CAVCO INDUSTRIES INC. - Quarter Report: 2023 July (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended July 1, 2023
OR
| ☐ | 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)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | 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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| 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 28, 2023, 8,677,178 shares of the registrant's Common Stock, $0.01 par value, were outstanding.
CAVCO INDUSTRIES, INC.
FORM 10-Q
July 1, 2023
TABLE OF CONTENTS
| Page | |||||
| Item 3. Not applicable | |||||
| Item 4. Not applicable | |||||
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
See accompanying Notes to Consolidated Financial Statements
| July 1, 2023 | April 1, 2023 | ||||||||||
| ASSETS | (Unaudited) | ||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 352,234 | $ | 271,427 | |||||||
| Restricted cash, current | 13,560 | 11,728 | |||||||||
| Accounts receivable, net | 84,877 | 89,347 | |||||||||
| Short-term investments | 14,173 | 14,978 | |||||||||
| Current portion of consumer loans receivable, net | 13,477 | 17,019 | |||||||||
| Current portion of commercial loans receivable, net | 48,772 | 43,414 | |||||||||
| Current portion of commercial loans receivable from affiliates, net | 1,491 | 640 | |||||||||
| Inventories | 253,986 | 263,150 | |||||||||
| Prepaid expenses and other current assets | 76,117 | 92,876 | |||||||||
| Total current assets | 858,687 | 804,579 | |||||||||
| Restricted cash | 585 | 335 | |||||||||
| Investments | 17,967 | 18,639 | |||||||||
| Consumer loans receivable, net | 25,891 | 27,129 | |||||||||
| Commercial loans receivable, net | 51,612 | 53,890 | |||||||||
| Commercial loans receivable from affiliates, net | 3,584 | 4,033 | |||||||||
| Property, plant and equipment, net | 223,663 | 228,278 | |||||||||
| Goodwill | 115,498 | 114,547 | |||||||||
| Other intangibles, net | 29,398 | 29,790 | |||||||||
| Operating lease right-of-use assets | 26,162 | 26,755 | |||||||||
| Total assets | $ | 1,353,047 | $ | 1,307,975 | |||||||
| LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 28,634 | $ | 30,730 | |||||||
| Accrued expenses and other current liabilities | 264,742 | 262,661 | |||||||||
| Total current liabilities | 293,376 | 293,391 | |||||||||
| Operating lease liabilities | 22,114 | 21,678 | |||||||||
| Other liabilities | 7,909 | 7,820 | |||||||||
| Deferred income taxes | 5,702 | 7,581 | |||||||||
| Redeemable noncontrolling interest | 1,120 | 1,219 | |||||||||
| Stockholders' equity | |||||||||||
Preferred stock, $0.01 par value; 1,000,000 shares authorized; No shares issued or outstanding | — | — | |||||||||
Common stock, $0.01 par value; 40,000,000 shares authorized; Issued 9,347,220 and 9,337,125 shares, respectively | 93 | 93 | |||||||||
Treasury stock, at cost; 671,801 shares | (164,452) | (164,452) | |||||||||
| Additional paid-in capital | 272,175 | 271,950 | |||||||||
| Retained earnings | 915,667 | 869,310 | |||||||||
| Accumulated other comprehensive loss | (657) | (615) | |||||||||
| Total stockholders' equity | 1,022,826 | 976,286 | |||||||||
| Total liabilities, redeemable noncontrolling interest and stockholders' equity | $ | 1,353,047 | $ | 1,307,975 | |||||||
1
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
Net revenue | $ | 475,875 | $ | 588,338 | |||||||
Cost of sales | 357,996 | 443,614 | |||||||||
Gross profit | 117,879 | 144,724 | |||||||||
Selling, general and administrative expenses | 61,680 | 66,136 | |||||||||
Income from operations | 56,199 | 78,588 | |||||||||
| Interest income | 4,618 | 1,314 | |||||||||
Interest expense | (266) | (161) | |||||||||
| Other income (expense), net | 126 | (431) | |||||||||
Income before income taxes | 60,677 | 79,310 | |||||||||
| Income tax expense | (14,266) | (19,616) | |||||||||
Net income | 46,411 | 59,694 | |||||||||
| Less: net income attributable to redeemable noncontrolling interest | 54 | 92 | |||||||||
| Net income attributable to Cavco common stockholders | $ | 46,357 | $ | 59,602 | |||||||
| Comprehensive income | |||||||||||
| Net income | $ | 46,411 | $ | 59,694 | |||||||
| Reclassification adjustment for securities sold | 3 | — | |||||||||
Applicable income taxes | (1) | — | |||||||||
Net change in unrealized position of investments held | (56) | (142) | |||||||||
Applicable income taxes | 12 | 30 | |||||||||
| Comprehensive income | 46,369 | 59,582 | |||||||||
| Less: comprehensive income attributable to redeemable noncontrolling interest | 54 | 92 | |||||||||
| Comprehensive income attributable to Cavco common stockholders | $ | 46,315 | $ | 59,490 | |||||||
| Net income per share attributable to Cavco common stockholders | |||||||||||
Basic | $ | 5.35 | $ | 6.68 | |||||||
Diluted | $ | 5.29 | $ | 6.63 | |||||||
| Weighted average shares outstanding | |||||||||||
Basic | 8,670,434 | 8,918,280 | |||||||||
Diluted | 8,758,080 | 8,988,929 | |||||||||
See accompanying Notes to Consolidated Financial Statements
2
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 46,411 | $ | 59,694 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 4,566 | 3,946 | |||||||||
| Provision for credit losses | 19 | (167) | |||||||||
| Deferred income taxes | (1,868) | (2,442) | |||||||||
| Stock-based compensation expense | 1,438 | 1,425 | |||||||||
| Non-cash interest income, net | (297) | (257) | |||||||||
| Loss (gain) on sale or retirement of property, plant and equipment, net | 190 | (232) | |||||||||
| Gain on investments and sale of loans, net | (3,165) | (288) | |||||||||
| Changes in operating assets and liabilities, net of acquisitions | |||||||||||
| Accounts receivable | 3,692 | (12,076) | |||||||||
| Consumer loans receivable originated | (36,737) | (47,467) | |||||||||
| Proceeds from sales of consumer loans receivable | 42,363 | 47,881 | |||||||||
| Principal payments received on consumer loans receivable | 1,819 | 2,421 | |||||||||
| Inventories | 9,110 | (10,751) | |||||||||
| Prepaid expenses and other current assets | 15,151 | 7,359 | |||||||||
| Commercial loans receivable originated | (28,726) | (22,776) | |||||||||
| Principal payments received on commercial loans receivable | 25,216 | 18,981 | |||||||||
| Accounts payable and accrued expenses and other current liabilities | 3,111 | 12,989 | |||||||||
| Net cash provided by operating activities | 82,293 | 58,240 | |||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchases of property, plant and equipment | (4,183) | (25,007) | |||||||||
| Proceeds from sale of property, plant and equipment | 4,434 | 283 | |||||||||
| Purchases of investments | (1,710) | (4,228) | |||||||||
| Proceeds from sale of investments | 3,545 | 4,553 | |||||||||
| Net cash provided (used) by investing activities | 2,086 | (24,399) | |||||||||
| FINANCING ACTIVITIES | |||||||||||
| Payments for taxes on stock option exercises and releases of equity awards | (1,363) | (848) | |||||||||
| Proceeds from exercise of stock options | 150 | — | |||||||||
| Payments on finance leases and other secured financings | (157) | (165) | |||||||||
| Payments for common stock repurchases | — | (38,960) | |||||||||
| Distributions to noncontrolling interest | (120) | (240) | |||||||||
| Net cash used in financing activities | (1,490) | (40,213) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 82,889 | (6,372) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of the fiscal year | 283,490 | 259,334 | |||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 366,379 | $ | 252,962 | |||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Cash paid for income taxes | $ | 8,123 | $ | 18,486 | |||||||
| Cash paid for interest | $ | 185 | $ | 71 | |||||||
| Supplemental disclosures of noncash activity | |||||||||||
| Change in GNMA loans eligible for repurchase | $ | (1,873) | $ | (2,620) | |||||||
| Right-of-use assets recognized and operating lease obligations incurred | $ | 687 | $ | 1,159 | |||||||
See accompanying Notes to Consolidated Financial Statements
3
CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 addition, references throughout to numbered "Notes" refer to these Notes to Consolidated Financial Statements, unless otherwise stated.
