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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 106 added, 53 removed, 156 unchanged (50% of the section changed)

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Forward-Looking Statements

Statements in this Report on Form 10-Q include "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995.

Statements in this Report on Form 10-Q ("Report") include "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions.

Forward-looking statements are typically included, for example, in discussions regarding the manufactured housing and site-built housing industries;

Forward-looking statements include, for example, discussions regarding the manufactured housing and site-built housing industries;

our financial performance and operating results;

our liquidity and financial resources;

our outlook with respect to the Company and the manufactured housing business in general;

our outlook with respect to Cavco Industries, Inc.

and its subsidiaries' (collectively, "we," "us," "our," the "Company" or "Cavco") and the manufactured housing business in general;

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

economic conditions and consumer confidence;

increasing interest rates;

trends in interest rates and inflation;

potential acquisitions, strategic investments and other expansions;

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

labor shortages and the pricing and availability of raw materials;

the cost and availability of labor and raw materials;

governmental regulations and legal proceedings;

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and the ultimate outcome of our commitments and contingencies.

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.

Forward-looking statements contained in this Report speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document.

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

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To the extent that our assumptions and expectations differ from actual results, our ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered.

Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Risk Factors in Part I, Item 1A of our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("Form 10-K").

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

and its subsidiaries' (collectively, "we," "us," "our," the "Company" or "Cavco") Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report.

The following should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes that appear in Part I, Item 1 of this Report.

References to "Note" or "Notes" pertain to the Notes to our Consolidated Financial Statements.

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Nampa, Idaho;

Phoenix and Goodyear, Arizona;

Phoenix, Goodyear, Arizona;

Austin, Fort Worth, Seguin and Waco, Texas;

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and Ocala and Plant City, Florida.

The majority of the homes produced are sold to, and distributed by, independently owned and controlled retail operations located throughout the United States and Canada.

We also recently opened two new production lines in Glendale, Arizona and Hamlet, North Carolina.

The majority of the homes produced are sold to, and distributed by, independently owned retail operations located throughout the United States and Canada.

In addition, our homes are sold through 42 Company-owned U.S.

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.

During fiscal 2022, we acquired an additional 20% ownership in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as "Craftsman"), which gave us a controlling interest.

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.

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 attributable to 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.

We also purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore").

Commodore added six manufacturing facilities and two wholly-owned retail locations, and also participates in commercial lending operations with its dealers.

On October 26, 2022, subsequent to the end of the second fiscal quarter of 2023, we signed a binding offer to acquire the business of Solitaire Homes, Inc.

and other related entities (collectively “Solitaire Homes”), including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations.

The transaction is expected to close early in our fourth fiscal quarter of 2023, subject to applicable regulatory approvals and the satisfaction of certain customary conditions.

The addition of Solitaire Homes to our existing manufacturing and retail system strengthens our position in the Southwest and expands our manufacturing capabilities into Mexico.

Company and Industry Outlook

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We are focused on building quality, energy efficient homes for the modern home buyer.

Our green building initiatives involve the creation of an energy efficient envelope, including higher utilization of renewable materials and provide lower utility costs.

Our green building initiatives involve the creation of an energy efficient envelope resulting in lower utility costs, as well as the higher utilization of renewable materials in our manufacturing process.

We also build homes designed to use alternative energy sources, such as solar.

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We continue to make certain commercial loan programs available to members of our wholesale distribution chain.

Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community owners and developers (see Note 7 to the Consolidated Financial Statements).

Our involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, community owners and developers and provides additional opportunities for product exposure to potential home buyers.

Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community operators and residential developers (see Note 7 to the Consolidated Financial Statements).

Our involvement in commercial lending helps to increase the availability of manufactured home financing to distributors, community operators and residential developers and provides additional opportunities for product exposure to potential home buyers.

While these initiatives support our ongoing efforts to expand product distribution, they also expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners.

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We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders.

Home order rates have moderated from the extreme highs we saw during the summer of 2020 to the summer of 2021.

However, o ur backlogs at July 2, 2022 were $1.0 billion , consistent with the sequential prior quarter of $1.1 billion and up $206 million, or 26.3%, compared to $792 million at July 3, 2021.

The year over year increase includes $231 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, wood products, steel, gypsum wallboard, windows, doors fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, aluminum, appliances and electrical items .

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These shortages may also result in extended order backlogs, delays in the delivery of homes and reduced gross margins from home sales.

Our backlog at October 1, 2022 was $651 million compared to $1.0 billion last quarter, a decrease of $347 million or 34.8%, and down $456 million, or 41.2%, compared to $1.1 billion at October 2, 2021.

Home order rates, net of cancellations, are down from the extreme highs we saw during the summer of 2020 to the summer of 2021.

Additionally, our efforts in product simplification and production staffing improvement have increased our total average plant capacity utilization.

While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand, and we face challenges in overcoming labor-related difficulties in the current environment to increase home production.

