What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 107 added, 48 removed, 158 unchanged (50% of the section changed)

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how the Company may be affected by the novel coronavirus COVID-19 pandemic ("COVID-19") or any other pandemic or outbreak;

labor shortages and the pricing and availability of raw materials;

governmental regulations and legal proceedings;

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Headquartered in Phoenix, Arizona, we design and produce factory-built housing products primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers.

We are one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments, marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Fairmont, Friendship, Chariot Eagle and Destiny.

We are also one of the leading producers of park model RVs, vacation cabins and factory-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand.

We are one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments.

Our products are marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood and Midcountry.

We are also one of the leading producers of park model RVs, vacation cabins and factory-built commercial structures.

Our finance subsidiary, CountryPlace Acceptance Corp.

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We operate 26 homebuilding production lines located in Millersburg and Woodburn, Oregon;

Nampa, Idaho;

Riverside, California;

Nampa, Idaho;

Phoenix and Goodyear, Arizona;

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Montevideo, Minnesota;

Nappanee, Indiana;

Dorchester, Wisconsin;

Nappanee and Goshen, Indiana;

Lafayette, Tennessee;

Martinsville and Rocky Mount, Virginia;

Douglas and Moultrie, Georgia;

Shippenville and Emlenton, Pennsylvania;

Martinsville and Rocky Mount, Virginia;

Cherryville, North Carolina;

and Ocala and Plant City, Florida.

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retail locations.

Included in the above figures are two recent acquisitions.

On July 4, 2021, we purchased an additional 20% ownership in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as “Craftsman") in addition to our existing 50% ownership, making us controlling owner.

Craftsman is a manufactured home street retailer with four locations in Nevada selling Company and other manufacturer branded homes.

They also provide general construction to setup the home property and assist with multi-home developments and multi-family dwellings.

The transaction was accounted for as a business combination achieved in stages and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of the acquisition of the additional 20% interest, with a reduction for the earnings of the noncontrolling shareholder.

On September 24, 2021, we purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore"), including its six manufacturing facilities and two wholly-owned retail locations.

In addition to manufacturing, Commodore also participates in commercial lending operations with its dealers.

The transaction was accounted for as a business combination and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition.

Company and Industry Outlook

According to data reported by the Manufactured Housing Institute, industry home shipments increased 14.3% for the first 8 months of calendar year 2021 compared to the same period in the prior year, which was impacted by shutdowns related to COVID-19.

However, we did not experience any significant factory shutdowns in the prior year period like some other industry participants did.

However, we did not experience any significant factory shutdowns in the prior year period, in contrast to certain other industry participants.

The industry offers solutions to the affordable housing crisis and these industry shipment numbers do not represent demand;

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Operational efficiencies have declined from hiring challenges, higher and largely unpredictable factory employee absenteeism and other inefficiencies from building material supply shortages.

Accordingly, our total average plant capacity utilization rate was approximately 75% during the first fiscal quarter of 2022, which remains consistent with that of our fourth quarter of fiscal 2021.

Sales order activity remained exceptionally strong during the first fiscal quarter of 2022 and was nearly 50% 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 to $792 million at July 3, 2021, up 31.3% compared to $603 million at April 3, 2021 and up 404.5% compared to $157 million at June 27, 2020.

Accordingly, our total average plant capacity utilization rate was approximately 75% during the second fiscal quarter of 2022, which remains consistent with that of our first quarter of fiscal 2022.

Housing demand remains strong as well-qualified individuals continue pursuing home-ownership, bolstered by the low home loan interest rates.

Home order rates are starting to gradually decline from the extreme highs we saw in the past few quarters, but still remain above pre-COVID rates, which were considered to be strong.

Our backlogs at October 2, 2021 were $1.1 billion, up $315 million or 39.8% compared to $792 million at July 3, 2021, and up $787 million or 245.4% compared to $321 million at September 26, 2020.

