Cavco(CVCO) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Cavco Industries, Inc. for the period ended September 26, 2020, including the balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining accounting policies, financial instrument details, and segment information Consolidated Balance Sheets The balance sheet highlights total assets of $882.5 million and total stockholders' equity of $640.7 million as of September 26, 2020 Consolidated Balance Sheet Highlights (in thousands) | Metric | September 26, 2020 | March 28, 2020 | | :------------------------------------ | :------------------- | :--------------- | | Total Assets | $882,510 | $810,431 | | Cash and cash equivalents | $312,243 | $241,826 | | Total current assets | $597,424 | $516,185 | | Total current liabilities | $208,221 | $172,102 | | Total stockholders' equity | $640,688 | $607,586 | Consolidated Statements of Comprehensive Income The statement details net revenue of $258.0 million and net income of $15.0 million for the three months ended September 26, 2020 Consolidated Statements of Comprehensive Income Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net revenue | $257,976 | $268,675 | $512,777 | $532,717 | | Gross profit | $53,541 | $58,467 | $108,864 | $118,765 | | Income from operations | $18,088 | $22,384 | $38,088 | $47,418 | | Net income | $15,049 | $20,885 | $31,723 | $42,167 | | Basic EPS | $1.64 | $2.29 | $3.46 | $4.63 | | Diluted EPS | $1.62 | $2.25 | $3.42 | $4.56 | Consolidated Statements of Cash Flows The cash flow statement shows net cash provided by operating activities of $74.6 million and a net increase in cash of $73.7 million for the six months ended September 26, 2020 Consolidated Statements of Cash Flows Highlights (6 Months Ended, in thousands) | Metric | September 26, 2020 | September 28, 2019 | | :------------------------------------ | :------------------- | :------------------- | | Net cash provided by operating activities | $74,609 | $43,593 | | Net cash used in investing activities | $(82) | $(18,308) | | Net cash used in financing activities | $(865) | $(19,345) | | Net increase in cash, cash equivalents and restricted cash | $73,662 | $5,940 | | Cash, cash equivalents and restricted cash at end of period | $329,269 | $205,809 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies, financial instrument details, and segment information 1. Basis of Presentation The unaudited financial statements, prepared under SEC rules, reflect management's COVID-19 estimates, segment operations in factory-built housing and financial services, and the impact of ASU 2016-13 adoption on credit loss measurement - The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance[19] - The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), on March 29, 2020, changing the impairment model for most financial assets to a forward-looking expected loss model[20] Impact of ASU 2016-13 Adoption (March 29, 2020, in thousands) | Metric | Amount | | :------------------------------------------------ | :------- | | Cumulative effect on Retained earnings (net of taxes) | $733 | | Increase in allowance for commercial loan losses | $435 | | Increase in allowance for non-acquired consumer loan losses | $528 | 2. Revenue from Contracts with Customers Net revenue decreased for both three and six months ended September 26, 2020, primarily due to lower factory-built housing sales, partially offset by increased financial services revenue Net Revenue by Segment (in thousands) | Segment | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | $240,967 | $252,690 | $479,057 | $501,458 | | Financial services | $17,009 | $15,985 | $33,720 | $31,259 | | Total Net Revenue | $257,976 | $268,675 | $512,777 | $532,717 | 3. Restricted Cash Restricted cash, primarily from CountryPlace customer payments, increased to $17.0 million as of September 26, 2020, from $13.8 million as of March 28, 2020 Restricted Cash (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :-------------------------------------------------- | :----------------- | :--------------- | | Cash related to CountryPlace customer payments | $15,818 | $12,740 | | Other restricted cash | $1,208 | $1,041 | | Total Restricted Cash | $17,026 | $13,781 | 4. Investments Total investments remained stable at $46.9 million as of September 26, 2020, with significant net gains on marketable equity securities Investments (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :--------------------------------- | :----------------- | :--------------- | | Available-for-sale debt securities | $12,676 | $14,774 | | Marketable equity securities | $12,791 | $9,829 | | Non-marketable