What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-05-19 compared with 2022-05-31 · 48 added, 43 removed, 180 unchanged (34% of the section changed)

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For all of these reasons, you should not place undue reliance on any such forward-looking statements included in this Annual Report.

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

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

Company Outlook

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

Home order rates have moderated from the extreme highs we saw during the summer of 2020 to the summer of 2021, but still remain above pre-pandemic rates, which we considered to be strong.

We maintain a backlog of orders from our network of licensed distributors, communities and developers.

It is difficult to predict the future of housing demand, employee availability, our supply chain or the Company's performance and operations.

Our home order backlog at April 1, 2023 was approximately $244 million in wholesale sales values, down $870 million from $1.1 billion one year earlier.

Distributors may cancel orders prior to production without penalty.

Accordingly, until the production of a particular unit has commenced, we do not consider our backlog to be firm orders.

We strive to manage our production levels, capacity and workforce size based upon current market demand.

The backlog of home sales orders at April 2, 2022 was $1.1 billion in total, up $511 million from $603 million as of April 3, 2021.

The year over year increase includes $264 million attributable to Commodore.

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

Although we continue to experience hiring challenges and other inefficiencies from building material supply disruptions, we have reduced our total open production positions needed by nearly 25% over the past year, bringing our total average plant capacity utilization rate to exceeding 80% during the fourth fiscal quarter of 2022, which is above pre-pandemic levels.

While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and ope rations, 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.

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.

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

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

We con tinue to focus on balancing the production levels and workforce size with the demand for our product offerings to maximize efficiencies.

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

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however, mandatory extended forbearance under the CARES Act and certain other regulations related to COVID-19 could negatively impact cash obligations in the future.

The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth.

We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loan and non-conforming mortgage portfolios and expand lending availability in the industry.

The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans result in higher borrowing costs for home-only loans and continue to constrain industry growth.

We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loans and non-conforming mortgage portfolios and expand lending availability in the industry.

Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities.

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

Purchasing reinsurance contracts mitigates the frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time.

Under these agreements, we may be required to repurchase and reestablish the reinsurance contracts for the remainder of the year to the extent that they have been utilized.

See Note 15 to the Consolidated Financial Statements for additional information.

Results of Operations

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Net factory-built housing revenue per home sold $ 106,805 $ 93,207 $ 13,598 14.6 %

In the factory-built housing segment, the increase in Net revenue was primarily due to higher legacy home selling prices, which provided $302.0 million, and higher legacy home sales volume from increased factory capacity utilization, which contributed $39.4 million.

The higher home prices were primarily driven by produc t price increases, and to a lesser extent a shift toward more multi-section homes.

Home sales volume also increased from the addition of Craftsman Homes, LLC and Craftsman Homes Development, LLC (together, "Craftsman") and Commodore, which provided $13.8 million and $166.7 million, respectively.

These increases were partially offset by th e prior year period containing an extra week of production, given the fiscal calendar.

In the factory-built housing segment, the increase in Net revenue was primarily due to higher home selling prices and sales volume, which provided $263.4 million and $221.5 million, respectively, and the acquisition of Solitaire Homes which contributed $28.3 million.

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

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32,885 19,376 28,885 16,697 13.8 % 16.0 %

Financial services segment revenue increased 1.0% primarily due to $4.5 million from more insurance policies in force in the current year, $1.5 million in greater loan servicing income and $1.1 million in net higher proceeds from home loan sales.

These increases were partially offset by $3.8 million in lower interest income earned on the acquired consumer loan portfolios that continue to amortize and $2.6 million in lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio.

Financial services segment Net revenue increased 3.4% primarily due to $3.7 million from more insurance policies in force in the current year partially offset by market fluctuations on marketable equity securities in the insurance subsidiary's portfolio, which reduced revenues by $1.1 million year-over-year.

Gross Profit.

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Financial services 42.9 % 51.5 % N/A (8.6) %

In the factory-built housing segment, Gross profit increased $323.8 million from higher home sales prices and $30.1 million from more units sold, partially offset by $181.3 million from higher material costs.

