Cavco(CVCO) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis for the periods ended December 26, 2020 Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of comprehensive income, and cash flows, along with detailed notes explaining accounting policies, credit losses, investments, loans, debt, leases, and various commitments and contingencies for the periods ended December 26, 2020 Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of December 26, 2020, and March 28, 2020 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 26, 2020 (Unaudited) | Mar 28, 2020 | | :----- | :----------------------- | :----------- | | Total Assets | $906,566 | $810,431 | | Cash and Cash Equivalents | $327,487 | $241,826 | | Total Current Liabilities | $213,342 | $172,102 | | Total Stockholders' Equity | $661,741 | $607,586 | Consolidated Statements of Comprehensive Income This section outlines the company's financial performance, presenting net revenue, net income, and earnings per share for the three and nine months ended December 26, 2020 Consolidated Statements of Comprehensive Income Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Revenue | $288,772 | $273,722 | $801,549 | $806,439 | | Net Income | $19,701 | $20,898 | $51,424 | $63,065 | | Basic EPS | $2.14 | $2.29 | $5.60 | $6.91 | | Diluted EPS | $2.12 | $2.25 | $5.54 | $6.81 | Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended December 26, 2020 Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | | :----- | :-------------------------- | :-------------------------- | | Net Cash Provided by Operating Activities | $91,566 | $68,320 | | Net Cash Used in Investing Activities | $(5,098) | $(18,873) | | Net Cash Used in Financing Activities | $(1,451) | $(19,058) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $340,624 | $230,258 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, segment information, and various financial instruments Note 1. Basis of Presentation This note describes the company's operating segments and the adoption of new accounting standards for credit losses - The company operates in two principal segments: factory-built housing (wholesale and retail systems-built housing) and financial services (manufactured housing consumer finance and insurance)[19] - Adopted ASU 2016-13 (Credit Losses) on March 29, 2020, resulting in a $733k net-of-tax adjustment to retained earnings and increasing the allowance for loan losses by $963k[21] Note 2. Revenue from Contracts with Customers This note disaggregates net revenue by the company's primary operating segments for the reported periods Net Revenue by Segment (in thousands) | Segment | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | $270,822 | $257,106 | $749,879 | $758,564 | | Financial services | $17,950 | $16,616 | $51,670 | $47,875 | | Total Net Revenue | $288,772 | $273,722 | $801,549 | $806,439 | Note 3. Restricted Cash This note details the total amount and primary sources of restricted cash as of December 26, 2020 - Total restricted cash was $13,137k as of December 26, 2020, primarily related to CountryPlace customer payments[26] Note 4. Investments This note outlines the company's total investments, including equity-method investments and net gains on marketable equity securities - Total investments were $52,451k as of December 26, 2020, including $15.0 million in equity-method investments in community-based initiatives[28][29] Net Gains on Marketable Equity Securities (in thousands) | Period | Net Gains on Securities Held | Net Gains on Securities Sold | Total Net Gains | | :----- | :--------------------------- | :--------------------------- | :-------------- | | 3 Months Ended Dec 26, 2020 | $1,857 | $151 | $2,008 | | 3 Months Ended Dec 28, 2019 | $764 | $13 | $777 | | 9 Months Ended Dec 26, 2020 | $5,132 | $157 | $5,289 | | 9 Months Ended Dec 28, 2019 | $2,066 | $11 | $2,077 | Note 5. Inventories This note provides the total inventory value and changes in raw materials as of December 26, 2020 - Inventories totaled $110,624k as of December 26, 2020, with raw materials increasing to $45,821k from $35,691k at March 28, 2020[35] Note 6. Consumer Loans Receivable This note details consumer loans receivable, the allowance for loan losses, and geographic concentration of the portfolio - Consumer loans receivable totaled $81,592k as of December 26, 2020[37] - The allowance for loan losses increased to $3,419k, with 37% of the portfolio concentrated in Texas and 20% in Florida[38][40] Note 7. Commercial Loans Receivable This note outlines commercial loans receivable, the allowance for loan losses, and key portfolio concentrations - Commercial loans receivable totaled $39,746k as of December 26, 2020[46] - The allowance for loan losses increased to $765k, with 10% of the portfolio concentrated in Arizona[47][50] Note 8. Property, Plant and Equipment, net This note reports the net value of property, plant, and equipment and its