equity investments | $21,400 | $21,536 | | Total Investments | $46,867 | $46,139 | Marketable Equity Securities Net Gains (in thousands) | Period | Net gains on securities held | Net (losses) gains on securities sold | Total | | :-------------------------- | :--------------------------- | :------------------------------------ | :------ | | 3 Months Ended Sep 26, 2020 | $1,278 | $(27) | $1,251 | | 6 Months Ended Sep 26, 2020 | $3,275 | $6 | $3,281 | - Non-marketable equity investments included contributions of $15.0 million to equity-method investments in community-based initiatives and other distribution operations[28] 5. Inventories Total inventories slightly decreased to $111.9 million as of September 26, 2020, with an increase in raw materials and work in process, offset by a decrease in finished goods Inventories (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :---------------- | :----------------- | :--------------- | | Raw materials | $41,907 | $35,691 | | Work in process | $15,723 | $13,953 | | Finished goods | $54,242 | $63,891 | | Total Inventories | $111,872 | $113,535 | 6. Consumer Loans Receivable Consumer loans receivable, net, slightly decreased to $81.8 million as of September 26, 2020, with a significant increase in the allowance for loan losses due to ASU 2016-13 adoption Consumer Loans Receivable (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :---------------------------------------------------- | :----------------- | :--------------- | | Loans held for investment (at Acquisition Date) | $35,692 | $37,779 | | Loans held for investment (originated after Acquisition Date) | $19,299 | $20,140 | | Loans held for sale | $18,986 | $14,671 | | Construction advances | $14,063 | $13,400 | | Deferred financing fees and other, net | $(2,290) | $(1,919) | | Allowance for loan losses | $(3,910) | $(1,767) | | Total Consumer Loans Receivable, net | $81,840 | $82,304 | Allowance for Loan Losses Activity (6 Months Ended, in thousands) | Metric | September 26, 2020 | September 28, 2019 | | :----------------------------------- | :----------------- | :----------------- | | Balance at beginning of period | $1,767 | $415 | | Impact of adoption of ASU 2016-13 | $2,276 | — | | Change in estimated loan losses, net | $67 | — | | Charge-offs | $(200) | — | | Allowance for loan losses at end of period | $3,910 | $415 | - As of September 26, 2020, 35% of the outstanding principal balance of consumer loans receivable portfolio was concentrated in Texas and 19% was concentrated in Florida[40] 7. Commercial Loans Receivable Commercial loans receivable, net, decreased to $41.5 million as of September 26, 2020, with the allowance for loan losses increasing due to ASU 2016-13 and COVID-19 considerations Commercial Loans Receivable, net (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :--------------------------------------------------------------------------------- | :----------------- | :--------------- | | Direct loans receivable | $42,336 | $47,058 | | Participation loans receivable | $175 | $144 | | Allowance for loan losses | $(789) | $(393) | | Deferred financing fees, net | $(244) | $(244) | | Total Commercial Loans Receivable, net | $41,478 | $46,565 | Allowance for Loan Losses Activity (6 Months Ended, in thousands) | Metric | September 26, 2020 | September 28, 2019 | | :----------------------------------- | :----------------- | :----------------- | | Balance at beginning of period | $393 | $180 | | Impact of adoption of ASU 2016-13 | $435 | — | | Change in estimated loan losses, net | $(39) | $(17) | | Balance at end of period | $789 | $163 | - As of September 26, 2020, 10.5% of the Company's outstanding commercial loans receivable principal balance was concentrated in Arizona and 10.0% was concentrated in California[49] 8. Property, Plant and Equipment, net Property, plant and equipment, net, increased slightly to $77.8 million as of September 26, 2020, with depreciation expense for the six months ended September 26, 2020, at $2.8 million Property, Plant and Equipment, net (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :---------------------------------- | :----------------- | :--------------- | | Property, plant and equipment, at cost | $112,833 | $109,822 | | Accumulated depreciation | $(34,997) | $(32,632) | | Total Property, Plant and Equipment, net | $77,836 | $77,190 | - Depreciation expense for the six months ended September 26, 2020, was $2.8 million, up from $2.4 million in the prior year period[51] 9. Leases The Company leases various properties and equipment, with operating lease liabilities totaling $14.6 million and finance leases $261 thousand as