In the financial services segment, Gross profit decreased primarily due to higher weather related claims, lower interest income earned on the acquired consumer loan portfolios and lower unrealized gains on marketable equity securities compared to the prior year period.

In the factory-built housing segment, Gross profit increased from the higher home sales prices and more units sold, partially offset by higher input costs.

In the financial services segment, Gross profit decreased primarily due to higher weather-related claims and market fluctuations of the marketable equity securities in the insurance subsidiary's portfolio.

Selling, General and Administrative Expenses.

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12.1 % 12.7 % N/A (0.6) %

Selling, general and administrative expenses related to factory-built housing increased primarily due to $30.4 million in higher wages and benefits and incentive compensation expense on improved earnings, $19.0 million attributable to acquired entities, $6.9 million in expenses incurred in engaging third-party consultants in relation to pursuing the non-recurring energy efficient home tax credits and $2.4 million in Commodore related acquisition transaction costs, partially offset by $4.2 million of amortization of additional Director & Officer insurance premiums in the prior year that did not repeat.

Selling, general and administrative expenses related to financial services increased primarily from higher salary expenses from continued growth and increased wages and benefits costs.

Selling, general and administrative expenses related to factory-built housing increased primarily due to $24.3 million in higher wages, benefits and incentive compensation expense on improved earnings, $3.4 million of higher legal expense related to the SEC inquiry and related settlement and $4.5 million attributable to Solitaire Homes.

As announced on September 23, 2022, the United States District Court for the District of Arizona approved the settlement of the SEC action against the Company regarding alleged securities trading in the shares of another company directed by our former CEO .

The settlement resolves all claims in the action against the Company, but we remain obligated for ongoing indemnification for a former officer of the Company.

As a percentage of Net revenue, Selling, general and administrative expenses improved 60 basis points from better utilization of fixed costs on higher sales.

Interest Income.

Interest income was $10.7 million in fiscal year 2023 and $3.5 million in fiscal year 2022.

The increase is due to higher interest rates on our cash balances and increased lending under our commercial loan programs .

Interest Expense.

Interest expense was $0.7 million in both fiscal year 2022 and 2021, and consists primarily of debt service on the financings of manufactured home-only loans and interest related to finance leases.

We realized a decrease in interest expense from the elimination of the securitized bond interest as we e xercised our right to repurchase the 2007-1 securitized loan portfolio in August 2019.

However, this was offset by an increase in interest expense from the secured credit facilities as well as additional finance leases.

Interest expense was $0.9 million in fiscal year 2023 and $0.7 million in fiscal year 2022 and consists primarily of interest related to finance leases and floor plan financing at our Craftsman retail location.

Other Income, net .

Other income, net primaril y 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 equip ment and assets held for sale.

For fisca l years 2022 and 2021, Other income, net was $10.2 million and $8.8 million, respectively, an increase of $1.4 million or 15.9%.

This increase was primarily from a $3.3 million revaluation gain recognized on the consolidation of an equity method investment and $1.2 million higher interest income on commercial loans from the addition of Commodore, partially offset by $3.2 million lower unrealized gains on corporate equity investments in the current year.

Other income, net primaril y consists of realized and unrealized gains and losses on corporate investments, gains and losses from the sale of property, plant and equip ment and partnership income from our unconsolidated joint ventures.

For fisca l years 2023 and 2022, Other income, net was $0.4 million and $6.7 million, respectively.

The current year includes $0.8 million of gains on corporate equity securities compared to $1.3 million of gains in the prior year.

Partnership income decreased to $0.8 million in fiscal 2023 from $1.5 million in fiscal 2022 mostly as a result of acquiring a majority interest, and thus consolidating, one of our non-marketable equity investments during fiscal 2022.

This transaction also resulted in a $3.3 million revaluation gain of our investment during the prior fiscal year.

The current year gains were partially offset by sale and disposition of property, plant and equipment during the year.

Income Before Income Taxes.

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Income tax expense was $65.9 million, resulting in an effective tax rate of 21.5% for the fiscal year ended April 1, 2023, compared to income tax expense of $14.2 million and an effective rate of 6.7% for the fiscal year ended April 2, 2022.