change as of December 26, 2020 - Property, plant and equipment, net, increased to $78,493k as of December 26, 2020, from $77,190k at March 28, 2020[52] Note 9. Leases This note discusses the impact of lease renewals on right-of-use assets and lease liabilities - Lease renewals, including a five-year extension at a manufacturing facility, led to an increase in right-of-use assets and lease liabilities[54] Note 10. Goodwill and Other Intangibles This note presents the carrying amounts of goodwill and other intangible assets as of December 26, 2020 - Goodwill remained at $75,090k, and total goodwill and other intangibles, net, were $89,640k as of December 26, 2020[57] Note 11. Accrued Expenses and Other Current Liabilities This note explains the increase in accrued expenses and other current liabilities, driven by customer deposits and loan repurchase options - Accrued expenses and other current liabilities increased to $186,026k as of December 26, 2020, primarily due to higher customer deposits and company repurchase options on loans sold[59] Note 12. Warranties This note details the estimated warranty liability and the amounts charged to costs and expenses for the period - The liability for estimated warranties was $17,996k as of December 26, 2020, with $20,303k charged to costs and expenses for the nine months[60] Note 13. Debt and Finance Lease Obligations This note outlines the decrease in total debt and finance lease obligations, including outstanding balances on secured credit facilities - Total debt and finance lease obligations decreased to $12,987k as of December 26, 2020[61] - Secured credit facilities for home-only loans had an outstanding balance of $8.8 million[63] Note 14. Reinsurance This note provides information on direct premiums written by Standard Casualty and the company's risk retention limits after reinsurance - Standard Casualty's direct premiums written were $16,100k for the nine months ended December 26, 2020, with risk of loss limited to $150k per claim after reinsurance[66] Note 15. Commitments and Contingencies This note details various off-balance sheet arrangements, including repurchase agreements, construction mortgages, and an ongoing SEC investigation - The company is contingently liable for $70.8 million under repurchase agreements for distributor inventory financing, with a reserve of $2.3 million[69] - Off-balance sheet contingent commitment for construction-period mortgages totaled $27,840k[72] - A reserve of $1.3 million is maintained for contingent repurchase and indemnification obligations on sold mortgages[72] - Outstanding interest rate lock commitments (IRLCs) had a notional amount of $24.5 million[74] - Forward sales of MBS and whole loan sale commitments totaled $68.9 million as of December 26, 2020[76] - The company is cooperating with an SEC investigation regarding securities trading by the former CEO, and the SEC staff issued a Wells Notice to the company in November 2020[78] Note 16. Stockholders' Equity This note reports the increase in total stockholders' equity as of December 26, 2020 - Total stockholders' equity increased to $661,741k as of December 26, 2020, from $607,586k at March 28, 2020[81] Note 17. Earnings Per Share This note presents the diluted earnings per share for the three and nine months ended December 26, 2020 - Diluted EPS was $2.12 for the three months and $5.54 for the nine months ended December 26, 2020[84] Note 18. Fair Value Measurements This note compares the fair value and book value of consumer loans receivable and details mortgage servicing rights - Consumer loans receivable had an estimated fair value of $96,313k compared to a book value of $81,592k as of December 26, 2020[85] - Mortgage Servicing Rights (MSRs) were $831k as of December 26, 2020, servicing 4,663 loans with a portfolio of $590,433k[93] Note 19. Related Party Transactions This note discloses sales to and commercial loans outstanding from related parties for the reported period - Sales to related parties totaled $34.2 million for the nine months ended December 26, 2020, with $7.5 million in commercial loans outstanding from related parties[94] Note 20. Acquisition of Destiny Homes This note confirms the finalization of the Destiny Homes acquisition, expanding manufacturing and distribution capabilities - The acquisition of Destiny Homes in August 2019 was finalized, expanding the company's manufacturing and distribution reach[95] Note 21. Business Segment Information This note provides a breakdown of income before income taxes by the company's operating segments Income Before Income Taxes by Segment (in thousands) | Segment | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Factory-built housing | $18,752 | $19,247 | $54,654 | $66,023 | | Financial services | $7,138 | $5,485 | $12,512 | $13,326 | 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 condition and results of operations, highlighting the impact