These increases include $279 million attributable to the Commodore acquisition.

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

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Three Months Ended

($ in thousands, except revenue per home sold) July 3,

2021 June 27,

($ in thousands, except revenue per home sold) October 2,

2021 September 26,

Factory-built housing $ 342,094 $ 240,967 $ 101,127 42.0 %

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Net factory-built housing revenue per home sold $ 95,105 $ 70,314 $ 24,791 35.3 %

In the factory-built housing segment, the increase in Net revenues was primarily due to a 10.5% increase in units sold and 18.7% increase in the average sales price.

Six Months Ended

($ in thousands, except revenue per home sold) October 2,

2021 September 26,

Factory-built housing $ 654,377 $ 479,057 $ 175,320 36.6 %

Financial services 35,588 33,720 1,868 5.5 %

$ 689,965 $ 512,777 $ 177,188 34.6 %

Factory-built homes sold

by Company-owned retail sales centers 1,433 1,515 (82) (5.4) %

to independent retailers, builders, communities & developers 5,864 5,261 603 11.5 %

7,297 6,776 521 7.7 %

Net factory-built housing revenue per home sold $ 89,678 $ 70,699 $ 18,979 26.8 %

In the factory-built housing segment, the increase in Net revenues was primarily due to an increase in the average sales price and the number of units sold.

The higher home prices were driven by product price increases and a shift toward more multi-section homes.

Home sales volume increased from higher factory capacity utilization.

On a sequential basis, adjusting for the extra week of production in the fourth quarter of fiscal year 2021, home sales volume would have also increased from slightly higher factory capacity utilization.

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

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Changes in the number of modules per home, the selection of different home types/models and optional home upgrades create changes in product mix, also causing fluctuations in this metric.

The table below presents the mix of modules and homes shipped for the three months ended July 3, 2021 and June 27, 2020:

The table below presents the mix of modules and homes sold for the three and six months ended October 2, 2021 and September 26, 2020:

Three Months Ended

2021 June 27,

2021 September 26,

Modules Homes Modules Homes Modules Homes

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6,256 3,597 5,739 3,427 9.0 % 5.0 %

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

These gains were partially offset by lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio, which were $0.4 million and $1.0 million for the three months ended July 3, 2021 and June 27, 2020, respectively, and lower interest income earned on the acquired consumer loan portfolios that continue to amortize.

Six Months Ended

2021 September 26,

Modules Homes Modules Homes Modules Homes

Housing and Urban Development code homes 11,200 6,430 9,911 5,844 13.0 % 10.0 %

Modular homes 987 480 950 438 3.9 % 9.6 %

Park model RVs 387 387 494 494 (21.7) % (21.7) %

12,574 7,297 11,355 6,776 10.7 % 7.7 %

Financial services segment revenue increased primarily due to higher volume in home loan sales and more insurance policies in force in the current year compared to the prior year, partially offset by lower interest income earned on the acquired consumer loan portfolios that continue to amortize and changes in the value of the marketable equity securities in the financial services portfolio.

For the three and six months ended October 2, 2021, we recognized unrealized losses on marketable equity securities of $0.5 million and $0.1 million, respectively.

For the three and six months ended September 26, 2020, we recognized gains of $0.7 million and $1.7 million, respectively.

Gross Profit.

Three Months Ended

($ in thousands) July 3,

2021 June 27,

($ in thousands) October 2,

2021 September 26,

Factory-built housing $ 82,299 $ 46,155 $ 36,144 78.3 %

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Financial services 43.7 % 43.4 % N/A 0.3 %

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Factory-built housing $ 148,572 $ 93,147 $ 55,425 59.5 %

Financial services 15,369 15,717 (348) (2.2) %

$ 163,941 $ 108,864 $ 55,077 50.6 %

Gross profit as % of Net revenue

Consolidated 23.8 % 21.2 % N/A 2.6 %

Factory-built housing 22.7 % 19.4 % N/A 3.3 %

Financial services 43.2 % 46.6 % N/A (3.4) %

Factory-built housing gross profit increased primarily due to increased home sales volume and higher average sales prices.

