 721 | | | $ | (11) | | | $ | 951 | | | $ | (20) | | | $ | 1,672 | | | $ | (31) | | Residential mortgage-backed securities | $ | 342 | | | $ | (9) | | | $ | 460 | | | $ | (8) | | | $ | 802 | | | $ | (17) | |
State and political subdivision debt securities | State and political subdivision debt securities | 300 | | | — | | | — | | | — | | | 300 | | | — | | State and political subdivision debt securities | 321 | | | (1) | | | 0 | | | 0 | | | 321 | | | (1) | |
Corporate debt securities | Corporate debt securities | 787 | | | (14) | | | — | | | — | | | 787 | | | (14) | | Corporate debt securities | 805 | | | (2) | | | 0 | | | 0 | | | 805 | | | (2) | |
| | $ | 1,808 | | | $ | (25) | | | $ | 951 | | | $ | (20) | | | $ | 2,759 | | | $ | (45) | | | $ | 1,468 | | | $ | (12) | | | $ | 460 | | | $ | (8) | | | $ | 1,928 | | | $ | (20) | |
| | | March 28, 2020 | | | March 28, 2020 |
| | Less than 12 Months | | | 12 Months or Longer | | | Total | | | Less than 12 Months | | 12 Months or Longer | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Residential mortgage-backed securities | Residential mortgage-backed securities | $ | 133 | | | $ | — | | | $ | 1,779 | | | $ | (26) | | | $ | 1,912 | | | $ | (26) | | Residential mortgage-backed securities | $ | 133 | | | $ | 0 | | | $ | 1,779 | | | $ | (26) | | | $ | 1,912 | | | $ | (26) | |
State and political subdivision debt securities | State and political subdivision debt securities | 601 | | | (2) | | | 101 | | | (1) | | | 702 | | | (3) | | State and political subdivision debt securities | 601 | | | (2) | | | 101 | | | (1) | | | 702 | | | (3) | |
Corporate debt securities | Corporate debt securities | 3,747 | | | (65) | | | — | | | — | | | 3,747 | | | (65) | | Corporate debt securities | 3,747 | | | (65) | | | 0 | | | 0 | | | 3,747 | | | (65) | |
| | $ | 4,481 | | | $ | (67) | | | $ | 1,880 | | | $ | (27) | | | $ | 6,361 | | | $ | (94) | | | $ | 4,481 | | | $ | (67) | | | $ | 1,880 | | | $ | (27) | | | $ | 6,361 | | | $ | (94) | |
The Company isWe are not aware of any changes to the securities or issuers that would indicate the losses above are indicative of credit impairment as of June 27, 2020, and the Company doesDecember 26, 2020. Further, we do not intend to sell the investments, and it is not more likely than not that the Companywe will not be required to sell the investments, before recovery of their amortized cost base.cost.
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 penalties.
| | | June 27, 2020 | | | December 26, 2020 |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in less than one year | Due in less than one year | $ | 4,414 | | | $ | 4,431 | | Due in less than one year | $ | 601 | | | $ | 603 | |
Due after one year through five years | Due after one year through five years | 2,376 | | | 2,389 | | Due after one year through five years | 8,335 | | | 8,375 | |
Due after five years through ten years | Due after five years through ten years | 773 | | | 840 | | Due after five years through ten years | 1,025 | | | 1,097 | |
Due after ten years | Due after ten years | 1,576 | | | 1,644 | | Due after ten years | 1,312 | | | 1,361 | |
Mortgage-backed securities | Mortgage-backed securities | 4,637 | | | 4,671 | | Mortgage-backed securities | 5,209 | | | 5,237 | |
| | $ | 13,776 | | | $ | 13,975 | | | $ | 16,482 | | | $ | 16,673 | |
The Company recognizesWe recognize investment gains and losses on available-for-sale debt securities when it sellswe sell or otherwise disposesdispose of securities using the specific identification method. For the three and nine months ended December 26, 2020, there were 0 gross gains realized on the sale of available-for-sale debt securities and gross losses realized were $1,000 and $6,000, respectively.There were 0 gross gains or losses realized on the sale of available-for-sale debt securities during the three and nine months ended June 27, 2020 or June 29,December 28, 2019.
The Company recognizesWe 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. Net investment gains and losses on marketable equity securities for the three months ended June 27, 2020 and June 29, 2019 were as follows (in thousands):
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Marketable equity securities: | Marketable equity securities: | | | | | Marketable equity securities: | | | | | | | |
Net gains on securities held | Net gains on securities held | | $ | 1,997 | | | $ | 952 | | Net gains on securities held | $ | 1,857 | | | $ | 764 | | | $ | 5,132 | | | $ | 2,066 | |
Net gains (losses) on securities sold | | 33 | | | (1) | | |
Total net gain on marketable equity securities | | $ | 2,030 | | | $ | 951 | | |
Net gains on securities sold | | Net gains on securities sold | 151 | | | 13 | | | 157 | | | 11 | |
| | | $ | 2,008 | | | $ | 777 | | | $ | 5,289 | | | $ | 2,077 | |
5. Inventories
Inventories consisted of the following (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Raw materials | Raw materials | $ | 35,552 | | | $ | 35,691 | | Raw materials | $ | 45,821 | | | $ | 35,691 | |
Work in process | Work in process | 13,120 | | | 13,953 | | Work in process | 16,223 | | | 13,953 | |
Finished goods | Finished goods | 57,724 | | | 63,891 | | Finished goods | 48,580 | | | 63,891 | |
| | $ | 106,396 | | | $ | 113,535 | | | $ | 110,624 | | | $ | 113,535 | |
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Loans held for investment (at Acquisition Date, defined below) | Loans held for investment (at Acquisition Date, defined below) | $ | 37,650 | | | $ | 37,779 | | Loans held for investment (at Acquisition Date, defined below) | $ | 33,726 | | | $ | 37,779 | |
Loans held for investment (originated after Acquisition Date) | Loans held for investment (originated after Acquisition Date) | 19,917 | | | 20,140 | | Loans held for investment (originated after Acquisition Date) | 17,873 | | | 20,140 | |
Loans held for sale | Loans held for sale | 25,297 | | | 14,671 | | Loans held for sale | 22,014 | | | 14,671 | |
Construction advances | Construction advances | 12,240 | | | 13,400 | | Construction advances | 13,923 | | | 13,400 | |
Consumer loans receivable | 95,104 | | | 85,990 | | |
| | | 87,536 | | | 85,990 | |
Deferred financing fees and other, net | Deferred financing fees and other, net | (2,133) | | | (1,919) | | Deferred financing fees and other, net | (2,525) | | | (1,919) | |
Allowance for loan losses | Allowance for loan losses | (4,012) | | | (1,767) | | Allowance for loan losses | (3,419) | | | (1,767) | |
| | $ | 88,959 | | | $ | 82,304 | | | 81,592 | | | 82,304 | |
Less current portion | | Less current portion | (42,091) | | | (32,376) | |
| | | $ | 39,501 | | | $ | 49,928 | |
The Company acquired consumer loans receivable as part of itsthe acquisition of Palm Harbor Homes, Inc. in April 2011 ("Acquisition Date"). The allowance for loan losses is developed at the loan level and allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the loan characteristics and historical loss experience. The Company then makes a determination of the best estimate within the range of loan losses. The allowance for loan losses reflects the Company'sour judgment of the probable loss exposure on its loans held for investment portfolio.investment. On March 29, 2020 the Companywe adopted ASU 2016-13 using the prospective transition approach for acquired consumer loans receivable assets that were previously accounted for under ASC 310-30. The CompanyWe determined thatthat $1.7 million ooff the existing purchase discount for such consumer loans was related to credit factors and was reclassified to the allowance for loan losslosses upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will be accreditedaccreted into interest income over the life of the loans.
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses (in thousands):
| | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Allowance for loan losses at beginning of period | Allowance for loan losses at beginning of period | $ | 1,767 | | | $ | 415 | | Allowance for loan losses at beginning of period | $ | 3,910 | | | $ | 415 | | | $ | 1,767 | | | $ | 415 | |
Impact of adoption of ASU 2016-13 | Impact of adoption of ASU 2016-13 | 2,276 | | | — | | Impact of adoption of ASU 2016-13 | 0 | | | 0 | | | 2,276 | | | 0 | |
Provision for loan losses | 161 | | | 6 | | |
Change in estimated loan losses, net | | Change in estimated loan losses, net | (491) | | | 16 | | | (424) | | | 16 | |
Charge-offs | Charge-offs | (192) | | | — | | Charge-offs | 0 | | | 0 | | | (200) | | | 0 | |
Recoveries | Recoveries | — | | | — | | Recoveries | 0 | | | 0 | | | 0 | | | 0 | |
Allowance for loan losses at end of period | Allowance for loan losses at end of period | $ | 4,012 | | | $ | 421 | | Allowance for loan losses at end of period | $ | 3,419 | | | $ | 431 | | | $ | 3,419 | | | $ | 431 | |
The consumer loans held for investment had the following characteristics:
| | | | | | | | | | | |
| June 27, 2020 | | March 28, 2020 |
Weighted average contractual interest rate | 8.4 | % | | 8.4 | % |
Weighted average effective interest rate | 9.2 | % | | 9.3 | % |
Weighted average months to maturity | 164 | | 164 |
The Company's policy is to place loans on non-accrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower is unable or unwilling to make payments as they become due. The Company will resume accrual of interest once these factors have been remedied. Payments received on non-accrual loans are recorded on a cash basis, first to interest and then to principal. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered. | | | | | | | | | | | |
| December 26, 2020 | | March 28, 2020 |
Weighted average contractual interest rate | 8.4 | % | | 8.4 | % |
Weighted average effective interest rate | 9.5 | % | | 9.3 | % |
Weighted average months to maturity | 159 | | 164 |
The following table is a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Current | Current | $ | 92,390 | | | $ | 83,861 | | Current | $ | 84,200 | | | $ | 83,861 | |
31-to-60 days | 751 | | | 547 | | |
61-to-90 days | 258 | | | 307 | | |
31 to 60 days | | 31 to 60 days | 834 | | | 547 | |
61 to 90 days | | 61 to 90 days | 178 | | | 307 | |
91+ days | 91+ days | 1,705 | | | 1,275 | | 91+ days | 2,324 | | | 1,275 | |
| | $ | 95,104 | | | $ | 85,990 | | | $ | 87,536 | | | $ | 85,990 | |
The following tables disaggregatetable disaggregates CountryPlace's gross consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| | | June 27, 2020 | | | | December 26, 2020 | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | March 28, 2020 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | March 28, 2020 |
Prime- FICO score 680 and greater | Prime- FICO score 680 and greater | $ | 10,464 | | | $ | 14,349 | | | $ | 2,761 | | | $ | 1,693 | | | $ | 2,105 | | | $ | 27,404 | | | $ | 58,776 | | | $ | 55,513 | | Prime- FICO score 680 and greater | $ | 21,087 | | | $ | 4,191 | | | $ | 1,832 | | | $ | 996 | | | $ | 1,761 | | | $ | 24,582 | | | $ | 54,449 | | | $ | 55,513 | |
Near Prime- FICO score 620-679 | Near Prime- FICO score 620-679 | 6,522 | | | 10,390 | | | 2,300 | | | 1,263 | | | 667 | | | 11,677 | | | 32,819 | | | 27,767 | | Near Prime- FICO score 620-679 | 11,502 | | | 4,074 | | | 1,809 | | | 1,141 | | | 614 | | | 10,875 | | | 30,015 | | | 27,767 | |
Sub-Prime- FICO score less than 620 | Sub-Prime- FICO score less than 620 | 78 | | | 90 | | | — | | | — | | | 86 | | | 2,042 | | | 2,296 | | | 2,142 | | Sub-Prime- FICO score less than 620 | 426 | | | 54 | | | 0 | | | 0 | | | 85 | | | 1,786 | | | 2,351 | | | 2,142 | |
No FICO score | No FICO score | 637 | | | 21 | | | 29 | | | — | | | — | | | 526 | | | 1,213 | | | 568 | | No FICO score | 151 | | | 0 | | | 28 | | | 0 | | | 0 | | | 542 | | | 721 | | | 568 | |
| | $ | 17,701 | | | $ | 24,850 | | | $ | 5,090 | | | $ | 2,956 | | | $ | 2,858 | | | $ | 41,649 | | | $ | 95,104 | | | $ | 85,990 | | | $ | 33,166 | | | $ | 8,319 | | | $ | 3,669 | | | $ | 2,137 | | | $ | 2,460 | | | $ | 37,785 | | | $ | 87,536 | | | $ | 85,990 | |
Loan contracts secured by 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 June 27,December 26, 2020, 36%37% of the outstanding principal balance of consumer loans receivable portfolio was concentrated in Texas and 17%20% was concentrated in Florida. As of March 28, 2020, 36% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 16% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of June 27,December 26, 2020 or March 28, 2020.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home less the costs to sell. At repossession, the fair value of the collateral is determined based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is recorded 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 $842,000$162,000 and $1.5 million as of June 27,December 26, 2020 and March 28, 2020, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $674,000$606,000 and $560,000 as of June 27,December 26, 2020 and March 28, 2020, respectively.
7. Commercial Loans Receivable
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of the Company'sour independent distributors, communitiescommunity owners and developers; and (ii) amounts loaned by the Companyus under participation financing programs.
