What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-03 compared with 2020-01-31 · 138 added, 136 removed, 149 unchanged (65% of the section changed)

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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's financial performance and operating results;

and the expected effect of certain risks and uncertainties on the Company's business, financial condition and results of operations, economic conditions and consumer confidence, operational and legal risks, how the Company may be affected by the COVID-19 pandemic, governmental regulations and legal proceedings, the availability of favorable consumer and wholesale manufactured home financing, market interest rates and Company investments and the ultimate outcome of the Company's 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 does 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's actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.

To the extent that the Company's assumptions differ from actual results, the Company's 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's results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed in Risk Factors described in this Report and in Risk Factors in Part I, Item 1A of the Company's 2019 Annual Report on Form 10-K ("Form 10-K"), which Risk Factors are incorporated herein.

To the extent that the Company's assumptions and expectations differ from actual results, the Company's 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's 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's 2020 Annual Report on Form 10-K ("Form 10-K"), which Risk Factors are incorporated herein.

The following should be read in conjunction with Cavco Industries, Inc.

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Headquartered in Phoenix, Arizona, the Company designs and produces factory-built homes primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers.

The Company is 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, Lexington and Destiny.

The Company is also one of the leading producers of park model RVs, vacation cabins and systems-built commercial structures, as well as modular homes.

The Company is 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's 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 mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes.

Our insurance subsidiary, Standard Casualty Co.

("Standard Casualty"), provides property and casualty insurance to owners of manufactured homes.

("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's insurance subsidiary, Standard Casualty Co., provides property and casualty insurance to owners of manufactured homes.

Company Growth

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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 industry competitors.

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.

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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.

The Company operates 20 homebuilding facilities located in Millersburg and Woodburn, Oregon;

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 operates 20 homebuilding production lines located in Millersburg and Woodburn, Oregon;

Nampa, Idaho;

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Lafayette, Tennessee;

Lexington, Mississippi;

Martinsville and Rocky Mount, Virginia;

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retail locations.

Our operations are generally managed on a decentralized basis, with oversight from the home office.

Company operations are generally managed 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 throughout the organization and strives to improve designs, production methods and marketing strategies.

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.

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The Company maintains a conservative cost structure in an effort to build added value into its homes and has worked diligently to maintain a solid financial position.

Our balance sheet strength, including our position in cash and cash equivalents, should help us avoid liquidity problems and enable us to act effectively as market opportunities present themselves.

The balance sheet strength, including 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.

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Based on the relatively low cost associated with manufactured home ownership, the Company's products have traditionally competed with rental housing's monthly payment affordability.

Rental housing activity is reported to have continued to increase in recent years, which has contributed to a decline in tenant housing vacancy rates and a corresponding rise in rental rates.

These factors, among other market and economic factors, may cause some renters to become buyers of affordable-housing alternatives, including manufactured homes.

Further, with respect to the general rise in demand for rental housing, the Company has 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.

The Company is responsive to the unique product requirements of these buyers and values the opportunity to provide units that are well suited for these purposes.

Cavco maintains a backlog of orders from its network of licensed distributors, communities and developers.

Distributors may cancel orders prior to production without penalty.

Accordingly, until the production of a particular unit has commenced, the Company does not consider its backlog to be firm orders.

The backlog of sales orders at December 28, 2019 was $115 million in total compared to $166 million at December 29, 2018 .

While order backlog levels vary per factory, the current backlog level in total is considered healthy.

A healthy backlog is indicative of the general ability to coordinate efficient factory production schedules, timely obtain raw materials based on product mix and achieve the unit completion timeframe expectations of our customers.

The Company's backlog at December 29, 2018 was elevated as a result of excessive order volume from industry distributors.

The high order rates may have been driven in part by wholesale distribution chain concerns about maintaining adequate inventory levels in a period where distributors may have perceived underlying affordable housing demand to be accelerating faster than expected.

The Company continues to focus on developing order volume growth opportunities by working to increase its production capabilities and adjusting product offerings as appropriate.

The Company strives to manage its production levels and workforce size in order to meet the demand for its product offerings while ensuring efficient use of its production capabilities.

