What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-07 compared with 2021-11-05 · 76 added, 73 removed, 192 unchanged (44% of the section changed)

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our financial performance and operating results;

our liquidity and financial resources;

the expected effect of certain risks and uncertainties on our business, financial condition and results of operations;

economic conditions and consumer confidence;

potential acquisitions, strategic investments and other expansions;

operational and legal risks;

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market interest rates and Company investments and the ultimate outcome of our 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.

We do not intend to publicly update or revise any forward-looking statement contained in this Report on Form 10-Q or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Forward-looking statements contained in this Report on Form 10-Q ("Report") speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document.

We do not intend to publicly update or revise any forward-looking statement contained in this Report or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law.

Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control.

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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.

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

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

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.

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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, in contrast to certain other industry participants.

According to data reported by the Manufactured Housing Institute, industry home shipments increased 12.0% in calendar year 2021 compared to the prior year, which was impacted by shutdowns related to COVID-19.

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

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 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.

While home production continues to experience hiring challenges, unpredictable factory employee absenteeism and building material supply disruptions, our factory utilization for the third fiscal quarter of 2022 was back to pre-pandemic levels of approximately 80%, up from a rate of 75% the past four quarters.

This is the result of an increase in production headcount and less production hours per module.

Housing demand remains strong, as qualified individuals continue pursuing affordable home-ownership.

Home order rates have moderated from the extreme highs we saw the past few quarters, but still remain above pre-COVID rates, which we considered to be strong.

Our backlogs at January 1, 2022 were $1.1 billion, consistent with second fiscal quarter of 2022 and up $633 million, or 134.1%, compared to $472 million at December 26, 2020.

The year over year increase includes $277 million attributable to Commodore.

Backlogs exclude home orders that have been paused or canceled at the request of the customer.

Key housing building materials include wood and wood products, gypsum wallboard, steel, windows, appliances, insulation and other petroleum-based produ cts.

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Three Months Ended

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

2021 September 26,

($ in thousands, except revenue per home sold) January 1,

2022 December 26,

Factory-built housing $ 413,590 $ 270,822 $ 142,768 52.7 %

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by Company-owned retail sales centers 658 768 (110) (14.3) %

to independent retailers, builders, communities & developers 2,887 2,664 223 8.4 %

to independent retailers, builders, communities and developers 3,766 2,835 931 32.8 %

4,424 3,603 821 22.8 %

Net factory-built housing revenue per home sold $ 93,488 $ 75,166 $ 18,322 24.4 %

Six Months Ended

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

2021 September 26,

Nine Months Ended

($ in thousands, except revenue per home sold) January 1,

2022 December 26,

Factory-built housing $ 1,067,967 $ 749,879 $ 318,088 42.4 %

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by Company-owned retail sales centers 2,091 2,283 (192) (8.4) %

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

to independent retailers, builders, communities and developers 9,630 8,096 1,534 18.9 %

11,721 10,379 1,342 12.9 %

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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.

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

Home sales volume increased from the addition of Commodore and higher factory capacity utilization, partially offset by lower retail sales.

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 sold for the three and six months ended October 2, 2021 and September 26, 2020:

The table below presents the mix of modules and homes sold for the three and nine months ended January 1, 2022 and December 26, 2020:

Three Months Ended

2021 September 26,

2022 December 26,

Modules Homes Modules Homes Modules Homes

Housing and Urban Development code homes 5,548 3,154 5,030 2,979 10.3 % 5.9 %

Housing and Urban Development ("HUD") code homes 6,166 3,583 5,427 3,186 13.6 % 12.5 %

Modular homes 1,270 632 533 255 138.3 % 147.8 %

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7,645 4,424 6,122 3,603 24.9 % 22.8 %

Six Months Ended

2021 September 26,

Nine Months Ended

2022 December 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 %

HUD code homes 17,366 10,013 15,338 9,030 13.2 % 10.9 %

Modular homes 2,257 1,112 1,483 693 52.2 % 60.5 %

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20,219 11,721 17,477 10,379 15.7 % 12.9 %

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.

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 lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio.

For the three and nine months ended January 1, 2022, we recognized unrealized gains on marketable equity securities of $0.5 million and $0.4 million, respectively.

For the three and nine months ended December 26, 2020, we recognized unrealized gains of $1.0 million and $2.7 million, respectively.

Three Months Ended

($ in thousands) October 2,

2021 September 26,

($ in thousands) January 1,

2022 December 26,

Factory-built housing $ 104,119 $ 47,031 $ 57,088 121.4 %

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Financial services 61.2 % 68.0 % N/A (6.8) %

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Nine Months Ended

($ in thousands) January 1,

2022 December 26,

Factory-built housing $ 252,691 $ 140,178 $ 112,513 80.3 %

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Financial services 49.3 % 54.0 % N/A (4.7) %

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

Factory-built housing gross profit increased for the three and nine months ended January 1, 2022 primarily due to higher average sales prices and increased home sales volume, partially offset by higher material costs per unit and purchase accounting related items at Commodore.