In the opinion of management, these financial statements include all adjustments, including normal recurring adjustments, that are necessary to fairly state the results for the periods presented. Certain prior period amounts have been reclassified including from Other income (expense), net to Interest income to conform to current period classification. We 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 disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in our 2023 Annual Report on Form 10-K for the year ended April 1, 2023, filed with the SEC ("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 accompanying notes. Due to uncertainties, actual results could differ from the estimates and assumptions used in preparation of the Consolidated Financial Statements. 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 current fiscal year will end on March 30, 2024 and will include 52 weeks.
We operate in two segments: (1) factory-built housing, which includes wholesale and retail factory-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. We design and build a wide variety of affordable manufactured homes, modular homes and park model RVs through 29 homebuilding production lines located throughout the United States and two production lines in Mexico. We distribute our homes through a large network of independent distribution points in 48 states and Canada and 68 Company-owned U.S. retail stores, of which 41 are located in Texas. The financial services segment is comprised of a finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Company ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association ("'FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer 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.
During fiscal 2023, we completed the acquisition of Solitaire Inc. and other related entities (collectively "Solitaire Homes"), including their four manufacturing facilities and twenty-two retail locations by acquiring 100% of the outstanding stock of Solitaire Homes. The results of operations are included in our Consolidated Financial Statements from the date of acquisition. See Note 20.
In addition to the below, for a description of significant accounting policies we used in the preparation of our Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements included in the Form 10-K.
4
2. Revenue from Contracts with Customers
The following table summarizes Net revenue disaggregated by reportable segment and source (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Factory-built housing | |||||||||||
| Home sales | $ | 439,744 | $ | 555,276 | |||||||
| Delivery, setup and other revenues | 17,365 | 17,321 | |||||||||
| 457,109 | 572,597 | ||||||||||
| Financial services | |||||||||||
Insurance agency commissions received from third-party insurance companies | 899 | 1,397 | |||||||||
| All other sources | 17,867 | 14,344 | |||||||||
| 18,766 | 15,741 | ||||||||||
| $ | 475,875 | $ | 588,338 | ||||||||
3. Restricted Cash
Restricted cash consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Cash related to CountryPlace customer payments to be remitted to third parties | $ | 12,883 | $ | 11,123 | |||||||
| Other restricted cash | 1,262 | 940 | |||||||||
| 14,145 | 12,063 | ||||||||||
| Less current portion | (13,560) | (11,728) | |||||||||
| $ | 585 | $ | 335 | ||||||||
Corresponding amounts for customer payments to be remitted to third parties are recorded in Accounts 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 in the Consolidated Statements of Cash Flows (in thousands):
| July 1, 2023 | July 2, 2022 | ||||||||||
| Cash and cash equivalents | $ | 352,234 | $ | 238,072 | |||||||
| Restricted cash | 14,145 | 14,890 | |||||||||
| $ | 366,379 | $ | 252,962 | ||||||||
5
4. Investments
Investments consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Available-for-sale debt securities | $ | 17,292 | $ | 18,555 | |||||||
Marketable equity securities | 9,798 | 9,989 | |||||||||
Non-marketable equity investments | 5,050 | 5,073 | |||||||||
| 32,140 | 33,617 | ||||||||||
| Less short-term investments | (14,173) | (14,978) | |||||||||
| $ | 17,967 | $ | 18,639 | ||||||||
Investments in marketable equity securities consist of investments in the common stock of industrial and other companies.
Our non-marketable equity investments include investments in community-based initiatives that buy and sell our homes and provide home-only financing to residents of certain manufactured home communities and other distribution operations.
We record investments in fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in Accumulated other comprehensive loss in the Consolidated Balance Sheets.
