What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-03 compared with 2022-11-04 · 72 added, 78 removed, 184 unchanged (45% of the section changed)

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

economic conditions and consumer confidence;

economic conditions, including concerns of a possible recession, and consumer confidence;

trends in interest rates and inflation;

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operational and legal risks;

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

how we may be affected by any pandemic or outbreak;

geopolitical conditions (including the continuing Russia-Ukraine conflict);

the cost and availability of labor and raw materials;

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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 a leading producer of park model RVs, vacation cabins and factory-built commercial structures.

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Nampa, Idaho;

Phoenix, Goodyear, Arizona;

Phoenix, Glendale and Goodyear, Arizona;

Deming, New Mexico;

Duncan, Oklahoma;

Austin, Fort Worth, Seguin and Waco, Texas;

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Martinsville and Rocky Mount, Virginia;

Cherryville, North Carolina;

and Ocala and Plant City, Florida.

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

Cherryville and Hamlet, North Carolina;

Ocala and Plant City, Florida;

and two in Ojinaga, Mexico.

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 64 Company-owned U.S.

retail locations.

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.

retail locations, including the 22 retail locations acquired with Solitaire Homes.

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 70% majority controlling interest.

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

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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.

On January 3, 2023, subsequent to the end of the third fiscal quarter of 2023, we completed the acquisition of Solitaire Homes, including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations.

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

According to data reported by the Manufactured Housing Institute, industry home shipments increased 14.2% for the first 8 months of calendar year 2022 compared to the same period last year.

According to data reported by the Manufactured Housing Institute, industry home shipments through November 2022 were 106,454, an increase of 8.9% compared to 97,745 shipments in the same period last year.

The industry offers solutions to the affordable housing crisis and these shipment numbers reflect the industry's ability to produce in the current environment.

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Fluctuations in the cost of materials and labor may affect gross margins from home sales to the extent that costs cannot be efficiently matched to the home sal es price.

Pricing and availability of certain raw materials have recently been volatile due to a number of factors in the current environment.

Pricing and availability of certain raw materials have been volatile due to a number of factors in the current environment.

We continue to monitor and react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such product pricing increases may lag behind the escalation of such costs.

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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.

Our backlog at December 31, 2022 was $427 million compared to $651 million last quarter, a decrease of $224 million or 34.4%, and down $678 million, or 61.4%, compared to $1.1 billion at January 1, 2022.

This was largely due to lower home order rates net of cancellations.

Order rates are down from the extreme highs we saw during the summer of 2020 to the summer of 2021.

We continually review the wage rates of our production employees and have established other monetary incentive and benefit programs, with a goal of providing competitive compensation.

We are also working to more extensively use web-based recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates.

We believe our ability to recruit the workforce we need to help meet the overall need for affordable housing continues to improve.

In the financial services segment, we continue to assist customers in need by servicing existing loans and insurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations.

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Three Months Ended

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

2022 October 2,

($ in thousands, except revenue per home sold) December 31,

2022 January 1,

Factory-built housing $ 481,193 $ 413,590 $ 67,603 16.3 %

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Net factory-built housing revenue per home sold $ 108,328 $ 93,488 $ 14,840 15.9 %

Six Months Ended

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

2022 October 2,

Nine Months Ended

($ in thousands, except revenue per home sold) December 31,

2022 January 1,

Factory-built housing $ 1,613,392 $ 1,067,967 $ 545,425 51.1 %

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Net factory-built housing revenue per home sold $ 108,289 $ 91,116 $ 17,173 18.8 %

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.

In factory-built housing, Net revenue for both the three and nine months ended December 31, 2022 increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices.

Also included in both current year periods is $3.9 million of home sales revenue from an equity method joint venture.

This represents revenue that was previously deferred and now recognized in the third quarter upon that entity selling those homes to an unrelated third party.

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 1, 2022 and October 2, 2021:

The tables below presents the mix of modules and homes sold for the three and nine months ended December 31, 2022 and January 1, 2022:

Three Months Ended

2022 October 2,

2022 January 1,

Modules Homes Modules Homes Modules Homes

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7,544 4,442 7,645 4,424 (1.3) % 0.4 %

Six Months Ended

2022 October 2,

Nine Months Ended

2022 January 1,

Modules Homes Modules Homes Modules Homes

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25,649 14,899 20,219 11,721 26.9 % 27.1 %

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.

For the three months ended December 31, 2022, Financial services segment Net revenue increased 7.1% primarily due to more policies in force in the current period, partially offset by lower interest income earned on the acquired consumer loan portfolios.

For the nine months ended December 31, 2022, Net revenue decreased 1.4% 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 period compared to the prior period.