Under the terms of the direct programs, the Company provideswe provide funds for financed home purchases by independent distributors, communitiescommunity owners and developers. The notes are secured by the homes as collateral and, in some instances, other security. Other terms of direct arrangements vary, depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provideswe provide loans to independent floor plan lenders representing a significant portion of the funds that such financiers then lend to distributors to finance their inventory purchases. The participation commercial loans receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivable, net consisted of the following, by class of financing notes receivable (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Direct loans receivable | Direct loans receivable | $ | 44,915 | | | $ | 47,058 | | Direct loans receivable | $ | 40,653 | | | $ | 47,058 | |
Participation loans receivable | Participation loans receivable | 166 | | | 144 | | Participation loans receivable | 105 | | | 144 | |
Allowance for loan losses | Allowance for loan losses | (828) | | | (393) | | Allowance for loan losses | (765) | | | (393) | |
Deferred financing fees, net | Deferred financing fees, net | (244) | | | (244) | | Deferred financing fees, net | (247) | | | (244) | |
| | $ | 44,009 | | | $ | 46,565 | | | 39,746 | | | 46,565 | |
Less current portion of commercial loans receivable (including from affiliates), net | | Less current portion of commercial loans receivable (including from affiliates), net | (19,012) | | | (15,423) | |
| | | $ | 20,734 | | | $ | 31,142 | |
The commercial loans receivable balance had the following characteristics:
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Weighted average contractual interest rate | Weighted average contractual interest rate | 5.3 | % | | 5.7 | % | Weighted average contractual interest rate | 6.1 | % | | 5.7 | % |
Weighted average months to maturity | Weighted average months to maturity | 11 | | 10 | Weighted average months to maturity | 11 | | 10 |
The risk of loss is spread over numerous borrowers. Borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. The Company has historicallyHistorically, we have been able to sell repossessed homes, thereby mitigating loss exposure. If a default occurs and collateral is lost, the Company iswe are exposed to loss of the full value of the home loan. The Company evaluatesWe evaluate the potential for loss from itsthe commercial loan programs based on the borrower's risk rating, overall financial stability, historical experience and estimates of other economic factors. The Company hasWe have included considerations related to the COVID-19 pandemic when assessing itsour risk of loan loss and setting reserve amounts for itsthe commercial finance portfolio as of June 27,December 26, 2020.
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses (in thousands):
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Balance at beginning of period | Balance at beginning of period | | $ | 393 | | | $ | 180 | | Balance at beginning of period | $ | 789 | | | $ | 163 | | | $ | 393 | | | $ | 180 | |
Impact of adoption of ASU 2016-13 | Impact of adoption of ASU 2016-13 | | 435 | | | — | | Impact of adoption of ASU 2016-13 | 0 | | | 0 | | | 435 | | | 0 | |
Change in estimated loan losses, net | Change in estimated loan losses, net | | — | | | 11 | | Change in estimated loan losses, net | (24) | | | (1) | | | (63) | | | (18) | |
Loans charged off, net of recoveries | Loans charged off, net of recoveries | | — | | | — | | Loans charged off, net of recoveries | 0 | | | 0 | | | 0 | | | 0 | |
Balance at end of period | Balance at end of period | | $ | 828 | | | $ | 191 | | Balance at end of period | $ | 765 | | | $ | 162 | | | $ | 765 | | | $ | 162 | |
The following table disaggregates the Company'sour commercial loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| | | June 27, 2020 | | | | | December 26, 2020 | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Total | | March 28, 2020 | | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Total | | March 28, 2020 | |
Risk profile based on payment activity: | Risk profile based on payment activity: | | Risk profile based on payment activity: | |
Performing | Performing | | $ | 13,074 | | | $ | 18,359 | | | $ | 9,370 | | | $ | 2,534 | | | $ | 1,619 | | | $ | 44,956 | | | $ | 47,016 | | | Performing | | $ | 22,708 | | | $ | 10,394 | | | $ | 3,954 | | | $ | 2,180 | | | $ | 1,522 | | | $ | 40,758 | | | $ | 47,016 | | |
Watch list | Watch list | | — | | | — | | | 125 | | | — | | | — | | | 125 | | | 186 | | | Watch list | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 186 | | |
Nonperforming | Nonperforming | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
| | $ | 13,074 | | | $ | 18,359 | | | $ | 9,495 | | | $ | 2,534 | | | $ | 1,619 | | | $ | 45,081 | | | $ | 47,202 | | | | $ | 22,708 | | | $ | 10,394 | | | $ | 3,954 | | | $ | 2,180 | | | $ | 1,522 | | | $ | 40,758 | | | $ | 47,202 | | |
Loans are subject to regular review and are given management's attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments 90 days or more past due. The Company's policy is to place loans on non-accrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower is unable or unwilling to make payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At June 27,December 26, 2020, there were no0 commercial loans 90 days or more past due that were still accruing interest. Payments received on non-accrual loans are recorded on a cash basis, first to interest and then to principal. At June 27, 2020, the Company waswe were not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
As of June 27,December 26, 2020, and 10.0% of our outstanding commercial loans receivable principal balance was concentrated in Arizona. As of March 28, 2020, 10.0% and 11.0%, respectively, of the Company's outstanding commercial loans receivable principal balance was concentrated in California. Other than California, noNo other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of June 27,December 26, 2020 or March 28, 2020.
The CompanyWe had concentrations with one independent third-party and its affiliates that equaled 19.8%16.8% and 21.0% of the net commercial loans receivablesreceivable principal balance outstanding, all of which was secured, as of June 27,December 26, 2020 and March 28, 2020, respectively. The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan loss.losses.
8. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Property, plant and equipment, at cost: | Property, plant and equipment, at cost: | | | | Property, plant and equipment, at cost: | | | |
Land | Land | $ | 26,827 | | | $ | 26,827 | | Land | $ | 26,862 | | | $ | 26,827 | |
Buildings and improvements | Buildings and improvements | 52,820 | | | 52,011 | | Buildings and improvements | 54,710 | | | 52,011 | |
Machinery and equipment | Machinery and equipment | 31,369 | | | 30,984 | | Machinery and equipment | 33,163 | | | 30,984 | |
| | 111,016 | | | 109,822 | | | 114,735 | | | 109,822 | |
Accumulated depreciation | Accumulated depreciation | (33,690) | | | (32,632) | | Accumulated depreciation | (36,242) | | | (32,632) | |
| | $ | 77,326 | | | $ | 77,190 | | | $ | 78,493 | | | $ | 77,190 | |
Depreciation expense was $1.4 million for each of the three month periods ended December 26, 2020and $1.2 millionDecember 28, 2019. Depreciation expense for the threenine months ended June 27,December 26, 2020 and June 29,December 28, 2019 was $4.2 million and $3.8 million, respectively.
Included in the amounts above are certain assets under finance leases. See Note 9 of the Notes to the Consolidated Financial Statements included in the Form 10-K for additional information.
9. Leases
The Company leases We lease certain production and retail locations, office space and equipment. The Company determines ifDuring the period ended December 26, 2020, we executed various lease renewals, including a contract or arrangement is, or contains, a lease at inception. Lease agreements with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term by one to three years or more. Generally, the exercise of lease renewal options is at the Company's discretion. Some agreements also include options to purchase the leased property. The estimated life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option that the Company is reasonably certain to exercise.
The following table provides information about the financial statement classification of the Company's lease balances reported within the Consolidated Balance Sheets as of June 27, 2020 and March 28, 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Classification | | June 27, 2020 | | March 28, 2020 |
ROU assets | | | | | |
Operating lease assets | Operating lease right-of-use assets | | $ | 18,378 | | | $ | 13,894 | |
Finance lease assets | Property, plant and equipment, net (1) | | 1,015 | | | 1,025 | |
Total lease assets | | | $ | 19,393 | | | $ | 14,919 | |
| | | | | |
Lease Liabilities | | | | | |
Current: | | | | | |
Operating lease liabilities | Accrued expenses and other current liabilities | | $ | 4,097 | | | $ | 4,170 | |
Finance lease liabilities | Current portion of secured credit facilities and other | | 74 | | | 77 | |
Non-current: | | | | | |
Operating lease liabilities | Operating lease liabilities | | 15,398 | | | 10,743 | |
Finance lease liabilities | Secured credit facilities and other | | 275 | | | 289 | |
Total lease liabilities | | | $ | 19,844 | | | $ | 15,279 | |
(1) Recorded net of accumulated amortization of $113,000 and $103,000 as of June 27, 2020 and March 28, 2020, respectively.
The balance increased from a five-year lease extension at one of our active manufacturing facilities.facilities, which increased the right of use asset and lease liability.
The present value of the minimum payments for future fiscal years under non-cancelable leases as of June 27,December 26, 2020 werewas as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
Remainder of 2021 | $ | 3,189 | | | $ | 58 | | | $ | 3,247 | |
2022 | 4,148 | | | 73 | | | 4,221 | |
2023 | 3,814 | | | 73 | | | 3,887 | |
2024 | 3,480 | | | 73 | | | 3,553 | |
2025 | 2,706 | | | 73 | | | 2,779 | |
Thereafter | 5,005 | | | 49 | | | 5,054 | |
Total lease payments | 22,342 | | | 399 | | | 22,741 | |
Less: Amount representing interest | (2,847) | | | (50) | | | (2,897) | |
Present value of lease liabilities | $ | 19,495 | | | $ | 349 | | | $ | 19,844 | |
The following table provides information about the weighted average remaining lease terms and weighted average discount rates as of June 27, 2020:
| | | | | | | | | | | |
| Remaining Lease Term (Years) | | Discount Rate |
Operating leases | 5.8 | | 4.5 | % |
Finance leases | 5.3 | | 5.0 | % |
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
Remainder of 2021 | $ | 1,051 | | | $ | 19 | | | $ | 1,070 | |
2022 | 4,182 | | | 73 | | | 4,255 | |
2023 | 3,854 | | | 73 | | | 3,927 | |
2024 | 3,503 | | | 73 | | | 3,576 | |
2025 | 2,706 | | | 73 | | | 2,779 | |
2026 | 2,799 | | | 49 | | | 2,848 | |
Thereafter | 2,206 | | | 0 | | | 2,206 | |
| 20,301 | | | 360 | | | 20,661 | |
Less amount representing interest | (2,392) | | | (41) | | | (2,433) | |
| 17,909 | | | 319 | | | 18,228 | |
Less current portion | (4,082) | | | (71) | | | (4,153) | |
| $ | 13,827 | | | $ | 248 | | | $ | 14,075 | |
10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
| | | June 27, 2020 | | | March 28, 2020 | | | December 26, 2020 | | March 28, 2020 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived: | Indefinite-lived: | | | | | | | | | | | | Indefinite-lived: | | | | | | | | | | | |
Goodwill | Goodwill | $ | 75,090 | | | $ | — | | | $ | 75,090 | | | $ | 75,090 | | | $ | — | | | $ | 75,090 | | Goodwill | $ | 75,090 | | | $ | — | | | $ | 75,090 | | | $ | 75,090 | | | $ | — | | | $ | 75,090 | |
Trademarks and trade names | Trademarks and trade names | 8,900 | | | — | | | 8,900 | | | 8,900 | | | — | | | 8,900 | | Trademarks and trade names | 8,900 | | | — | | | 8,900 | | | 8,900 | | | — | | | 8,900 | |
State insurance licenses | State insurance licenses | 1,100 | | | — | | | 1,100 | | | 1,100 | | | — | | | 1,100 | | State insurance licenses | 1,100 | | | — | | | 1,100 | | | 1,100 | | | — | | | 1,100 | |
Total indefinite-lived intangible assets | 85,090 | | | — | | | 85,090 | | | 85,090 | | | — | | | 85,090 | | |
| | | 85,090 | | | — | | | 85,090 | | | 85,090 | | | — | | | 85,090 | |
Finite-lived: | Finite-lived: | | Finite-lived: | |
Customer relationships | Customer relationships | 11,300 | | | (6,622) | | | 4,678 | | | 11,300 | | | (6,463) | | | 4,837 | | Customer relationships | 11,300 | | | (6,938) | | | 4,362 | | | 11,300 | | | (6,463) | | | 4,837 | |
Other | Other | 1,424 | | | (1,179) | | | 245 | | | 1,424 | | | (1,151) | | | 273 | | Other | 1,424 | | | (1,236) | | | 188 | | | 1,424 | | | (1,151) | | | 273 | |
| | $ | 97,814 | | | $ | (7,801) | | | $ | 90,013 | | | $ | 97,814 | | | $ | (7,614) | | | $ | 90,200 | | | $ | 97,814 | | | $ | (8,174) | | | $ | 89,640 | | | $ | 97,814 | | | $ | (7,614) | | | $ | 90,200 | |
Amortization expense recognized on intangible assets was $187,000$186,000 and $80,000$188,000 for the three months ending June 27,ended December 26, 2020 and June 29,December 28, 2019, respectively. Amortization expense recognized on intangible assets was $560,000 and $419,000 for the nine months ended December 26, 2020 and December 28, 2019, respectively.