Rental housing activity is reported to have continued to increase in recent years, which has contributed to a decline in tenant housing vacancy rates.

These factors, should they persist, as well as other market and economic factors may cause some renters to become buyers of affordable-housing alternatives, including manufactured homes.

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 Company continued to operate substantially all of its homebuilding and retail sales facilities while working to follow COVID-19 health guidelines.

The Company has worked to minimize exposure and transmission risks by implementing enhanced facility cleaning, social distancing and related protocols while continuing to serve its customers.

Operational efficiencies declined from adjusting home production processes to comply with health guidelines, managing higher factory employee absenteeism, limited new-hire availability and certain building material supply shortages.

Accordingly, the Company's total average plant capacity utilization rate fell to as low as approximately 45% during the early part of the first fiscal year quarter, compared to 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 at the beginning 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 quarter to the point where sales order rates were somewhat higher than the comparable prior year at quarter's end.

Increased order volume is the result of a higher number of well-qualified home-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% to $157 million at June 27, 2020, compared to $131 million at June 29, 2019.

This backlog of home orders excludes orders that have been paused or canceled at the request of the customer.

The financial services segment also maintained operations since the onset of the COVID-19 pandemic, largely through the implementation of work-from-home solutions.

This includes accepting and processing new applications as well as servicing home loans and insurance policies.

The financial services operations are complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations and are assisting customers in need.

Because of changed 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 deficits 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, given various state and local emergency orders in light of COVID-19, this could change.

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 homes and supportive of our efforts to continue to meet affordable housing needs.

The Company continues to focus on developing order volume growth opportunities by working to improve its production capabilities and adjusting product offerings where appropriate.

The Company strives to balance the production levels and workforce size with the demand for its product offerings to attain efficient use of its production capabilities.

The Company continually reviews wage rates of its production employees and has established other monetary incentive programs to ensure competitive compensation.

The Company is working to more extensively use on-line recruiting tools, update recruitment brochures and improve the appearance and appeal of its production facilities in order to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates.

Even with these challenges, the Company believes its ability to help meet the overall need for affordable housing continues to improve.

The Company participates in certain commercial loan programs with members of the Company's independent wholesale distribution chain.

Maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand.

The Company views 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.

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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 lack of an efficient secondary market for manufactured home loans and the limited number of institutions lending to manufactured home buyers result in higher interest rates for loans secured by manufactured homes compared to those for site-built homes.

This continues to constrain industry growth.

The Company is working directly with other industry participants to develop secondary market opportunities for manufactured home loan portfolios and expand lending availability in the industry.

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.

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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 comply with a "Duty to Serve" the underserved markets specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008.

Manufactured housing is one of the specified underserved markets.

In December 2017, Fannie Mae and Freddie Mac released their final Underserved Markets Plans that describe, with specificity, the actions they will take over a three-year period to fulfill their "Duty to Serve" obligations.

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 were announced in the latter part of calendar 2018.

Small-scale pilot programs for the purchase of home-only loans are also included in the GSE’s Underserved Markets Plans.

Implementation of various aspects of the GSE’s Underserved Markets Plans are subject to approval by their regulator, the Federal Housing Finance Agency, and their approval is not assured.

Expansion of the secondary market for lending through the GSEs could support further demand for housing, as lending options would likely become more affordable to home buyers.

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.

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The insurance subsidiary is subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity in Texas where most of its policies are underwritten.

Where applicable, losses from catastrophic events are somewhat limited by reinsurance contracts in place as part of the Company's loss mitigation structure.

As disclosed in Part II, Item 1, Legal Proceedings , the Company and Joseph Stegmayer, the Company's former Chairman, President and Chief Executive Officer, received subpoenas from the Securities and Exchange Commission's ("SEC") Division of Enforcement seeking documents related to trading in stock of another public company.

The Company expects to continue to incur expenses related to this matter that may materially impact the Company's earnings.

Those costs include, among other items, advancement of expenses for Mr.

Stegmayer pursuant to his indemnity agreement with the Company.

