Cavco(CVCO) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section details Cavco Industries, Inc.'s unaudited consolidated financial statements and management's analysis Item 1. Financial Statements Cavco Industries, Inc.'s unaudited consolidated financial statements for the quarter detail financial position, performance, and cash flows Consolidated Balance Sheets Consolidated Balance Sheets show increased total assets and stockholders' equity as of June 27, 2020, driven by higher cash and retained earnings | Metric | June 27, 2020 (Unaudited) ($ thousands) | March 28, 2020 ($ thousands) | | :-------------------------------------- | :------------------------------------ | :--------------------------- | | ASSETS | | | | Cash and cash equivalents | 270,547 | 241,826 | | Total current assets | 547,991 | 516,185 | | Total assets | 838,256 | 810,431 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | 179,056 | 172,102 | | Total stockholders' equity | 624,007 | 607,586 | | Total liabilities and stockholders' equity | 838,256 | 810,431 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income show decreased net revenue and net income for the quarter, due to lower gross profit and operations income | Metric | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net revenue | 254,801 | 264,042 | | Cost of sales | 199,478 | 203,744 | | Gross profit | 55,323 | 60,298 | | Selling, general and administrative expenses | 35,323 | 35,264 | | Income from operations | 20,000 | 25,034 | | Income before income taxes | 21,680 | 27,362 | | Income tax expense | (5,006) | (6,080) | | Net income | 16,674 | 21,282 | | Comprehensive income | 16,742 | 21,371 | | Basic Net income per share | 1.82 | 2.34 | | Diluted Net income per share | 1.80 | 2.31 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows indicate a significant increase in net cash from operating activities, boosting overall cash and equivalents | Metric | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :---------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | 16,674 | 21,282 | | Net cash provided by operating activities | 35,692 | 16,798 | | Net cash provided by (used in) investing activities | 105 | (1,469) | | Net cash used in financing activities | (922) | (2,174) | | Net increase in cash, cash equivalents and restricted cash | 34,875 | 13,155 | | Cash, cash equivalents and restricted cash at end of the period | 290,482 | 213,024 | Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed disclosures on accounting policies, financial instruments, segment operations, and recent events 1. Basis of Presentation This note outlines the basis for preparing unaudited consolidated financial statements, including SEC compliance, management estimates, and ASU 2016-13 adoption - The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), on March 29, 2020, resulting in a $733,000 net-of-tax adjustment to Retained earnings and increasing the allowance for loan losses by $435,000 for commercial loans and $528,000 for non-acquired consumer loans[25] - The Company operates in two segments: factory-built housing (wholesale and retail systems-built housing) and financial services (manufactured housing consumer finance and insurance)[23] - The uncertainty from the COVID-19 pandemic has made management's estimates and assumptions for financial statements more difficult and subjective[22] 2. Revenue from Contracts with Customers Net revenue for the three months ended June 27, 2020, decreased to $254.8 million, primarily due to a decline in factory-built housing revenue | Segment | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | 238,090 | 248,768 | | Financial services | 16,711 | 15,274 | | Total Net revenue | 254,801 | 264,042 | 3. Restricted Cash Restricted cash increased to $19.9 million as of June 27, 2020, primarily due to higher CountryPlace customer payments to be remitted to third parties | Restricted Cash Category | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :---------------------------------------------------- | :-------------------------- | :--------------------------- | | Cash related to CountryPlace customer payments to be remitted to third parties | 18,739 | 12,740 | | Other restricted cash | 1,196 | 1,041 | | Total Restricted cash | 19,935 | 13,781 | | Cash and Restricted Cash | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :---------------------------------------------------- | :-------------------------- | :--------------------------- | | Cash and cash equivalents | 270,547 | 241,826 | | Restricted cash, current | 19,600 | 13,446 | | Restricted cash | 335 | 335 | | Cash, cash equivalents and restricted cash per statement of cash flows | 290,482 | 255,607 | 4. Investments Total investments increased slightly to $46.9 million as of June 27, 2020, with net gains on marketable equity securities of $2.0 million | Investment Type | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :----------------------------- | :-------------------------- | :--------------------------- | | Available-for-sale