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Customer deposits | | Customer deposits | $ | 34,373 | | | $ | 22,055 | |
Salaries, wages and benefits | Salaries, wages and benefits | $ | 23,958 | | | $ | 25,885 | | Salaries, wages and benefits | 32,338 | | | 25,885 | |
Customer deposits | 22,090 | | | 22,055 | | |
Company repurchase options on certain loans sold | | Company repurchase options on certain loans sold | 29,104 | | | 7,444 | |
Unearned insurance premiums | Unearned insurance premiums | 21,710 | | | 20,614 | | Unearned insurance premiums | 21,223 | | | 20,614 | |
Estimated warranties | Estimated warranties | 18,538 | | | 18,678 | | Estimated warranties | 17,996 | | | 18,678 | |
Accrued volume rebates | Accrued volume rebates | 10,155 | | | 9,801 | | Accrued volume rebates | 12,063 | | | 9,801 | |
Company repurchase options on certain loans sold | 8,714 | | | 7,444 | | |
Accrued self-insurance | | Accrued self-insurance | 5,661 | | | 5,112 | |
Insurance loss reserves | Insurance loss reserves | 6,730 | | | 5,582 | | Insurance loss reserves | 5,351 | | | 5,582 | |
Accrued self-insurance | 5,273 | | | 5,112 | | |
Operating lease liabilities | Operating lease liabilities | 4,097 | | | 4,170 | | Operating lease liabilities | 4,082 | | | 4,170 | |
Reserve for repurchase commitments | Reserve for repurchase commitments | 2,475 | | | 2,679 | | Reserve for repurchase commitments | 2,281 | | | 2,679 | |
Accrued taxes | Accrued taxes | 2,385 | | | 1,908 | | Accrued taxes | 2,212 | | | 1,908 | |
Other | Other | 16,068 | | | 16,002 | | Other | 19,342 | | | 16,002 | |
| | $ | 142,193 | | | $ | 139,930 | | | $ | 186,026 | | | $ | 139,930 | |
12. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Balance at beginning of period | Balance at beginning of period | | $ | 18,678 | | | $ | 17,069 | | Balance at beginning of period | $ | 17,805 | | | $ | 18,563 | | | $ | 18,678 | | | $ | 17,069 | |
| Purchase accounting additions | | Purchase accounting additions | 0 | | | 0 | | | 0 | | | 1,192 | |
Charged to costs and expenses | Charged to costs and expenses | | 6,347 | | | 7,821 | | Charged to costs and expenses | 7,724 | | | 7,269 | | | 20,303 | | | 21,855 | |
Payments and deductions | Payments and deductions | | (6,487) | | | (7,130) | | Payments and deductions | (7,533) | | | (7,873) | | | (20,985) | | | (22,157) | |
Balance at end of period | Balance at end of period | | $ | 18,538 | | | $ | 17,760 | | Balance at end of period | $ | 17,996 | | | $ | 17,959 | | | $ | 17,996 | | | $ | 17,959 | |
13. Debt and Finance Lease Obligations
Debt and finance lease obligations primarily consistedconsist of secured credit facilities at the Company'sour finance subsidiary and lease obligations infor which it is expected that the Companywe will obtain ownership of athe leased assetassets at the end of thetheir lease term. The following table summarizes debt and finance lease obligations (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Secured credit facilities | Secured credit facilities | $ | 10,178 | | | $ | 10,474 | | Secured credit facilities | $ | 8,825 | | | $ | 10,474 | |
Other secured financings | Other secured financings | 3,985 | | | 4,113 | | Other secured financings | 3,843 | | | 4,113 | |
Finance lease liabilities | 349 | | | 366 | | |
Finance lease obligations | | Finance lease obligations | 319 | | | 366 | |
| | $ | 14,512 | | | $ | 14,953 | | | 12,987 | | | 14,953 | |
Less current portion | | Less current portion | (2,140) | | | (2,248) | |
| | | $ | 10,847 | | | $ | 12,705 | |
The Company's finance subsidiary
CountryPlace entered into secured credit facilities with independent third-party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods, which have now expired. The proceeds were used by the Company to originate and hold consumer home-only loans secured by manufactured homes, which are pledged as collateral to the facilities. Upon completion of the draw down periods, the facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program was 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As of June 27, 2020, theThe outstanding balance of the converted loans was $10.2$8.8 million atas of December 26, 2020 and $10.5 million as of March 28, 2020, with a weighted average interest rate of 4.91%.
See Note 9 of the Notes to the Consolidated Financial Statements included in the Form 10-K for further discussion of the finance lease obligations.
14. Reinsurance
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned were as follows (in thousands):
| | | Three Months Ended | | | Three Months Ended |
| | June 27, 2020 | | | June 29, 2019 | | | December 26, 2020 | | December 28, 2019 |
| | Written | | Earned | | Written | | Earned | | Written | | Earned | | Written | | Earned |
Direct premiums | Direct premiums | $ | 5,765 | | | $ | 5,185 | | | $ | 5,033 | | | $ | 4,570 | | Direct premiums | $ | 5,420 | | | $ | 5,429 | | | $ | 4,654 | | | $ | 4,756 | |
Assumed premiums—nonaffiliated | Assumed premiums—nonaffiliated | 7,653 | | | 6,790 | | | 7,513 | | | 6,435 | | Assumed premiums—nonaffiliated | 6,541 | | | 7,195 | | | 5,918 | | | 6,676 | |
Ceded premiums—nonaffiliated | Ceded premiums—nonaffiliated | (3,202) | | | (3,202) | | | (2,987) | | | (2,987) | | Ceded premiums—nonaffiliated | (3,146) | | | (3,146) | | | (3,071) | | | (3,071) | |
Net premiums | $ | 10,216 | | | $ | 8,773 | | | $ | 9,559 | | | $ | 8,018 | | |
| | | $ | 8,815 | | | $ | 9,478 | | | $ | 7,501 | | | $ | 8,361 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| December 26, 2020 | | December 28, 2019 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 16,100 | | | $ | 15,759 | | | $ | 13,866 | | | $ | 13,979 | |
Assumed premiums—nonaffiliated | 21,787 | | | 21,028 | | | 20,191 | | | 19,703 | |
Ceded premiums—nonaffiliated | (9,201) | | | (9,201) | | | (9,087) | | | (9,087) | |
| $ | 28,686 | | | $ | 27,586 | | | $ | 24,970 | | | $ | 24,595 | |
Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000 per claim, of which Standard Casualty cedes $175,000$150,000 of the risk of loss per reinsurance. Therefore, Standard Casualty's risk of loss is limited to $125,000$150,000 per claim on typical policies, subject to the reinsurers meeting their obligations. After this limit, amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.5$2 million per occurrence, up to a maximum of $43.5$55 million in the aggregate.
Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time. Under these agreements, the Company may be required to repurchase and reestablish its reinsurance contracts for the remainder of the year to the extent that they have been utilized.
The Company has reinsurance reinstatement premium protection coverage, which will assist in reducing premium repurchase expense in the event of a catastrophic weather claim.
15. Income Taxes
Our tax provision for interim periods is determined by estimating an annual effective tax rate, adjusted for discrete items arising in the fiscal quarters. Each quarter we update the annual effective tax rate and record a year to date adjustment to the tax provision.
Income taxes totaled $5.0 million in the first quarter of fiscal 2021, a 23.1% reported effective tax rate compared to $6.1 million in the first quarter of fiscal 2020, a 22.2% effective tax rate. The higher effective tax rate in the current quarter was primarily from lower tax benefits from the exercise of stock options compared to the same period last year.
16. Commitments and Contingencies
Repurchase Contingencies. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent distributors of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to distributors in the event of default by the distributor. The risk
The maximum amount for which the Company waswe were liable under such agreements approximated $78.8$70.8 million and $79.3 million at June 27,December 26, 2020 and March 28, 2020, respectively, without a reduction for the resale value of the homes. The Company appliesWe apply ASC 460, Guarantees ("ASC 460"), and ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liability forthe repurchase commitments. Under the provisions of ASC 460, during the period in which a home is sold (inception of the purchase commitment), the Company records the greater of the estimated value of the non-contingent obligation (accounted for pursuant to ASC 460) or a contingent liability for each repurchase arrangement (accounted for under the provisions of ASC 450-20) as acommitment liability. We The Company had a reserve for repurchase commitments of $2.5$2.3 million and $2.7 million at June 27,December 26, 2020 and March 28, 2020, respectively.
Letter of Credit. To secure certain reinsurance contracts, Standard Casualty maintainsmaintained an irrevocable letter of credit of $11.0 million to provide assurance that Standard Casualty willwould fulfill its reinsurance obligations. ThisThe letter of credit is secured by certain of Standard Casualty's investments. There were no amounts outstanding against the letter of credit at either June 27, 2020 or March 28,was released on July 11, 2020.
Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried on the Consolidated Balance Sheets at the amount advanced less a valuation allowance and are included in Consumer loans receivable, net. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands):
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Construction loan contract amount | Construction loan contract amount | $ | 31,376 | | | $ | 31,136 | | Construction loan contract amount | $ | 41,763 | | | $ | 31,136 | |
Cumulative advances | Cumulative advances | (12,240) | | | (13,400) | | Cumulative advances | (13,923) | | | (13,400) | |
Remaining construction contingent commitment | $ | 19,136 | | | $ | 17,736 | | |
| | | $ | 27,840 | | | $ | 17,736 | |
Representations and Warranties of Mortgages Sold. CountryPlace sells loans to Government-Sponsored Enterprises ("GSEs") and whole-loan purchasers and finances certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, CountryPlace provides to the GSEs and whole-loan purchasers and lenders representations and warranties related to the loans sold or financed. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer, and CountryPlace's ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims forDuring the nine months ended December 26, 2020, the Company executed indemnification payments are reviewed on a loan-by-loan basisagreements to validate if there has been a breach requiring repurchase. CountryPlace managescover 20% of the risk of repurchase through underwriting and quality assurance practices andlosses experienced over the next two years related to 5 loans that were impacted by servicing the mortgage loans to investor standards. The Company maintainsCOVID-19. We maintain a reserve for these contingent repurchase and indemnification obligations. This reserve of $1.1$1.3 million as of June 27,December 26, 2020 and $1.0 million as of March 28, 2020, included in Accrued expenses and other current liabilities, reflects management's estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan default rates to estimate the liability for loan repurchases and indemnifications. During the three months ended June 27, 2020, noThere were 0 claim requestrequests that resulted in the execution of an indemnification agreement or in the repurchase of a loan.loan during the nine months ended December 26, 2020.
Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers. 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 the CompanyCountryPlace 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, the Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.
As of June 27,December 26, 2020, CountryPlace had outstanding IRLCs with a notional amount of $27.0$24.5 million, which are recorded at fair value in accordance with ASC 815, Derivatives and Hedging ("ASC 815"). ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair value of IRLCs is recorded in Prepaid expenses and other current assets in the Consolidated Balance Sheets. The fair value of IRLCs is based on the value of the underlying loan adjusted for: (1) estimated cost to complete and originate the loan and (2) the estimated percentage of IRLCs that will result in closed loans. The initial and subsequent changes in the value of IRLCs are a component of gain (loss) on loans held for sale. During the three months ended June 27,December 26, 2020 and June 29,December 28, 2019, the Company recognizedwe recognized gains of $57,000 and losses of $125,000$5,000, respectively, on outstanding IRLCs. During the nine months ended December 26, 2020 and $1,000December 28, 2019, we recognized losses of $87,000 and $8,000, respectively, on outstanding IRLCs.
Forward Sales Commitments. CountryPlace manages the risk profiles of a portion of its outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage-backed securities ("MBS") and whole loan sale commitments. As of June 27,December 26, 2020, CountryPlace had $60.8$68.9 million in outstanding notional forward sales of MBSs and forward sales commitments. Commitments for forward sales of whole loans are typically in an amount proportionate with the amount of IRLCs expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.
The estimated fair values of forward sales of MBS and forwardwhole loan sale commitments are based on quoted market values and are recorded within Prepaid expenses and other current assets in the Consolidated Balance Sheets. During the three months ended June 27,December 26, 2020 and June 29,December 28, 2019, the Company we recognized losses of $318,000 and gains of $1.0 million and $35,000$79,000, respectively, on forward sales of MBS and whole loan sale commitments, respectively.commitments. During the nine months ended December 26, 2020 and December 28, 2019, we recognized gains of$816,000 and $163,000,respectively,on forward sales of MBS and whole loan sale commitments.
Legal Matters. Since 2018, the Company has been cooperating with an investigation by the enforcement staff of the SECSEC's Los Angeles Regional Office regarding securities trading in personal and Company accounts directed by the Company's former Chief Executive Officer, Joseph Stegmayer. The Audit Committee of the Board of Directors conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the Audit Committee shared the results of the Audit Committee'sits work were shared with the Company's auditors, listing exchange and the SEC staff. The Company continues to makeWe have also made documents and personnel available to the SEC staff and intendswe intend to continue cooperating with its investigation. We have been exploring the possibility of a settlement with the SEC staff but, at this time, we are unable to assess the probability of that outcome or reasonably estimate the amount of a potential loss, if any.
Joseph D. Robles v. Cavco Industries, Inc.("Robles"), was filed in the Superior Court for the State of California, Riverside on June 25, 2019 and Malik Griffin v. Fleetwood Homes, Inc. ("Griffin"), was filed in the Superior Court for the State of California, San Bernardino on September 19, 2019, each seeking recovery on behalf of a putative class of current and former hourly employees for certain alleged wage-and-hour violations including, among other things: (i) alleged failure to comply with certain wage statement formatting requirements; (ii) alleged failure to compensate employees for straight-time and overtime hours worked; and (iii) alleged failure to provide employees with all requisite work breaks. On November 24, 2020, Robles dismissed his separate action in the Riverside County Superior Court and Griffin filed an amended complaint adding Robles as a named plaintiff to the action in the San Bernardino County Superior Court. A joint mediation occurred on January 27, 2021 where the Parties failed to reach a settlement or resolution to the matter
The Company is party to certain other lawsuits in the ordinary course of business. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company'sour consolidated financial position, liquidity or results of operations after taking into account any existing reserves which reserves are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. However, future events or circumstances that may currently be unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company'sour consolidated financial position, liquidity or results of operations in any future reporting periods.