The amortized cost and fair value of our investments in available-for-sale debt securities, by security type are shown in the table below (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||
Residential mortgage-backed securities | $ | 2,328 | $ | 2,237 | $ | 2,567 | $ | 2,488 | |||||||||||||||
State and political subdivision debt securities | 5,172 | 4,910 | 6,023 | 5,769 | |||||||||||||||||||
Corporate debt securities | 10,623 | 10,145 | 10,745 | 10,298 | |||||||||||||||||||
| $ | 18,123 | $ | 17,292 | $ | 19,335 | $ | 18,555 | ||||||||||||||||
The amortized cost and fair value of our investments in available-for-sale debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without penalties.
| July 1, 2023 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| Due in less than one year | $ | 3,590 | $ | 3,510 | |||||||
| Due after one year through five years | 11,565 | 10,906 | |||||||||
| Due after five years through ten years | 250 | 250 | |||||||||
| Due after ten years | 390 | 389 | |||||||||
| Mortgage-backed securities | 2,328 | 2,237 | |||||||||
| $ | 18,123 | $ | 17,292 | ||||||||
6
Net investment gains and losses on marketable equity securities were as follows (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Marketable equity securities | |||||||||||
| Net gain (loss) recognized during the period | $ | 460 | $ | (2,342) | |||||||
| Less: Net (gain) loss recognized on securities sold during the period | (20) | 74 | |||||||||
| Unrealized gain (loss) recognized during the period on securities still held | $ | 440 | $ | (2,268) | |||||||
5. Inventories
Inventories consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Raw materials | $ | 85,289 | $ | 92,045 | |||||||
| Work in process | 29,087 | 29,022 | |||||||||
| Finished goods | 139,610 | 142,083 | |||||||||
| $ | 253,986 | $ | 263,150 | ||||||||
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Loans held for investment, previously securitized | $ | 20,055 | $ | 21,000 | |||||||
| Loans held for investment | 12,880 | 13,117 | |||||||||
| Loans held for sale | 7,599 | 10,846 | |||||||||
| Construction advances | 376 | 706 | |||||||||
| 40,910 | 45,669 | ||||||||||
| Deferred financing fees and other, net | (398) | (368) | |||||||||
| Allowance for loan losses | (1,144) | (1,153) | |||||||||
| 39,368 | 44,148 | ||||||||||
| Less current portion | (13,477) | (17,019) | |||||||||
| $ | 25,891 | $ | 27,129 | ||||||||
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 | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Allowance for loan losses at beginning of period | $ | 1,153 | $ | 2,115 | |||||||
| Change in estimated loan losses, net | (9) | (210) | |||||||||
| Charge-offs | — | (19) | |||||||||
| Recoveries | — | 19 | |||||||||
| Allowance for loan losses at end of period | $ | 1,144 | $ | 1,905 | |||||||
7
The consumer loans held for investment had the following characteristics:
| July 1, 2023 | April 1, 2023 | ||||||||||
| Weighted average contractual interest rate | 8.1 | % | 8.2 | % | |||||||
| Weighted average effective interest rate | 9.6 | % | 8.8 | % | |||||||
| Weighted average months to maturity | 153 | 150 | |||||||||
The following table is a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Current | $ | 38,722 | $ | 43,252 | |||||||
| 31 to 60 days | 1,040 | 1,247 | |||||||||
| 61 to 90 days | 77 | 213 | |||||||||
| 91+ days | 1,071 | 957 | |||||||||
| $ | 40,910 | $ | 45,669 | ||||||||
The following table disaggregates gross consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| July 1, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Total | |||||||||||||||||||||||||||||||||||
Prime- FICO score 680 and greater | $ | 5,378 | $ | 1,440 | $ | 183 | $ | 996 | $ | 1,963 | $ | 16,864 | $ | 26,824 | |||||||||||||||||||||||||||
Near Prime- FICO score 620-679 | 694 | 265 | — | 1,008 | 1,087 | 9,680 | 12,734 | ||||||||||||||||||||||||||||||||||
Sub-Prime- FICO score less than 620 | — | — | — | 19 | 50 | 938 | 1,007 | ||||||||||||||||||||||||||||||||||
No FICO score | — | — | — | — | — | 345 | 345 | ||||||||||||||||||||||||||||||||||
| $ | 6,072 | $ | 1,705 | $ | 183 | $ | 2,023 | $ | 3,100 | $ | 27,827 | $ | 40,910 | ||||||||||||||||||||||||||||
| April 1, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | |||||||||||||||||||||||||||||||||||
Prime- FICO score 680 and greater | $ | 9,471 | $ | 185 | $ | 1,051 | $ | 1,982 | $ | 1,191 | $ | 16,601 | $ | 30,481 | |||||||||||||||||||||||||||
Near Prime- FICO score 620-679 | 1,695 | — | 1,012 | 1,131 | 1,550 | 8,244 | 13,632 | ||||||||||||||||||||||||||||||||||
Sub-Prime- FICO score less than 620 | 84 | — | 19 | 51 | — | 1,033 | 1,187 | ||||||||||||||||||||||||||||||||||
No FICO score | — | — | — | — | 24 | 345 | 369 | ||||||||||||||||||||||||||||||||||
| $ | 11,250 | $ | 185 | $ | 2,082 | $ | 3,164 | $ | 2,765 | $ | 26,223 | $ | 45,669 | ||||||||||||||||||||||||||||
As of July 1, 2023, 39% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 15% was concentrated in Florida. As of April 1, 2023, 44% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 13% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the outstanding principal balance of the consumer loans receivable as of July 1, 2023 or April 1, 2023.
Repossessed homes totaled approximately $1.1 million as of both July 1, 2023 and April 1, 2023 and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $0.6 million and $0.5 million as of July 1, 2023 and April 1, 2023, respectively.
8
7. Commercial Loans Receivable
The commercial loans receivable balance consists of direct financing arrangements for the home product needs of our independent distributors, community owners and developers.
Commercial loans receivable, net consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Loans receivable | $ | 107,246 | $ | 103,726 | |||||||
| Allowance for loan losses | (1,614) | (1,586) | |||||||||
| Deferred financing fees, net | (173) | (163) | |||||||||
| 105,459 | 101,977 | ||||||||||
| Less current portion of commercial loans receivable (including from affiliates), net | (50,263) | (44,054) | |||||||||
| $ | 55,196 | $ | 57,923 | ||||||||
The commercial loans receivable balance had the following characteristics:
| July 1, 2023 | April 1, 2023 | ||||||||||
| Weighted average contractual interest rate | 7.5 | % | 7.6 | % | |||||||
| Weighted average months outstanding | 10 | 9 | |||||||||
The following table represents changes in the estimated allowance for loan losses (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
Balance at beginning of period | $ | 1,586 | $ | 1,011 | |||||||
Change in estimated loan losses, net | 28 | 43 | |||||||||
Balance at end of period | $ | 1,614 | $ | 1,054 | |||||||
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. As of July 1, 2023 and April 1, 2023, there were no commercial loans considered watch list or nonperforming. The following table disaggregates our commercial loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| July 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Total | ||||||||||||||||||||||||||||||||||||||
Performing | $ | 26,639 | $ | 63,412 | $ | 10,907 | $ | 3,268 | $ | 2,015 | $ | 1,005 | $ | 107,246 | ||||||||||||||||||||||||||||||
| April 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | ||||||||||||||||||||||||||||||||||||||
Performing | $ | 80,193 | $ | 16,028 | $ | 4,071 | $ | 2,203 | $ | 1,231 | $ | — | $ | 103,726 | ||||||||||||||||||||||||||||||
As of July 1, 2023, there were no commercial loans 90 days or more past due that were still accruing interest, and we were not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance.