debt securities | 13,975 | 14,774 | | Marketable equity securities | 11,611 | 9,829 | | Non-marketable equity investments | 21,294 | 21,536 | | Total Investments | 46,880 | 46,139 | | Marketable Equity Securities | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net gains on securities held | 1,997 | 952 | | Net gains (losses) on securities sold | 33 | (1) | | Total net gain on marketable equity securities | 2,030 | 951 | - Non-marketable equity investments include $15.0 million in equity-method investments in community-based initiatives that buy and sell the Company's homes and provide home-only financing[35] 5. Inventories Inventories decreased to $106.4 million as of June 27, 2020, primarily due to a reduction in finished goods | Inventory Category | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :----------------- | :-------------------------- | :--------------------------- | | Raw materials | 35,552 | 35,691 | | Work in process | 13,120 | 13,953 | | Finished goods | 57,724 | 63,891 | | Total Inventories | 106,396 | 113,535 | 6. Consumer Loans Receivable Consumer loans receivable, net, increased to $89.0 million, with a significant rise in the allowance for loan losses due to ASU 2016-13 adoption | Consumer Loans Receivable | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :---------------------------------------------------- | :-------------------------- | :--------------------------- | | Loans held for investment (at Acquisition Date) | 37,650 | 37,779 | | Loans held for investment (originated after Acquisition Date) | 19,917 | 20,140 | | Loans held for sale | 25,297 | 14,671 | | Construction advances | 12,240 | 13,400 | | Consumer loans receivable | 95,104 | 85,990 | | Deferred financing fees and other, net | (2,133) | (1,919) | | Allowance for loan losses | (4,012) | (1,767) | | Total Consumer loans receivable, net | 88,959 | 82,304 | | Allowance for Loan Losses Activity | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Balance at beginning of period | 1,767 | 415 | | Impact of adoption of ASU 2016-13 | 2,276 | — | | Provision for loan losses | 161 | 6 | | Charge-offs | (192) | — | | Allowance for loan losses at end of period | 4,012 | 421 | - As of June 27, 2020, 36% of the outstanding principal balance of consumer loans receivable was concentrated in Texas and 17% in Florida[48] 7. Commercial Loans Receivable Commercial loans receivable, net, decreased to $44.0 million, with a significant increase in the allowance for loan losses due to ASU 2016-13 adoption | Commercial Loans Receivable | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Direct loans receivable | 44,915 | 47,058 | | Participation loans receivable | 166 | 144 | | Allowance for loan losses | (828) | (393) | | Deferred financing fees, net | (244) | (244) | | Total Commercial loans receivable, net | 44,009 | 46,565 | | Allowance for Loan Losses Activity | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Balance at beginning of period | 393 | 180 | | Impact of adoption of ASU 2016-13 | 435 | — | | Change in estimated loan losses, net | — | 11 | | Balance at end of period | 828 | 191 | - As of June 27, 2020, 10.0% of the outstanding commercial loans receivable principal balance was concentrated in California[58] - The Company also had concentrations with one independent third-party and its affiliates, equaling 19.8% of net commercial loans receivables[59] 8. Property, Plant and Equipment, net Property, plant and equipment, net, remained stable at $77.3 million, with depreciation expense increasing to $1.4 million for the quarter | Property, Plant and Equipment | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :------------------------------ | :-------------------------- | :--------------------------- | | Land | 26,827 | 26,827 | | Buildings and improvements | 52,820 | 52,011 | | Machinery and equipment | 31,369 | 30,984 | | Accumulated depreciation | (33,690) | (32,632) | | Total Property, plant and equipment, net | 77,326 | 77,190 | - Depreciation expense was $1.4 million for the three months ended June 27, 2020, compared to $1.2 million for the three months ended June 29, 2019[60] 9. Leases Lease assets and liabilities significantly increased, with operating lease right-of-use assets rising to $18.4 million, primarily due to a five-year lease extension | Lease Balances | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :--------------------------------- | :-------------------------- | :--------------------------- | | Operating lease right-of-use assets | 18,378 | 13,894 | | Finance lease assets | 1,015 | 1,025 | | Total lease assets | 19,393 | 14,919 | | Current operating lease liabilities | 4,097 | 4,170 | | Current finance lease liabilities | 74 | 77 | | Non-current operating lease liabilities | 15,398 | 10,743 | | Non-current finance lease liabilities | 275 | 289 | | Total lease liabilities | 19,844 | 15,279 | - The increase in lease balances is attributed to a five-year lease extension at one of the company's active manufacturing