16. Stockholders' Equity
The following table represents changes in stockholders' equity for each quarterly period during the nine months ended December 26, 2020 (dollars in thousands):
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| | | | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 28, 2020 | 9,173,242 | | | $ | 92 | | | $ | 252,260 | | | $ | 355,144 | | | $ | 90 | | | $ | 607,586 | |
Cumulative effect of implementing ASU 2016-13, net | — | | | 0 | | | 0 | | | (733) | | | 0 | | | (733) | |
Net income | — | | | 0 | | | 0 | | | 16,674 | | | 0 | | | 16,674 | |
Issuance of common stock under stock incentive plans | 3,822 | | | 0 | | | (533) | | | 0 | | | 0 | | | (533) | |
Stock-based compensation | — | | | 0 | | | 945 | | | 0 | | | 0 | | | 945 | |
Other comprehensive income, net | — | | | 0 | | | 0 | | | 0 | | | 68 | | | 68 | |
Balance, June 27, 2020 | 9,177,064 | | | $ | 92 | | | $ | 252,672 | | | $ | 371,085 | | | $ | 158 | | | $ | 624,007 | |
Net income | — | | | 0 | | | 0 | | | 15,049 | | | 0 | | | 15,049 | |
Issuance of common stock under stock incentive plans | 11,098 | | | 0 | | | 522 | | | 0 | | | 0 | | | 522 | |
Stock-based compensation | — | | | 0 | | | 1,103 | | | 0 | | | 0 | | | 1,103 | |
Other comprehensive income, net | — | | | 0 | | | 0 | | | 0 | | | 7 | | | 7 | |
Balance, September 26, 2020 | 9,188,162 | | | $ | 92 | | | $ | 254,297 | | | $ | 386,134 | | | $ | 165 | | | $ | 640,688 | |
Net income | — | | | 0 | | | 0 | | | 19,701 | | | 0 | | | 19,701 | |
Issuance of common stock under stock incentive plans | 4,075 | | | 0 | | | 480 | | | 0 | | | 0 | | | 480 | |
Stock-based compensation | — | | | 0 | | | 887 | | | 0 | | | 0 | | | 887 | |
Other comprehensive loss, net | — | | | 0 | | | 0 | | | 0 | | | (15) | | | (15) | |
Balance, December 26, 2020 | 9,192,237 | | | $ | 92 | | | $ | 255,664 | | | $ | 405,835 | | | $ | 150 | | | $ | 661,741 | |
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The following table represents changes in stockholders' equity for each quarterly period during the nine months ended December 28, 2019 (dollars in thousands):
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| | | | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 30, 2019 | 9,098,320 | | | $ | 91 | | | $ | 249,447 | | | $ | 280,078 | | | $ | (28) | | | $ | 529,588 | |
Net income | — | | | 0 | | | 0 | | | 21,282 | | | 0 | | | 21,282 | |
Issuance of common stock under stock incentive plans | 13,304 | | | 0 | | | (1,252) | | | 0 | | | 0 | | | (1,252) | |
Stock-based compensation | — | | | 0 | | | 630 | | | 0 | | | 0 | | | 630 | |
Other comprehensive income, net | — | | | 0 | | | 0 | | | 0 | | | 89 | | | 89 | |
Balance, June 29, 2019 | 9,111,624 | | | $ | 91 | | | $ | 248,825 | | | $ | 301,360 | | | $ | 61 | | | $ | 550,337 | |
Net income | — | | | 0 | | | 0 | | | 20,885 | | | 0 | | | 20,885 | |
Issuance of common stock under stock incentive plans | 15,842 | | | 0 | | | 941 | | | 0 | | | 0 | | | 941 | |
Stock-based compensation | — | | | 0 | | | 818 | | | 0 | | | 0 | | | 818 | |
Other comprehensive loss, net | — | | | 0 | | | 0 | | | 0 | | | 23 | | | 23 | |
Balance, September 28, 2019 | 9,127,466 | | | $ | 91 | | | $ | 250,584 | | | $ | 322,245 | | | $ | 84 | | | $ | 573,004 | |
Net income | — | | | 0 | | | 0 | | | 20,898 | | | 0 | | | 20,898 | |
Issuance of common stock under stock incentive plans | 13,725 | | | 0 | | | 537 | | | 0 | | | 0 | | | 537 | |
Stock-based compensation | — | | | 0 | | | 820 | | | 0 | | | 0 | | | 820 | |
Other comprehensive income, net | — | | | 0 | | | 0 | | | 0 | | | 1 | | | 1 | |
Balance, December 28, 2019 | 9,141,191 | | | $ | 91 | | | $ | 251,941 | | | $ | 343,143 | | | $ | 85 | | | $ | 595,260 | |
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17. Stockholders' Equity
The following table represents changes in stockholders' equity during the three months ended June 27, 2020 (dollars in thousands):
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| | | | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | | | | | | | |
Balance, March 28, 2020 | 9,173,242 | | | $ | 92 | | | $ | 252,260 | | | $ | 355,144 | | | $ | 90 | | | $ | 607,586 | |
Cumulative effect of implementing ASU 2016-13, net | — | | | — | | | — | | | (733) | | | — | | | (733) | |
Net income | — | | | — | | | — | | | 16,674 | | | — | | | 16,674 | |
Issuance of common stock under stock incentive plans | 3,822 | | | — | | | (533) | | | — | | | — | | | (533) | |
Stock-based compensation | — | | | — | | | 945 | | | — | | | — | | | 945 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | 68 | | | 68 | |
Balance, June 27, 2020 | 9,177,064 | | | $ | 92 | | | $ | 252,672 | | | $ | 371,085 | | | $ | 158 | | | $ | 624,007 | |
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The following table represents changes in stockholders' equity during the three months ended June 29, 2019 (dollars in thousands):
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| | | | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | | | | | | | |
Balance, March 30, 2019 | 9,098,320 | | | $ | 91 | | | $ | 249,447 | | | $ | 280,078 | | | $ | (28) | | | $ | 529,588 | |
Net income | — | | | — | | | — | | | 21,282 | | | — | | | 21,282 | |
Issuance of common stock under stock incentive plans | 13,304 | | | — | | | (1,252) | | | — | | | — | | | (1,252) | |
Stock-based compensation | — | | | — | | | 630 | | | — | | | — | | | 630 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | 89 | | | 89 | |
Balance, June 29, 2019 | 9,111,624 | | | $ | 91 | | | $ | 248,825 | | | $ | 301,360 | | | $ | 61 | | | $ | 550,337 | |
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18. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. The plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company's common stock, of which 246,157 shares were still available for grant as of June 27, 2020. Upon option exercise, new shares of the Company's common stock are issued and when restricted stock vests, restricted stock shares issued become unrestricted. Awards may not be granted below 100% of the fair market value of the Company's common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock vest over a defined period or based on certain performance criteria, as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors), but typically is no more than five years. The stock incentive plans provide for accelerated vesting of stock options and removal of restrictions on restricted stock awards upon a change in control (as defined in the plans).
Stock-based compensation charged against income for the three months ended June 27, 2020 and June 29, 2019 was $945,000 and $630,000, respectively.
As of June 27, 2020, total unrecognized compensation cost related to stock options was approximately $5.7 million and the related weighted-average period over which it is expected to be recognized is approximately 2.49 years.
Stock Options. The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes-Merton option pricing model, which requires the input of assumptions. The Company estimates the risk-free interest rate based on the U.S. Treasury security rate in effect at the time of the grant. The expected life of the options, volatility and dividend rates are estimated based on historical data.
The following table summarizes stock option activity for the three months ended June 27, 2020:
| | | | | |
| Number of Options |
Outstanding at March 28, 2020 | 364,174 | |
Granted | 15,250 | |
Exercised | (9,100) | |
Canceled or expired | (6,200) | |
Outstanding at June 27, 2020 | 364,124 | |
Exercisable at June 27, 2020 | 194,058 | |
Restricted Stock Awards. The fair value of restricted stock awards is estimated as the closing price of the Company's common stock on the date of grant. A summary of restricted stock award activity is as follows:
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| Number of Shares | | | | |
| Performance-Based Awards | | Service-Based Awards | | Total |
Outstanding at March 28, 2020 | 7,305 | | | 4,500 | | | 11,805 | |
Awarded | 7,300 | | | — | | | 7,300 | |
Released | — | | | — | | | — | |
Canceled or expired | (350) | | | — | | | (350) | |
Outstanding at June 27, 2020 | 14,255 | | | 4,500 | | | 18,755 | |
Unvested target stock awards that vest based upon performance conditions through fiscal year 2022 | 6,955 | | | | | |
Unvested target stock awards that vest based upon performance conditions through fiscal year 2023 | 7,300 | | | | | |
19. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Net income | Net income | | $ | 16,674 | | | $ | 21,282 | | Net income | $ | 19,701 | | | $ | 20,898 | | | $ | 51,424 | | | $ | 63,065 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | | | | Weighted average shares outstanding: | | | | | | | |
Basic | Basic | | 9,174,182 | | | 9,102,685 | | Basic | 9,190,254 | | | 9,138,202 | | | 9,182,491 | | | 9,120,241 | |
Effect of dilutive securities | Effect of dilutive securities | | 90,479 | | | 114,914 | | Effect of dilutive securities | 105,299 | | | 155,739 | | | 102,747 | | | 138,962 | |
Diluted | Diluted | | 9,264,661 | | | 9,217,599 | | Diluted | 9,295,553 | | | 9,293,941 | | | 9,285,238 | | | 9,259,203 | |
Net income per share: | Net income per share: | | | | | Net income per share: | | | | | | | |
Basic | Basic | | $ | 1.82 | | | $ | 2.34 | | Basic | $ | 2.14 | | | $ | 2.29 | | | $ | 5.60 | | | $ | 6.91 | |
Diluted | Diluted | | $ | 1.80 | | | $ | 2.31 | | Diluted | $ | 2.12 | | | $ | 2.25 | | | $ | 5.54 | | | $ | 6.81 | |
Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended June 27,December 26, 2020 and June 29,December 28, 2019 were 39,99626,601 and 60,600,14,482, respectively. Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the nine months ended December 26, 2020 and December 28, 2019 were 26,357 and 29,971, respectively. In addition, 14,255 and 7,600 outstanding restricted share awards were excluded from the calculation of diluted earnings per share for both the three months ended June 27, 2020 and June 29, 2019, respectively, because the underlying performance criteria had not yet been met.met were 14,405 for the three and nine months ended December 26, 2020, and 7,305 for the three and nine months ended December 28, 2019.
20.18. Fair Value Measurements
The book value and estimated fair value of the Company'sour financial instruments were as follows (in thousands):
| | | June 27, 2020 | | | March 28, 2020 | | | December 26, 2020 | | March 28, 2020 |
| | Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value |
Available-for-sale debt securities | Available-for-sale debt securities | $ | 13,975 | | | $ | 13,975 | | | $ | 14,774 | | | $ | 14,774 | | Available-for-sale debt securities | $ | 16,673 | | | $ | 16,673 | | | $ | 14,774 | | | $ | 14,774 | |
Marketable equity securities | Marketable equity securities | 11,611 | | | 11,611 | | | 9,829 | | | 9,829 | | Marketable equity securities | 13,987 | | | 13,987 | | | 9,829 | | | 9,829 | |
Non-marketable equity investments | Non-marketable equity investments | 21,294 | | | 21,294 | | | 21,536 | | | 21,536 | | Non-marketable equity investments | 21,791 | | | 21,791 | | | 21,536 | | | 21,536 | |
Consumer loans receivable | Consumer loans receivable | 88,959 | | | 102,578 | | | 82,304 | | | 97,395 | | Consumer loans receivable | 81,592 | | | 96,313 | | | 82,304 | | | 97,395 | |
Interest rate lock commitment derivatives | Interest rate lock commitment derivatives | 40 | | | 40 | | | 164 | | | 164 | | Interest rate lock commitment derivatives | 77 | | | 77 | | | 164 | | | 164 | |
Forward loan sale commitment derivatives | Forward loan sale commitment derivatives | 5 | | | 5 | | | (1,011) | | | (1,011) | | Forward loan sale commitment derivatives | (195) | | | (195) | | | (1,011) | | | (1,011) | |
Commercial loans receivable | Commercial loans receivable | 44,009 | | | 47,503 | | | 46,565 | | | 46,819 | | Commercial loans receivable | 39,746 | | | 38,300 | | | 46,565 | | | 46,819 | |
Securitized financings and other | (14,512) | | | (14,099) | | | (14,953) | | | (15,592) | | |
Secured financings and other | | Secured financings and other | (12,987) | | | (12,493) | | | (14,953) | | | (15,592) | |
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See Note 19, Fair Value Measurements and the Fair Value of Financial Instruments caption in Note 1, Summary of Significant Accounting Policies in our 2020the Form 10-K for more information on the input levels and methodologies we use in determining fair value.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
| | | June 27, 2020 | | | December 26, 2020 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Residential mortgage-backed securities (1) | Residential mortgage-backed securities (1) | $ | 4,671 | | | $ | — | | | $ | 4,671 | | | $ | — | | Residential mortgage-backed securities (1) | $ | 5,237 | | | $ | 0 | | | $ | 5,237 | | | $ | 0 | |
State and political subdivision debt securities (1) | State and political subdivision debt securities (1) | 4,581 | | | — | | | 4,581 | | | — | | State and political subdivision debt securities (1) | 6,306 | | | 0 | | | 6,306 | | | 0 | |
Corporate debt securities (1) | Corporate debt securities (1) | 4,723 | | | — | | | 4,723 | | | — | | Corporate debt securities (1) | 5,130 | | | 0 | | | 5,130 | | | 0 | |
Marketable equity securities (2) | Marketable equity securities (2) | 11,611 | | | 11,611 | | | — | | | — | | Marketable equity securities (2) | 13,987 | | | 13,987 | | | 0 | | | 0 | |
Interest rate lock commitment derivatives (3) | Interest rate lock commitment derivatives (3) | 40 | | | — | | | — | | | 40 | | Interest rate lock commitment derivatives (3) | 77 | | | 0 | | | 0 | | | 77 | |
Forward loan sale commitment derivatives (3) | Forward loan sale commitment derivatives (3) | 5 | | | — | | | — | | | 5 | | Forward loan sale commitment derivatives (3) | (195) | | | 0 | | | 0 | | | (195) | |
Mortgage servicing rights (4) | Mortgage servicing rights (4) | 1,195 | | | — | | | — | | | 1,195 | | Mortgage servicing rights (4) | 831 | | | 0 | | | 0 | | | 831 | |
| | | March 28, 2020 | | | March 28, 2020 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Residential mortgage-backed securities (1) | Residential mortgage-backed securities (1) | $ | 5,443 | | | $ | — | | | $ | 5,443 | | | $ | — | | Residential mortgage-backed securities (1) | $ | 5,443 | | | $ | 0 | | | $ | 5,443 | | | $ | 0 | |
State and political subdivision debt securities (1) | State and political subdivision debt securities (1) | 4,370 | | | — | | | 4,370 | | | — | | State and political subdivision debt securities (1) | 4,370 | | | 0 | | | 4,370 | | | 0 | |
Corporate debt securities (1) | Corporate debt securities (1) | 4,961 | | | — | | | 4,961 | | | — | | Corporate debt securities (1) | 4,961 | | | 0 | | | 4,961 | | | 0 | |
Marketable equity securities (2) | Marketable equity securities (2) | 9,829 | | | 9,829 | | | — | | | — | | Marketable equity securities (2) | 9,829 | | | 9,829 | | | 0 | | | 0 | |
Interest rate lock commitment derivatives (3) | Interest rate lock commitment derivatives (3) | 164 | | | — | | | — | | | 164 | | Interest rate lock commitment derivatives (3) | 164 | | | 0 | | | 0 | | | 164 | |
Forward loan sale commitment derivatives (3) | Forward loan sale commitment derivatives (3) | (1,011) | | | — | | | — | | | (1,011) | | Forward loan sale commitment derivatives (3) | (1,011) | | | 0 | | | 0 | | | (1,011) | |
Mortgage servicing rights (4) | Mortgage servicing rights (4) | 1,225 | | | — | | | — | | | 1,225 | | Mortgage servicing rights (4) | 1,225 | | | 0 | | | 0 | | | 1,225 | |
(1)Unrealized gains or losses on investments are recorded in Accumulated other comprehensive income at each measurement date.