9
As of July 1, 2023 and April 1, 2023, we had concentrations of our outstanding principal balance of the commercial loans receivable balance in New York of 17% and 18%, respectively. No other state had concentrations in excess of 10% of the outstanding principal balance of the commercial loans receivable as of July 1, 2023 or April 1, 2023.
As of July 1, 2023 and April 1, 2023, one independent third-party and its affiliates comprised 13% and 12%, respectively, of the net commercial loans receivable principal balance outstanding, all of which was secured.
8. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Property, plant and equipment, at cost | |||||||||||
| Land | $ | 39,823 | $ | 39,822 | |||||||
| Buildings and improvements | 168,091 | 167,291 | |||||||||
| Machinery and equipment | 73,733 | 76,826 | |||||||||
| Construction in progress | 7,136 | 5,472 | |||||||||
| 288,783 | 289,411 | ||||||||||
| Accumulated depreciation | (65,120) | (61,133) | |||||||||
| $ | 223,663 | $ | 228,278 | ||||||||
Depreciation expense for the three months ended July 1, 2023 and July 2, 2022 was $4.2 million and $3.4 million, respectively.
9. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
| Indefinite-lived | |||||||||||||||||||||||||||||||||||
| Goodwill | $ | 115,498 | $ | — | $ | 115,498 | $ | 114,547 | $ | — | $ | 114,547 | |||||||||||||||||||||||
Trademarks and trade names | 16,980 | — | 16,980 | 16,980 | — | 16,980 | |||||||||||||||||||||||||||||
State insurance licenses | 1,100 | — | 1,100 | 1,100 | — | 1,100 | |||||||||||||||||||||||||||||
| 133,578 | — | 133,578 | 132,627 | — | 132,627 | ||||||||||||||||||||||||||||||
| Finite-lived | |||||||||||||||||||||||||||||||||||
| Customer relationships | 15,000 | (4,267) | 10,733 | 16,900 | (5,818) | 11,082 | |||||||||||||||||||||||||||||
Other | 1,114 | (529) | 585 | 1,114 | (486) | 628 | |||||||||||||||||||||||||||||
| $ | 149,692 | $ | (4,796) | $ | 144,896 | $ | 150,641 | $ | (6,304) | $ | 144,337 | ||||||||||||||||||||||||
During the three months ended July 1, 2023, fair value adjustments were made to certain assets and liabilities of Solitaire Homes in connection with purchase accounting measurement period adjustments. This resulted in additional Goodwill of $1.0 million. See Note 20.
10
Amortization expense recognized on intangible assets for the three months ended July 1, 2023 and July 2, 2022 was $0.4 million and $0.5 million, respectively. Customer relationships have a weighted average remaining life of 7.6 years and other finite lived intangibles have a weighted average remaining life of 3.3 years.
Expected amortization for future fiscal years is as follows (in thousands):
| Remainder of fiscal year 2024 | $ | 1,177 | |||
| 2025 | 1,530 | ||||
| 2026 | 1,488 | ||||
| 2027 | 1,415 | ||||
| 2028 | 1,299 | ||||
| 2029 | 1,265 | ||||
| Thereafter | 3,144 | ||||
| $ | 11,318 | ||||
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Customer deposits | $ | 46,122 | $ | 45,193 | |||||||
| Salaries, wages and benefits | 45,998 | 47,100 | |||||||||
| Estimated warranties | 32,401 | 31,368 | |||||||||
| Unearned insurance premiums | 29,835 | 27,901 | |||||||||
| Accrued volume rebates | 23,943 | 22,858 | |||||||||
| Other | 86,443 | 88,241 | |||||||||
| $ | 264,742 | $ | 262,661 | ||||||||
11. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Balance at beginning of period | $ | 31,368 | $ | 26,250 | |||||||
| Charged to costs and expenses | 13,409 | 15,004 | |||||||||
| Payments and deductions | (12,376) | (12,452) | |||||||||
| Balance at end of period | $ | 32,401 | $ | 28,802 | |||||||
11
12. Other Liabilities
The following table summarizes secured financings and other obligations (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Finance lease payables | $ | 6,224 | $ | 6,243 | |||||||
| Other secured financing | 2,184 | 2,379 | |||||||||
| Mandatorily redeemable noncontrolling interest | 2,300 | 2,268 | |||||||||
| 10,708 | 10,890 | ||||||||||
| Less current portion included in Accrued expenses and other current liabilities | (2,799) | (3,070) | |||||||||
| $ | 7,909 | $ | 7,820 | ||||||||
13. Debt
We are party to a Credit Agreement that expires in 2027 with Bank of America, N.A., providing for a $50 million revolving credit facility (the "Revolving Credit Facility"), which may be increased up to an aggregate amount of $100 million. Borrowings under the Revolving Credit Facility generally bear interest at the Secured Overnight Financing Rate plus a credit spread and a margin based on our Consolidated Total Leverage Ratio.
As of July 1, 2023 and April 1, 2023, there were no borrowings outstanding under the Revolving Credit Facility and we were in compliance with all covenants.
14. Reinsurance and Insurance Loss Reserves
Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations.
The effects of reinsurance on premiums written and earned were as follows (in thousands):
| Three Months Ended | |||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||||||||||||||
| Written | Earned | Written | Earned | ||||||||||||||||||||
Direct premiums | $ | 10,379 | $ | 8,676 | $ | 7,728 | $ | 7,050 | |||||||||||||||
Assumed premiums—nonaffiliated | 9,800 | 8,570 | 9,028 | 7,957 | |||||||||||||||||||
Ceded premiums—nonaffiliated | (6,127) | (6,127) | (4,229) | (4,229) | |||||||||||||||||||
| $ | 14,052 | $ | 11,119 | $ | 12,527 | $ | 10,778 | ||||||||||||||||
12
Typical insurance policies written or assumed have a maximum coverage of $0.4 million per claim, of which we cede $0.2 million of the risk of loss per reinsurance. Therefore, our risk of loss is limited to $0.2 million per claim on typical policies, subject to the reinsurers meeting their obligations. After this limit, amounts are recoverable through reinsurance for catastrophic losses in excess of $3.0 million per occurrence, up to a maximum of $100 million in the aggregate for that occurrence.