of September 26, 2020 - The Company executed various lease renewals, including a five-year extension at one of its active manufacturing facilities, which increased the right-of-use asset and lease liability[53] Lease Liabilities (in thousands) | Category | September 26, 2020 | | :---------------------- | :----------------- | | Operating lease liabilities | $14,602 | | Finance lease liabilities | $261 | | Total Lease Liabilities | $14,863 | 10. Goodwill and Other Intangibles Goodwill remained stable at $75.1 million, while the net carrying amount of other intangibles slightly decreased to $14.7 million Goodwill and Other Intangibles, net (in thousands) | Category | September 26, 2020 Net Carrying Amount | March 28, 2020 Net Carrying Amount | | :--------------------------- | :------------------------------------- | :----------------------------------- | | Goodwill | $75,090 | $75,090 | | Trademarks and trade names | $8,900 | $8,900 | | State insurance licenses | $1,100 | $1,100 | | Customer relationships | $4,520 | $4,837 | | Other | $216 | $273 | | Total | $89,826 | $90,200 | - Amortization expense recognized on intangible assets was $374k for the six months ended September 26, 2020, compared to $231k in the prior year period[56] 11. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $173.2 million as of September 26, 2020, driven by increases in customer deposits, salaries, and company repurchase options Accrued Expenses and Other Current Liabilities (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :------------------------------------------- | :----------------- | :--------------- | | Customer deposits | $30,153 | $22,055 | | Salaries, wages and benefits | $29,375 | $25,885 | | Company repurchase options on certain loans sold | $23,854 | $7,444 | | Unearned insurance premiums | $21,907 | $20,614 | | Estimated warranties | $17,805 | $18,678 | | Accrued volume rebates | $11,040 | $9,801 | | Insurance loss reserves | $6,887 | $5,582 | | Accrued self-insurance | $5,827 | $5,112 | | Operating lease liabilities | $4,081 | $4,170 | | Accrued taxes | $3,247 | $1,908 | | Reserve for repurchase commitments | $2,463 | $2,679 | | Other | $16,545 | $16,002 | | Total | $173,184 | $139,930 | 12. Warranties The liability for estimated warranties slightly decreased to $17.8 million as of September 26, 2020, with charges to costs and expenses for warranties at $12.6 million for the six-month period Warranty Liability Activity (6 Months Ended, in thousands) | Metric | September 26, 2020 | September 28, 2019 | | :----------------------------------- | :----------------- | :----------------- | | Balance at beginning of period | $18,678 | $17,069 | | Charged to costs and expenses | $12,579 | $14,586 | | Payments and deductions | $(13,452) | $(14,284) | | Balance at end of period | $17,805 | $18,563 | 13. Debt and Finance Lease Obligations Total debt and finance lease obligations decreased to $14.1 million as of September 26, 2020, including $9.8 million in secured credit facilities at a 4.91% weighted average interest rate Debt and Finance Lease Obligations (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :---------------------------- | :----------------- | :--------------- | | Secured credit facilities | $9,793 | $10,474 | | Other secured financings | $3,925 | $4,113 | | Finance lease liabilities | $333 | $366 | | Total | $14,051 | $14,953 | - As of September 26, 2020, the outstanding balance of converted secured credit facilities was $9.8 million at a weighted average interest rate of 4.91%[62] 14. Reinsurance Standard Casualty, the Company's insurance subsidiary, engaged in reinsurance activities, with total premiums written of $19.9 million and earned of $18.1 million for the six months ended September 26, 2020 Reinsurance Premiums (6 Months Ended, in thousands) | Category | September 26, 2020 Written | September 26, 2020 Earned | September 28, 2019 Written | September 28, 2019 Earned | | :----------------------------- | :------------------------- | :------------------------ | :------------------------- | :------------------------ | | Direct premiums | $10,680 | $10,330 | $9,212 | $9,223 | | Assumed premiums—nonaffiliated | $15,246 | $13,833 | $14,273 | $13,027 | | Ceded premiums—nonaffiliated | $(6,055) | $(6,055) | $(6,016) | $(6,016) | | Total | $19,871 | $18,108 | $17,469 | $16,234 | - Standard Casualty's risk of loss is limited to $125,000 per claim on typical policies, with reinsurance covering amounts above this limit and catastrophic losses[66] 15. Commitments and Contingencies The Company has repurchase contingencies for distributor inventory financing with a maximum liability