(2)Unrealized gains or losses on investments are recorded in earnings at each measurement date.
(3)Gains or losses on derivatives are recognizedrecorded in current period earnings through Cost of sales.
(4)Changes in the fair value of mortgage servicing rights are recognizedrecorded in the current period earnings through Net revenue.
NaN transfers between Level 1, Level 2 or Level 3 occurred during the threenine months ended June 27,December 26, 2020. The Company's policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
Financial instruments for which fair value is disclosed but not required to be recognized in the balance sheet on a recurring basis are summarized below (in thousands):
| | | June 27, 2020 | | | December 26, 2020 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Loans held for investment | Loans held for investment | $ | 63,647 | | | $ | — | | | $ | — | | | $ | 63,647 | | Loans held for investment | $ | 59,167 | | | $ | 0 | | | $ | 0 | | | $ | 59,167 | |
Loans held for sale | Loans held for sale | 26,691 | | | — | | | — | | | 26,691 | | Loans held for sale | 23,223 | | | 0 | | | 0 | | | 23,223 | |
Loans held—construction advances | 12,240 | | | — | | | — | | | 12,240 | | |
Construction advances | | Construction advances | 13,923 | | | 0 | | | 0 | | | 13,923 | |
Commercial loans receivable | Commercial loans receivable | 47,503 | | | — | | | — | | | 47,503 | | Commercial loans receivable | 38,300 | | | 0 | | | 0 | | | 38,300 | |
Securitized financings and other | (14,099) | | | — | | | (14,099) | | | — | | |
Secured financings and other | | Secured financings and other | (12,493) | | | 0 | | | (12,493) | | | 0 | |
Non-marketable equity investments | Non-marketable equity investments | 21,294 | | | — | | | — | | | 21,294 | | Non-marketable equity investments | 21,791 | | | 0 | | | 0 | | | 21,791 | |
| | | March 28, 2020 | | | March 28, 2020 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Loans held for investment | Loans held for investment | $ | 68,503 | | | $ | — | | | $ | — | | | $ | 68,503 | | Loans held for investment | $ | 68,503 | | | $ | 0 | | | $ | 0 | | | $ | 68,503 | |
Loans held for sale | Loans held for sale | 15,492 | | | — | | | — | | | 15,492 | | Loans held for sale | 15,492 | | | 0 | | | 0 | | | 15,492 | |
Loans held—construction advances | 13,400 | | | — | | | — | | | 13,400 | | |
Construction advances | | Construction advances | 13,400 | | | 0 | | | 0 | | | 13,400 | |
Commercial loans receivable | Commercial loans receivable | 46,819 | | | — | | | — | | | 46,819 | | Commercial loans receivable | 46,819 | | | 0 | | | 0 | | | 46,819 | |
Securitized financings and other | (15,592) | | | — | | | (15,592) | | | — | | |
Secured financings and other | | Secured financings and other | (15,592) | | | 0 | | | (15,592) | | | 0 | |
Non-marketable equity investments | Non-marketable equity investments | 21,536 | | | — | | | — | | | 21,536 | | Non-marketable equity investments | 21,536 | | | 0 | | | 0 | | | 21,536 | |
No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics or performance. Therefore, loans held for investment are measured using Level 3 inputs that are calculated using estimated discounted future cash flows from the evaluation of loan credit quality and performance history to determine expected prepayments and defaults on the portfolio, discounted with rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using inputs that consist of quoted market prices for mortgage-backed securities or investor purchase commitments for similar types of loan commitments on hand from investors. These loans are held for relatively short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk are not a significant component of the change in fair value and changes are largely driven by changes in interest rates or investor yield requirements. The cost of loans held for sale was lower than the fair value as of June 27, 2020. As noted above, activity in the manufactured housing asset-backed securities market is infrequent with no reliable market price information. As such, to determine the fair value of securitized financings, management evaluates the credit quality and performance history of the underlying loan assets to estimate the expected prepayment of the debt and credit spreads, based on market activity for similar rated bonds from other asset classes with similar durations.
The Company records impairment losses on long-lived assets held for sale when the fair value of such long-lived assets is below their carrying values. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. NaN impairment charges were recorded during the threenine months ended June 27,December 26, 2020.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow accounts, performing loss mitigation activities on behalf of investors and otherwise administering the loan servicing portfolio. MSRs are initially recorded at fair value. Changes in fair value subsequent to the initial capitalization are recorded in the Company's results of operations. The Company recognizes MSRs on all loans sold to investors that meet the requirements for sale accounting and for which servicing rights are retained.earnings.
The Company applies fair value accounting to MSRs, with all changes in fair value recorded to Net revenue in accordance with ASC 860-50, Servicing Assets and Liabilities. The fair value of MSRs is based on the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicer advances that are consistent with the assumptions major market participants use in valuing MSRs. The expected cash flows are primarily impacted by prepayment estimates, delinquencies and market discounts. Generally, the value of MSRs is expected to increase when interest rates rise and decrease when interest rates decline, due to the effect those changes in interest rates have on prepayment estimates. Other factors noted above as well as the overall market demand for MSRs may also affect the valuation.
| | | June 27, 2020 | | March 28, 2020 | | December 26, 2020 | | March 28, 2020 |
Number of loans serviced with MSRs | Number of loans serviced with MSRs | 4,660 | | | 4,688 | | Number of loans serviced with MSRs | 4,663 | | | 4,688 | |
Weighted average servicing fee (basis points) | Weighted average servicing fee (basis points) | 31.07 | | | 31.12 | | Weighted average servicing fee (basis points) | 31.81 | | | 31.12 | |
Capitalized servicing multiple | Capitalized servicing multiple | 65.92 | % | | 67.19 | % | Capitalized servicing multiple | 44.23 | % | | 67.19 | % |
Capitalized servicing rate (basis points) | Capitalized servicing rate (basis points) | 20.48 | | | 20.91 | | Capitalized servicing rate (basis points) | 14.07 | | | 20.91 | |
Serviced portfolio with MSRs (in thousands) | Serviced portfolio with MSRs (in thousands) | $ | 583,372 | | | $ | 585,777 | | Serviced portfolio with MSRs (in thousands) | $ | 590,433 | | | $ | 585,777 | |
Mortgage servicing rights (in thousands) | $ | 1,195 | | | $ | 1,225 | | |
MSRs (in thousands) | | MSRs (in thousands) | $ | 831 | | | $ | 1,225 | |
21.19. Related Party Transactions
The Company hasWe have non-marketable equity investments in other distribution operations outside of Company-owned retail locations. In the ordinary course of business, the Company sellswe sell homes and lendslend to certain of these operations through itsour commercial lending programs. For the three months ended June 27,December 26, 2020 and June 29,December 28, 2019, the total amount of sales to related parties were $12.7was $11.2 million and $13.213.3 million, respectively. For the nine months ended December 26, 2020 and December 28, 2019, the total amount of sales to related parties was $34.2 millionand$37.1 million, respectively. As of June 27,December 26, 2020, receivables from related parties included $2.5$3.9 million of accounts receivable and $10.3$7.5 million of commercial loans outstanding. As of March 28, 2020, receivables from related parties included $1.7 million of accounts receivable and $8.2 million of commercial loans outstanding.
22.20. Acquisition of Destiny Homes
On August 2, 2019, the Company purchased certain manufactured housing assets and assumed certain liabilities of Destiny Homes, which operates one manufacturing facility located in Moultrie, Georgia and produces and distributes manufactured and modular homes through a network of independent retailers in the Southeastern United States, further expanding our reach. We finalized the Company's reach. The transaction was accounted for as a business combinationpurchase price allocation and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition. The Company has not made any purchase accounting adjustments during the quarter. However, the allocationfiscal year 2021.
Destiny Homes contributed Net revenue of $9.8 million and increased consolidated Net income on the Company's Consolidated Statements of Comprehensive Income by $125,000 for the three months ended June 27, 2020.
Pro Forma Impact of Acquisition. The following table presents supplemental pro forma information as if the acquisition of Destiny Homes had occurred on March 31, 2019 (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | |
| | | | | June 27, 2020 | | June 29, 2019 |
Net revenue | | | | | $ | 254,801 | | | $ | 273,713 | |
Net income | | | | | 16,674 | | | 21,855 | |
Diluted net income per share | | | | | 1.80 | | | 2.37 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Net revenue | $ | 288,772 | | | $ | 273,722 | | | $ | 801,549 | | | $ | 817,674 | |
Net income | 19,701 | | | 20,898 | | | 51,424 | | | 63,868 | |
Diluted net income per share | 2.12 | | | 2.25 | | | 5.54 | | | 6.90 | |
23.21. Business Segment Information
The Company operatesWe operate principally in 2 segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations and (2) financial services, which includes manufactured housing consumer finance and insurance. The following table details Net revenue and Income before income taxes by segment (in thousands):
| | | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | June 27, 2020 | | June 29, 2019 | | December 26, 2020 | | December 28, 2019 | | December 26, 2020 | | December 28, 2019 |
Net revenue: | Net revenue: | | | | | Net revenue: | | | | | | | |
Factory-built housing | Factory-built housing | | $ | 238,090 | | | $ | 248,768 | | Factory-built housing | $ | 270,822 | | | $ | 257,106 | | | $ | 749,879 | | | $ | 758,564 | |
Financial services | Financial services | | 16,711 | | | 15,274 | | Financial services | 17,950 | | | 16,616 | | | 51,670 | | | 47,875 | |
| | | $ | 254,801 | | | $ | 264,042 | | | $ | 288,772 | | | $ | 273,722 | | | $ | 801,549 | | | $ | 806,439 | |
| Income before income taxes: | Income before income taxes: | | | Income before income taxes: | |
Factory-built housing | Factory-built housing | | $ | 18,450 | | | $ | 24,313 | | Factory-built housing | $ | 18,752 | | | $ | 19,247 | | | $ | 54,654 | | | $ | 66,023 | |
Financial services | Financial services | | 3,230 | | | 3,049 | | Financial services | 7,138 | | | 5,485 | | | 12,512 | | | 13,326 | |
| | | $ | 21,680 | | | $ | 27,362 | | | $ | 25,890 | | | $ | 24,732 | | | $ | 67,166 | | | $ | 79,349 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Report on Form 10-Q include "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often 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; the Company'sour financial performance and operating results; and the expected effect of certain risks and uncertainties on the Company'sour business, financial condition and results of operations,operations; economic conditions and consumer confidence,confidence; operational and legal risks,risks; how the Company may be affected by the novel coronavirus COVID-19 pandemic,("COVID-19") pandemic; governmental regulations and legal proceedings,proceedings; the availability of favorable consumer and wholesale manufactured home financing,financing; market interest rates and Company investments and the ultimate outcome of the Company'sour commitments and contingencies. Forward-looking statements contained in this Report on Form 10-Q speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. The Company doesWe do not intend to publicly update or revise any forward-looking statement contained in this Report on Form 10-Q or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Forward-looking statements involve risks, uncertainties and other factors that may cause the Company'sour actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control. To the extent that the Company'sour assumptions and expectations differ from actual results, the Company'sour ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered. Factors that could affect the Company'sour results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed in Risk Factors in Part I, Item 1A of the Company'sour 2020 Annual Report on Form 10-K ("Form 10-K"), which Risk Factors are incorporated herein..