The Audit Committee of the Board of Directors (the "Audit Committee") conducted and completed an internal investigation led by independent legal counsel and other advisers in relation to this inquiry.

The results of this investigation have been shared with the Company's auditors, listing exchange and the SEC staff.

The Company has also made internal records and personnel available to the SEC staff and intends to continue cooperating with the SEC on this matter.

As a result of this inquiry, the Company incurred $0.9 million and $2.5 million in legal and other expenses during the three and nine months ended December 28, 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.

These new 22-month policies were implemented December 21, 2018.

Total premiums paid during the third quarter of fiscal year 2019 for these policies were $15.3 million.

As a result, the Company recorded $2.1 million and $6.3 million of additional D&O policy premium expense during the three and nine months ended December 28, 2019 , respectively, and expects to incur approximately $2.1 million per quarter in Selling, general and administrative expense from the amortization of these policy premiums through the second quarter of fiscal year 2021.

Any additional adjustments are expected to be in the normal course of maintaining adequate D&O insurance for the Company.

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.

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.

Some of this decrease was the result of the industry's production of disaster-relief homes for the Federal Emergency Management Agency during calendar year 2018 that did not repeat in calendar year 2019.

During calendar year 2018 , the manufactured housing industry shipped approximately 97,000 HUD code manufactured homes, an increase of 4.3% over the approximately 93,000 units shipped in 2017 .

Through 2018, annual shipments have 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.

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 proportion of new manufactured home purchasers.

The Company believes that employment rates among these groups and other potential home buyers who favor affordable housing are strong.

Additionally, improved consumer confidence is evident among manufactured home buyers interested in the Company's products for seasonal or retirement living that may have been previously concerned about financial stability, and now appear to be less hesitant to commit to a new home purchase.

The Company believes sales growth is most achievable when employment and consumer confidence levels are strong.

"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.

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Results of Operations

Three and nine months ended December 28, 2019 compared to December 29, 2018

Net revenue consisted of the following for the three and nine months ended December 28, 2019 and December 29, 2018 , respectively (dollars in thousands, except net factory-built housing revenue per home sold):

Three Months Ended June 27, 2020 compared to June 29, 2019

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

Factory-built housing

Financial services

Total homes sold

Net factory-built housing revenue per home sold

Nine Months Ended

2020 June 29,

2019 Change % Change

Factory-built housing $ 238,090 $ 248,768 $ (10,678) (4.3) %

Financial services 16,711 15,274 1,437 9.4 %

$ 254,801 $ 264,042 $ (9,241) (3.5) %

Total homes sold 3,349 3,807 (458) (12.0) %

Net factory-built housing revenue per home sold $ 71,093 $ 65,345 $ 5,748 8.8 %

The increase in Net revenue from the factory-built housing segment for the three and nine months ended December 28, 2019 compared to the same periods last year was from improved home sales volume, including homes sold from the newly acquired Destiny Homes, changes in product mix and higher average home selling prices compared to the prior year.

Net revenue from the operations of Destiny Homes was $11.2 million and $17.6 million for the three and nine months ended December 28, 2019 , respectively.

In the factory-built housing segment, the decrease in Net revenue for the three months ended June 27, 2020 compared to the same period last year was primarily from 12% lower home sales volume from challenges related to the COVID-19 pandemic.

This was partially offset by higher home selling prices and changes in product mix compared to the prior year.

Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors.

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Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services.

Changes to the proportion of home sales among these distribution channels between reporting periods impacts the overall net revenue per home sold.

For the nine months ended December 28, 2019 , the Company sold 9,222 homes Wholesale and 2,231 homes Retail versus 8,891 homes Wholesale and 1,979 homes Retail in the comparable prior year period.

Further, fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, which results from home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home.

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, fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, which result from home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home.

These selections vary regularly based on consumer interests, local housing preferences and economic circumstances.

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For these reasons, the Company has experienced, and expects to continue to experience, volatility in overall net factory-built housing revenue per home sold.

Financial services segment revenue increased for the three and nine months ended December 28, 2019 , from greater unrealized gains on investments in the insurance subsidiary’s portfolio, an increase in home loan sales compared to the prior year period, additional interest income on commercial loans outstanding and more insurance policies in force in the current year compared to the prior year.