of $77.6 million, off-balance sheet construction loan commitments of $25.0 million, and is involved in an ongoing SEC investigation and wage-and-hour class action lawsuits - The maximum amount for which the Company was liable under repurchase agreements for distributor inventory financing approximated $77.6 million at September 26, 2020, with a reserve for repurchase commitments of $2.5 million[69] Off-Balance Sheet Construction Loan Commitments (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :------------------------------ | :----------------- | :--------------- | | Construction loan contract amount | $39,094 | $31,136 | | Cumulative advances | $(14,063) | $(13,400) | | Off-balance sheet commitment | $25,031 | $17,736 | - As of September 26, 2020, CountryPlace had outstanding interest rate lock commitments (IRLCs) with a notional amount of $23.2 million and $58.8 million in outstanding notional forward sales of mortgage-backed securities (MBS) and forward sales commitments[74][75] - The Company is cooperating with an investigation by the SEC regarding securities trading in personal and Company accounts directed by its former CEO, Joseph Stegmayer, and is exploring a settlement[78] 16. Stockholders' Equity Total stockholders' equity increased to $640.7 million as of September 26, 2020, driven by net income and stock-based compensation, partially offset by ASU 2016-13 adoption Stockholders' Equity Changes (March 28, 2020 to September 26, 2020, in thousands) | Metric | March 28, 2020 Balance | Cumulative effect of ASU 2016-13 | Net Income | Stock-based compensation | Other comprehensive income, net | September 26, 2020 Balance | | :------------------------------------ | :--------------------- | :------------------------------- | :--------- | :----------------------- | :------------------------------ | :------------------------- | | Common Stock | $92 | — | — | — | — | $92 | | Additional paid-in capital | $252,260 | — | — | $2,048 | — | $254,297 | | Retained earnings | $355,144 | $(733) | $31,723 | — | — | $386,134 | | Accumulated other comprehensive income | $90 | — | — | — | $75 | $165 | | Total Stockholders' Equity | $607,586 | $(733) | $31,723 | $2,048 | $75 | $640,688 | 17. Earnings Per Share Basic EPS for the three and six months ended September 26, 2020, was $1.64 and $3.46, respectively, with diluted EPS at $1.62 and $3.42 Earnings Per Share | Metric | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $15,049 | $20,885 | $31,723 | $42,167 | | Basic EPS | $1.64 | $2.29 | $3.46 | $4.63 | | Diluted EPS | $1.62 | $2.25 | $3.42 | $4.56 | 18. Fair Value Measurements The Company's financial instruments are measured at fair value, with Mortgage Servicing Rights (MSRs) recorded at fair value, and the serviced portfolio with MSRs increasing to $589.0 million Assets Measured at Fair Value on a Recurring Basis (September 26, 2020, in thousands) | Category | Total | Level 1 | Level 2 | Level 3 | | :------------------------------------ | :------ | :-------- | :-------- | :-------- | | Residential mortgage-backed securities | $3,641 | — | $3,641 | — | | State and political subdivision debt securities | $4,278 | — | $4,278 | — | | Corporate debt securities | $4,757 | — | $4,757 | — | | Marketable equity securities | $12,791 | $12,791 | — | — | | Interest rate lock commitment derivatives | $21 | — | — | $21 | | Forward loan sale commitment derivatives | $123 | — | — | $123 | | Mortgage servicing rights | $1,058 | — | — | $1,058 | Mortgage Servicing Rights (MSRs) | Metric | September 26, 2020 | March 28, 2020 | | :------------------------------------ | :----------------- | :--------------- | | Number of loans serviced with MSRs | 4,671 | 4,688 | | Serviced portfolio with MSRs (in thousands) | $588,955 | $585,777 | | Mortgage servicing rights (in thousands) | $1,058 | $1,225 | 19. Related Party Transactions The Company engages in sales and lending activities with related parties, with sales totaling $23.0 million and commercial loans outstanding of $7.3 million for the six months ended September 26, 2020 Sales to Related Parties (in thousands) | Period | Sales to Related Parties | | :-------------------------- | :----------------------- | | 3 Months Ended Sep 26, 2020 | $10,300 | | 6 Months Ended Sep 26, 2020 | $23,000 | Receivables from Related Parties (in thousands) | Category | September 26, 2020 | March 28, 2020 | | :----------------------- | :----------------- | :--------------- | | Accounts receivable | $2,900 | $1,700 | | Commercial loans outstanding | $7,300 | $8,200 | 20. Acquisition of Destiny Homes The Company acquired Destiny Homes on August 2, 2019, expanding its manufacturing