What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-05-24 compared with 2023-05-19 · 40 added, 66 removed, 162 unchanged (40% of the section changed)

10 unchanged sentences

economic conditions and consumer confidence;

increasing interest rates;

changes in interest rates;

potential acquisitions, strategic investments and other expansions;

operational and legal risks;

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

how we may be affected by a pandemic or other infectious outbreak;

labor shortages and the pricing and availability of raw materials;

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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.

Our home order backlog at March 30, 2024 was approximately $191 million in wholesale sales values, down $53 million from $244 million one year earlier.

Distributors may cancel orders prior to production without penalty.

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Ginnie Mae permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments.

Through fiscal year 2023, monthly collections of principal and interest from borro wers have exceeded scheduled principal and interest payments owed to investors;

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

Through fiscal year 2024, monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors;

however, any future regulatory mandates requiring extended forbearance could negatively impact future cash obligations.

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.

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Net revenue consisted of the following for fiscal years 2024 and 2023, respectively:

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

($ in thousands, except revenue per home sold) March 30,

2024 April 1,

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Net factory-built housing revenue per home sold $ 101,406 $ 106,805 $ (5,399) (5.1) %

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.

In the factory-built housing segment, the decrease in Net revenue was primarily due to lower sales volume and selling prices, $372.1 million and $80.5 million, respectively, partially offset by the addition of Solitaire Homes which contributed $128.1 million in fiscal year 2024 compared to $28.3 million for one quarter of post acquisition activity in the prior fiscal year.

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

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Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site.

Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services.

Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, which include installation, utility connections, site improvements, landscaping and other additional services.

Changes to the proportion of home sales among our distribution channels between reporting periods impacts the overall net revenue per home sold.

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For these reasons, we have experienced, and expect to continue to experience, volatility in overall net factory-built housing revenue per home sold.

The table below presents the mix of modules and homes sold for the fiscal years 2023 and 2022, respectively :

2023 April 2,

Modules Homes Modules Homes Modules Homes

HUD code homes 26,288 15,565 24,497 14,136 7.3 % 10.1 %

Modular homes 5,578 2,792 3,569 1,742 56.3 % 60.3 %

Park model RVs 1,019 1,019 819 819 24.4 % 24.4 %

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

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.

Financia l services segment Net revenue increased 6.7% primarily due to $4.9 million from more insurance policies in force in the current year.

Gross Profit.

Gross profit consisted of the following for fiscal years 2024 and 2023, respectively:

($ in thousands) April 1,

($ in thousands) March 30,

2024 April 1,

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Financial services 35.8 % 42.9 % N/A (7.1) %

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 factory-built housing segment, Gross profit decreased from the lower home sales prices and fewer units sold, partially offset by lower 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.

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Selling, general and administrative expenses consisted of the following for fiscal years 2024 and 2023, respectively:

($ in thousands) April 1,

($ in thousands) March 30,

2024 April 1,

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13.8 % 12.1 % N/A 1.7 %

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.

Selling, general and administrative expenses related to factory-built housing decreased primarily due to $19.5 million in lower wages, benefits and incentive compensation expense on declined earnings;

$7.3 million from lower expenses incurred in engaging third-party consultants in relation to the non-recurring energy efficient home tax credits;

and $2.1 million from lower legal expenses related to the SEC investigation, partially offset by the full year of Solitaire operations, which was acquired in the prior year's fourth quarter, which increased Selling, general and administrative expenses by $19.1 million.

Interest Income.

Interest income was $21.0 million in fiscal year 2024 and $10.7 million in fiscal year 2023.

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

The increase is due to higher interest rates throughout fiscal year 2024.

Interest Expense.

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For fisca l years 2024 and 2023, Other income, net was $0.8 million and $0.4 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.

Prior year saw non-recurring retirement of property, plant and equipment with a $1.2 million loss.

This was offset by $0.3 million of gains on corporate equity securities in fiscal 2024 compared to $0.8 million of gains in the prior fiscal year.

Income Before Income Taxes.

Income before income taxes consisted of the following for fiscal years 2024 and 2023, respectively:

($ in thousands) April 1,

($ in thousands) March 30,

2024 April 1,

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Income Tax Expense.

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 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.

Income tax expense was $41.3 million, resulting in an effective tax rate of 20.7%, for the fiscal year ended March 30, 2024, compared to income tax expense of $65.9 million and an effective rate of 21.5% for the fiscal year ended April 1, 2023.

The lower effective tax rate in fiscal year 2024 is primarily related to $4.2 million in tax credits related to the sale of energy efficient homes and Energy Star credits available under the Internal Revenue Code §45L and $2.4 million related to the research and development, solar, and work opportunity tax credits.

Fiscal Year 2023 Compared to Fiscal Year 2022

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.

See Part II, Item 7, "Management's Discussion and Analy sis of Financial Condition and Results of Operations - Results of Operations" in the Company's 2023 Annual Report on Form 10-K.

Liquidity and Capital Resources

We believe that cash and cash equivalents at April 1, 2023, 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 March 30, 2024, 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.

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.

We have sufficient liquid resources including our $50.0 million revolving credit facility (the "Revolving Credit Facility"), of which no amounts were outstanding at March 30, 2024.