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Three Months Ended

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

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

2022 October 2,

Factory-built housing $ 559,602 $ 342,094 $ 217,508 63.6 %

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Net factory-built housing revenue per home sold $ 109,490 $ 95,105 $ 14,385 15.1 %

In the factory-built housing segment, the increase in Net revenue 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.

Home sales volume increased from the addition of Commodore, which provided $101 million in Net revenue for the three months ended July 2, 2022, and higher factory capacity utilization.

Six Months Ended

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

2022 October 2,

Factory-built housing $ 1,132,199 $ 654,377 $ 477,822 73.0 %

Financial services 33,531 35,588 (2,057) (5.8) %

$ 1,165,730 $ 689,965 $ 475,765 69.0 %

Factory-built homes sold

by Company-owned retail sales centers 1,733 1,433 300 20.9 %

to independent retailers, builders, communities and developers 8,724 5,864 2,860 48.8 %

10,457 7,297 3,160 43.3 %

Net factory-built housing revenue per home sold $ 108,272 $ 89,678 $ 18,594 20.7 %

In factory-built housing, Net revenue for both the three and six months ended October 1, 2022 increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices.

Home sales volume increased from the Commodore acquisition, completed in the second quarter of fiscal year 2022, which provided $107 million and $208 million in Net revenue for the three and six months ended October 1, 2022, respectively.

The three and six months also benefited from higher factory capacity utilization which enabled higher sales volume.

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 months ended July 2, 2022 and July 3, 2021:

The table below presents the mix of modules and homes sold for the three and six months ended October 1, 2022 and October 2, 2021:

Three Months Ended

2022 October 2,

Modules Homes Modules Homes Modules Homes

Housing and Urban Development ("HUD") code homes 8,099 4,639 5,548 3,154 46.0 % 47.1 %

Modular homes 444 226 519 254 (14.5) % (11.0) %

Park model RVs 246 246 189 189 30.2 % 30.2 %

8,789 5,111 6,256 3,597 40.5 % 42.1 %

Six Months Ended

2022 October 2,

Modules Homes Modules Homes Modules Homes

HUD code homes 16,614 9,493 11,200 6,430 48.3 % 47.6 %

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18,031 10,457 12,574 7,297 43.4 % 43.3 %

Financial services segment revenue decreased primarily due to lower interest income earned on the acquired consumer loan portfolios that continue to amortize, unrealized losses on marketable equity securities in the insurance subsidiary's portfolio and lower volume of home loan sales, partially offset by more insurance policies in force.

For the three months ended July 2, 2022 and July 3, 2021, we recognized unrealized losses on marketable equity securities of $1.2 million and unrealized gains of $0.4 million, respectively.

For the three months ended October 1, 2022, Financial services segment Net revenue increased 2.0% primarily due to higher volume in home loan sales in the period.

For the six months ended October 1, 2022, Net revenue decreased 5.8% primarily due to realized and unrealized losses on marketable equity securities in the insurance subsidiary's portfolio during such period, lower interest income earned on the acquired consumer loan portfolios, and lower volume in home loan sales.

These items were partially offset by more insurance policies in force in the current year compared to the prior year.

Three Months Ended

($ in thousands) July 2,

($ in thousands) October 1,

2022 October 2,

Factory-built housing $ 149,665 $ 82,299 $ 67,366 81.9 %

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Financial services 44.6 % 43.7 % N/A 0.9 %

Factory-built housing gross profit increased for the three months ended July 2, 2022 primarily due to higher average sales prices, increased home sales volume and streamlining of our HUD code product offering across our network, partially offset by higher materials costs per unit.

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.

For the three months ended July 2, 2022, Financial services gross profit decreased primarily due to higher weather related claims and unrealized losses on marketable equity securities compared to unrealized gains in the prior year period.

Six Months Ended

($ in thousands) October 1,

2022 October 2,

Factory-built housing $ 289,251 $ 148,572 $ 140,679 94.7 %

Financial services 13,072 15,369 (2,297) (14.9) %

$ 302,323 $ 163,941 $ 138,382 84.4 %

Gross profit as % of Net revenue

Consolidated 25.9 % 23.8 % N/A 2.1 %

Factory-built housing 25.5 % 22.7 % N/A 2.8 %

Financial services 39.0 % 43.2 % N/A (4.2) %

Factory-built housing Gross profit and the Gross profit percentage increased for the three and six months ended October 1, 2022 primarily due to higher average sales prices.

In Financial services, Gross profit increased for the three months ended October 1, 2022 primarily due to the higher volume of home loan sales.

For the six months ended October 1, 2022, Financial services gross profit decreased primarily due to higher insurance claims from New Mexico and Arizona weather related events, and greater unrealized losses on marketable equity securities compared to the same period last year.