and distribution reach in the Southeastern United States, with purchase price allocation finalized in fiscal year 2021 - The Company purchased certain manufactured housing assets and assumed certain liabilities of Destiny Homes on August 2, 2019, expanding its reach in the Southeastern United States[95] 21. Business Segment Information Factory-built housing remains the dominant segment in terms of net revenue and income before income taxes, though both segments saw declines in income before income taxes for the six months ended September 26, 2020 Net Revenue by Segment (in thousands) | Segment | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | $240,967 | $252,690 | $479,057 | $501,458 | | Financial services | $17,009 | $15,985 | $33,720 | $31,259 | | Total Net Revenue | $257,976 | $268,675 | $512,777 | $532,717 | Income Before Income Taxes by Segment (in thousands) | Segment | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | $17,452 | $22,463 | $35,902 | $46,776 | | Financial services | $2,144 | $4,792 | $5,374 | $7,841 | | Total Income Before Income Taxes | $19,596 | $27,255 | $41,276 | $54,617 | 22. Subsequent Events On October 27, 2020, the Board approved a new $100 million stock repurchase program, replacing the previous $10 million authorization - On October 27, 2020, the Company's Board of Directors approved a $100 million stock repurchase program, replacing a previously standing $10 million authorization[99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Cavco Industries, Inc., its business segments (factory-built housing and financial services), and an analysis of its financial performance for the three and six months ended September 26, 2020. It discusses the impact of COVID-19 on operations, industry outlook, and key financial metrics including revenue, gross profit, expenses, and liquidity. The Company highlights its efforts to address operational challenges and capitalize on market opportunities Forward-Looking Statements This report contains forward-looking statements that involve risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied - This report contains forward-looking statements that involve risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied[103] Company Overview Cavco Industries designs and produces factory-built homes and operates a financial services segment, including consumer finance and property and casualty insurance - Cavco Industries designs and produces factory-built homes (manufactured, modular, park model RVs, vacation cabins, and systems-built commercial structures) under various brand names, distributed through independent and Company-owned retailers[105] - The Company operates 20 homebuilding production lines and 40 Company-owned U.S. retail locations[107] - Cavco's financial services segment includes CountryPlace Acceptance Corp. (consumer finance) and Standard Casualty Co. (property and casualty insurance for manufactured homes)[105] Company and Industry Outlook Despite a slight industry decline, manufactured homes offer affordable housing solutions, with Cavco observing growing demand and maintaining a strong financial position to capitalize on market opportunities - Industry home shipments decreased 1.4% for the first 8 months of calendar year 2020, but manufactured homes offer solutions to the affordable housing crisis due to lower average price per square foot[109] - The Company observes growing demand from young adults and those aged 55 and older, as well as increased interest from developers and community owners for new manufactured homes for rental, alternative dwelling units, and seasonal living[110] - Cavco maintains a conservative cost structure, a strong balance sheet, and invests in commercial loan programs and community-based lending initiatives to expand product distribution and sales growth opportunities[112][113][115] COVID-19 Impact and Strategy The Company's essential businesses faced operational inefficiencies due to absenteeism and supply shortages, leading to lower plant capacity utilization despite a significant increase in home sales order backlog - The Company's homebuilding and retail sales facilities continued to operate as essential businesses, but faced operational inefficiencies due to higher factory employee absenteeism, limited new-hire availability, and certain building material supply shortages[116] - Plant capacity utilization was approximately 65% during the second fiscal quarter of 2021, ending the quarter at approximately 70%, which is lower than pre-pandemic levels of more than 80%[116] - Home sales order rates increased nearly 65% compared to the prior year quarter, leading