facilities[65] 10. Goodwill and Other Intangibles Goodwill and other intangibles, net, remained stable at $90.0 million, with amortization expense increasing to $187,000 for the quarter | Intangible Asset Category | June 27, 2020 Net Carrying Amount ($ thousands) | March 28, 2020 Net Carrying Amount ($ thousands) | | :-------------------------------- | :---------------------------------------------- | :----------------------------------------------- | | Goodwill | 75,090 | 75,090 | | Trademarks and trade names | 8,900 | 8,900 | | State insurance licenses | 1,100 | 1,100 | | Customer relationships | 4,678 | 4,837 | | Other finite-lived intangibles | 245 | 273 | | Total Goodwill and other intangibles, net | 90,013 | 90,200 | - Amortization expense recognized on intangible assets was $187,000 for the three months ended June 27, 2020, compared to $80,000 for the three months ended June 29, 2019[71] 11. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $142.2 million, with notable increases in customer deposits and unearned insurance premiums | Liability Category | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :------------------------------------------- | :-------------------------- | :--------------------------- | | Salaries, wages and benefits | 23,958 | 25,885 | | Customer deposits | 22,090 | 22,055 | | Unearned insurance premiums | 21,710 | 20,614 | | Estimated warranties | 18,538 | 18,678 | | Accrued volume rebates | 10,155 | 9,801 | | Company repurchase options on certain loans sold | 8,714 | 7,444 | | Insurance loss reserves | 6,730 | 5,582 | | Operating lease liabilities | 4,097 | 4,170 | | Total Accrued expenses and other current liabilities | 142,193 | 139,930 | 12. Warranties The liability for estimated warranties remained stable at $18.5 million, with $6.3 million charged to costs and expenses during the quarter | Warranty Liability Activity | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Balance at beginning of period | 18,678 | 17,069 | | Charged to costs and expenses | 6,347 | 7,821 | | Payments and deductions | (6,487) | (7,130) | | Balance at end of period | 18,538 | 17,760 | 13. Debt and Finance Lease Obligations Total debt and finance lease obligations decreased to $14.5 million, primarily due to a reduction in secured credit facilities | Debt and Finance Lease Obligations | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :--------------------------------- | :-------------------------- | :--------------------------- | | Secured credit facilities | 10,178 | 10,474 | | Other secured financings | 3,985 | 4,113 | | Finance lease liabilities | 349 | 366 | | Total Debt and finance lease obligations | 14,512 | 14,953 | - The outstanding balance of converted loans from secured credit facilities was $10.2 million at a weighted average interest rate of 4.91% as of June 27, 2020[75] 14. Reinsurance Standard Casualty's net premiums written increased to $10.2 million, with net premiums earned rising to $8.8 million, while limiting risk per claim | Premiums Activity | Three Months Ended June 27, 2020 ($ thousands) | Three Months Ended June 29, 2019 ($ thousands) | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Direct premiums written | 5,765 | 5,033 | | Direct premiums earned | 5,185 | 4,570 | | Assumed premiums—nonaffiliated | 7,653 | 7,513 | | Ceded premiums—nonaffiliated | (3,202) | (2,987) | | Net premiums written | 10,216 | 9,559 | | Net premiums earned | 8,773 | 8,018 | - Standard Casualty's risk of loss is limited to $125,000 per claim on typical policies, with $175,000 of the risk ceded per reinsurance[81] 15. Income Taxes Income tax expense decreased to $5.0 million, with the effective tax rate increasing to 23.1% due to lower tax benefits from stock option exercises - Income taxes totaled $5.0 million in the first quarter of fiscal 2021, with a 23.1% effective tax rate, compared to $6.1 million and a 22.2% effective tax rate in the first quarter of fiscal 2020[85] - The higher effective tax rate in the current quarter was primarily from lower tax benefits from the exercise of stock options compared to the same period last year[85] 16. Commitments and Contingencies The company has various commitments and contingencies, including repurchase agreements, an irrevocable letter of credit, and off-balance sheet construction loan commitments - The maximum amount for which the Company was liable under repurchase agreements approximated $78.8 million at June 27, 2020[87] - The Company maintains an irrevocable letter of credit of $11.0 million to secure certain reinsurance contracts[89] | Construction Loan Commitments | June 27, 2020 ($ thousands) | March 28, 2020 ($ thousands) | | :------------------------------------ | :-------------------------- | :--------------------------- | | Construction loan contract amount | 31,376 | 31,136 | | Cumulative advances | (12,240) | (13,400) | | Remaining construction contingent commitment | 19,136 | 17,736 | - As of June 27, 2020, CountryPlace had outstanding Interest Rate Lock Commitments (IRLCs) with a notional amount of $27.0 million[94] - CountryPlace also had $60.8 million in outstanding notional forward sales of MBSs and forward sales commitments[95] 17. Stockholders' Equity Total stockholders' equity increased to $624.0 million, driven by net income and stock-based compensation, partially offset by ASU 2016-13 implementation | Stockholders' Equity Activity | March 28, 2020 ($ thousands) | June 27, 2020 ($ thousands) | | :------------------------------------------- | :--------------------------- | :-------------------------- | | Balance, March 28, 2020 | 607,586 | | | Cumulative effect of implementing ASU 2016-13, net | (733) | | | Net income | 16,674 | | | Issuance of common stock under stock incentive plans | (533) | | | Stock-based compensation | 945 | | | Other comprehensive income, net | 68 | | | Balance, June 27, 2020 | | 624,007 | 18. Stock-Based Compensation Stock-based compensation expense increased to $945,000, with total unrecognized compensation cost related to stock options at approximately $5.7 million - Stock-based compensation charged against income was $945,000 for the three months ended June 27, 2020, compared to $630,000 for the three months ended June 29, 2019[104] - As of June 27, 2020, total unrecognized compensation cost related to stock options was approximately $5.7 million, with a weighted-average recognition period of approximately 2.49 years[106] 19. Earnings Per Share Basic net income per share decreased to $1.82, while diluted net income per share decreased to $1.80 for the three months ended June 27, 2020 | EPS Metric | Three Months Ended June 27, 2020 | Three Months Ended June 29, 2019 | | :--------------------------------- | :------------------------------- | :------------------------------- | | Net income | 16,674 | 21,282 | | Basic weighted average shares outstanding | 9,174,182 | 9,102,685 | | Diluted weighted average shares outstanding | 9,264,661 | 9,217,599 | | Basic Net income per share | $1.82 | $2.34 | | Diluted Net income per share | $1.80 | $2.31 | 20. Fair Value Measurements The company provides fair value measurements for financial instruments, primarily using Level 3 inputs for loans due to infrequent market activity | Financial Instrument | June 27, 2020 Estimated Fair Value ($ thousands) | March 28, 2020 Estimated Fair Value ($ thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Available-for-sale debt securities | 13,975 | 14,774 | | Marketable equity securities | 11,611 | 9,829 | | Non-marketable equity investments | 21,294 | 21,536 | | Consumer loans receivable | 102,578 | 97,395 | | Commercial loans receivable | 47,503 | 46,819 | | Securitized financings and other | (14,099) | (15,592) | - Loans held for investment, loans held for sale, and commercial loans receivable are measured using Level 3 inputs, reflecting estimated discounted future cash flows and market conditions due to the absence of an orderly market for comparable portfolios[117] - Mortgage Servicing Rights (MSRs) are recorded at fair value, with changes recognized in Net revenue[119] - The fair value of MSRs is based on the present value of expected future cash flows, impacted by prepayment estimates, delinquencies, and market discounts[120] 21. Related Party Transactions The company engages in related party transactions, with total sales to related parties reaching $12.7 million for the three months ended June 27, 2020 - Total sales to related parties were $12.7 million for the three months ended June 27, 2020, compared to $13.2 million for the three months ended June 29, 2019[123] - As of June 27, 2020, receivables from related parties included $2.5 million of accounts receivable and $10.3 million of commercial loans outstanding[123] 22. Acquisition of Destiny Homes On August 2, 2019, the company acquired Destiny Homes, which contributed $9.8 million in Net revenue and increased consolidated Net income by $125,000 - The Company acquired Destiny Homes on August 2, 2019, expanding its manufacturing and distribution network in the Southeastern United States[124] - Destiny Homes contributed $9.8 million in Net revenue and increased consolidated Net income by $125,000 for the three months ended June 27, 2020[125] 23. Business Segment Information The company's two segments, factory-built housing and financial services, reported total net revenue of $254.8 million and income before income taxes of $21.7 million | Segment | Net Revenue (June 27, 2020) ($ thousands) | Net Revenue (June 29, 2019) ($ thousands) | | :------------------------ | :---------------------------------------- | :---------------------------------------- | | Factory-built housing | 238,090 | 248,768 | | Financial services | 16,711 | 15,274 | | Total Net revenue | 254,801 | 264,042 | | | | | | Segment | Income Before Income Taxes (June 27, 2020) ($ thousands) | Income Before Income Taxes (June 29, 2019) ($ thousands) | | :------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Factory-built housing | 18,450 | 24,313 | | Financial services | 3,230 | 3,049 | | Total Income before income taxes | 21,680 | 27,362 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the quarter Forward-Looking Statements This subsection cautions that the report contains forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are characterized by words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates"[130] - Factors that could affect the Company's results include economic conditions, consumer confidence, operational and legal risks, the COVID-19 pandemic, governmental regulations, and financing availability[131] Introduction This section introduces the Management's Discussion and Analysis, directing readers to review it with the Consolidated Financial Statements - The Management's Discussion and Analysis should be read in conjunction with Cavco Industries, Inc.'s Consolidated Financial Statements and related Notes in Item 1 of this Report[132] Overview Cavco Industries, Inc., headquartered in Phoenix, Arizona, is a leading producer of factory-built homes and operates financial services subsidiaries - Cavco designs and produces factory-built homes under various brand names and is a leading producer of park model RVs, vacation cabins, and modular homes[133] - The company's financial services segment includes CountryPlace Acceptance Corp. (consumer finance) and Standard Casualty Co. (property and casualty insurance)[133] Company Growth Cavco has expanded significantly through strategic acquisitions, though it recently closed its Lexington, Mississippi plant due to market challenges - Cavco has expanded through acquisitions including Fleetwood (2009), Palm Harbor (2011), Chariot Eagle (2015), Fairmont (2015), Lexington (2017), and Destiny (2019), increasing production and distribution capabilities and entering financial services[137][138] - In April 2020, the Company decided to shut down production and close its Lexington, Mississippi plant due to ongoing market and operating challenges exacerbated by the COVID-19 pandemic[139] - The Company operates 20 homebuilding production lines across the U.S. and sells homes through a network of independent distributors and 39 Company-owned U.S. retail locations[140] Company Outlook Cavco maintains a conservative cost structure and strong financial position, focusing on growth initiatives despite COVID-19 impacts and labor difficulties - The Company's total average plant capacity utilization rate fell to approximately 45% during the early part of the first fiscal quarter due to COVID-19, but improved to approximately 70% by quarter-end[149] - Sales order activity declined substantially at the beginning of the quarter due to COVID-19 but continuously improved, resulting in order backlogs increasing 20% to $157 million at June 27, 2020, compared to $131 million at June 29, 2019[150][151] - The Company is focusing on developing order volume growth, improving production capabilities, adjusting product offerings, and addressing labor-related difficulties in the COVID-19 environment[156] - Cavco is working to develop secondary market opportunities for manufactured home-only loans and expand lending availability, including investing in community-based lending initiatives[158] - The Company incurred $0.1 million in SEC inquiry-related expenses (net of $0.5 million insurance recovery) and $2.1 million in additional D&O policy premium expense for the three months ended June 27, 2020[164] Industry Overview The manufactured housing industry experienced a slight decrease in home shipments for the first five months of 2020, with key demographics representing significant market segments - Industry home shipments decreased 0.9% for the first 5 months of calendar year 2020 compared to the same period in the prior year[166] - The two largest manufactured housing consumer demographics, young adults (Gen Y) and those aged 55 and older, are both growing and represent prime buyers for affordable, sustainable, and energy-efficient factory-built homes[168] Results of Operations This section details the company's financial performance for the three months ended June 27, 2020, highlighting changes in revenue, expenses, and income before taxes Net Revenue Total net revenue decreased by 3.5% to $254.8 million, primarily due to lower factory-built housing sales volume, partially offset by increased financial services revenue | Metric | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | Change ($ thousands) | % Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------------------- | :------- | | Factory-built housing | 238,090 | 248,768 | (10,678) | (4.3)% | | Financial services | 16,711 | 15,274 | 1,437 | 9.4% | | Total Net revenue | 254,801 | 264,042 | (9,241) | (3.5)% | | Total homes sold | 3,349 | 3,807 | (458) | (12.0)% | | Net factory-built housing revenue per home sold | 71,093 | 65,345 | 5,748 | 8.8% | - The decrease in factory-built housing revenue was primarily from 12% lower home sales volume due to COVID-19, partially offset by higher home selling prices and changes in product mix[169] - Financial