Introduction
The following should be read in conjunction with Cavco Industries, Inc. and its subsidiaries' (collectively, "we," "us," "our," the "Company" or "Cavco") Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to the Company'sour Consolidated Financial Statements.
Company Overview
Headquartered in Phoenix, Arizona, the Company designswe design and producesproduce factory-built homeshousing products 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, marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Fairmont, Friendship, Chariot Eagle and Destiny. The Company isWe are also one of the leading producers of park model RVs, vacation cabins and systems-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand. Cavco'sOur finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), 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") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Cavco'sOur insurance subsidiary, Standard Casualty Co., provides property and casualty insurance to owners of manufactured homes.
Company Growth
From its inception in 1965, Cavco traditionally served affordable housing markets in the southwestern United States principally through manufactured home production. During the period from 1997 to 2000, Cavco was purchased by, and became a wholly-owned subsidiary of, Centex Corporation, which operated the Company until 2003, when Cavco became a stand-alone publicly-held company traded on the Nasdaq Global Select Market under the ticker symbol CVCO.
The Company has strategically expanded its factory operations and related business activities primarily through the acquisition of other industry participants. This has enabled Cavco to meet the needs of the affordable housing market on a national basis.
The purchase of the Fleetwood and Palm Harbor assets in August 2009 and April 2011, respectively, increased home production and distribution capabilities and provided for vertical integration through entry into financial services businesses specific to the Company's industry. These transactions expanded the Company's geographic reach at a national level by adding factories and retail locations serving the Northwest, West, South, South Central and Mid-Atlantic regions.
The purchases of Chariot Eagle, Fairmont, Lexington and Destiny, in March 2015, May 2015, April 2017 and August 2019, respectively, provided additional operating capacity, increased home production capabilities and further strengthened the Company's market in certain areas of the United States and several provinces in Canada.
In April 2020, the Company decided to shut down production and close its Lexington, Mississippi plant. Ongoing market and operating challenges were exacerbated by decreased business and uncertainty resulting from the novel coronavirus COVID-19 ("COVID-19") pandemic. This location finalized production in June 2020, however, the Company remains available to fulfill the needs of wholesale customers previously served by the Lexington facility from its other production lines in the southeast. The Company does not expect that closing the Lexington facility will have a significant adverse financial effect on the Company. The production facility has been placed on the market for sale.
The Company operatesWe operate 20 homebuilding production lines located in Millersburg and Woodburn, Oregon; Nampa, Idaho; Riverside, California; Phoenix and Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Nappanee, Indiana; Lafayette, Tennessee; Martinsville and Rocky Mount, Virginia; Douglas and Moultrie, Georgia; and Ocala and Plant City, Florida. The majority of the homes produced are sold to, and distributed by, independently owned and controlled retail operations located throughout the United States and Canada. In addition, the Company'sour homes are sold through 3940 Company-owned U.S. retail locations.
In April 2020, the Company operations are generally managedshut down production and closed its Lexington, Mississippi manufacturing facility, finalizing production in June 2020. However, we remain available to serve wholesale customers previously served by the Lexington facility from our other production lines in the southeast. The production facility has been placed on a decentralized basis with oversight from the home office. This decentralization enables the Company's 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.
The Company regularly reviews its product offerings and strives to improve designs, production methods and marketing strategies. The Company continues to focus on gaining operational efficiencies among its operations, all of which have organic growth potential.sale.
Company and Industry Outlook
According to data reported by the Manufactured Housing Institute, industry home shipments decreased 1.3% for the first 11 months of calendar year 2020 compared to the same period in the prior year. The Company maintains a conservative cost structure in an effortindustry offers solutions to build added value into its homesthe affordable housing crisis and has worked diligently to maintain a solid financial position. The balance sheet strength, includingthese shipment numbers have not represented demand; instead, they represent the position in cash and cash equivalents, should help avoid liquidity problems and enable the Company to act effectively as market opportunities or challenges present themselves.
The Company's manufacturing facilities are strategically positioned across the United States, and utilize local market research to design homes to meet the demands of its customers. The Company has theindustry's ability to customize floor plansproduce in the current environment. The average price per square foot for a manufactured home is lower than a site-built home. Also, based on the relatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing's monthly payment affordability.
The two largest manufactured housing consumer demographics, young adults and designs to fulfill specific needsthose who are age 55 and interests. By offering a full rangeolder, are both growing. First-time and "move-up" buyers of affordable homes from entry-level models to large custom homes and withare historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that may be limited in their ability to engineer designs in-house, the Company can accommodate virtually any customer request. In addition to homes builtqualify for a new home loan by their particular employment status and down payment capability. Consumer confidence, as an indicator of retirement security, is especially important among manufactured home buyers interested in accordance with the National Manufacturing Home Construction and Safety Standards ("HUD code") promulgated by the U.S. Department of Housing and Urban Development ("HUD"), the Company also constructs modular homes that conform to state and local codes, park model RVs and cabins and light commercial buildings at many of its manufacturing facilities.our products for seasonal or retirement living.
The Company seeksWe seek out niche market opportunities where itsour diverse product lines and custom building capabilities provide a competitive advantage. Our green building initiatives involve the creation of an energy efficient envelope and higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, typically lower utility costs and sustainability.
We maintain a conservative cost structure in an effort to build added value into our homes and we work diligently to maintain a solid financial position. Our balance sheet strength, including the position in cash and cash equivalents, helps avoid liquidity problems and enables us to act effectively as market opportunities or challenges present themselves.
We continue to make certain commercial loan programs available to members of our wholesale distribution chain. Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community owners and developers. In addition, we provide loans to independent floor plan lenders that then lend to distributors to finance their inventory purchases (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, community owners and developers and provides additional opportunity for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they do expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners. We have included considerations related to the COVID-19 pandemic when assessing the risks of loan loss and setting reserve amounts for the commercial finance portfolio.
The Company also builds homes designed to use alternative energy sources,lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such as solarloans results in higher borrowing costs for home-only loans and wind. From bamboo flooring and tankless water heaters to solar-powered homes, the Company's products are diverse and tailored to a wide range of consumer interests. Innovation in housing design is a forte of the Company and it continues to introduce new models at competitive price pointsconstrain industry growth. We work directly with expressive interiorsother industry participants to develop secondary market opportunities for manufactured home-only loan portfolios and exteriors that complement home stylesexpand lending availability in the areasindustry. Additionally, we continue to invest in which they are located.
Based on the relatively low cost associated withcommunity-based lending initiatives that provide home-only financing to new residents of certain manufactured home ownership, the Company's products have traditionally competed with rental housing's monthly payment affordability. Rental housing activity is reportedcommunities. Our mortgage subsidiary also develops and invests in home-only lending programs to have continued to increasegrow sales of homes through traditional distribution points. We believe that growing our investment and participation in recent years, which has contributed to a decline in tenant housing vacancy rates. These factors, should they persist,home-only lending may provide additional sales growth opportunities for our financial services segment, as well as other marketprovide a means that could lead to increased home sales for our factory-built housing operations.
COVID-19 Impact and economic factors may cause some renters to become buyers of affordable-housing alternatives, including manufactured homes.Strategy
Further, with respect to the general rise in demand for rental housing, during fiscal year 2020, the Company realized a larger proportion of orders and interest from developers and community owners for new manufactured homes intended for use as rental homes, alternative dwelling units and seasonal living.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. The CompanyAs our business was considered essential, we continued to operate substantially all of itsour homebuilding and retail sales facilities while working to follow COVID-19 health guidelines. The Company hasWe have worked to minimize exposure and transmission risks by implementing enhanced facility cleaning, social distancing and related protocols while continuing to serve itsour customers. Operational efficiencies declined from adjusting home production processesdue to comply with health guidelines, managing higher and largely unpredictable factory employee absenteeism, limited new-hire availabilityhiring challenges and certain building material supply shortages. Accordingly, the Company'sour total average plant capacity utilization rate fell to as low aswas approximately 45%75% during the early partthird fiscal quarter of 2021, which has improved from approximately 65% during the firstsecond fiscal year quarter compared toof 2021, but is lower than pre-pandemic levels of more than 80%. By the end of the quarter, overall plant capacity utilization rates were approximately 70% compared to approximately 80% during last year's first fiscal quarter as the Company continues to work to increase production.
Sales order activity declined substantially atremained exceptionally strong during the beginningthird fiscal quarter of the quarter due to the onset of COVID-19. The pandemic had a cascading effect on every point in the home sales process, including delaying some orders and sales. While Company-owned retail stores and most independently owned retail sales locations remained open for business since the onset of the pandemic, customer traffic initially declined, resulting in declining home sales orders. In addition, as a result of the pandemic, home orders from developers and community owners were put (and generally remain) on hold, causing sales to these customers to decline substantially.
Subsequently, retail traffic and sales activity continuously improved over the balance of the quarter2021 to the point where home sales order rates were somewhatnearly 65% higher than the comparable prior year at quarter's end.quarter. Increased order volume is the result of a higher number of well-qualified home-buyershome buyers making purchase decisions, supported by reduced home loan interest rates. Increased orders outpaced the challenging production environment during the quarter, raising order backlogs 20%310% to $157$472 million at June 27,December 26, 2020, compared to $131$115 million at June 29, 2019. ThisDecember 28, 2019 and $321 million at September 26, 2020. The backlog of home orders excludes orders that have been paused or canceled at the request of the customer.
The financial services segment has also maintained operations since the onset of the COVID-19 pandemic, largely through the implementation of work-from-home solutions. This includesIn addition to accepting and processing new applications as well as servicingfor home loans and insurance policies. Thepolicies, the financial services operations arecontinue to assist customers in need and service existing loans and insurance policies while complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations and are assisting customers in need.cancellations. Because of changedthese economic conditions, loan loss reserves were increased at the end of fiscal year 2020 and continue to be adjusted as considered appropriate.
Certain loans serviced by CountryPlace for investors expose the Company to cash flow deficitsdecreases if customers do not make contractual monthly payments of principal and interest in a timely manner. Our primary investor, 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. While monthly collections of principal and interest from borrowers has normally exceeded scheduled principal and interest payments owed to investors, this could be negatively impacted given various state and local emergency orders in light of COVID-19, this could change.COVID-19.
It is difficult to predict the future impacts of the COVID-19 pandemic on housing demand, or operations at each of our locations. However, our wholesale customers have been positive about continuing the process of delivering homesemployee availability, supply chain and supportive of our efforts toCompany performance and operations. We continue to meet affordable housing needs.
The Company continues to focus on developing order volume growth opportunities by working to improve itsour production capabilities and adjusting product offerings where appropriate. The Company strivesofferings. We strive to balance the production levels and workforce size with the demand for itsour product offerings to attain efficient use of its production capabilities. The Companymaximize efficiencies. We continually reviewsreview wage rates of itsour production employees and hashave established other monetary incentive programs to ensure competitive compensation. The Company isWe are also working to more extensively use on-lineonline recruiting tools, update recruitment brochures and improve the appearance and appeal of its productionour manufacturing facilities in order to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. Maintaining an appropriately sized and well-trained workforceworkforce is key to increasing production to meet increased demand. The Company viewsWe face a major challenge in overcoming labor-related difficulties in the COVID-19 environment to increase home production rates as a major challenge.
The Company continues to make certain commercial loan programs available to members of the Company's independent wholesale distribution chain. Under these programs, the Company provides a significant amount of the funds that independent financiers then lend to distributors to finance retail inventories of its products. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes (see Note 7 to the Consolidated Financial Statements). The Company's involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, communities and developers. Participation in wholesale financing is helpful to these customers and provides additional opportunity for product exposure to potential home buyers. These initiatives support the Company's ongoing efforts to expand product distribution. However, these initiatives do expose the Company to risks associated with the creditworthiness of this customer base and the Company's inventory financing partners. The Company has included considerations related to the COVID-19 pandemic when assessing its risks of loan loss and setting reserve amounts for its commercial finance portfolio.
The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. The Company is working directly with other industry participants to develop secondary market opportunities for manufactured home-only loan portfolios and expand lending availability in the industry. Additionally, the Company continues to invest in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. Our mortgage subsidiary also develops and invests in home-only lending programs to grow sales of homes through traditional distribution points. The Company believes that growing its investment and participation in home-only lending may provide additional sales growth opportunities for the financial services segment, as well as provide a means that could lead to increased home sales for its factory-built housing operations.
The Company is also working through industry trade associations to encourage favorable legislative and Government-Sponsored Enterprise ("GSE") action to address the mortgage financing needs of buyers of affordable homes. Federal law requires the 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 December 2017, Fannie Mae and Freddie Mac each released their final Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill their "Duty to Serve" obligation. These plans became effective on January 1, 2018. Each of the three-year plans offers an enhanced mortgage loan product through their "MH Advantage" and "ChoiceHome" programs, respectively, that began in the latter part of calendar year 2018. Small-scale pilot programs for the purchase of home-only loans that were expected to commence towards the end of calendar year 2019 have not occurred. Expansion of the secondary market for lending through the GSEs could support further demand for housing as lending options would likely become more available to home buyers. Although some progress has been made in this area, meaningful positive impact in the form of increased home orders has yet to be realized.
On January 25, 2018, HUD announced a top-to-bottom review of its manufactured housing rules as part of a broader effort to identify regulations that may be ineffective, overly burdensome, or excessively costly given the critical need for affordable housing. In addition, on June 25, 2019, President Trump signed an Executive Order directing federal agencies to work together to alleviate barriers that impede the production of affordable housing. The Executive Order created a White House Council on Eliminating Regulatory Barriers to Affordable Housing, consisting of members from eight federal agencies and chaired by the HUD Secretary. While there has been no timeline established, if certain changes are made, the Company may be able to serve a broader range of home buyers.