to a 134% increase in order backlog to $321 million at September 26, 2020[117] - The financial services segment maintained operations through work-from-home solutions, assisting customers with loan forbearance and policy cancellations, and increasing loan loss reserves[118] - The Company is focused on improving production capabilities, adjusting product offerings, and enhancing recruitment and retention of production employees to meet increased demand, facing labor-related difficulties in the COVID-19 environment[122] Results of Operations This section analyzes the company's financial performance, detailing changes in net revenue, gross profit, expenses, and other income for the periods presented Net Revenue Net revenue decreased by 4.0% for the three months and 3.7% for the six months ended September 26, 2020, primarily due to lower home sales volume in factory-built housing Net Revenue by Segment (in thousands, except homes sold) | Metric | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $240,967 | $252,690 | $(11,723) | (4.6)% | | Financial services | $17,009 | $15,985 | $1,024 | 6.4% | | Total Net Revenue | $257,976 | $268,675 | $(10,699) | (4.0)% | | Total homes sold | 3,427 | 3,781 | (354) | (9.4)% | | Net factory-built housing revenue per home sold | $70,314 | $66,832 | $3,482 | 5.2% | Net Revenue by Segment (in thousands, except homes sold) | Metric | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $479,057 | $501,458 | $(22,401) | (4.5)% | | Financial services | $33,720 | $31,259 | $2,461 | 7.9% | | Total Net Revenue | $512,777 | $532,717 | $(19,940) | (3.7)% | | Total homes sold | 6,776 | 7,588 | (812) | (10.7)% | | Net factory-built housing revenue per home sold | $70,699 | $66,086 | $4,613 | 7.0% | - The decrease in factory-built housing revenue was primarily due to 9% and 11% lower home sales volume during the three and six months ended September 26, 2020, respectively, partially offset by higher home selling prices[123] Gross Profit Consolidated gross profit decreased by 8.4% for the three months and 8.3% for the six months ended September 26, 2020, impacted by lower sales volume and production inefficiencies in factory-built housing and higher claims in financial services Gross Profit by Segment (in thousands) | Metric | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $46,155 | $48,639 | $(2,484) | (5.1)% | | Financial services | $7,386 | $9,828 | $(2,442) | (24.8)% | | Total Gross Profit | $53,541 | $58,467 | $(4,926) | (8.4)% | | Consolidated Gross profit as % of Net revenue | 20.8% | 21.8% | N/A | (1.0)% | | Factory-built housing Gross profit as % of Net revenue | 19.2% | 19.2% | N/A | 0.0% | Gross Profit by Segment (in thousands) | Metric | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $93,147 | $100,774 | $(7,627) | (7.6)% | | Financial services | $15,717 | $17,991 | $(2,274) | (12.6)% | | Total Gross Profit | $108,864 | $118,765 | $(9,901) | (8.3)% | | Consolidated Gross profit as % of Net revenue | 21.2% | 22.3% | N/A | (1.1)% | | Factory-built housing Gross profit as % of Net revenue | 19.4% | 20.1% | N/A | (0.7)% | | Financial services Gross profit as % of Net revenue | 46.6% | 57.6% | N/A | (11.0)% | - Financial services segment's Gross profit as a percentage of Net revenue decreased due to higher weather-related claims volume at the insurance subsidiary and lower interest income earned on acquired consumer loan portfolios[130] Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses decreased by 1.7% for the three months and 0.8% for the six months ended September 26, 2020, with varied segment-specific drivers Selling, General and Administrative Expenses (in thousands) | Segment | 3 Months Ended Sep 26, 2020 | 3 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $30,725 | $31,580 | $(855) | (2.7)% | | Financial services | $4,728 | $4,503 | $225 | 5.0% | | Total SG&A | $35,453 | $36,083 | $(630) | (1.7)% | | SG&A as % of Net revenue | 13.7% | 13.4% | N/A | 0.3% | | Factory-built housing SG&A as % of Net revenue | 12.7% | 12.5% | N/A | 0.2% | | Financial services SG&A as % of Net revenue | 27.8% | 28.2% | N/A | (0.4)% | Selling, General and Administrative Expenses (in thousands) | Segment | 6 Months Ended Sep 26, 2020 | 6 Months Ended Sep 28, 2019 | Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :--------- | | Factory-built housing | $61,462 | $62,331 | $(869) | (1.4)% | | Financial services | $9,314 | $9,016 | $298 | 3.3% | | Total SG&A | $70,776 | $71,347 | $(571) | (0.8)% | | SG&A as % of Net revenue | 13.8% | 13.4% | N/A | 0.4% | | Factory-built housing SG&A as % of Net revenue | 12.8% | 12.4% | N/A | 0.4% | | Financial services