The lower effective tax rate in the current year period primarily relates to $35.7 million in 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, offset by an increase in income before income taxes.

The tax credit for energy efficient homes expired in its current form as of December 31, 2021.

The lower effective tax rate in the prior year period primarily related to $35.7 million in net tax credits related to the sale of energy efficient homes available under the Internal Revenue Code §45L.

Fiscal Year 2022 Compared to Fiscal Year 2021

See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 Annual Report on Form 10-K.

See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2022 Annual Report on Form 10-K, as supplemented with the information below.

Interest Income.

Interest income was $3.5 million in fiscal year 2022 and $2.1 million in fiscal year 2021.

The increase is primarily due to higher interest income on commercial loans from the addition of Commodore, adding $1.2 million, and higher interest rates on invested cash balances during the year.

Other Income, net.

Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, gains and losses from the sale of property, plant and equipment and partnership income from our unconsolidated joint ventures.

Other income, net was $6.7 million in both fiscal year 2022 and 2021.

Fiscal year 2022 included a $3.3 million revaluation gain recognized on the consolidation of an equity method investment, $1.3 million of unrealized gains on equity securities and $1.5 million of partnership income.

Fiscal year 2021 included $4.5 million of unrealized gains on equity securities and $1.9 million of partnership income.

Liquidity and Capital Resources

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We maintain cash in U.S.

Treasury and other money market funds, some of which are in excess of federally insured limits.

Treasury and other money market funds, some of which are in excess of federally insured limits, but we have not experienced any losses with regards to such excesses.

We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities.

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 the 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 April 1, 2023.

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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State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies.

As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries.

As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its subsidiaries.

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.

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Cash, cash equivalents and restricted cash at end of the fiscal year $ 283,490 $ 259,334 $ 24,156

Net cash pro vided by operating activities increased primarily due to the increased profitability, partially offset by increased costs for operating activities, including rising costs of our raw materials and higher purchases of such materials, increased accounts receivables from timing of collections and increased sales and refunds related to the estimated net tax credits under the Internal Revenue Code §45L which have not been received.

Consumer loan originations decreased $2.6 million to $159.0 million during the year ended April 2, 2022, from $161.6 million during the year ended April 3, 2021.

Net cash pro vided by operating activities increased primarily from the increased profitability and managing retail inventory levels, partially offset by increased originations of consumer and commercial loans as discussed below.

Consumer loan originations increased $19.0 million to $178.0 million during the year ended April 1, 2023, from $159.0 million during the year ended April 2, 2022.

Proceeds from the sale of consumer loans provided $186.0 million in cash, compared to $184.8 million in the previous year, a net increase of $1.2 million.

Net cash used in investing activities for the year ended April 2, 2022 included purchases of Commodore and Craftsman, as well as purchases of property, plant and equipment.

Net cash used in investing activities for the year ended April 3, 2021 was primarily for purchases of property, plant and equipment, including the new park model RV facility in Arizona, which is expected to be operational in mid-calendar year of 2022, partially offset by net proceeds from sales of investments.

Net cash used in financing activities for the year ended April 2, 2022 was primarily related to common stock repurchases and the payments of the secured term loans, which have been paid in full as of January 1, 2022, partially offset by proceeds received from the exercise of stock options.

Commercial loan originations increased $64.2 million to $132.1 million during the year ended April 1, 2023, from $67.9 million during the year ended April 2, 2022.

Proceeds from the collection on commercial loans provided $98.2 million in cash, compared to $74.3 million in the previous year, a net increase of $23.9 million.

Net cash used in investing activities for the year ended April 1, 2023 included the acquisition of Solitaire Homes and purchases of property, plant and equipment including our newly opened Glendale, Arizona and Hamlet, North Carolina facilities.

Net cash used in investing activities for the year ended April 2, 2022 was primarily for the purchase of Commodore.

Net cash used in financing activities for the year ended April 1, 2023 was primarily related to common stock repurchases, partially offset by proceeds received from the exercise of stock options.

Net cas h used in financing activities for the year ended April 2, 2022 was mainly for the payments of tax liabilities on the exercise of stock options and payments on secured financings.

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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-K

Item 7. Management’s Discussion and Analysis