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 mitigated by reinsurance contracts in place as part of the Company's loss mitigation structure.
As disclosed in Part II, Item 1, Legal Proceedings, since 2018, the Company has been cooperating with an investigation by the enforcement staff of the Securities and Exchange Commission ("SEC") regarding trading in personal and Company accounts directed by the Company's former Chief Executive Officer ("CEO"), Joseph Stegmayer. The Audit Committee of the Board of Directors conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the results of the Audit Committee's work were shared with the Company's auditors, listing exchange and the SEC staff. The Company continues to make documents and personnel available to the SEC staff and intends to continue cooperating with its investigation.
As a result of the ongoing independent investigation, the Company recorded $0.1 million, net of a $0.5 million insurance recovery of prior expenses, and $0.8 million of expenses related to legal and other expenses during the three months ended June 27, 2020 and June 29, 2019, respectively, and expects to continue to incur related costs pertaining to this matter. During the third quarter of fiscal year 2019, the Company also reviewed the sufficiency of its insurance coverage and as a result, Cavco's Board of Directors made a decision to purchase additional director and officer ("D&O") liability insurance coverage with 22-month terms for a total premium of $15.3 million. As a result, the Company recorded $2.1 million of additional D&O policy premium expense during each of the three months ended June 27, 2020 and June 29, 2019, and expects to incur approximately $2.1 million per quarter in Selling, general and administrative expenses from the amortization of these policy premiums through the second quarter of fiscal year 2021, at which point D&O policy needs and related premium costs will be assessed further.
Industry Overview
According to data reported by the Manufactured Housing Institute, industry home shipments decreased 0.9% for the first 5 months of calendar year 2020 compared to the same period in the prior year. During calendar year 2019, the manufactured housing industry shipped approximately 95,000 HUD code manufactured homes, a decrease of 2.1% from the approximately 97,000 units shipped in 2018. Excess inventory in the market from accelerated purchasing in 2018 slowed shipment levels in 2019. Prior to 2019, annual shipments had 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.
"First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that are particularly affected by their particular employment status to qualify for a new home loan and their down payment capability. Consumer confidence, as in indicator of retirement security, is especially important among manufactured home buyers interested in our products for seasonal or retirement living.
The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. The U.S. adult population is estimated to expand by approximately 9.2 million between 2020 and 2025. Young adults born from 1976 to 1995, often referred to as Gen Y, represent a large segment of the population. Late-stage Gen Y is approximately 4.3 million people larger than the next age category born from 1966 to 1975, Gen X, and is considered to be in the peak home-buying years. Gen Y represents prime first-time home buyers who may be attracted by the affordability, sustainability, 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-built homes, and by the lifestyle offered by planned communities specifically designed for homeowners that fall into this age group.
Results of Operations
Three Months Ended June 27, 2020 compared to June 29, 2019
Net Revenue.
Net revenue consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (dollars in thousands, except net factory-built housing revenue per home sold): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands, except revenue per home sold) | December 26, 2020 | | December 28, 2019 | | Change |
Net revenue: | | | | | | | |
Factory-built housing | $ | 270,822 | | | $ | 257,106 | | | $ | 13,716 | | | 5.3 | % |
Financial services | 17,950 | | | 16,616 | | | 1,334 | | | 8.0 | % |
| $ | 288,772 | | | $ | 273,722 | | | $ | 15,050 | | | 5.5 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total homes sold | 3,603 | | | 3,865 | | | (262) | | | (6.8) | % |
| | | | | | | |
Net factory-built housing revenue per home sold | $ | 75,166 | | | $ | 66,522 | | | $ | 8,644 | | | 13.0 | % |
| | | Three Months Ended | | | | Nine Months Ended | |
| June 27, 2020 | | June 29, 2019 | | Change | | % Change | |
($ in thousands, except revenue per home sold) | | ($ in thousands, except revenue per home sold) | December 26, 2020 | | December 28, 2019 | | Change |
Net revenue: | Net revenue: | | | | | | | | Net revenue: | | | | | |
Factory-built housing | Factory-built housing | $ | 238,090 | | | $ | 248,768 | | | $ | (10,678) | | | (4.3) | % | Factory-built housing | $ | 749,879 | | | $ | 758,564 | | | $ | (8,685) | | | (1.1) | % |
Financial services | Financial services | 16,711 | | | 15,274 | | | 1,437 | | | 9.4 | % | Financial services | 51,670 | | | 47,875 | | | 3,795 | | | 7.9 | % |
| | $ | 254,801 | | | $ | 264,042 | | | $ | (9,241) | | | (3.5) | % | | $ | 801,549 | | | $ | 806,439 | | | $ | (4,890) | | | (0.6) | % |
| | Total homes sold | Total homes sold | 3,349 | | | 3,807 | | | (458) | | | (12.0) | % | Total homes sold | 10,379 | | | 11,453 | | | (1,074) | | | (9.4) | % |
| Net factory-built housing revenue per home sold | Net factory-built housing revenue per home sold | $ | 71,093 | | | $ | 65,345 | | | $ | 5,748 | | | 8.8 | % | Net factory-built housing revenue per home sold | $ | 72,250 | | | $ | 66,233 | | | $ | 6,017 | | | 9.1 | % |
In the factory-built housing segment, the decreaseincrease in Net revenue for the three months ended June 27,December 26, 2020 compared to the same period last year was primarily due to higher home selling prices resulting from 12%pricing increases implemented because of rising input costs. These gains were partially offset by lower home sales volume during the third fiscal quarter, as production inefficiencies from challenges related to the COVID-19 pandemic. Thispandemic continue to limit factory delivery volume.
The decrease for the nine months ended December 26, 2020 was primarily from lower home sales volume related to the production inefficiencies previously discussed, partially offset by higher home selling prices and changes in product mix compared to the priorlast year. Note that Destiny Homes was purchased in August 2019 and Lexington Homes was closed in June 2020.
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, communitiescommunity owners and developers ("Wholesale") and sales of homes to consumers by Company-owned retail centers ("Retail"). Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuildingmanufacturing facility to the home-site. Retail home prices include these items andplus 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 these distribution channels between reporting periods impact the overall net revenue per home sold. For the three months ended June 27, 2020, the Company sold 2,597 homes Wholesale and 752 homes Retail versus 3,058 homes Wholesale and 749 homes Retail in the comparable prior year period. Further,Other factors include fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, whichthe result fromof home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Our product prices are also periodically adjusted for
As discussed above, changes to the cost and availabilityproportion of raw materials included in, and labor used to produce, each home. For these reasons,home sales among the Company has experienced, and expects to continue to experience, volatility indistribution channels between reporting periods impact the overall net factory-built housing revenue per home sold. For the three and nine months ended December 26, 2020, we sold 2,835 and 8,096 homes Wholesale, respectively, and 768 and 2,283 homes Retail, respectively. For the three and nine months ended December 28, 2019, we sold 3,158 and 9,222 homes Wholesale, respectively, and 707 and 2,231 homes Retail, respectively.
Financial services segment revenue increased for the three months ended June 27, 2020 from greaterprimarily due to unrealized gains on investmentsmarketable equity securities in the insurance subsidiary's portfolio, an increasewhich were $1.0 million and $2.7 million for the three and nine months ended December 26, 2020, respectively, compared to $0.3 million and $0.6 million in unrealized gains in the comparable prior year periods, respectively. In addition, higher volume in home loan sales compared to the prior year period and more insurance policies in force in the current year compared to the prior year. Theyear were positive contributors. These overall increase isincreases were partially offset by lower interest income earned on the acquired consumer loan portfolios that continue to amortize.
Gross Profit.
Gross profit consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands) | December 26, 2020 | | December 28, 2019 | | Change |
Gross profit: | | | | | | | |
Factory-built housing | $ | 47,031 | | | $ | 48,793 | | | $ | (1,762) | | | (3.6) | % |
Financial services | 12,207 | | | 11,062 | | | 1,145 | | | 10.4 | % |
| $ | 59,238 | | | $ | 59,855 | | | $ | (617) | | | (1.0) | % |
| | | | | | | |
Gross profit as % of Net revenue: | | | | | | | |
Consolidated | 20.5 | % | | 21.9 | % | | N/A | | (1.4) | % |
Factory-built housing | 17.4 | % | | 19.0 | % | | N/A | | (1.6) | % |
Financial services | 68.0 | % | | 66.6 | % | | N/A | | 1.4 | % |
| | | Three Months Ended | | | | Nine Months Ended | |
| June 27, 2020 | | June 29, 2019 | | $ Change | | % Change | |
($ in thousands) | | ($ in thousands) | December 26, 2020 | | December 28, 2019 | | Change |
Gross profit: | Gross profit: | | | | | | | | Gross profit: | | | | | |
Factory-built housing | Factory-built housing | $ | 46,992 | | | $ | 52,135 | | | $ | (5,143) | | | (9.9) | % | Factory-built housing | $ | 140,178 | | | $ | 149,567 | | | $ | (9,389) | | | (6.3) | % |
Financial services | Financial services | 8,331 | | | 8,163 | | | 168 | | | 2.1 | % | Financial services | 27,924 | | | 29,053 | | | (1,129) | | | (3.9) | % |
| | $ | 55,323 | | | $ | 60,298 | | | $ | (4,975) | | | (8.3) | % | | $ | 168,102 | | | $ | 178,620 | | | $ | (10,518) | | | (5.9) | % |
| Gross profit as % of Net revenue: | Gross profit as % of Net revenue: | | Gross profit as % of Net revenue: | |
Consolidated | Consolidated | 21.7 | % | | 22.8 | % | | N/A | | (1.1) | % | Consolidated | 21.0 | % | | 22.1 | % | | N/A | | (1.1) | % |
Factory-built housing | Factory-built housing | 19.7 | % | | 21.0 | % | | N/A | | (1.3) | % | Factory-built housing | 18.7 | % | | 19.7 | % | | N/A | | (1.0) | % |
Financial services | Financial services | 49.9 | % | | 53.4 | % | | N/A | | (3.5) | % | Financial services | 54.0 | % | | 60.7 | % | | N/A | | (6.7) | % |
Factory-built housing Gross profit and Gross profit as a percentage of Net revenue decreased for the three and nine months ended June 27,December 26, 2020 decreased primarily fromdue to higher material costs and lower sales volume andresulting from the production inefficiencies caused by the COVID-19 pandemic.
In the financial services segment, Gross profit as a percentage of Net revenue increased for the three months ended December 26, 2020 due to lower weather-related claims volume and higher unrealized gains on marketable equity securities. However, for the nine months ended December 26, 2020, Gross profit as a percentage of Net revenue decreased as a result of higher weather relatedweather-related claims volume at our insurance subsidiary and lower interest income earned on the acquired consumer loan portfolios that continue to amortize.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands) | December 26, 2020 | | December 28, 2019 | | Change |
Selling, general and administrative expenses: | | | | | | | |
Factory-built housing | $ | 30,575 | | | $ | 32,017 | | | $ | (1,442) | | | (4.5) | % |
Financial services | 4,839 | | | 4,827 | | | 12 | | | 0.2 | % |
| $ | 35,414 | | | $ | 36,844 | | | $ | (1,430) | | | (3.9) | % |
| | | | | | | |
Selling, general and administrative expenses as % of Net revenue: | 12.3 | % | | 13.5 | % | | N/A | | (1.2) | % |
| | | Three Months Ended | | | | Nine Months Ended | |
| June 27, 2020 | | June 29, 2019 | | $ Change | | % Change | |
($ in thousands) | | ($ in thousands) | December 26, 2020 | | December 28, 2019 | | Change |
Selling, general and administrative expenses: | Selling, general and administrative expenses: | | | | | | | | Selling, general and administrative expenses: | | | | | |
Factory-built housing | Factory-built housing | $ | 30,737 | | | $ | 30,751 | | | $ | (14) | | | — | % | Factory-built housing | $ | 92,037 | | | $ | 94,348 | | | $ | (2,311) | | | (2.4) | % |
Financial services | Financial services | 4,586 | | | 4,513 | | | 73 | | | 1.6 | % | Financial services | 14,153 | | | 13,843 | | | 310 | | | 2.2 | % |
| | $ | 35,323 | | | $ | 35,264 | | | $ | 59 | | | 0.2 | % | | $ | 106,190 | | | $ | 108,191 | | | $ | (2,001) | | | (1.8) | % |
| Selling, general and administrative expenses as % of Net revenue: | Selling, general and administrative expenses as % of Net revenue: | 13.9 | % | | 13.4 | % | | N/A | | 0.5 | % | Selling, general and administrative expenses as % of Net revenue: | 13.2 | % | | 13.4 | % | | N/A | | (0.2) | % |
Selling, general and administrative expenses related to factory-built housing remained consistentdecreased between periods. Increases in salaries and employee related expenses during the current period were offset byperiods primarily from a reduction in legal expenses and the amortization of the additional director and officer ("D&O") insurance premium, partially offset by increased corporate-related expenses. ExpensesDuring the three months ended December 26, 2020, we incurred $0.7 million in expenses related to the SEC inquiry, during the three months ended June 27, 2020 were $0.1 million, net ofbut also received a $0.5$0.4 million insurance recovery of prior expenses, resulting in a net expense of $0.3 million during the period compared to $0.9 million in expense in the third quarter of fiscal year 2020. For the nine months ended December 26, 2020, we recorded a net expense of $0.1 million for SEC inquiry related expenses. Forexpenses compared to $2.5 million in expense in the comparable prior year period.