Financial services segment revenue increased for the three months ended June 27, 2020 from greater unrealized gains on investments in the insurance subsidiary's portfolio, an increase 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.

The overall increase is partially offset by lower interest income earned on the acquired loan portfolios that continue to amortize.

Gross Profit.

Gross profit consisted of the following for the three and nine months ended December 28, 2019 and December 29, 2018 , respectively (in thousands):

Gross profit consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands):

Three Months Ended

Gross profit:

Factory-built housing

Financial services

Gross profit as % of Net revenue:

Factory-built housing

Financial services

Nine Months Ended

2020 June 29,

2019 $ Change % Change

Gross profit:

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Financial services 8,331 8,163 168 2.1 %

$ 55,323 $ 60,298 $ (4,975) (8.3) %

Gross profit as % of Net revenue:

Factory-built housing

Financial services

Factory-built housing gross profit and gross profit as a percentage of net sales for the three and nine months ended December 28, 2019 increased primarily from changes in product mix, while continuing to benefit from generally lower commodity prices.

Financial services gross profit for the three and nine months ended December 28, 2019 increased from greater home loan sales, increased interest income on commercial loans outstanding, more insurance policies in force in the current year compared to the prior year and decreased weather related claims volume at our insurance subsidiary.

This was partially offset by lower interest income earned on the acquired loan portfolios that continue to amortize.

As a percentage of net revenue, financial services gross profit improved primarily from lower claims expense at our insurance subsidiary from less storm activity in the current year as compared to the prior year.

Consolidated 21.7 % 22.8 % N/A (1.1) %

Factory-built housing 19.7 % 21.0 % N/A (1.3) %

Financial services 49.9 % 53.4 % N/A (3.5) %

Factory-built housing Gross profit and Gross profit as a percentage of Net revenue for the three months ended June 27, 2020 decreased primarily from lower sales volume and production inefficiencies caused by the COVID-19 pandemic.

Gross profit as a percentage of Net revenue decreased as a result of higher weather related claims volume at our insurance subsidiary and lower interest income earned on the acquired loan portfolios that continue to amortize.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses consisted of the following for the three and nine months ended December 28, 2019 and December 29, 2018 , respectively (in thousands):

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

Selling, general and administrative expenses:

Factory-built housing

Financial services

Selling, general and administrative expenses as % of Net revenue:

Nine Months Ended

2020 June 29,

2019 $ Change % Change

Selling, general and administrative expenses:

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Financial services 4,586 4,513 73 1.6 %

$ 35,323 $ 35,264 $ 59 0.2 %

Selling, general and administrative expenses as % of Net revenue:

Selling, general and administrative expenses related to factory-built housing for the three months ended December 28, 2019 included amortization of $2.1 million in premiums for additional D&O insurance purchased by the Company and $0.9 million in expenses related to the Company's response to the SEC inquiry, compared to $0.7 million and $1.3 million in such costs, respectively, for the three months ended December 29, 2018 , as well as greater sales commissions and incentive-based compensation from improved results.

Selling, general and administrative expenses related to factory-built housing for the nine months ended December 28, 2019 included amortization of $6.3 million in premiums for additional D&O insurance purchased by the Company and $2.5 million in expenses related to the Company's response to the SEC inquiry compared to $0.7 million and $1.3 million in such costs, respectively, for the nine months ended December 29, 2018 , as well as greater sales commissions and incentive-based compensation from improved results.

Selling, general and administrative expenses related to financial services increased for the three and nine months ended December 28, 2019 , primarily from higher salary and incentive-based compensation expense.

13.9 % 13.4 % N/A 0.5 %

Selling, general and administrative expenses related to factory-built housing remained consistent between periods.

Increases in salaries and employee related expenses during the current period were offset by a reduction in legal expenses.

Expenses related to the SEC inquiry during the three months ended June 27, 2020 were $0.1 million, net of a $0.5 million insurance recovery of prior SEC related expenses.

For the three months ended June 29, 2019, the Company incurred $0.8 million in costs related to the Company's response to the SEC inquiry.