We continue to monitor and react to inflation in building material prices by maintaining a focus on our product pricing;

however, product price increases may lag behind the escalation of building costs.

Gross profit as a percentage of Net revenue also increased this period from a shift toward more multi-section homes.

Financial services gross profit decreased due to higher weather-related claims volume and lower unrealized gains on marketable equity securities.

however, product price increases may lag behind the escalation of building material costs.

While lumber and other lumber related product market prices have begun to decline, we have seen most other product prices increase, offsetting those declines.

Gross profit as a percentage of Net revenue also increased from a shift toward more multi-section homes.

For the three months ended October 2, 2021, Financial services gross profit increased primarily due to lower weather-related claims volume, partially offset by unrealized losses on marketable equity securities.

For the six months ended October 2, 2021, gross profit decreased primarily due to higher weather-related claims volume in the first quarter and unrealized losses on marketable equity securities.

Selling, General and Administrative Expenses.

Three Months Ended

($ in thousands) July 3,

2021 June 27,

($ in thousands) October 2,

2021 September 26,

Factory-built housing $ 40,347 $ 30,725 $ 9,622 31.3 %

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Selling, general and administrative expenses as % of Net revenue 12.6 % 13.7 % N/A (1.1) %

Selling, general and administrative expenses related to factory-built housing increased between periods primarily from higher salary and incentive-based compensation expense.

This was partially offset by a reduction in the amortization of the additional Director and Officer insurance premium, added in the third quarter of fiscal year 2019, which was $2.1 million for the three months ended June 27, 2020, with no expense in the current period .

In Financial services, Selling, general and administrative expenses increased primarily from greater expensing of deferred origination costs on higher loan sales and higher compensation expense.

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Factory-built housing $ 75,844 $ 61,462 $ 14,382 23.4 %

Financial services 10,360 9,314 1,046 11.2 %

$ 86,204 $ 70,776 $ 15,428 21.8 %

Selling, general and administrative expenses as % of Net revenue 12.5 % 13.8 % N/A (1.3) %

Selling, general and administrative expenses related to factory-built housing increased between periods primarily from higher salary and incentive-based compensation expense and deal costs related to the Commodore acquisition which were $2.1 million and $2.4 million for the three and six months ended October 2, 2021, respectively .

This was partially offset by a reduction in the amortization of the additional Director and Officer insurance premium, added in the third quarter of fiscal year 2019, which was $2.1 million and $4.2 million for the three and six months ended September 26, 2020, respectively, with no expense in the current year .

In Financial services, Selling, general and administrative expenses increased primarily from greater recognition of deferred origination costs on higher loan sales and higher compensation expense.

Other Components of Net Income.

Three Months Ended

($ in thousands) July 3,

2021 June 27,

($ in thousands) October 2,

2021 September 26,

Interest expense $ 203 $ 194 $ 9 4.6 %

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Effective tax rate 23.1 % 23.2 % N/A (0.1) %

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Interest expense $ 367 $ 390 $ (23) (5.9) %

Other income, net 7,129 3,578 3,551 99.2 %

Income tax expense 19,770 9,553 10,217 107.0 %

Effective tax rate 23.4 % 23.1 % N/A 0.3 %

Interest expense consists primarily of debt service on the financings of manufactured home-only loans and interest related to finance leases.

Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses from the sale of property, plant and equipment.

The increase is driven by more interest income earned on larger cash and commercial loan receivables than the prior year period.

During the year, we also recognized a non-cash gain of $3.3 million on the remeasurement of the assets and liabilities of Craftsman.

See Note 21 to the Consolidated Financial Statements for further information .

Liquidity and Capital Resources

We believe that cash and cash equivalents at July 3, 2021, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next 12 months and into the foreseeable future.