of the COVID-19 pandemic on production and sales, segment performance, and liquidity. It details revenue, gross profit, and expense trends, along with the company's outlook and strategies Company Overview This section introduces Cavco Industries as a leading producer of factory-built housing and financial services, detailing its operational footprint - Cavco Industries is a leading producer of factory-built housing (manufactured homes, modular homes, park model RVs) and operates financial services (CountryPlace Acceptance Corp.) and insurance (Standard Casualty Co.) subsidiaries[103] - The company operates 20 homebuilding production lines across the U.S. and sells homes through independent distributors and 40 company-owned retail locations[103][105] - The Lexington, Mississippi manufacturing facility ceased production in June 2020 and is on the market for sale[106] Company and Industry Outlook This section discusses industry trends, strong demand drivers, and the company's strategic focus on niche markets and cost structure - Industry home shipments decreased 1.3% for the first 11 months of calendar year 2020, but demand remains strong, driven by affordable housing needs and growing demographics (young adults and 55+)[107][108] - The company focuses on niche market opportunities, green building initiatives, and maintaining a conservative cost structure to build value and financial strength[109][110] - Commercial loan programs are available to wholesale distribution chains to increase financing availability and product exposure, with COVID-19 considerations included in loan loss risk assessment[111] COVID-19 Impact and Strategy This section details the operational and financial impacts of COVID-19, including production inefficiencies, strong sales orders, and adjustments to financial services operations - Operational efficiencies declined due to higher employee absenteeism, hiring challenges, and material shortages, resulting in a plant capacity utilization rate of approximately 75% in Q3 FY2021, below pre-pandemic levels of over 80%[114] - Sales order activity was exceptionally strong, with home sales order rates nearly 65% higher than the comparable prior year quarter, leading to a 310% increase in order backlogs to $472 million at December 26, 2020[115] - Financial services maintained operations through work-from-home solutions and adjusted loan loss reserves due to economic conditions, while managing cash flow risks from loan forbearance[116][117] Results of Operations This section analyzes the company's financial performance, including net revenue, gross profit, and various expense categories for the reported periods Net Revenue This section analyzes net revenue by segment, highlighting changes in factory-built housing sales volume and financial services gains Net Revenue by Segment (in thousands, except revenue per home sold) | Metric | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | Change (%) | | :----- | :-------------------------- | :-------------------------- | :--------- | | Factory-built housing | $270,822 | $257,106 | 5.3% | | Financial services | $17,950 | $16,616 | 8.0% | | Total homes sold | 3,603 | 3,865 | (6.8)% | | Net factory-built housing revenue per home sold | $75,166 | $66,522 | 13.0% | | Metric | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | Change (%) | | :----- | :-------------------------- | :-------------------------- | :--------- | | Factory-built housing | $749,879 | $758,564 | (1.1)% | | Financial services | $51,670 | $47,875 | 7.9% | | Total homes sold | 10,379 | 11,453 | (9.4)% | | Net factory-built housing revenue per home sold | $72,250 | $66,233 | 9.1% | - Factory-built housing revenue increased for the three months due to higher home selling prices from rising input costs, partially offset by lower sales volume due to COVID-19 related production inefficiencies[121] - Financial services revenue increased primarily due to unrealized gains on marketable equity securities ($1.0M for 3 months, $2.7M for 9 months) and higher volume in home loan sales and insurance policies[127] Gross Profit This section examines gross profit and margins by segment, attributing changes to material costs, sales volume, and insurance claims Gross Profit by Segment (in thousands, and as % of Net Revenue) | Metric | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | Change (%) | % of Net Revenue (2020) | % of Net Revenue (2019) | Change (pp) | | :----- | :-------------------------- | :-------------------------- | :--------- | :---------------------- | :---------------------- | :---------- | | Factory-built housing | $47,031 | $48,793 | (3.6)% | 17.4% | 19.0% | (1.6)% | | Financial services | $12,207 | $11,062 | 10.4% | 68.0% | 66.6% | 1.4% | | Consolidated | $59,238 | $59,855 | (1.0)% | 20.5% | 21.9% | (1.4)% | | Metric | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | Change (%) | % of Net Revenue (2020) | % of Net Revenue (2019) | Change (pp) | | :----- | :-------------------------- | :-------------------------- | :--------- | :---------------------- | :---------------------- | :---------- | | Factory-built housing | $140,178 | $149,567 | (6.3)% | 18.7% | 19.7% | (1.0)% | | Financial services | $27,924 | $29,053 | (3.9)% | 54.0% | 60.7% | (6.7)% | | Consolidated | $168,102 | $178,620 | (5.9)% | 21.0% | 22.1% | (1.1)% | - Factory-built housing gross profit margin decreased due to higher material costs and lower sales volume resulting from COVID-19 production inefficiencies[128] - Financial services gross profit margin increased for the three months due to lower weather-related claims and higher unrealized gains on marketable equity securities, but decreased for the nine months due to higher weather-related claims and lower interest income[131] Selling, General and Administrative Expenses This section details changes in SG&A expenses for both segments, noting reductions in legal costs and increases in compensation Selling, General and Administrative Expenses (in thousands, and as % of Net Revenue) | Metric | 3 Months Ended Dec 26, 2020 | 3 Months Ended Dec 28, 2019 | Change (%) | % of Net Revenue (2020) | % of Net Revenue (2019) | Change (pp) | | :----- | :-------------------------- | :-------------------------- | :--------- | :---------------------- | :---------------------- | :---------- | | Factory-built housing | $30,575 | $32,017 | (4.5)% | | | | | Financial services | $4,839 | $4,827 | 0.2% | | | | | Consolidated | $35,414 | $36,844 | (3.9)% | 12.3% | 13.5% | (1.2)% | | Metric | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | Change (%) | % of Net Revenue (2020) | % of Net Revenue (2019) | Change (pp) | | :----- | :-------------------------- | :-------------------------- | :--------- | :---------------------- | :---------------------- | :---------- | | Factory-built housing | $92,037 | $94,348 | (2.4)% | | | | | Financial services | $14,153 | $13,843 | 2.2% | | | | | Consolidated | $106,190 | $108,191 | (1.8)% | 13.2% | 13.4% | (0.2)% | - Factory-built housing SG&A decreased due to reduced legal expenses and the completion of D&O insurance premium amortization[132] - Net SEC inquiry related expense was $0.3M for the three months and $0.1M for the nine months ended Dec 26, 2020, significantly lower than prior year[133] - Financial services SG&A increased primarily from higher salary and incentive-based compensation expense[134] Interest Expense This section explains the decrease in interest expense, primarily due to the repurchase of a securitized loan portfolio Interest Expense (in thousands) | Period | Dec 26, 2020 | Dec 28, 2019 | Change | | :----- | :----------- | :----------- | :----- | | 3 Months Ended | $177 | $490 | $(313) | | 9 Months Ended | $567 | $1,278 | $(711) | - The decrease in interest expense was primarily due to the repurchase of the 2007-1 securitized loan portfolio in August 2019, partially offset by increases from secured credit facilities[136] Other Income, net This section analyzes the decline in other income, net, attributing it to prior year land sales and reduced interest income Other Income, net (in thousands) | Period | Dec 26, 2020 | Dec 28, 2019 | Change | | :----- | :----------- | :----------- | :----- | | 3 Months Ended | $2,243 | $2,211 | $32 | | 9 Months Ended | $5,821 | $10,198 | $(4,377) | - The decline for the nine months was primarily due to a $3.4 million net gain on the sale of idle land in the prior year and reduced interest income, partially offset by increased unrealized gains on corporate marketable equity securities[138] Income tax expense This section details income tax expense and effective tax rates, noting prior year benefits from stock option exercises Income Tax Expense and Effective Rate | Period | Income Tax Expense (in thousands) | Effective Income Tax Rate | | :----- | :-------------------------------- | :------------------------ | | 3 Months Ended Dec 26, 2020 | $6,189 | 23.9% | | 3 Months Ended Dec 28, 2019 | $3,834 | 15.5% | | 9 Months Ended Dec 26, 2020 | $15,742 | 23.4% | | 9 Months Ended Dec 28, 2019 | $16,284 | 20.5% | - Prior year's lower effective tax rates were primarily due to tax benefits from stock option exercises and a catch-up of tax credits[139] Liquidity and Capital Resources This section assesses the company's ability to fund operations and growth, detailing cash flow changes from operating, investing, and financing activities - The company believes its cash and cash equivalents, along with cash flow from operations, will be sufficient to fund operations and growth for the next 12 months and into the foreseeable future[140] Cash Flow Summary (in thousands) | Metric | 9 Months Ended Dec 26, 2020 | 9 Months Ended Dec 28, 2019 | Change | | :----- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | $91,566 | $68,320 | $23,246 | | Net cash used in investing activities | $(5,098) | $(18,873) | $13,775 | | Net cash used in financing activities | $(1,451) | $(19,058) | $17,607 | | Cash, cash equivalents and restricted cash at end of period | $340,624 | $230,258 | $110,366 | - Net cash from operating activities increased due to more customer deposits, higher commercial loan collections, and timing of payments on liabilities[144] - Net cash used in investing and financing activities decreased, largely due to the repurchase of the 2007-1 securitized loan portfolio[147] Critical Accounting Policies This section discusses the adoption of ASU 2016-13 for credit losses and confirms no other significant changes to critical accounting policies - Adopted ASU 2016-13 (Credit Losses) on March 29, 2020, which changes the impairment model for most financial assets[151] - No other significant changes to critical accounting policies during the nine months ended December 26, 2020[151] Recent Accounting Pronouncements This section refers to Note 1 for details on 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[152] Other Matters This section refers to Note 19 for a discussion of related party transactions - Refer to Note 19 to the Consolidated Financial Statements for a discussion of related party transactions[153] Off Balance Sheet Arrangements This section refers to Note 15 for a discussion of the company's off-balance sheet commitments - Refer to Note 15 to the Consolidated Financial Statements for a discussion of off-balance sheet commitments[154] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that 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[154] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of December 26, 2020, and reports no material changes in internal control over financial reporting during the quarter - The company's disclosure controls and procedures were evaluated and concluded to be effective as of December 26, 2020[155] - No material changes in the company's internal controls over financial reporting occurred during the fiscal quarter ended December 26, 2020[156] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and other required disclosures not included in the financial information Item 1. Legal Proceedings This section provides updates on significant legal matters, including an ongoing SEC investigation into securities trading by the former CEO, which has resulted in a Wells Notice to the company, and a consolidated class-action lawsuit concerning alleged wage-and-hour violations - The company is cooperating with an SEC investigation regarding securities trading by its former CEO, Joseph Stegmayer[160] - The SEC staff issued a Wells Notice to the company in November 2020, indicating an intent to recommend an enforcement action[161] - A consolidated class-action lawsuit (Griffin, adding Robles as plaintiff) alleging wage-and-hour violations is ongoing, with a joint mediation on January 27, 2021, failing to reach a settlement[162] - Management does not believe that loss contingencies from pending matters are likely to have a material adverse effect on the company's consolidated financial position, liquidity, or results of operations, considering existing reserves[163] Item 1A. Risk Factors This section directs readers to the comprehensive discussion of risk factors in the company's Form 10-K and acknowledges that additional, currently unknown or immaterial risks could also materially affect the business - Readers should carefully consider the risk factors discussed in Part I, Item 1A of the Form 10-K[164] - Additional risks and uncertainties not currently known or deemed immaterial may also materially adversely affect the business[164] Item 5. Other Information This section confirms that there is no other information required to be disclosed under this item that was not previously disclosed - No other information required to be disclosed under this item was not previously disclosed[166] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including various certifications and XBRL taxonomy documents - Exhibits include certifications of the Principal Executive Officer (31.1), Principal Financial and Accounting Officer (31.2), and Certification Pursuant to 18 U.S.C. 1350 (32)[167] - The report also includes Inline XBRL Taxonomy Extension Schema, Calculation, Definition, and Label Linkbase Documents, and the Cover Page Interactive Data File[167] SIGNATURES This section formally concludes the report with the required signatures from the company's President and Chief Executive Officer, and Chief Accounting Officer, affirming its submission Signatures This section formally concludes the report with the required signatures from the company's President and Chief Executive Officer, and Chief Accounting Officer, affirming its submission - The report was signed by William C. Boor, President and Chief Executive Officer, and Paul Bigbee, Chief Accounting Officer[171][172] - The signing date for the report was January 29, 2021[172]