Selling, General and Administrative Expenses

Three Months Ended

($ in thousands) July 2,

($ in thousands) October 1,

2022 October 2,

Factory-built housing $ 61,640 $ 40,347 $ 21,293 52.8 %

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Selling, general and administrative expenses as % of Net revenue 11.6 % 12.6 % N/A (1.0) %

For the three months ended July 2, 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 claiming the non-recurring energy efficient home net tax credits which were recognized in the second half of fiscal 2022.

As a percentage of Net revenue, Selling, general and administrative expenses improved 120 basis points from better utilization of fixed costs on higher sales.

Six Months Ended

($ in thousands) October 1,

2022 October 2,

Factory-built housing $ 122,563 $ 75,844 $ 46,719 61.6 %

Financial services 10,467 10,360 107 1.0 %

$ 133,030 $ 86,204 $ 46,826 54.3 %

Selling, general and administrative expenses as % of Net revenue 11.4 % 12.5 % N/A (1.1) %

For the three and six months ended October 1, 2022, Selling, general and administrative expenses related to factory-built housing increased between periods primarily from the addition of Commodore, as well as higher salary and incentive compensation expense on improved earnings and higher legal and professional fees.

As a percentage of Net revenue, Selling, general and administrative expenses improved by 100 and 110 basis points for the three and six months ended October 1, 2022, respectively, from better utilization of fixed costs on higher sales.

Other Components of Net Income

Three Months Ended

($ in thousands) July 2,

($ in thousands) October 1,

2022 October 2,

Interest expense $ 233 $ 203 $ 30 14.8 %

Other income, net 2,339 4,668 (2,329) (49.9) %

Income tax (benefit) expense 18,613 11,338 7,275 64.2 %

Effective tax rate 20.1 % 23.1 % N/A (3.0) %

Six Months Ended

($ in thousands) October 1,

2022 October 2,

Interest expense $ 394 $ 367 $ 27 7.4 %

Other income, net 3,222 7,129 (3,907) (54.8) %

Income tax expense 38,229 19,770 18,459 93.4 %

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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 declined from a $1.1 million unrealized loss on corporate marketable investments and lower interest income on reduced cash balances.

The decrease in Other income, net is primarily due to a $3.3 million gain recognized in the second quarter of last year on the remeasurement of the assets and liabilities of Craftsman upon acquisition of a controlling interest.

Additionally, for the six months ended October 1, 2022, we recognized a $1.1 million unrealized loss on corporate marketable investments compared to a $1.7 million unrealized gain in the prior year.

These items were partially offset by higher interest income earned on a larger cash balance held in high yield money market funds.

The effective tax rate for the current year periods benefited from $2.7 million of estimated non-recurring net tax credits related to the sale of energy efficient homes, available under the Internal Revenue Code §45L.

This program expired on December 31, 2021 and was recently renewed as part of the Inflation Reduction Act legislation through December 31, 2022.

Liquidity and Capital Resources

We believe that cash and cash equivalents at July 2, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future.

We believe that cash and cash equivalents at October 1, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future.

We maintain cash in U.S.

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

Because of our sufficient cash position, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for our home-only lending programs.

Because of our sufficient liquid resources, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for our home-only lending programs.

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

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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 at anticipated levels will be restricted per state regulations.

The following is a summary of the Company's cash flows for the three months ended July 2, 2022 and July 3, 2021, respectively:

Three Months Ended

(in thousands) July 2,

The following is a summary of the Company's cash flows for the six months ended October 1, 2022 and October 2, 2021, respectively:

Six Months Ended

(in thousands) October 1,

2022 October 2,

2021 $ Change

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This increase was partially offset by increased lending in our Financial Services segment, as well as under our commercial loan programs.

Consumer loan originations increased $4.8 million to $47.5 million for the three months ended July 2, 2022 from $42.7 million for the three months ended July 3, 2021.

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 used in the current period reflects the purchase of plant facilities in Hamlet, North Carolina.

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

Consumer loan originations increased $11.8 million to $97.2 million for the six months ended October 1, 2022 from $85.4 million for the six months ended October 2, 2021.

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

Cash used in the current period reflects the purchase of plant facilities in Hamlet, North Carolina.

Cash used in the prior period reflects the purchase of Commodore and Craftsman.

Net cash used in financing activities for the current period was primarily for the repurchase of common stock during the first quarter of fiscal 2023.

See Note 14 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.

Obligations and Commitments.

There were no material changes to the obligations and commitments as set forth in our Annual Report on Form 10-K.

There were no material changes to the obligations and commitments as set forth in the Form 10-K.

Critical Accounting Estimates

Except as described in Note 1 t o the Consolidated Financial Statements , there have been no other significant changes to our critical accounting estimates during the three months ended July 2, 2022, as compared to those disclosed in Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting Estimates," which provides a discussion of the critical accounting estimates 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 significant changes to our critical accounting estimates during the six months ended October 1, 2022, as compared to those disclosed in Part II, Item 7 of the Form 10-K, under the heading "Critical Accounting Estimates," which provides a discussion of the critical accounting estimates that management believes 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