SG&A as % of Net revenue | 27.6% | 28.9% | N/A | (1.3)% | - Factory-built housing SG&A decreased primarily from a reduction in legal expenses, partially offset by increased corporate-related expenses[134] - Financial services SG&A increased due to increases in salaries and employee-related expenses[135] Interest Expense Interest expense decreased to $0.2 million for the three months and $0.4 million for the six months ended September 26, 2020, primarily due to a reduction in securitized bond interest expense Interest Expense (in thousands) | Period | Interest Expense | | :-------------------------- | :--------------- | | 3 Months Ended Sep 26, 2020 | $194 | | 6 Months Ended Sep 26, 2020 | $390 | - The decrease in interest expense is primarily the result of a reduction in securitized bond interest expense, as the Company exercised its right to repurchase the 2007-1 securitized loan portfolio in August 2019[136] Other Income, net Other income, net, declined to $1.7 million for the three months and $3.6 million for the six months ended September 26, 2020, mainly due to a prior-year land sale gain and reduced interest income, partially offset by increased unrealized gains on marketable equity securities Other Income, net (in thousands) | Period | Other Income, net | | :-------------------------- | :---------------- | | 3 Months Ended Sep 26, 2020 | $1,702 | | 6 Months Ended Sep 26, 2020 | $3,578 | - Other income, net, declined primarily due to a $3.4 million net gain on the sale of idle land recorded in the prior year period, as well as a reduction in interest earned on cash and commercial loan receivables due to the lower interest rate environment[140] - These declines were partially offset by increases in unrealized gains on corporate marketable equity securities[140] Income tax expense Income tax expense was $4.5 million for the three months and $9.6 million for the six months ended September 26, 2020, with effective tax rates of 23.2% and 23.1%, respectively Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in thousands) | Effective Income Tax Rate | | :-------------------------- | :-------------------------------- | :------------------------ | | 3 Months Ended Sep 26, 2020 | $4,547 | 23.2% | | 6 Months Ended Sep 26, 2020 | $9,553 | 23.1% | - The higher effective tax rate for the six-month period was primarily due to lower tax benefits from the exercise of stock options, which provided a benefit of $0.7 million compared to $0.9 million in the same period last year[141] Liquidity and Capital Resources The Company maintains a strong liquidity position with sufficient cash and cash equivalents, experiencing a significant increase in net cash provided by operating activities and decreased cash used in investing and financing activities - The Company believes that cash and cash equivalents at September 26, 2020, together with cash flow from operations, will be sufficient to fund its operations and provide for growth for the next 12 months and into the foreseeable future[142] Cash Flows Summary (6 Months Ended, in thousands) | Metric | September 26, 2020 | September 28, 2019 | $ Change | | :-------------------------------------------------------------------------------- | :------------------- | :------------------- | :------- | | Cash, cash equivalents and restricted cash at beginning of fiscal year | $255,607 | $199,869 | $55,738 | | Net cash provided by operating activities | $74,609 | $43,593 | $31,016 | | Net cash used in investing activities | $(82) | $(18,308) | $18,226 | | Net cash used in financing activities | $(865) | $(19,345) | $18,480 | | Cash, cash equivalents and restricted cash at end of period | $329,269 | $205,809 | $123,460 | - Net cash provided by operating activities increased primarily due to more customer deposits, higher collections on accounts receivables and commercial loans receivables, and favorable timing of payments on liabilities[146] - Net cash used in investing activities decreased significantly due to lower acquisition funding compared to the prior year (Destiny Homes acquisition)[149] - Net cash used in financing activities decreased due to the repurchase of the 2007-1 securitized loan portfolio in August 2019[150] Contractual Commitments and Contingencies There were no material changes to the contractual obligations as set forth in the Company's Annual Report on Form 10-K - There were no material changes to the contractual obligations as set forth in the Company's Annual Report on Form 10-K[152] Critical Accounting Policies The Company adopted ASU 2016-13 on March 29, 2020, changing the impairment model for most financial assets to an expected loss