services revenue increased from greater unrealized gains on investments, an increase in home loan sales, and more insurance policies in force, partially offset by lower interest income on acquired loan portfolios[172] Gross Profit Consolidated gross profit decreased by 8.3% to $55.3 million, with the gross profit margin declining to 21.7%, mainly due to lower sales volume and production inefficiencies | Metric | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------------- | :------- | | Factory-built housing Gross profit | 46,992 | 52,135 | (5,143) | (9.9)% | | Financial services Gross profit | 8,331 | 8,163 | 168 | 2.1% | | Consolidated Gross profit | 55,323 | 60,298 | (4,975) | (8.3)% | | | | | | | | Consolidated Gross profit as % of Net revenue | 21.7% | 22.8% | N/A | (1.1)% | | Factory-built housing Gross profit as % of Net revenue | 19.7% | 21.0% | N/A | (1.3)% | | Financial services Gross profit as % of Net revenue | 49.9% | 53.4% | N/A | (3.5)% | - Factory-built housing Gross profit and Gross profit as a percentage of Net revenue decreased primarily from lower sales volume and production inefficiencies caused by the COVID-19 pandemic[173] - Financial services Gross profit as a percentage of Net revenue decreased due to higher weather-related claims volume and lower interest income earned on acquired loan portfolios[174] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses remained relatively consistent at $35.3 million, with increased salaries offset by reduced legal expenses | SG&A Expenses | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------------------------------------- | :-------------------------- | :-------------------------- | :------------------- | :------- | | Factory-built housing | 30,737 | 30,751 | (14) | —% | | Financial services | 4,586 | 4,513 | 73 | 1.6% | | Total Selling, general and administrative expenses | 35,323 | 35,264 | 59 | 0.2% | | | | | | | | Selling, general and administrative expenses as % of Net revenue | 13.9% | 13.4% | N/A | 0.5% | - Factory-built housing SG&A remained consistent, with increases in salaries and employee-related expenses offset by a reduction in legal expenses, including a $0.5 million insurance recovery for prior SEC-related expenses[176] Interest Expense Interest expense decreased to $0.2 million, primarily due to the repurchase of the 2007-1 securitized loan portfolio in August 2019 - Interest expense was $0.2 million for the three months ended June 27, 2020, compared to $0.5 million for the three months ended June 29, 2019[178] - The decrease was primarily due to a reduction in securitized bond interest expense following the repurchase of the 2007-1 securitized loan portfolio in August 2019[178] Other Income, net Other income, net, decreased to $1.9 million, mainly due to a $0.9 million reduction in interest earned on cash balances in a lower interest rate environment - Other income, net was $1.9 million for the three months ended June 27, 2020, compared to $2.8 million for the three months ended June 29, 2019[180] - The decrease was primarily from a $0.9 million reduction in interest earned on cash balances and commercial loans receivables, given the lower interest rate environment[180] Income Before Income Taxes Income before income taxes decreased by 20.8% to $21.7 million, driven by a decline in the factory-built housing segment | Segment | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------------- | :------- | | Factory-built housing | 18,450 | 24,313 | (5,863) | (24.1)% | | Financial services | 3,230 | 3,049 | 181 | 5.9% | | Total Income before income taxes | 21,680 | 27,362 | (5,682) | (20.8)% | Income Tax Expense Income tax expense decreased to $5.0 million, with the effective tax rate increasing to 23.1% due to lower tax benefits from stock option exercises - Income tax expense was $5.0 million for the three months ended June 27, 2020, compared to $6.1 million for the three months ended June 29, 2019[183] - The effective income tax rate for the 2021 first quarter was 23.1%, up from 22.2% in the same period last year, primarily due to lower tax benefits from stock option exercises[183] Liquidity and Capital Resources The company's cash and cash equivalents, along with cash flow from operations, are sufficient for the foreseeable future, with operating activities significantly increasing cash - The Company believes its cash and cash equivalents ($270.5 million at June 27, 2020) and cash flow from operations will be sufficient to fund operations and growth for the next 12 months and into the foreseeable future[10][184] | Cash Flow Activity | June 27, 2020 ($ thousands) | June 29, 2019 ($ thousands) | Change ($ thousands) | | :---------------------------------------------------- | :-------------------------- | :-------------------------- | :------------------- | | Cash, cash equivalents and restricted cash at beginning of the fiscal year | 255,607 | 199,869 | 55,738 | | Net cash provided by operating activities | 35,692 | 16,798 | 18,894 | | Net cash provided by (used in) investing activities | 105 | (1,469) | 1,574 | | Net cash used in financing activities | (922) | (2,174) | 1,252 | | Cash, cash equivalents and restricted cash at end of the period | 290,482 | 213,024 | 77,458 | - Net cash provided by operating activities increased primarily from decreased finished goods inventories, lower commercial lending, higher accrued taxes, and sales of consumer loans, partially offset by lower net income and more consumer loans originated[186] - Financing activities used $1.3 million less cash, mainly due to lower payments of taxes for employees' net exercise of stock options and lower payments on securitized financings after repurchasing the 2007-1 securitized loan portfolio[192] Critical Accounting Policies The company adopted ASU 2016-13, Financial Instruments - Credit Losses, on March 29, 2020, with no other significant changes to critical accounting policies - The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, on March 29, 2020, recognizing the cumulative effect as an adjustment to the opening balance of Retained earnings[195] Recent Accounting Pronouncements This section refers to Note 1 of the Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements - Refer to Note 1 to the Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements[196] Other Matters This section directs readers to Note 21 of the Consolidated Financial Statements for a discussion of the company's related party transactions - Refer to Note 21 to the Consolidated Financial Statements for a discussion of the Company's related party transactions[198] Off Balance Sheet Arrangements This section refers to Note 16 of the Consolidated Financial Statements for a discussion of the company's off-balance sheet commitments - Refer to Note 16 to the Consolidated Financial Statements for a discussion of the Company's off-balance sheet commitments[199] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the quantitative and qualitative disclosures about market risk previously reported in the company's Form 10-K - No material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K[200] Item 4. Controls and Procedures The company's management concluded that disclosure controls and procedures were effective as of June 27, 2020, with no material changes in internal control over financial reporting - The Company's President and Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of June 27, 2020[201] - There have been no changes in the Company's internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the fiscal quarter ended June 27, 2020[202] PART II. OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, and exhibits for the reporting period Item 1. Legal Proceedings The company continues to cooperate with an ongoing SEC investigation and faces two class-action lawsuits, though management believes loss contingencies are not material - The Company is cooperating with an ongoing SEC investigation regarding trading in personal and Company accounts directed by its former CEO, Joseph Stegmayer[205] - Two class-action lawsuits (Joseph D. Robles v. Cavco Industries, Inc. and Malik Grif in v. Fleetwood Homes, Inc.) were filed in California alleging wage-and-hour violations[206] - Management does not believe that loss contingencies arising from pending legal matters are likely to have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations[208] Item 1A. Risk Factors Readers should carefully consider the risk factors discussed in Part I, Item 1A of the company's Form 10-K, as well as additional unknown risks - Readers should carefully consider the risk factors discussed in Part I, Item 1A of the Company's Form 10-K[209] - Additional risks and uncertainties not currently known or deemed immaterial may also materially adversely affect the Company's business, financial condition, and/or operating results[209] Item 5. Other Information This section states that all other items required under Part II are omitted because they are not applicable, with no other information to disclose - All other items required under Part II are omitted because they are not applicable[210] - There is no other information required to be disclosed under this item which was not previously disclosed[212] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial and Accounting Officer | Exhibit No. | Description | | :---------- | :------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | | 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Rule 13a-14(a)/15d-14(a) | | 31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Rule 13a-14(a)/15d-14(a) | | 32 | Certification Pursuant to 18 U.S.C. 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | SIGNATURES The report is duly signed on behalf of Cavco Industries, Inc. by its President, CEO, Executive Vice President, CFO, and Treasurer on July 31, 2020 - The report was signed by William C. Boor, President and Chief Executive Officer, and Daniel L. Urness, Executive Vice President, Chief Financial Officer and Treasurer, on July 31, 2020[215]