The Credit Agreement includes the following financial covenants:

(i) as of the end of any fiscal quarter, the Consolidated Total Leverage Ratio (as defined in the Credit Agreement) cannot exceed 3.25 to 1.00 and (ii) a requirement to maintain Consolidated EBITDA (as defined in the Credit Agreement) for any period of four fiscal quarters of at least $75 million.

The Credit Agreement also contains customary representations and warranties, and affirmative and negative covenants.

The Company anticipates compliance with its debt covenants and projects its level of cash availability to be in excess of cash needed to operate the business for the next year.

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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The following is a summary of the Company's cash flows for fiscal years 2024 and 2023, respectively:

($ in thousands) April 1,

($ in thousands) March 30,

2024 April 1,

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Cash, cash equivalents and restricted cash at end of the fiscal year $ 368,753 $ 283,490 $ 85,263

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.

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.

Net cash provided by operating activities decreased primarily from lower Net income adjusted for non-cash items during the period, partially offset by greater collections on commercial loans.

Consumer loan originations decreased $87.2 million to $90.8 million during the year ended March 30, 2024, from $178.0 million during the year ended April 1, 2023.

Proceeds from the sale of consumer loans provided $91.5 million in cash, compared to $186.0 million in the previous year, a net decrease of $94.5 million.

Commercial loan originations decreased $20.8 million to $111.2 million during the year ended March 30, 2024, from $132.1 million during the year ended April 1, 2023.

Proceeds from the collection on commercial loans provided $117.3 million in cash, compared to $98.2 million in the previous year, a net increase of $19.1 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.

Net cash used in investing activities for the year ended March 30, 2024 was primarily used for purchases of property, plant and equipment and acquisition of Kentucky Dream Homes during the year.

Net cash used in investing activities for the year ended April 1, 2023 was primarily for the acquisition of Solitaire Homes and purchases of property, plant and equipment including opening manufacturing facilities in Glendale, Arizona and Hamlet, North Carolina.

Net cash used in financing activities for the year ended March 30, 2024 and April 1, 2023 was primarily related to common stock repurchases, partially offset by net proceeds received from the exercise of stock options.

Obligations and Commitments

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For additional information related to these obligations, see Note 9 to the Consolidated Financial Statements.

In addition, we also have contingent commitments at April 1, 2023 consisting of contingent repurchase obligations, construction contingent commitments, interest rate lock commitments ("IRLCs") and forward loan sale commitments.

In addition, we also have contingent commitments at March 30, 2024 consisting of contingent repurchase obligations, construction contingent commitments, interest rate lock commitments ("IRLCs") and forward loan sale commitments.

For additional information related to these contingent obligations, see Note 17 to the Consolidated Financial Statements.

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See "Forward-Looking Statements" above.

We believe the following accounting policies are critical to Company operating results or may affect significant judgments and estimates used in the preparation of the Consolidated Financial Statements and should be read in conjunction with the Notes to the Consolidated Financial Statements.

We believe the following accounting policies are critical to the Company's operating results or may affect significant judgments and estimates used in the preparation of the Consolidated Financial Statements and should be read in conjunction with the Notes to the Consolidated Financial Statements.

Estimates include the number of homes still under warranty, including homes in distributor inventories, homes purchased by consumers still within the one-year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home.

While the number of homes still under warranty and the timing in which work orders are completed are readily determinable, the average costs incurred will vary based on market prices and availability, which are the primary subjective inputs in estimating the reserve.

While the number of homes still under warranty and the timing in which work orders are completed are readily determinable, the average costs incurred will vary based on market prices, which are the primary subjective inputs in estimating the reserve.

We expect that a 5% increase in average costs would increase our reserve proportionally.

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The determination of the need for, or amount of, any valuation allowance involves significant judgment and is based upon the evaluation of both positive and negative evidence, including estimates of anticipated taxable profits in various jurisdictions with which the deferred tax assets are associated.

At April 1, 2023, based on historical profits earned and forecasted taxable profits, we determined that all deferred tax assets, except for certain state net operating loss deferred tax assets, would be utilized in future periods.

At March 30, 2024, based on historical profits earned and forecasted taxable profits, we determined that all deferred tax assets, except for certain state net operating loss deferred tax assets, would be utilized in future periods.

Additionally, the overall state income tax rate is based on income apportionment by state, which is estimated using prior year results, along with expected current year impacts.

Goodwill and Other Intangibles.

We evaluate the fair value of reporting units and when we record an impairment loss on goodwill.

During the fourth quarter of fiscal year 2023 we conducted our annual goodwill impairment test and no impairment charges were recorded.

The estimated fair values of our two reporting units exceeded their carrying values at the date of their most recent estimated fair value determination.

However, estimated fair values would need to decrease by over 375% for there to be indicators of impairment.

The fair value evaluation of intangible assets acquired includes the use of acceptable valuation approaches utilizing unobservable inputs, which may lead to a high level of uncertainty.

These Level 3 inputs relate to forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of royalty and discount rates.

The analysis depends upon a number of judgments, estimates and assumptions.

Accordingly, such testing is subject to uncertainties, which could cause fair value to fluctuate.

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 material and labor.

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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