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 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.

While lower lumber product market price benefits are being realized in cost of sales for the three and nine months ended January 1, 2022, we have seen most other product prices increase, offsetting those lumber declines.

In addition to lumber price benefits, Gross profit as a percentage of Net revenue also increased from a shift toward more multi-module homes and from streamlining our HUD code product offering across our network.

For the three and nine months ended January 1, 2022, Financial services gross profit decreased primarily due to higher weather related claims and lower unrealized gains on marketable equity securities compared to the prior year period.

Selling, General and Administrative Expenses

Three Months Ended

($ in thousands) October 2,

2021 September 26,

($ in thousands) January 1,

2022 December 26,

Factory-built housing $ 55,735 $ 30,575 $ 25,160 82.3 %

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Selling, general and administrative expenses as % of Net revenue 14.0 % 12.3 % N/A 1.7 %

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Nine Months Ended

($ in thousands) January 1,

2022 December 26,

Factory-built housing $ 131,579 $ 92,037 $ 39,542 43.0 %

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Selling, general and administrative expenses as % of Net revenue 13.1 % 13.2 % N/A (0.1) %

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.

For the three months ended January 1, 2022, Selling, general and administrative expenses related to factory-built housing increased between periods primarily from the addition of Commodore, higher salary and incentive-based compensation expense and expenses incurred in engaging third-party consultants in relation to pursuing the availability of the non-recurring energy efficient home net tax credits.

The nine month period also includes $2.4 million in deal costs related to the Commodore acquisition and $1.2 million in expenses related to the SEC inquiry.

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 $4.2 million for the nine months ended December 26, 2020, 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.

Other Components of Net Income

Three Months Ended

($ in thousands) October 2,

2021 September 26,

($ in thousands) January 1,

2022 December 26,

Interest expense $ 209 $ 177 $ 32 18.1 %

Other income, net 4,258 2,243 2,015 89.8 %

Income tax expense 11,338 4,547 6,791 149.4 %

Income tax (benefit) expense (20,680) 6,189 (26,869) (434.1) %

Effective tax rate (35.1) % 23.9 % N/A (59.0) %

Six Months Ended

($ in thousands) October 2,

2021 September 26,

Nine Months Ended

($ in thousands) January 1,

2022 December 26,

Interest expense $ 576 $ 567 $ 9 1.6 %

Other income, net 11,387 5,821 5,566 95.6 %

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

Income tax (benefit) expense (910) 15,742 (16,652) (105.8) %

Effective tax rate (0.6) % 23.4 % N/A (24.0) %

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.

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

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 22 to the Consolidated Financial Statements for further information .

The effective income tax rate was a benefit for the three and nine months ended January 1, 2022.

This is due to $34.4 million of estimated non-recurring net tax credits related to the sale of energy efficient homes between fiscal year 2018 and fiscal third quarter 2022 available under the Internal Revenue Code §45L.

This credit was initially established under the Federal Energy Policy Act of 2005 and most recently extended in the Consolidated Appropriations Act, 2021.

It allows for eligible manufacturer to claim a tax credit for each qualifying newly constructed and sold residence.

Excluding these credits, the effective income tax rate was consistent between periods.

Liquidity and Capital Resources

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 believe that cash and cash equivalents at January 1, 2022, 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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Because of our sufficient cash position, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for the home-only lending programs.

Regardless, depending on our operating results and strategic opportunities, we may need to seek additional or alternative sources of financing in the future.

Regardless, depending on our operating results and strategic opportunities, we may seek additional or alternative sources of financing in the future.

There can be no assurance that such financing would be available on satisfactory terms, if at all.

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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 six months ended October 2, 2021 and September 26, 2020, respectively:

Six Months Ended

(in thousands) October 2,

2021 September 26,

The following is a summary of the Company's cash flows for the nine months ended January 1, 2022 and December 26, 2020, respectively:

Nine Months Ended

(in thousands) January 1,

2022 December 26,

2020 $ Change

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Net cash provided by operating activities increased primarily from higher net income and proceeds from consumer loan sales, which were $142.4 million this year compared to $122.6 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.

This increase was partially offset by the refunds related to the estimated net tax credits under the Internal Revenue Code §45L which had not been received as of January 1, 2022, rising costs of our raw materials and higher purchases of such materials and payments on Accounts p ayable and Accrued expenses and other current liabilities.

Consumer loan originations decreased $1.2 million to $122.9 million for the nine months ended January 1, 2022 from $124.1 million for the nine months ended December 26, 2020.

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

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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.

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

Cash receipts, net of amounts loaned, increased cash by $8.1 million while the prior period net activity provided an additional $6.4 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 October 2, 2021, the outstanding balance of the converted loans was $7.7 million with a weighted average interest rate o f 4.91% .

Net cash used in financing activities for the current period was primarily for the repurchase of common stock and the payments of the secured term loans, which have been paid in full as of January 1, 2022.

Contractual Commitments and Contingencies.

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Critical Accounting Policies

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.

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 nine months ended January 1, 2022, 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