Three Months Ended

($ in thousands) October 1,

2022 October 2,

($ in thousands) December 31,

2022 January 1,

Factory-built housing $ 122,923 $ 104,119 $ 18,804 18.1 %

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Financial services 46.6 % 61.2 % N/A (14.6) %

Six Months Ended

($ in thousands) October 1,

2022 October 2,

Nine Months Ended

($ in thousands) December 31,

2022 January 1,

Factory-built housing $ 412,174 $ 252,691 $ 159,483 63.1 %

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Financial services 41.8 % 49.3 % N/A (7.5) %

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.

Factory-built housing Gross profit and Gross profit percentage increased for the three and nine months ended December 31, 2022 primarily due to higher average sales prices.

In Financial services, Gross profit and Gross profit percentage decreased for the three and nine months ended December 31, 2022 primarily due to higher insurance claims from Arizona and Texas 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) October 1,

2022 October 2,

($ in thousands) December 31,

2022 January 1,

Factory-built housing $ 54,127 $ 55,735 $ (1,608) (2.9) %

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Selling, general and administrative expenses as % of Net revenue 11.8 % 14.0 % N/A (2.2) %

Six Months Ended

($ in thousands) October 1,

2022 October 2,

Nine Months Ended

($ in thousands) December 31,

2022 January 1,

Factory-built housing $ 176,690 $ 131,579 $ 45,111 34.3 %

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Selling, general and administrative expenses as % of Net revenue 11.5 % 13.1 % N/A (1.6) %

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.

For the three months ended December 31, 2022, Selling, general and administrative expenses related to factory-built housing decreased primarily from lower legal and professional fees, partially offset by higher incentive compensation on improved earnings.

For the nine months ended December 31, 2022, Selling, general and administrative expenses increased primarily from higher legal and professional fees and higher salary and incentive compensation expense on improved earnings.

As a percentage of Net revenue, Selling, general and administrative expenses improved by 220 and 160 basis points for the three and nine months ended December 31, 2022, respectively, from better utilization of fixed costs on higher sales.

Other Components of Net Income

Three Months Ended

($ in thousands) October 1,

2022 October 2,

($ in thousands) December 31,

2022 January 1,

Interest expense $ 216 $ 209 $ 7 3.3 %

Other income, net 3,233 4,258 (1,025) 24 %

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,

Income tax (expense) benefit (16,492) 20,680 (37,172) 179.7 %

Effective tax rate 21.7 % (35.1) % N/A N/M

Nine Months Ended

($ in thousands) December 31,

2022 January 1,

Interest expense $ 610 $ 576 $ 34 5.9 %

Other income, net 6,455 11,387 (4,932) 43.3 %

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

Effective tax rate 22.2 % 23.4 % N/A (1.2) %

Income tax (expense) benefit (54,721) 910 (55,631) 6,113.3 %

Effective tax rate 22.0 % (0.6) % N/A N/M

Interest expense consists primarily of interest related to finance leases.

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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.

Additionally, for the nine months ended December 31, 2022, we recognized a $1.2 million unrealized loss on corporate marketable investments compared to a $4.0 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.

For the three and nine months ended January 1, 2022, the effective income tax rate was a benefit due to $34.4 million of energy efficient home tax credits, which included catch up credits for homes sold between 2018 through 2021.

The effective tax rate for the three and nine months ended December 31, 2022 was 21.7% and 22.0%, respectively.

Liquidity and Capital Resources

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 believe that cash and cash equivalents at December 31, 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 liquid resources, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for our home-only lending programs.

We have sufficient liquid resources including our recently implemented $50.0 million Revolving Credit Facility, of which no amounts were outstanding at December 31, 2022.

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 six months ended October 1, 2022 and October 2, 2021, respectively:

Six Months Ended

(in thousands) October 1,

2022 October 2,

The following is a summary of the Company's cash flows for the nine months ended December 31, 2022 and January 1, 2022, respectively:

Nine Months Ended

(in thousands) December 31,

2022 January 1,

2022 $ 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 $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.

Consumer loan originations increased $12.7 million to $135.6 million for the nine months ended December 31, 2022 from $122.9 million for the nine months ended January 1, 2022, which was partially offset by increased proceeds of $3.6 million from sales of consumer loans.

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 current period reflects the purchase of our plant facilities in Hamlet, North Carolina and development of our facility in Glendale, Arizona.

These expenditures were partially offset by a $12.2 million return of invested capital from one of our equity method joint ventures.

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.

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

See Note 17 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.

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Critical Accounting Estimates

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

Impact of Inflation.

At the end of the period, inflation was the highest in the U.S.

in over 30 years.

Our ability to maintain certain levels of gross margin can be adversely impacted by sudden increases in specific costs, such as the increases in materials and labor.

In addition, measures used by the Federal Reserve to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing.

We can give no assurance that inflation will not affect our future profitability and financial position.

There have been no significant changes to our critical accounting estimates during the nine months ended December 31, 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.

Quantitative and Qualitative Disclosures About Market Risk

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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