Standard Casualty establishes reserves for claims and claims expense on reported and incurred but not reported ("IBNR") claims of non-reinsured losses. Reserves for claims are included in the Accrued expenses and other current liabilities line item on the Consolidated Balance Sheets and claims expenses are recorded in Cost of sales on the Consolidated Statements of Comprehensive Income. The following details the activity in the reserve for the three months ended July 1, 2023 and July 2, 2022 (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Balance at beginning of period | $ | 10,939 | $ | 8,149 | |||||||
| Net incurred losses during the period | 11,077 | 8,777 | |||||||||
| Net claim payments during the period | (9,015) | (8,352) | |||||||||
| Balance at end of period | $ | 13,001 | $ | 8,574 | |||||||
15. Commitments and Contingencies
Repurchase Contingencies. The maximum amount for which the Company was liable under the terms of repurchase agreements with financial institutions that provide inventory financing to independent distributors of our products approximated $157 million and $178 million at July 1, 2023 and April 1, 2023, respectively, without reduction for the resale value of the homes. During the fourth quarter of fiscal 2023, we received one repurchase demand notice and the inventory was acquired during the current quarter. Our reserve for repurchase commitments, recorded in Accrued expenses and other current liabilities, was $3.9 million at July 1, 2023 and $5.2 million at April 1, 2023.
Construction-Period Mortgages. Loan contracts with off-balance sheet commitments are summarized below (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||
| Construction loan contract amount | $ | 1,594 | $ | 2,214 | |||||||
| Cumulative advances | (376) | (706) | |||||||||
| $ | 1,218 | $ | 1,508 | ||||||||
Representations and Warranties of Mortgages Sold. The reserve for contingent repurchases and indemnification obligations was $0.7 million as of July 1, 2023 and April 1, 2023, included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets. There were no claim requests that resulted in the repurchase of any loans during the three months ended July 1, 2023.
Interest Rate Lock Commitments. As of July 1, 2023, we had outstanding IRLCs with a notional amount of $31.1 million. For the three months ended July 1, 2023 and July 2, 2022, we recognized insignificant non-cash gains on outstanding IRLCs.
Forward Sales Commitments. As of July 1, 2023, we had $1.1 million in outstanding forward sales commitments ("Commitments"). During the three months ended July 1, 2023, we recognized an insignificant gain and during the three months ended July 2, 2022, we recognized a non-cash loss of $0.3 million relating to our Commitments.
13
Legal Matters. We are party to certain lawsuits in the ordinary course of business. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on our consolidated financial position, liquidity or results of operations after taking into account any existing reserves, which reserves are included in Accrued expenses and other current liabilities on 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 our consolidated financial position, liquidity or results of operations in any future reporting periods.
16. Stockholders' Equity and Redeemable Noncontrolling Interest
The following table represents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest during the three months ended July 1, 2023 (dollars in thousands):
| Equity Attributable to Cavco Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total | Redeemable noncontrolling interest | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 1, 2023 | 9,337,125 | $ | 93 | $ | (164,452) | $ | 271,950 | $ | 869,310 | $ | (615) | $ | 976,286 | $ | 1,219 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 46,357 | — | 46,357 | 54 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | (42) | (42) | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock incentive plans, net | 10,095 | — | — | (1,213) | — | — | (1,213) | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 1,438 | — | — | 1,438 | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | — | (120) | ||||||||||||||||||||||||||||||||||||||||||
| Valuation adjustment | — | — | — | — | — | — | — | (33) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2023 | 9,347,220 | $ | 93 | $ | (164,452) | $ | 272,175 | $ | 915,667 | $ | (657) | $ | 1,022,826 | $ | 1,120 | |||||||||||||||||||||||||||||||||||
The following table represents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest during the three months ended July 2, 2022 (dollars in thousands):
| Equity Attributable to Cavco Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total | Redeemable noncontrolling interest | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 2, 2022 | 9,292,278 | $ | 93 | $ | (61,040) | $ | 263,049 | $ | 628,756 | $ | (403) | $ | 830,455 | $ | 825 | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 59,602 | — | 59,602 | 92 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net | — | — | — | — | — | (112) | (112) | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock incentive plans, net | 5,957 | — | — | (848) | — | — | (848) | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 1,425 | — | — | 1,425 | — | ||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | — | (38,960) | — | — | — | (38,960) | — | ||||||||||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | — | — | (240) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, July 2, 2022 | 9,298,235 | $ | 93 | $ | (100,000) | $ | 263,626 | $ | 688,358 | $ | (515) | $ | 851,562 | $ | 677 | |||||||||||||||||||||||||||||||||||
14
17. 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 | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Net income attributable to Cavco common stockholders | $ | 46,357 | $ | 59,602 | |||||||
| Weighted average shares outstanding | |||||||||||
| Basic | 8,670,434 | 8,918,280 | |||||||||
| Effect of dilutive securities | 87,646 | 70,649 | |||||||||
| Diluted | 8,758,080 | 8,988,929 | |||||||||
| Net income per share attributable to Cavco common stockholders | |||||||||||
| Basic | $ | 5.35 | $ | 6.68 | |||||||
| Diluted | $ | 5.29 | $ | 6.63 | |||||||
| Anti-dilutive common stock equivalents excluded | 39 | 1,617 | |||||||||
18. Fair Value Measurements
The book value and estimated fair value of our financial instruments were as follows (in thousands):
| July 1, 2023 | April 1, 2023 | ||||||||||||||||||||||
| Book Value | Estimated Fair Value | Book Value | Estimated Fair Value | ||||||||||||||||||||
Available-for-sale debt securities | $ | 17,292 | $ | 17,292 | $ | 18,555 | $ | 18,555 | |||||||||||||||
Marketable equity securities | 9,798 | 9,798 | 9,989 | 9,989 | |||||||||||||||||||
Non-marketable equity investments | 5,050 | 5,050 | 5,073 | 5,073 | |||||||||||||||||||
| Consumer loans receivable | 39,368 | 44,604 | 44,148 | 50,686 | |||||||||||||||||||
Commercial loans receivable | 105,459 | 99,281 | 101,977 | 97,106 | |||||||||||||||||||
| Other secured financing | (2,184) | (2,078) | (2,379) | (2,332) | |||||||||||||||||||
See Note 20, Fair Value Measurements, and the Fair Value of Financial Instruments caption in Note 1, Summary of Significant Accounting Policies, in the Form 10-K for more information on the methodologies we use in determining fair value.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are recorded at fair value in Prepaid expenses and other current assets on the Consolidated Balance Sheets.