Selling, general and administrative expenses related to financial services were relatively consistent each period.

Interest Expense.

Interest expense was $0.5 million and $0.9 million for the three months ended December 28, 2019 and December 29, 2018 , respectively.

For the nine months ended December 28, 2019 and December 29, 2018 , Interest expense was $1.3 million and $2.8 million , respectively.

The decrease for the three and nine months ended December 28, 2019 is primarily the result of a reduction in bond interest expense, as the Company exercised its right to repurchase the 2005-1 and 2007-1 securitized loan portfolios in January and August 2019, respectively, thereby eliminating the related interest expense.

These decreases were partially offset by interest expense related to secured credit facilities and finance leases.

Interest expense was $0.2 million and $0.5 million for the three months ended June 27, 2020 and June 29, 2019, respectively.

Interest expense consists primarily of debt service on the CountryPlace 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 Company exercised its 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, net was $2.2 million and $0.3 million for the three months ended December 28, 2019 and December 29, 2018 , respectively.

The three months ended December 28, 2019 includes unrealized gains on corporate investments of $0.3 million compared to losses of $2.1 million for the three months ended December 29, 2018 .

The current year period also includes an increase in interest income from larger Cash and cash equivalents balances compared to the same period last year.

For the nine months ended December 28, 2019 and December 29, 2018 , Other income, net was $10.2 million and $3.6 million , respectively.

The nine months ended December 28, 2019 includes $1.4 million in unrealized gains on corporate investments compared to losses of $1.0 million for the nine months ended December 29, 2018 .

In addition, the current period includes a $3.4 million net gain on the sale of idle land and an increase in interest income on larger Cash and cash equivalents balances compared to the same period last year.

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 million for the three months ended June 27, 2020 and June 29, 2019, respectively.

The decrease is primarily from a $0.9 million reduction in interest earned on cash balances and commercial loans receivables, given the lower interest rate environment.

Income Before Income Taxes.

Income before income taxes consisted of the following for the three and nine months ended December 28, 2019 and December 29, 2018 , respectively (in thousands):

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

Income before income taxes:

Factory-built housing

Financial services

Nine Months Ended

2020 June 29,

2019 $ Change % Change

Income before income taxes:

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Financial services 3,230 3,049 181 5.9 %

$ 21,680 $ 27,362 $ (5,682) (20.8) %

Income tax expense.

Income tax expense was $3.8 million and $3.6 million for the three months ended December 28, 2019 and December 29, 2018 , respectively, for an effective income tax rate for the 2020 third quarter of 15.5% compared to an effective tax rate of 21.0% for the same period last year.

The lower effective tax rate in the current period is mainly from a benefit of $1.7 million for the recognition of certain tax credits under the 2020 Appropriations Bill that was signed into law on December 20, 2019.

For the nine months ended December 28, 2019 and December 29, 2018 , Income tax expense was $16.3 million and $11.9 million , respectively, for an effective income tax rate of 20.5% compared to an effective tax rate of 19.7% for the nine months ended December 29, 2018 .

The lower effective tax rate in the prior year relates to greater tax benefits from the exercise of stock options, as the nine months ended December 29, 2018 included a benefit of $2.3 million , compared to a benefit of $1.3 million for the nine months ended December 28, 2019 .

Income tax expense w as $5.0 million and $6.1 million for the three months ended June 27, 2020 and June 29, 2019, respectively, for an effective income tax rate for the 2021 first quarter of 23.1% compared to an effective tax rate of 22.2% for the same period last year.

The higher effective tax rate in the current quarter was primarily due to lower tax benefits from the exercise of stock options, which provided a benefit of $0.3 million compared to the $0.6 million in the same period last year.

Liquidity and Capital Resources

The Company believes that cash and cash equivalents at December 28, 2019 , together with cash flow from operations, will be sufficient to fund its operations and provide for growth for the next 12 months and into the foreseeable future.

The Company believes that cash and cash equivalents at June 27, 2020, together with cash flow from operations, will be sufficient to fund its operations and provide for growth for the next 12 months and into the foreseeable future.