We believe that cash and cash equivalents at October 2, 2021, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next 12 months and into the foreseeable future.

We maintain cash in U.S.

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We believe that stockholders' equity at the insurance subsidiary remains sufficient and do not believe that the 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 July 3, 2021 and June 27, 2020, respectively:

Three Months Ended

(in thousands) July 3,

2021 June 27,

The following is a summary of the Company's cash flows for the six months ended October 2, 2021 and September 26, 2020, respectively:

Six Months Ended

(in thousands) October 2,

2021 September 26,

2020 $ Change

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Net cash provided by operating activities 80,087 74,609 5,478

Net cash (used in) provided by investing activities (3,616) 105 (3,721)

Net cash used in investing activities (156,045) (82) (155,963)

Net cash used in financing activities (18,873) (865) (18,008)

Cash, cash equivalents and restricted cash at end of the period $ 244,476 $ 329,269 $ (84,793)

Net cash provided by operating activities decreased primarily due to the rising material costs of our raw materials and higher purchases of such materials.

This was partially offset by higher proceeds from consumer loan sales of $49.6 million compared to $39.3 million in the previous year.

Consumer loan originations decreased $4.7 million to $42.7 million for the three months ended July 3, 2021 from $47.4 million for the three months ended June 27, 2020 due to origination personnel shortages.

We enter into commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes.

In addition, we enter into commercial loan arrangements with certain distributors of our products under which the Company provides funds for wholesale purchases.

Net cash provided by operating activities increased primarily from higher net income and proceeds from consumer loan sales, which were $101.6 million this year compared to $80.6 million in the previous year.

This increase was partially offset by rising costs of our raw materials and higher purchases of such materials, the timing of collections on accounts receivable and commercial loans receivable and payments on Accounts p ayable and Accrued expenses and other current liabilities.

Consumer loan originations increased $3.0 million to $85.4 million for the six months ended October 2, 2021 from $82.4 million for the six months ended September 26, 2020.

We enter into commercial loan arrangements with distributors, communities and developers under which we provide funds for financing homes.

In addition, we enter into commercial loan arrangements with certain distributors of our products under which we provide funds for wholesale purchases.

We have also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities.

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Further, we invest in and develop 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.

Increased lending activity resulted in a net use of $0.2 million while the prior period net activity provided $2.6 million.

Net cash used in or provided by investing activities consist of buying and selling debt and marketable equity securities in our Financial Services segment, p urchases of property, plant and equipment and funding strategic growth acquisitions.

Greater cash was used in the current period for the purchase of debt securities.

Net cash used in financing activities was primarily for the repurchase of common stock.

Decreased lending activity provided cash of $3.3 million while the prior period net activity provided $4.7 million in cash.

Net cash used in investing activities consists of buying and selling debt and marketable equity securities in our Financial Services segment, p urchases of property, plant and equipment and funding strategic growth acquisitions.

Greater cash was used in the current period for the purchase of Craftsman and Commodore.

Net cash used in financing activities for the current period was primarily for the repurchase of common stock.

We entered into secured credit facilities with independent third-party banks 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 or 25-year amortization period with a balloon payment due upon maturity.

As of July 3, 2021, the outstanding balance of the converted loans was $8.0 million with a weighted average interest rate o f 4.91% .

As of October 2, 2021, the outstanding balance of the converted loans was $7.7 million with a weighted average interest rate o f 4.91% .

Contractual Commitments and Contingencies.

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Critical Accounting Policies

There have been no other significant changes to our critical accounting policies during the three months ended July 3, 2021, as compared to those disclosed in Part II, Item 7 of our 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.

Except as described in Note 1 t o the Consolidated Financial Statements , there have been no other significant changes to our critical accounting policies during the six months ended October 2, 2021, as compared to those disclosed in Part II, Item 7 of our 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.

Other Matters

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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