As the amortization of the additional D&O insurance premium has now been completed, the three months ended June 29, 2019,December 26, 2020 contains no related expense while the Company incurred $0.8prior year period included a $2.1 million charge. For the nine months ended December 26, 2020, additional D&O insurance premium amortization was $4.2 million versus $6.3 million in costs related to the Company's response to the SEC inquiry.prior year period.
In Financial services, Selling, general and administrative expenses related to financial services were relatively consistent each period.increased for the three and nine months ended December 26, 2020 primarily from higher salary and incentive-based compensation expense.
Interest Expense.
Interest expense was $0.2 million and $0.5 million for the three months ended June 27,December 26, 2020 and June 29,December 28, 2019, respectively. For the nine months ended December 26, 2020 and December 28, 2019, Interest expense was $0.6 million and $1.3 million, respectively. Interest expense consists primarily of debt service on the CountryPlaceCountryPlace's financings of manufactured home-only loans and interest related to finance leases. The decrease for the three months ended June 27, 2020 is primarily the result of a reduction in securitized bond interest expense, as the Companywe exercised itsour right to repurchase the 2007-1 securitized loan portfolio in August 2019, thereby eliminating the related interest expense. This decrease is partially offset by increases in interest expense from secured credit facilities at CountryPlace.
Other Income, net.
Other income primarily consists of realized and unrealized gains and losses on corporate marketable equity investments, interest income related to commercial loans receivable balances, interest income earned on cash balances and gains and losses (including impairments) from the sale of property, plant and equipment.
Other income, net was $1.9 million and $2.8$2.2 million for each of the three month periods ended December 26, 2020 and December 28, 2019.
For the nine months ended June 27,December 26, 2020 and June 29,December 28, 2019, Other income, net was $5.8 million and $10.2 million, respectively. The decrease isdecline was primarily fromdue to a $0.9 $3.4 million net gain on the sale of idle land that was recorded in the prior year period, as well as a reduction in interest earned in the current periods on cash balances and commercial loansloan receivables, given the lower interest rate environment. These declines were partially offset by increases in unrealized gains on corporate marketable equity securities.
Income Before Income Taxes.
Income before income taxes consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| June 27, 2020 | | June 29, 2019 | | $ Change | | % Change |
Income before income taxes: | | | | | | | |
Factory-built housing | $ | 18,450 | | | $ | 24,313 | | | $ | (5,863) | | | (24.1) | % |
Financial services | 3,230 | | | 3,049 | | | 181 | | | 5.9 | % |
| $ | 21,680 | | | $ | 27,362 | | | $ | (5,682) | | | (20.8) | % |
Income tax expense.
Income tax expense was $5.0$6.2 million and $6.1$3.8 million for the three months ended June 27,December 26, 2020 and June 29,December 28, 2019, respectively, for an effective income tax rate of 23.9% and 15.5%, respectively. Income tax expense for the 2021 first quarternine months ended December 26, 2020 and December 28, 2019 was $15.7 million and $16.3 million, respectively, for effective income tax rates of 23.1% compared to an23.4% and 20.5%, respectively. The lower effective tax rate of 22.2%rates for the same period last year. The higher effective tax rate in the current quarter wasprior year periods were primarily due to lower tax benefits from the exercise of stock options, which provided a benefit of $0.3$0.5 million in the nine months ended December 26, 2020 compared to the $0.6$1.3 million in the same period last year.year, and a catch up of tax credits that were enacted as part of the 2020 Appropriations Bill. Certain of these credits were extended as part of the 2021 Consolidated Appropriations Act that was signed into law after quarter end on December 27, 2020. We are currently evaluating the impact this will have in future periods.
Liquidity and Capital Resources
The Company believesWe believe that cash and cash equivalents at June 27,December 26, 2020, together with cash flow from operations, will be sufficient to fund itsour operations and provide for growth for the next 12 months and into the foreseeable future. The Company maintainsWe maintain cash in U.S. Treasury and other money market funds, some of which are in excess of federally insured limits. The Company expectsWe expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on the Company'sour liquidity and capital resources. The acquisition of Destiny Homes did not have a significant impact on our liquidity or capital 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 its home-only lending programs. However, depending on the Company'sour operating results and strategic opportunities, itwe may need to seek additional or alternative sources of financing. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for the Companyus to reevaluate itsour long-term operating plans to make more efficient use of itsour existing capital resources. The exact nature of any changes to the Company's plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of the Company'sour 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 the Company'sour insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. The Company believesWe believe that stockholders' equity at itsour insurance subsidiary remains sufficient and doeswe do not believe that its ability to pay ordinary dividends to Cavco will be restricted per state regulations.
The following is a summary of the Company's cash flows for the threenine months ended June 27,December 26, 2020 and June 29,December 28, 2019, respectively (in thousands):respectively:
| | | Three Months Ended | | | | Nine Months Ended | |
| June 27, 2020 | | June 29, 2019 | | $ Change | |
(in thousands) | | (in thousands) | December 26, 2020 | | December 28, 2019 | | $ Change |
Cash, cash equivalents and restricted cash at beginning of the fiscal year | Cash, cash equivalents and restricted cash at beginning of the fiscal year | $ | 255,607 | | | $ | 199,869 | | | $ | 55,738 | | Cash, cash equivalents and restricted cash at beginning of the fiscal year | $ | 255,607 | | | $ | 199,869 | | | $ | 55,738 | |
Net cash provided by operating activities | Net cash provided by operating activities | 35,692 | | | 16,798 | | | 18,894 | | Net cash provided by operating activities | 91,566 | | | 68,320 | | | 23,246 | |
Net cash provided by (used in) investing activities | 105 | | | (1,469) | | | 1,574 | | |
Net cash used in investing activities | | Net cash used in investing activities | (5,098) | | | (18,873) | | | 13,775 | |
Net cash used in financing activities | Net cash used in financing activities | (922) | | | (2,174) | | | 1,252 | | Net cash used in financing activities | (1,451) | | | (19,058) | | | 17,607 | |
Cash, cash equivalents and restricted cash at end of the period | Cash, cash equivalents and restricted cash at end of the period | $ | 290,482 | | | $ | 213,024 | | | $ | 77,458 | | Cash, cash equivalents and restricted cash at end of the period | $ | 340,624 | | | $ | 230,258 | | | $ | 110,366 | |
Net cash provided by operating activities increased during the threenine months ended June 27,December 26, 2020 compared to the threenine months ended June 29,December 28, 2019 primarily from decreased finished goods inventories at Company-owned stores, lower levelsdue to more customer deposits received as a result of higher order rates, higher collections on commercial lending, higher accrued taxesloans receivables and salesthe timing of consumer loans, partially offset by lower net incomepayments on Accounts payable and more consumer loans originated.Accrued expenses and other current liabilities.
Consumer loan originations increased by $9.8$2.5 million to $47.4$124.1 million for the threenine months ended June 27,December 26, 2020 from $37.6$121.6 million for the threenine months ended June 29,December 28, 2019. Proceeds from sales of consumer loans provided $39.3$122.6 million in cash compared to $37.6$117.1 million in the previous year.
With respect to consumer lending for the purchase of manufactured housing, states may classify manufactured homes for both legal and tax purposes as personal property rather than real estate. As a result, financing for the purchase of manufactured homes is characterized by shorter loan maturities and higher interest rates. Unfavorable changes in these factors mayWe have material negative effects on the Company's results of operations and financial condition. See Item IA, "Risk Factors" in the Company's Form 10-K.
Cavco has entered into commercial loan arrangements with certain distributors of itsour products under which the Company provideswe provide funds for Wholesale purchases. In addition, the Company haswe have entered into direct commercial loan arrangements with distributors, communitiescommunity owners and developers under which the Company provideswe provide funds for financing homes. The Company hasWe have also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. For additional information regarding our commercial loans receivable, see Note 7 to the Consolidated Financial Statements. Further, the Company haswe have invested in and developed 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.
Investing activities primarily consist of buying and selling bondsdebt and marketable equity securities in our Financial Services segment, purchases of property, plant and equipment and funding strategic growth acquisitions. Net cash for investing activities in the prior year was primarily used to supportfund the operational strategies. As compared to the same period last year, the Company used $1.0 million less on purchases, while proceeds and distributions provided $0.5 million more during the three months ended June 27, 2020.acquisition of Destiny Homes.
Financing activities used $1.3$17.6 million less cash during the period compared to the same period last year from lower payments of taxes for employees' net exercise of stock options, as well as lower payments on securitized financings, as the Companywe repurchased the 2007-1 securitized loan portfolio in August 2019.
Financings. The Company's finance subsidiaryCountryPlace entered into secured credit facilities with independent third-party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods, which have now expired.banks. The proceeds were used byto facilitate the Company to originate and holdorigination of consumer home-only loans to be held for investment, secured by the manufactured homes which arewere subsequently pledged as collateral to the facilities. Upon completion of the draw down periods, thethese facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program was 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As of June 27,December 26, 2020, the outstanding balance of the converted loans was $10.2$8.8 million atwith a weighted average interest rate of 4.91%.
Contractual Commitments and Contingencies. There were no material changes to the contractual obligations as set forth in the Company'sour Annual Report on Form 10-K.
Critical Accounting Policies
On March 29, 2020, the Companywe adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. We adopted the standard by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. Refer to Note 1 to the Consolidated Financial Statements for additional discussion. There have been no other significant changes to the Company'sour critical accounting policies during the threenine months ended June 27,December 26, 2020, as compared to those disclosed in Part II, Item 7 of the Company'sour Form 10-K, under the heading "Critical Accounting Policies," which provides a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements.
Other Matters
Related Party Transactions. See Note 2119 to the Consolidated Financial Statements for a discussion of the Company'sour related party transactions.
Off Balance Sheet Arrangements
See Note 1615 to the Consolidated Financial Statements for a discussion of the Company'sour off-balance sheet commitments, which discussion is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its President and Chief Executive Officer and Chiefits Principal Financial Officer, of the effectiveness of the design and operation of the Company'sits disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Company's President and Chief Executive Officer and Chiefits Principal Financial Officer concluded that, as of June 27,December 26, 2020, its disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 27,December 26, 2020 which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding reportable legal proceedings is contained in Part I, Item 3, Legal Proceedings, in the Form 10-K. The following describes legal proceedings, if any, that became reportable during the period ended June 27,December 26, 2020, and, if applicable, amends and restates descriptions of previously reported legal proceedings in which there have been material developments during such quarter.
Since 2018, the Company has been cooperating with an investigation by the enforcement staff of the SECSEC's Los Angeles Regional Office regarding securities trading in personal and Company accounts directed by the Company's former CEO,Chief Executive Officer, Joseph Stegmayer. The Audit Committee of the Board of Directors conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the Audit Committee shared the results of the Audit Committee'sits work were shared with the Company's auditors, listing exchange and with the SEC staff. The Company continues to makeWe have also made documents and personnel available to the SEC staff and intendswe intend to continue cooperating with its investigation.
As previously disclosed in September 2020, the SEC staff issued a Wells Notice to Dan Urness, the Company's Chief Financial Officer and Principal Financial Officer and Principal Accounting Officer at the time, in connection with its investigation, noting that it intends to recommend an enforcement action against him. Rather than have this be a distraction to the Company, Mr. Urness has gone on leave to focus on his response to the Wells Notice. Also, as previously disclosed in November 2020, the SEC staff issued a Wells Notice to the Company stating that they intend to recommend an enforcement action against the Company in connection with the SEC's investigation. We have been exploring the possibility of a settlement with the SEC staff in connection with the matter but, at this time, we are unable to assess the probability of that outcome or reasonably estimate the amount of a potential loss, if any.
Joseph D. Robles v. Cavco Industries, Inc.("Robles"), was filed in the Superior Court for the State of California, Riverside on June 25, 2019 and Malik Griffin v. Fleetwood Homes, Inc. ("Griffin"), was filed in the Superior Court for the State of California, San Bernardino on September 19, 2019, each seeking recovery on behalf of a putative class of current and former hourly employees for certain alleged wage-and-hour violations, including, among other things: (i) alleged failure to comply with certain wage statement formatting requirements; (ii) alleged failure to compensate employees for straight-time and overtime hours worked; and (iii) alleged failure to provide employees with all requisite work breaks. On November 24, 2020, Robles dismissed his separate action in the Riverside County Superior Court and Griffin filed an amended complaint adding Robles as a named plaintiff to the action in the San Bernardino County Superior Court. A joint mediation occurred on January 27, 2021 where the Parties failed to reach a settlement or resolution to the matter.
The Company is party to certain other lawsuits in the ordinary course of business. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations after taking into account any existing reserves which reserves are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. However, future events or circumstances that may currently be unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company's consolidated financial position, liquidity or results of operations in any future reporting periods.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in the Form 10-K, which could materially affect the Company'sour business, financial condition or future results. The risks described in this Report and in the Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Companyus or that itwe currently deemsdeem to be immaterial also may materially adversely affect the Company'sour business, financial condition and/or operating results.
Item 5. Other Information
There is no other information required to be disclosed under this item which was not previously disclosed.
Item 6. Exhibits
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Exhibit No. | | Exhibit |
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101.INS | | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
All other items required under Part II are omitted because they are not applicable.
(1) Filed herewith.
(2) Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Cavco Industries, Inc. | | | |
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Signature | | Title | Date |
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/s/ William C. Boor | | President and Chief Executive Officer | July 31, 2020January 29, 2021 |
William C. Boor | | (Principal Executive Officer) | |
| | | |
/s/ Daniel L. UrnessPaul Bigbee | | Executive Vice President, Chief FinancialAccounting Officer and Treasurer | July 31, 2020January 29, 2021 |
Daniel L. UrnessPaul Bigbee | | (Principal Financial and Accounting Officer) | |
| | | |