model, with no other significant changes to critical accounting policies - On March 29, 2020, the Company adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326), which changed the impairment model for most financial assets to an expected loss model[153] - There have been no other significant changes to the Company's critical accounting policies during the six months ended September 26, 2020, as compared to those disclosed in the Form 10-K[153] Recent Accounting Pronouncements Refer to Note 1 to 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[154] Other Matters Refer to Note 19 to the Consolidated Financial Statements for a discussion of the Company's related party transactions - Refer to Note 19 to the Consolidated Financial Statements for a discussion of the Company's related party transactions[156] Off Balance Sheet Arrangements Refer to Note 15 to the Consolidated Financial Statements for a discussion of the Company's off-balance sheet commitments - Refer to Note 15 to the Consolidated Financial Statements for a discussion of the Company's off-balance sheet commitments[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the quantitative and qualitative disclosures about market risk previously reported in the Company's Annual Report on Form 10-K - There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K[158] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of September 26, 2020, with no material changes in internal control over financial reporting during the fiscal quarter (a) Disclosure Controls and Procedures The Company's disclosure controls and procedures were evaluated and concluded to be effective as of September 26, 2020 - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of September 26, 2020[159] (b) Changes in Internal Control over Financial Reporting 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 September 26, 2020 - 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 September 26, 2020[160] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is cooperating with an ongoing SEC investigation related to its former CEO's securities trading, with the CFO recently receiving a Wells Notice, and is also facing two wage-and-hour class action lawsuits - The Company is cooperating with an ongoing SEC investigation since 2018 regarding securities trading by its former CEO, Joseph Stegmayer, and its CFO, Dan Urness, recently received a Wells Notice[163] - For the six months ended September 26, 2020, the Company incurred $1.1 million in SEC inquiry expenses but received a $1.3 million insurance reimbursement, resulting in a net benefit of $0.2 million[164] - Two class action lawsuits (Joseph D. Robles v. Cavco Industries, Inc. and Malik Grif in v. Fleetwood Homes, Inc.) are pending in California for alleged wage-and-hour violations, with mediation scheduled for January 27, 2021[165] - Management does not believe that loss contingencies arising from other pending matters are likely to have a material adverse effect on the Company's consolidated financial position, liquidity, or results of operations[166] Item 1A. Risk Factors Readers should carefully consider the risk factors discussed in Part I, Item 1A of the Company's 2020 Annual Report on Form 10-K, as these could materially affect the Company's business, financial condition, or future results - Readers should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in the Form 10-K, which could materially affect the Company's business, financial condition, or future results[168] Item 5. Other Information Paul Bigbee was appointed as the Company's Principal Financial Officer and Principal Accounting Officer on October 26, 2020, following Dan Urness's leave of absence - Paul Bigbee was appointed the Company's Principal Financial Officer and Principal Accounting Officer on October 26, 2020[169] - Dan Urness, the Company's Chief Financial Officer and Principal Accounting Officer, has taken a leave of absence and is no longer designated for those roles as of October 26, 2020[171] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, XBRL taxonomy documents, and the cover page interactive data file - The exhibits include certifications (31.1, 31.2, 32) and various Inline XBRL Taxonomy Extension documents (101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[174] SIGNATURES The report was duly signed on behalf of Cavco Industries, Inc. by William C. Boor and Paul Bigbee (Principal Financial and Accounting Officer) on October 30, 2020 - The report was duly signed on behalf of Cavco Industries, Inc. by William C. Boor and Paul Bigbee (Principal Financial and Accounting Officer) on October 30, 2020[177][178]