| July 1, 2023 | April 1, 2023 | ||||||||||
| Number of loans serviced with MSRs | 4,018 | 4,070 | |||||||||
| Weighted average servicing fee (basis points) | 34.69 | 34.71 | |||||||||
| Capitalized servicing multiple | 176.5 | % | 98.99 | % | |||||||
| Capitalized servicing rate (basis points) | 61.23 | 34.36 | |||||||||
| Serviced portfolio with MSRs (in thousands) | $ | 512,707 | $ | 520,458 | |||||||
| MSRs (in thousands) | $ | 3,140 | $ | 1,788 | |||||||
15
19. Related Party Transactions
We have non-marketable equity investments in other distribution operations outside of Company-owned retail stores. In the ordinary course of business, we sell homes and lend to certain of these operations through our commercial lending programs. For the three months ended July 1, 2023 and July 2, 2022, the total amount of sales to related parties was $15.1 million and $17.2 million, respectively. As of July 1, 2023, receivables from related parties included $6.5 million of accounts receivable and $5.1 million of commercial loans outstanding. As of April 1, 2023, receivables from related parties included $5.7 million of accounts receivable and $4.7 million of commercial loans outstanding.
20. Acquisition
On January 3, 2023 (the "Acquisition Date"), we completed the acquisition of Solitaire Homes, including their four manufacturing facilities and twenty-two retail locations by acquiring 100% of the outstanding stock of Solitaire Homes for $110.8 million, subject to customary adjustments.
Our provisional estimates of the fair values of the assets that we acquired and the liabilities that we assumed were based on the information that was available as of the Acquisition Date. We are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these provisional estimates are subject to change during the measurement period, which is up to one year from the Acquisition Date. During the first quarter of fiscal 2024, we made certain adjustments to the assets and liabilities based on information that became available.
The following table presents our provisional estimates of the fair values of the assets that we acquired and the liabilities that we assumed on the Acquisition Date as of the end of the 2024 first quarter (in thousands):
| January 3, 2023 | Adjustments | January 3, 2023 (as Adjusted at July 1, 2023) | |||||||||||||||
| Cash | $ | 5,119 | $ | (77) | $ | 5,042 | |||||||||||
| Investments | 334 | — | 334 | ||||||||||||||
| Accounts receivable | 3,536 | (778) | 2,758 | ||||||||||||||
| Inventories | 58,045 | (54) | 57,991 | ||||||||||||||
| Property, plant and equipment | 36,109 | (70) | 36,039 | ||||||||||||||
| Other current assets | 1,519 | — | 1,519 | ||||||||||||||
Intangible assets(1) | 3,400 | — | 3,400 | ||||||||||||||
| Total identifiable assets acquired | 108,062 | (979) | 107,083 | ||||||||||||||
| Accounts payable and accrued liabilities | 11,251 | (28) | 11,223 | ||||||||||||||
| Net identifiable assets acquired | 96,811 | (951) | 95,860 | ||||||||||||||
Goodwill(2) | 13,970 | 951 | 14,921 | ||||||||||||||
| Net assets acquired | $ | 110,781 | $ | — | $ | 110,781 | |||||||||||
(1) Includes $1.3 million assigned to trade names, which are considered indefinite lived intangible assets and are not subject to amortization, $1.9 million assigned to customer-related intangibles, subject to a useful life of 10 years amortized on a straight-line basis, and $0.2 million for covenants not to compete from the sellers amortized on a straight-line basis over the term of 5 years.
(2) Attributable to the Factory-built housing segment, all of which will be deductible for income tax purposes.
16
Pro Forma Impact of Acquisition (Unaudited). The following table presents supplemental pro forma information as if the above acquisition had occurred on April 3, 2022 (in thousands, except per share data):
| Three Months Ended | |||||
| July 2, 2022 | |||||
| Net revenue | $ | 624,511 | |||
| Net income attributable to Cavco common stockholders | 61,645 | ||||
| Diluted net income per share | 6.86 | ||||
21. Business Segment Information
We operate principally in two segments: (1) factory-built housing, which includes wholesale and retail factory-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The following table provides selected financial data by segment (in thousands):
| Three Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Net revenue: | |||||||||||
| Factory-built housing | $ | 457,109 | $ | 572,597 | |||||||
| Financial services | 18,766 | 15,741 | |||||||||
| $ | 475,875 | $ | 588,338 | ||||||||
| Income (loss) before income taxes: | |||||||||||
| Factory-built housing | $ | 61,825 | $ | 79,772 | |||||||
| Financial services | (1,148) | (462) | |||||||||
| $ | 60,677 | $ | 79,310 | ||||||||
| July 1, 2023 | April 1, 2023 | ||||||||||
Total assets: | |||||||||||
Factory-built housing | $ | 1,151,632 | $ | 1,107,555 | |||||||
Financial services | 201,415 | 200,420 | |||||||||
| $ | 1,353,047 | $ | 1,307,975 | ||||||||
17
45Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Report on Form 10-Q ("Report") 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 (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 include, for example, discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; our strategy; our liquidity and financial resources; our outlook with respect to Cavco Industries, Inc. and its subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco") and the manufactured housing business in general; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations; economic conditions, including concerns of a possible recession, and consumer confidence; trends in interest rates and inflation; potential acquisitions, strategic investments and other expansions; the sufficiency of our liquidity; that we may seek alternative sources of financing in the future; operational and legal risks; how we may be affected by any pandemic or outbreak; geopolitical conditions (including the continuing Russia-Ukraine conflict); the cost and availability of labor and raw materials; governmental regulations and legal proceedings; the availability of favorable consumer and wholesale manufactured home financing; and the ultimate outcome of our commitments and contingencies. Forward-looking statements contained in this Report speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document. We do not intend to publicly update or revise any forward-looking statement contained in this Report 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, except as required by law.
Forward-looking statements involve risks, uncertainties and other factors that may cause our 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 our assumptions and expectations differ from actual results, our 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 our results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Risk Factors in Part I, Item 1A of our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Form 10-K").
Introduction
The following should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes that appear in Part I, Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to our Consolidated Financial Statements.
Company Overview
Headquartered in Phoenix, Arizona, we design and produce factory-built homes primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. We are one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments. Our products are marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood, MidCountry and Solitaire. We are also a leading producer of park model RVs, vacation cabins and factory-built commercial structures. Our finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Our insurance subsidiary, Standard Casualty Company ("Standard Casualty"), provides property and casualty insurance primarily to owners of manufactured homes.