The Company maintains cash in U.S.

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Such transactions may require the use of cash and have other impacts on the Company's liquidity and capital resources.

The recent acquisition of Destiny Homes did not have a significant impact on our liquidity or capital resources.

The acquisition of Destiny Homes did not have a significant impact on our liquidity or capital resources.

Because of the Company's sufficient cash position, the Company has not historically sought external sources of liquidity, with the exception of certain credit facilities for its home-only lending programs.

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The Company believes that stockholders' equity at its insurance subsidiary remains sufficient and does 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 nine months ended December 28, 2019 and December 29, 2018 , respectively (in thousands):

Nine Months Ended

The following is a summary of the Company's cash flows for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands):

Three Months Ended

2020 June 29,

2019 $ Change

Cash, cash equivalents and restricted cash at beginning of the fiscal year $ 255,607 $ 199,869 $ 55,738

Net cash provided by operating activities 35,692 16,798 18,894

Net cash used in investing activities

Net cash provided by (used in) investing activities 105 (1,469) 1,574

Net cash used in financing activities (922) (2,174) 1,252

Cash, cash equivalents and restricted cash at end of the period $ 290,482 $ 213,024 $ 77,458

Net cash provided by operating activities increased during the nine months ended December 28, 2019 , compared to the nine months ended December 29, 2018 , primarily from increased profitability from improved home sales volume and a lower inventory balance.

Consumer loan originations increased by $22.9 million to $121.6 million for the nine months ended December 28, 2019 from $98.7 million for the nine months ended December 29, 2018 .

Net cash provided by operating activities increased during the three months ended June 27, 2020, compared to the three months ended June 29, 2019 primarily from decreased finished goods inventories at Company-owned stores, lower levels of commercial lending, higher accrued taxes and sales of consumer loans, partially offset by lower net income and more consumer loans originated.

Consumer loan originations increased by $9.8 million to $47.4 million for the three months ended June 27, 2020 from $37.6 million for the three months ended June 29, 2019.

Proceeds from sales of consumer loans provided $39.3 million in cash, compared to $37.6 million in the previous year.

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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.

The Company has also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities (see Note 7 to the Consolidated Financial Statements).

The Company has 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 has 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.

Net cash for investing activities was primarily used to fund the acquisition of Destiny Homes, which operates a manufactured and modular housing factory in Moultrie, Georgia.

Financing activities used $13.2 million more cash during the period compared to the same period last year, as the Company repurchased the 2007-1 securitized loan portfolio in August 2019, eliminating the related securitized financings.

In August 2019, the Company repurchased the 2007-1 securitized loan portfolio, leaving no further securitized financing balance outstanding.

The Company has 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.

This draw down period expired in September 2019.

The proceeds are 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 period, the facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity.

Investing activities primarily consist of buying and selling bonds and equity securities in our Financial Services segment to support 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.

Financing activities used $1.3 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 Company repurchased the 2007-1 securitized loan portfolio in August 2019.

The Company's finance subsidiary 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 December 28, 2019 , the outstanding balance of the converted loans was $10.8 million at a weighted average interest rate of 4.91%.

As of June 27, 2020, the outstanding balance of the converted loans was $10.2 million at a weighted average interest rate o f 4.91% .

Contractual Commitments and Contingencies.

Other than the Company's repurchase of the 2007-1 securitized loan portfolio, which is discussed above, there were no material changes to the contractual obligations as set forth in the Company's Annual Report on Form 10-K.

There were no material changes to the contractual obligations as set forth in the Company's Annual Report on Form 10-K.

Critical Accounting Policies

On March 31, 2019, the Company adopted ASU No.

2016-02, Leases (Topic 842) , which provides new guidance for lease recognition and elected to use the modified retrospective approach to account for prior periods.

On March 29, 2020, the Company 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's critical accounting policies during the nine months ended December 28, 2019 , as compared to those disclosed in Part II, Item 7 of the Company's 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.

There have been no other significant changes to the Company's critical accounting policies during the three months ended June 27, 2020, as compared to those disclosed in Part II, Item 7 of the Company's 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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis