What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-08-03 · 135 added, 164 removed, 123 unchanged (71% of the section changed)

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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.

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 novel coronavirus COVID-19 ("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.

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References to "Note" or "Notes" pertain to the Notes to the Company's Consolidated Financial Statements.

Company Overview

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.

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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 ("Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes.

("CountryPlace"), is an approved Federal National Mortgage Association and Federal Home Loan Mortgage Corporation 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

From its inception in 1965, Cavco traditionally served affordable housing markets in the southwestern United States principally through manufactured home production.

During the period from 1997 to 2000, Cavco was purchased by, and became a wholly-owned subsidiary of, Centex Corporation, which operated the Company until 2003, when Cavco became a stand-alone publicly-held company traded on the Nasdaq Global Select Market under the ticker symbol CVCO.

The Company has strategically expanded its factory operations and related business activities primarily through the acquisition of other industry participants.

This has enabled Cavco to meet the needs of the affordable housing market on a national basis.

The purchase of the Fleetwood and Palm Harbor assets in August 2009 and April 2011, respectively, increased home production and distribution capabilities and provided for vertical integration through entry into financial services businesses specific to the Company's industry.

These transactions expanded the Company's geographic reach at a national level by adding factories and retail locations serving the Northwest, West, South, South Central and Mid-Atlantic regions.

The purchases of Chariot Eagle, Fairmont, Lexington and Destiny, in March 2015, May 2015, April 2017 and August 2019, respectively, provided additional operating capacity, increased home production capabilities and further strengthened the Company's market in certain areas of the United States and several provinces in Canada.

In April 2020, the Company decided to shut down production and close its Lexington, Mississippi plant.

Ongoing market and operating challenges were exacerbated by decreased business and uncertainty resulting from the novel coronavirus COVID-19 ("COVID-19") pandemic.

This location finalized production in June 2020, however, the Company remains available to fulfill the needs of wholesale customers previously served by the Lexington facility from its other production lines in the southeast.

The Company does not expect that closing the Lexington facility will have a significant adverse financial effect on the Company.

The production facility has been placed on the market for sale.

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

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retail locations.

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 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.

Company Outlook

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.

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.

The Company has the ability to customize floor plans and designs to fulfill specific needs and interests.

By offering a full range of homes from entry-level models to large custom homes and with the ability to engineer designs in-house, the Company can accommodate virtually any customer request.

In addition to homes built in accordance with the National Manufacturing Home Construction and Safety Standards ("HUD code") promulgated by the U.S.

Department of Housing and Urban Development ("HUD"), the Company also constructs modular homes that conform to state and local codes, park model RVs and cabins and light commercial buildings at many of its manufacturing facilities.

In April 2020, the Company shut down production and closed its Lexington, Mississippi manufacturing facility, finalizing production in June 2020.

However, the Company remains available to serve wholesale customers previously served by the Lexington facility from its other production lines in the southeast.

The production facility has been placed on the market for sale.

Company and Industry Outlook

According to data reported by the Manufactured Housing Institute, industry home shipments decreased 1.4% for the first 8 months of calendar year 2020 compared to the same period in the prior year.

The industry offers solutions to the affordable housing crisis.

The average price per square foot for a manufactured home is lower than a site-built home.

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

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.

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 may be limited in their ability to qualify for a new home loan by their particular employment status and down payment capability.

Consumer confidence, as an indicator of retirement security, is especially important among manufactured home buyers interested in our products for seasonal or retirement living.

The Company seeks out niche market opportunities where its diverse product lines and custom building capabilities provide a competitive advantage.

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These homes provide environmentally-friendly maintenance requirements, typically lower utility costs and sustainability.

The Company also builds homes designed to use alternative energy sources, such as solar and wind.

From bamboo flooring and tankless water heaters to solar-powered homes, the Company's products are diverse and tailored to a wide range of consumer interests.

Innovation in housing design is a forte of the Company and it continues to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located.

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.

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.

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 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.

The balance sheet strength, including the position in cash and cash equivalents, helps avoid liquidity problems and enable the Company to act effectively as market opportunities or challenges present themselves.

The Company continues to make certain commercial loan programs available to members of the Company's independent wholesale distribution chain.

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The Company believes that growing its investment and participation in home-only lending may provide additional sales growth opportunities for the financial services segment, as well as provide a means that could lead to increased home sales for its factory-built housing operations.

The Company is also working through industry trade associations to encourage favorable legislative and Government-Sponsored Enterprise ("GSE") action to address the mortgage financing needs of buyers of affordable homes.

Federal law requires the GSEs to implement the "Duty to Serve" requirements specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008.

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

These plans became effective on January 1, 2018.

Each of the three-year plans offers an enhanced mortgage loan product through their "MH Advantage" and "ChoiceHome" programs, respectively, that began in the latter part of calendar year 2018.

Small-scale pilot programs for the purchase of home-only loans that were expected to commence towards the end of calendar year 2019 have not occurred.

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

Although some progress has been made in this area, meaningful positive impact in the form of increased home orders has yet to be realized.

On January 25, 2018, HUD announced a top-to-bottom review of its manufactured housing rules as part of a broader effort to identify regulations that may be ineffective, overly burdensome, or excessively costly given the critical need for affordable housing.

In addition, on June 25, 2019, President Trump signed an Executive Order directing federal agencies to work together to alleviate barriers that impede the production of affordable housing.

The Executive Order created a White House Council on Eliminating Regulatory Barriers to Affordable Housing, consisting of members from eight federal agencies and chaired by the HUD Secretary.

While there has been no timeline established, if certain changes are made, the Company may be able to serve a broader range of home buyers.

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

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

As disclosed in Part II, Item 1, Legal Proceedings , since 2018, the Company has been cooperating with an investigation by the enforcement staff of the Securities and Exchange Commission ("SEC") regarding trading in personal and Company accounts directed by the Company's former Chief Executive Officer ("CEO"), Joseph Stegmayer.

The Audit Committee of the Board of Directors conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the results of the Audit Committee's work were shared with the Company's auditors, listing exchange and the SEC staff.

The Company continues to make documents and personnel available to the SEC staff and intends to continue cooperating with its investigation.

As a result of the ongoing independent investigation, the Company recorded $0.1 million, net of a $0.5 million insurance recovery of prior expenses, and $0.8 million of expenses related to legal and other expenses during the three months ended June 27, 2020 and June 29, 2019, respectively, and expects to continue to incur related costs pertaining to this matter.

During the third quarter of fiscal year 2019, the Company also reviewed the sufficiency of its insurance coverage and as a result, Cavco's Board of Directors made a decision to purchase additional director and officer ("D&O") liability insurance coverage with 22-month terms for a total premium of $15.3 million.

As a result, the Company recorded $2.1 million of additional D&O policy premium expense during each of the three months ended June 27, 2020 and June 29, 2019, and expects to incur approximately $2.1 million per quarter in Selling, general and administrative expenses from the amortization of these policy premiums through the second quarter of fiscal year 2021, at which point D&O policy needs and related premium costs will be assessed further.

Industry Overview

According to data reported by the Manufactured Housing Institute, industry home shipments decreased 0.9% for the first 5 months of calendar year 2020 compared to the same period in the prior year.

During calendar year 2019, the manufactured housing industry shipped approximately 95,000 HUD code manufactured homes, a decrease of 2.1% from the approximately 97,000 units shipped in 2018.

Excess inventory in the market from accelerated purchasing in 2018 slowed shipment levels in 2019.

Prior to 2019, annual shipments had increased each year since calendar year 2009 when 50,000 HUD code manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959.

While shipments of HUD code manufactured homes have improved in recent years, the industry continues to operate at relatively low levels compared to historical shipment statistics.

"First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers.

Included in this group are lower-income households that are particularly affected by their particular employment status to qualify for a new home loan and their down payment capability.

Consumer confidence, as in indicator of retirement security, is especially important among manufactured home buyers interested in our products for seasonal or retirement living.

The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing.

adult population is estimated to expand by approximately 9.2 million between 2020 and 2025.

Young adults born from 1976 to 1995, often referred to as Gen Y, represent a large segment of the population.

Late-stage Gen Y is approximately 4.3 million people larger than the next age category born from 1966 to 1975, Gen X, and is considered to be in the peak home-buying years.

Gen Y represents prime first-time home buyers who may be attracted by the affordability, sustainability, diversity and location flexibility of factory-built homes.

The age 55 and older category is reported to be the fastest growing segment of the U.S.

This group is similarly interested in the value proposition;

however, they are also motivated by the energy efficiency and low maintenance requirements of systems-built homes, and by the lifestyle offered by planned communities specifically designed for homeowners that fall into this age group.

COVID-19 Impact and Strategy

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

As the business was considered essential, 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.

Accordingly, the Company's total average plant capacity utilization rate was approximately 65% during the second fiscal quarter of 2021, ending the quarter at approximately 70%.

This is lower than pre-pandemic levels of more than 80%.

Sales order activity has continued to improve during the second fiscal quarter of 2021 to the point where home sales order rates were nearly 65% higher than the comparable prior year quarter.

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 134% to $321 million at September 26, 2020, compared to $137 million at September 28, 2019 and $157 million at June 27, 2020.

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

Distributors may cancel orders prior to production without penalty.

After production of a particular home has commenced, the order becomes non-cancelable and the distributor is obligated to take delivery of the home.

Accordingly, until production of a particular home has commenced, we do not consider order backlog to be firm orders.

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

In addition to accepting and processing new applications for home loans and insurance policies, the financial services operations continue to assist customers in need and service existing loans and insurance policies while complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations.

Because of these 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 decreases if customers do not make contractual monthly payments of principal and interest in a timely manner.

Our primary investor, Ginnie Mae, permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments.

While monthly collections of principal and interest from borrowers has normally exceeded scheduled principal and interest payments owed to investors, this could be negatively impacted given various state and local emergency orders in light of COVID-19.

It is difficult to predict the future impacts of the COVID-19 pandemic on housing demand, employee availability, supply chain and Company performance and operations.

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

The Company strives to balance the production levels and workforce size with the demand for its product offerings to maximize efficiencies.

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

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

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

The Company faces a major challenge in overcoming labor-related difficulties in the COVID-19 environment to increase home production.

Results of Operations

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

2020 June 29,

($ in thousands, except homes sold and revenue per home sold) September 26,

2020 September 28,

2019 Change % Change

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Net factory-built housing revenue per home sold $ 70,314 $ 66,832 $ 3,482 5.2 %

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.

Six Months Ended

($ in thousands, except homes sold and revenue per home sold) September 26,

2020 September 28,

2019 Change % Change

Factory-built housing $ 479,057 $ 501,458 $ (22,401) (4.5) %

Financial services 33,720 31,259 2,461 7.9 %

$ 512,777 $ 532,717 $ (19,940) (3.7) %

Total homes sold 6,776 7,588 (812) (10.7) %

Net factory-built housing revenue per home sold $ 70,699 $ 66,086 $ 4,613 7.0 %

In the factory-built housing segment, the decrease in Net revenue was primarily due to 9% and 11% lower home sales volume during the three and six months ended September 26, 2020, respectively.

These declines were partially offset by higher home selling prices compared to the same periods last year.

Note that Destiny Homes was purchased in August 2019 and Lexington Homes was closed in June 2020.

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

A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers ("Wholesale") and sales of homes to consumers by Company-owned retail centers ("Retail").

Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site.

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

Changes to the proportion of home sales among 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.

Our product prices are also periodically adjusted for the cost and availability of raw materials included in, and labor used to produce, each home.

For these reasons, 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 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.

Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a manufacturing facility to the home-site.

Retail home prices include these items plus 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.

Other factors include fluctuations in product mix, the result of home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home.

As discussed above, changes to the proportion of home sales among the distribution channels between reporting periods impact the overall net revenue per home sold.

For the three and six months ended September 26, 2020, the Company sold 2,664 and 5,261 homes W holesale, respectively, and 763 and 1,515 homes Re tail, respectively.

For the three and six months ended September 28, 2019, the Company sold 3,006 and 6,064 homes Wholesale, respectively, and 775 and 1,524 homes Retail, respectively.

Financial services segment revenue increased due to higher volume in home loan sales and more insurance policies in force in the current year compared to the prior year.

Also, the three and six months ended September 26, 2020 include $0.7 million and $1.7 million, respectively, of unrealized gains on marketable equity securities in the insurance subsidiary's portfolio, compared to $0.2 million in unrealized gains in each of the prior year periods.

These overall increases were partially offset by lower interest income earned on the acquired consumer loan portfolios that continue to amortize.

Gross Profit.

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

Three Months Ended

2020 June 29,

($ in thousands) September 26,

2020 September 28,

2019 $ Change % Change

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Financial services 43.4 % 61.5 % N/A (18.1) %

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.

Six Months Ended

($ in thousands) September 26,

2020 September 28,

2019 $ Change % Change

Gross profit:

Factory-built housing $ 93,147 $ 100,774 $ (7,627) (7.6) %

Financial services 15,717 17,991 (2,274) (12.6) %

$ 108,864 $ 118,765 $ (9,901) (8.3) %

Gross profit as % of Net revenue:

Consolidated 21.2 % 22.3 % N/A (1.1) %

Factory-built housing 19.4 % 20.1 % N/A (0.7) %

Financial services 46.6 % 57.6 % N/A (11.0) %

Factory-built housing Gross profit as a percentage of Net revenue for the three month period was flat as compared to the same period last year, and decreased for the six months ended September 26, 2020, primarily due to lower sales volume and production inefficiencies caused by the COVID-19 pandemic.

In the financial services segment, 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 consumer loan portfolios that continue to amortize.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses consisted of the following for the three months ended June 27, 2020 and June 29, 2019, respectively (in thousands):

Three Months Ended

2020 June 29,

($ in thousands) September 26,

2020 September 28,

2019 $ Change % Change

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13.7 % 13.4 % N/A 0.3 %

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 $0.2 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 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 months ended June 27, 2020 and June 29, 2019, respectively (in thousands):

Three Months Ended

2020 June 29,

Six Months Ended

($ in thousands) September 26,

2020 September 28,

2019 $ Change % Change

Income before income taxes:

Selling, general and administrative expenses:

Factory-built housing $ 61,462 $ 62,331 $ (869) (1.4) %

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$ 70,776 $ 71,347 $ (571) (0.8) %

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

13.8 % 13.4 % N/A 0.4 %

Selling, general and administrative expenses related to factory-built housing decreased between periods primarily from a reduction in legal expenses, partially offset by increased corporate-related expenses.

During the three months ended September 26, 2020, the Company incurred $0.5 million in expenses related to the SEC inquiry.

However, the Company also received a $0.8 million insurance recovery of prior expenses, resulting in a net benefit of $0.3 million during the period compared to $0.8 million in expense in the second quarter of fiscal year 2020.

For the six months ended September 26, 2020, the Company recorded a net benefit of $0.2 million for SEC inquiry related expenses compared to $1.6 million in expense in the comparable prior year period.

Selling, general and administrative expenses related to financial services increased due to increases in salaries and employee related expenses.

Interest Expense.

Interest expense was $0.2 million and $0.3 million for the three months ended September 26, 2020 and September 28, 2019, respectively.

For the six months ended September 26, 2020 and September 28, 2019, Interest expense was $0.4 million and $0.8 million, 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 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 $1.7 million and $5.2 million for the three months ended September 26, 2020 and September 28, 2019, respectively.

For the six months ended September 26, 2020 and September 28, 2019, Other income, net was $3.6 million and $8.0 million , respectively.

Other income, net, declined primarily due to a $3.4 million net gain on the sale of idle land that was recorded in the prior year period, as well as a reduction in interest earned in the current periods on cash and commercial loan receivables, given the lower interest rate environment.

These declines were partially offset by increases in unrealized gains on corporate marketable equity securities.

Income tax expense.

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.

Income tax expense w as $4.5 million and $6.4 million for the three months ended September 26, 2020 and September 28, 2019, respectively, for an effective income tax rate of 23.2% and 23.4%, respectively.

Income tax expense for the six months ended September 26, 2020 and September 28, 2019 was $9.6 million and $12.5 million , respectively, for an effective income tax rate of 23.1% compared to an effective tax rate of 22.8% for the same period la st year.

The higher effective tax rate for the six month period was primarily due to lower tax benefits from the exercise of stock options, which provided a benefit of $0.7 million compared to the $0.9 million in the same period last year.

Liquidity and Capital Resources

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 believes that cash and cash equivalents at September 26, 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 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 three months ended June 27, 2020 and June 29, 2019, respectively (in thousands):

Three Months Ended

2020 June 29,

The following is a summary of the Company's cash flows for the six months ended September 26, 2020 and September 28, 2019, respectively:

Six Months Ended

($ in thousands) September 26,

2020 September 28,

2019 $ Change

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Net cash provided by operating activities 74,609 43,593 31,016

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

Net cash used in investing activities (82) (18,308) 18,226

Net cash used in financing activities (865) (19,345) 18,480

Cash, cash equivalents and restricted cash at end of the period $ 329,269 $ 205,809 $ 123,460

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.

Net cash provided by operating activities increased during the six months ended September 26, 2020 compared to the six months ended September 28, 2019 primarily due to more customer deposits received as a result of higher order rates, higher collections on accounts receivables and commercial loans receivables and the timing of payments on Accounts payable and Accrued expenses and other current liabilities.

Consumer loan originations increased by $2.1 million to $82.4 million for the six months ended September 26, 2020 from $80.3 million for the six months ended September 28, 2019.

Proceeds from sales of consumer loans provided $80.6 million in cash, compared to $77.2 million in the previous year.

With respect to consumer lending for the purchase of manufactured housing, states may classify manufactured homes for both legal and tax purposes as personal property rather than real estate.

As a result, financing for the purchase of manufactured homes is characterized by shorter loan maturities and higher interest rates.

Unfavorable changes in these factors may have material negative effects on the Company's results of operations and financial condition.

See Item IA, "Risk Factors" in the Company's Form 10-K.

Cavco has entered into commercial loan arrangements with certain distributors of its products under which the Company provides funds for Wholesale purchases.

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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.

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

Investing activities consist of buying and selling bonds and marketable equity securities in our Financial Services segment and funding strategic growth acquisitions.

The Company received $2.1 million more in net proceeds from investments for the six months ended September 26, 2020 compared to the same period last year, and Net cash for investing activities in the prior year was primarily used to fund the acquisition of Destiny Homes.

Financing activities used $18.5 million less cash during the period compared to the same period last year 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.

The proceeds were used to facilitate the origination of consumer home-only loans to be held for investment, secured by the manufactured homes which were subsequently pledged as collateral to the facilities.

Upon completion of the draw down periods, these facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity.

As of September 26, 2020, the outstanding balance of the converted loans was $9.8 million at a weighted average interest rate o f 4.91% .

Contractual Commitments and Contingencies.

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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.

The Company 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 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.

There have been no other significant changes to the Company's critical accounting policies during the six months ended September 26, 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