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We operate a total of 31 homebuilding production lines in Millersburg and Woodburn, Oregon; Riverside, California; Nampa, Idaho; Phoenix, Glendale and Goodyear, Arizona; Deming, New Mexico; Duncan, Oklahoma; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Dorchester, Wisconsin; Nappanee and Goshen, Indiana; Lafayette, Tennessee; Douglas and Moultrie, Georgia; Shippenville and Emlenton, Pennsylvania; Martinsville and Rocky Mount, Virginia; Crouse and Hamlet, North Carolina; Ocala and Plant City, Florida; and two in Ojinaga, Mexico. We distribute our homes through a large network of independent distribution points in 48 states and Canada and 68 Company-owned U.S. retail stores, of which 41 are located in Texas.
Company and Industry Outlook
According to data reported by the Manufactured Housing Institute, industry home shipments for the calendar year through May 2023 were 35,714, a decrease of 29.0% compared to 50,278 shipments in the same calendar period last year. Higher interest rates and continued inflationary pressures have tempered industry demand. However, the manufactured housing industry offers solutions to the housing crisis with lower average price per square foot than a site-built home and the comparatively low cost associated with manufactured home ownership remains competitive with rental housing.
The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. "First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that are particularly affected by periods of low employment rates and underemployment. Consumer confidence is especially important among manufactured home buyers interested in our products for seasonal or retirement living.
We employ a concerted effort to identify niche market opportunities where our diverse product lines and flexible building capabilities provide us with a competitive advantage. We are focused on building quality, energy efficient homes for the modern home buyer. Our green building initiatives involve the creation of an energy efficient envelope resulting in lower utility costs, as well as the higher utilization of renewable materials in our manufacturing process. We also build homes designed to use alternative energy sources, such as solar.
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 operators and residential developers (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial lending helps to increase the availability of manufactured home financing to distributors, community operators and residential developers and provides additional opportunities for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they also expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners.
The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loan and non-conforming mortgage portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities. We also develop and invest in home-only lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders.
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Key housing building materials include wood, wood products, steel, gypsum wallboard, windows, doors fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, aluminum, appliances and electrical items. Fluctuations in the cost of materials and labor may affect gross margins from home sales to the extent that costs cannot be efficiently matched to the home sales price. Pricing and availability of certain raw materials have been volatile due to a number of factors in the current environment. We continue to monitor and react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such product pricing increases may lag behind the escalation of such costs. From time to time and to varying degrees, we may experience shortages in the availability of materials and/or labor in the markets served. Availability of these inputs has not caused significant production halts in the current period, but we have experienced periodic shutdowns in other periods and shortages of primary building materials have caused production inefficiencies as we have needed to change processes in response to the delay in materials. These shortages may also result in extended order backlogs, delays in the delivery of homes and reduced gross margins from home sales.
Our backlog at July 1, 2023 was $177 million compared to $244 million at April 1, 2023, a decrease of $67 million and down $823 million compared to $1.0 billion at July 2, 2022.
While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to meeting demand. We continually review the wage rates of our production employees and have established other monetary incentive and benefit programs, with a goal of providing competitive compensation. We are also working to more extensively use web-based recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates.
Results of Operations
Net Revenue
| Three Months Ended | |||||||||||||||||||||||
| ($ in thousands, except revenue per home sold) | July 1, 2023 | July 2, 2022 | Change | ||||||||||||||||||||
| Factory-built housing | $ | 457,109 | $ | 572,597 | $ | (115,488) | (20.2) | % | |||||||||||||||
| Financial services | 18,766 | 15,741 | 3,025 | 19.2 | % | ||||||||||||||||||
| $ | 475,875 | $ | 588,338 | $ | (112,463) | (19.1) | % | ||||||||||||||||
| Factory-built homes sold | |||||||||||||||||||||||
| by Company-owned retail sales centers | 959 | 873 | 86 | 9.9 | % | ||||||||||||||||||
| to independent retailers, builders, communities and developers | 3,623 | 4,473 | (850) | (19.0) | % | ||||||||||||||||||
| 4,582 | 5,346 | (764) | (14.3) | % | |||||||||||||||||||
| Net factory-built housing revenue per home sold | $ | 99,762 | $ | 107,108 | $ | (7,346) | (6.9) | % | |||||||||||||||
In factory-built housing, Net revenue decreased compared to the respective period in the prior year due to lower home sales volume and lower home selling prices, partially offset by the addition of Solitaire Homes.
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers and sales of homes to consumers by Company-owned retail stores. Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Our homes are constructed in one or more floor sections ("modules") which are then installed on the customer's site. Changes in the number of modules per home, the selection of different home types/models and optional home upgrades create changes in product mix, also causing fluctuations in this metric.
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For the three months ended July 1, 2023, Net revenue in Financial Services increased 19.2% primarily due to realized and unrealized gains on marketable equity securities in the insurance subsidiary's portfolio compared to losses during the prior year period and more insurance policies in force in the current period compared to the prior period. This was partially offset by lower interest income earned on the acquired consumer loan portfolios.
Gross Profit
| Three Months Ended | |||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | Change | ||||||||||||||||||||
| Factory-built housing | $ | 113,368 | $ | 139,586 | $ | (26,218) | (18.8) | % | |||||||||||||||
| Financial services | 4,511 | 5,138 | (627) | (12.2) | % | ||||||||||||||||||
| $ | 117,879 | $ | 144,724 | $ | (26,845) | (18.5) | % | ||||||||||||||||
| Gross profit as % of Net revenue | |||||||||||||||||||||||
| Consolidated | 24.8 | % | 24.6 | % | N/A | 0.2 | % | ||||||||||||||||
| Factory-built housing | 24.8 | % | 24.4 | % | N/A | 0.4 | % | ||||||||||||||||
| Financial services | 24.0 | % | 32.6 | % | N/A | (8.6) | % | ||||||||||||||||
Factory-built housing Gross profit percentage increased primarily due to favorable material costs.
In Financial services, Gross profit and Gross profit percentage decreased primarily due to higher insurance claims from Arizona and Texas weather related events partially offset by greater realized and unrealized gains on marketable equity securities in the current period compared to the same period last year.
Selling, General and Administrative Expenses
| Three Months Ended | |||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | Change | ||||||||||||||||||||
| Factory-built housing | $ | 56,021 | $ | 60,923 | $ | (4,902) | (8.0) | % | |||||||||||||||
| Financial services | 5,659 | 5,213 | 446 | 8.6 | % | ||||||||||||||||||
| $ | 61,680 | $ | 66,136 | $ | (4,456) | (6.7) | % | ||||||||||||||||
| Selling, general and administrative expenses as % of Net revenue | 13.0 | % | 11.2 | % | N/A | 1.8 | % | ||||||||||||||||
Selling, general and administrative expenses decreased primarily from lower legal expenses, professional fees and incentive compensation expense, partially offset by higher expenses reflecting the addition of Solitaire Homes.
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Other Components of Net Income
| Three Months Ended | |||||||||||||||||||||||
| ($ in thousands) | July 1, 2023 | July 2, 2022 | Change | ||||||||||||||||||||
| Interest income | $ | 4,618 | $ | 1,314 | $ | 3,304 | 251.4 | % | |||||||||||||||
| Interest expense | (266) | (161) | (105) | 65.2 | % | ||||||||||||||||||
| Other income (expense), net | 126 | (431) | 557 | N/M | |||||||||||||||||||
| Income tax expense | (14,266) | (19,616) | (5,350) | (27.3) | % | ||||||||||||||||||
| Effective tax rate | 23.5 | % | 24.7 | % | N/A | (1.20) | % | ||||||||||||||||
Interest income consists primarily of interest earned on cash balances held in money market accounts, and interest earned on commercial floorplan lending. Interest expense consists primarily of interest related to finance leases.
Other income (expense), net primarily consists of realized and unrealized gains and losses on corporate investments and gains and losses from the sale of property, plant and equipment. For the three months ended July 1, 2023, we recognized a $0.1 million gain on corporate marketable investments compared to a $1.1 million loss in the prior year.
Liquidity and Capital Resources
We believe that cash and cash equivalents at July 1, 2023, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in U.S. Treasury and other money market funds, some of which are in excess of federally insured limits, but we have not experienced any losses with regards to such excesses. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on our liquidity and capital resources. We have sufficient liquid resources including our recently implemented $50.0 million Revolving Credit Facility, of which no amounts were outstanding at July 1, 2023. Regardless, depending on our operating results and strategic opportunities, we may choose to seek additional or alternative sources of financing in the future. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its subsidiaries. We believe that stockholders' equity at the insurance subsidiary remains sufficient and do not believe that the ability to pay ordinary dividends to Cavco at anticipated levels will be restricted per state regulations.
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The following is a summary of the Company's cash flows for the three months ended July 1, 2023 and July 2, 2022, respectively:
| Three Months Ended | |||||||||||||||||
| (in thousands) | July 1, 2023 | July 2, 2022 | $ Change | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of the fiscal year | $ | 283,490 | $ | 259,334 | $ | 24,156 | |||||||||||
| Net cash provided by operating activities | 82,293 | 58,240 | 24,053 | ||||||||||||||
| Net cash provided (used) by investing activities | 2,086 | (24,399) | 26,485 | ||||||||||||||
| Net cash used in financing activities | (1,490) | (40,213) | 38,723 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 366,379 | $ | 252,962 | $ | 113,417 | |||||||||||
Net cash provided by operating activities increased primarily from reductions in accounts receivable, inventories and prepaid expenses and other current assets. These increases were partially offset by lower net income, adjusted for non-cash items.
Consumer loan originations decreased $10.8 million to $36.7 million for the three months ended July 1, 2023 from $47.5 million for the three months ended July 2, 2022, and proceeds from sales of consumer loans decreased $5.5 million.
Commercial loan originations increased $5.9 million to $28.7 million for the three months ended July 1, 2023 from $22.8 million for the three months ended July 2, 2022. Proceeds from the collection on commercial loans provided $25.2 million this year, compared to $19.0 million in the prior year, a net increase of $6.2 million.
Net cash for investing activities consists of buying and selling debt and marketable equity securities in our Financial Services segment, purchases of property, plant and equipment and funding strategic growth acquisitions. Cash used in the prior year period reflects the purchase of our plant facilities in Hamlet, North Carolina.
Net cash used in financing activities for the prior year period was primarily for the repurchase of common stock.
See Note 15 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.
Obligations and Commitments. There were no material changes to the obligations and commitments as set forth in the Form 10-K.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the three months ended July 1, 2023, as compared to those disclosed in Part II, Item 7 of the Form 10-K, under the heading "Critical Accounting Estimates," which provides a discussion of the critical accounting estimates that management believes are critical to the Company's operating results or may affect significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements.
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.
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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 its Chief Financial Officer, of the effectiveness of its 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 its Chief Financial Officer concluded that, as of July 1, 2023, its disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended July 1, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See the information under the "Legal Matters" caption in Note 15 to the Consolidated Financial Statements, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in the Form 10-K, which could materially affect our 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 us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Repurchases of Equity Securities
Issuer Purchases of Equity Securities
As announced on May 26, 2022 in a current report on Form 8-K, the Company's Board of Directors approved a $100 million stock repurchase program with the same terms and conditions as the previous plan. There were no repurchases during the fiscal quarter ended July 1, 2023 and $35.7 million remains available under this program.
On August 1, 2023, the Company's Board of Directors approved another $100 million stock repurchase program with the same terms and conditions as the previous plans. This increases the total amount available for repurchases to $135.7 million. The repurchase programs are funded using our available cash. Repurchases may be made in the open market or in privately negotiated transactions in compliance with applicable state and federal securities laws and other legal requirements. The level of repurchase activity is subject to market conditions and other investment opportunities. The repurchase programs do not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time.
Item 5. Other Information
Rule 10b5-1 Plan Adoptions and Modifications
No officers or directors entered into a 10b5-1 plan during the three months ended July 1, 2023.
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Item 6. Exhibits
| Exhibit No. | Exhibit | ||||||||||
| 10.1* | (1) | 2023 Omnibus Equity Incentive Plan | |||||||||
| (2) | |||||||||||
| (2) | |||||||||||
| (3) | |||||||||||
| 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||||
*Management Contract or Compensatory Plan, Contract or Arrangement
(1) Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed on August 1, 2023.
(2) Filed herewith.
(3) Furnished herewith.
All other items required under Part II are omitted because they are not applicable.
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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.
| Cavco Industries, Inc. | |||||||||||
| Registrant | |||||||||||
| Signature | Title | Date | |||||||||
| /s/ William C. Boor | Director, President and Chief Executive Officer | August 4, 2023 | |||||||||
| William C. Boor | (Principal Executive Officer) | ||||||||||
| /s/ Allison K. Aden | Executive Vice President, Chief Financial Officer & Treasurer | August 4, 2023 | |||||||||
| Allison K. Aden | (Principal Financial Officer) | ||||||||||
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