Cavco(CVCO) - 2021 Q4 - Annual Report

Part I Business The company is a leading U.S. producer of factory-built homes with integrated financial services operations - Cavco is one of the largest producers of manufactured homes in the United States, operating 20 homebuilding production lines and distributing through 40 company-owned retail stores and a network of independent dealers[12][13] - The company operates two primary business segments: Factory-built Housing and Financial Services, which includes mortgage financing (CountryPlace) and property/casualty insurance (Standard Casualty)[12][14][15] - The COVID-19 pandemic led to strong home sales order rates, increasing the home order backlog from $124 million to approximately $603 million at the end of fiscal year 2021[19] Factory-Built Homes Sold | Fiscal Year | Homes Sold | | :--- | :--- | | 2021 | 14,214 | | 2020 | 15,100 | | 2019 | 14,389 | Products The company produces a diverse range of factory-built structures including HUD code, modular, and park model homes - Products include HUD code manufactured homes, park model RVs, modular homes (single and multi-section), and commercial structures like apartment buildings and hotels[28] - Residential homes range from approximately 500 to 3,300 square feet, with extensive customization options available, including eco-friendly features like bamboo flooring and solar power[29][30][32] Factory-built Housing Segment This segment operates 20 manufacturing facilities and saw its sales order backlog surge to $603 million - The company operates 20 homebuilding production lines across the United States, with a typical manufacturing facility serving a 350-mile radius[36][37] - Distribution channels include 40 Company-owned retail stores, with a heavy concentration of 32 stores in Texas, and a network of independent distributors across 43 states and Canada[13][40] Sales Order Backlog | Date | Backlog (in millions) | | :--- | :--- | | April 3, 2021 | $603 | | March 28, 2020 | $124 | Financial Services Segment This segment provides mortgage financing and property and casualty insurance for manufactured home buyers - CountryPlace originates and services various home loans and is an approved seller/servicer for Fannie Mae, Freddie Mac, and a Ginnie Mae issuer[46] - The loan portfolio is geographically concentrated, with the largest concentrations in Texas, Florida, Arizona, Oklahoma, and New Mexico[47] - Standard Casualty provides property and casualty insurance for manufactured homes, primarily in Texas, Arizona, New Mexico, and Nevada[52] Competition The company faces significant competition in manufacturing, financing, and insurance from larger entities - The manufactured housing industry is highly competitive, with key competitors including Clayton Homes, Inc and Skyline Champion Corporation[64][65] - Financial services competitors include 21st Mortgage Corporation, Triad Financial Services, Inc, and Cascade Financial Services[66] - Insurance competitors include National Lloyds and American Modern Insurance, which may be larger and offer broader insurance types[67] Government Regulation Operations are subject to extensive regulation from HUD, CFPB, and state agencies, including pandemic-related acts - Manufactured home construction is governed by the National Manufactured Housing Construction and Safety Standards Act of 1974, with regulations established by HUD[69] - Financing operations are subject to numerous regulations, including the Dodd-Frank Act, TILA, RESPA, and rules from the Consumer Financial Protection Bureau (CFPB)[74][75] - The CARES Act granted forbearance rights and foreclosure protection to borrowers with federally backed mortgage loans experiencing hardship due to the COVID-19 pandemic, impacting servicing operations[88] Risk Factors The company faces risks from the COVID-19 pandemic, supply chain disruptions, economic cyclicality, and an SEC investigation Business and Operational Risks Key operational risks include pandemic impacts, labor shortages, material costs, and contingent repurchase obligations - The COVID-19 pandemic poses significant risks by constraining operations, reducing factory capacity utilization, increasing employee absenteeism, and disrupting the supply chain[105][106] - The company faces risks from labor shortages and the pricing and availability of key raw materials like wood, steel, and gypsum wallboard, which can increase costs and cause production delays[109][110] - Contingent repurchase obligations related to wholesale financing for distributors amounted to a maximum of approximately $74.2 million as of April 3, 2021[126] Industry and Economic Risks The business is subject to risks from tightened credit, limited financing, and the cyclical nature of the housing market - Tightened credit standards, a limited number of home-only lenders, and increased government regulation constrain the consumer financing market, which can restrict home sales[134][135] - The manufactured housing industry is highly cyclical and seasonal, influenced by economic factors such as employment levels, interest rates, and consumer confidence[141] - The industry is highly competitive, with numerous companies producing manufactured homes and competition from other forms of low-cost housing like site-built homes and apartments[142] Legal and Regulatory Risks The company faces risks from restrictive zoning ordinances and an ongoing SEC investigation into its former CEO - The business is subject to local zoning ordinances, which can restrict the placement of manufactured homes and adversely affect revenue[145] - The company has been cooperating with an SEC investigation since 2018 regarding trading directed by its former CEO, which could lead to penalties and other adverse consequences[147][148] Properties The company owns or leases numerous manufacturing, supply, and administrative facilities across the United States - The company owns the land for most of its manufacturing facilities, with a notable exception being the Goodyear, Arizona plant, which is leased[160] Core Property Overview | Property Type | Count | Primary Ownership Status | | :--- | :--- | :--- | | Active Manufacturing Facilities | 19 | Owned | | Component and Supply Facilities | 2 | 1 Owned, 1 Leased | | Inactive Manufacturing Facilities | 3 | 2 Owned, 1 Leased | | Administrative Locations | 3 | 1 Owned, 2 Leased | Legal Proceedings The company is involved in an ongoing SEC investigation and recently settled two class-action lawsuits - The company is cooperating with an SEC investigation initiated in 2018 regarding securities trading directed by the former CEO; in November 2020, the SEC staff issued a Wells Notice to Cavco, indicating a potential enforcement action[467][468] - Two class-action lawsuits alleging wage-and-hour violations were settled during the fourth quarter of fiscal year 2021[470] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[162] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, and a $100 million share repurchase program was approved in October 2020 - The company's common stock is traded on the Nasdaq Global Select Market under the symbol CVCO[165] - A $100 million stock repurchase program was approved on October 27, 2020, replacing a previous $10 million authorization[167] Share Repurchase Activity (Q4 FY 2021) | Period | Shares Purchased | Average Price Paid Per Share | Dollar Value Remaining Under Program (in thousands) | | :--- | :--- | :--- | :--- | | Feb 28, 2021 to Apr 3, 2021 | 6,600 | $218.37 | $98,559 | Selected Financial Data This section presents a five-year summary of key financial metrics, showing consistent revenue and asset growth Selected Financial Data (Fiscal Years 2017-2021) | ($ in thousands, except per share) | April 3, 2021 | March 28, 2020 | March 30, 2019 | March 31, 2018 | April 1, 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue | $1,108,051 | $1,061,774 | $962,746 | $871,235 | $773,797 | | Net income | $76,646 | $75,066 | $68,622 | $61,502 | $37,955 | | Diluted EPS | $8.25 | $8.10 | $7.40 | $6.68 | $4.17 | | Total assets | $951,833 | $810,431 | $725,216 | $674,780 | $607,316 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting revenue growth driven by higher prices and a significant order backlog Company Outlook The outlook is positive due to a strong order backlog, though challenged by labor and supply chain disruptions - The backlog of home sales orders increased dramatically to $603 million as of April 3, 2021, up from $124 million a year prior[190] - Factory capacity utilization was approximately 75% in Q4 2021, below pre-pandemic levels of over 80%, due to employee absenteeism and supply shortages[191] - The company is working with industry associations and GSEs to expand the secondary market for home-only loans through the "Duty to Serve" initiatives, which could increase housing demand[199] Results of Operations Fiscal 2021 net revenue grew 4.4% to $1.11 billion, driven by higher home selling prices despite fewer homes sold Net Revenue by Segment (FY 2021 vs. FY 2020) | ($ in thousands) | April 3, 2021 | March 28, 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Factory-built housing | $1,037,889 | $999,340 | $38,549 | 3.9% | | Financial services | $70,162 | $62,434 | $7,728 | 12.4% | | Total | $1,108,051 | $1,061,774 | $46,277 | 4.4% | Gross Profit by Segment (FY 2021 vs. FY 2020) | ($ in thousands) | April 3, 2021 | March 28, 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Factory-built housing | $199,604 | $195,244 | $4,360 | 2.2% | | Financial services | $39,373 | $35,274 | $4,099 | 11.6% | | Total | $238,977 | $230,518 | $8,459 | 3.7% | Income Before Income Taxes by Segment (FY 2021 vs. FY 2020) | ($ in thousands) | April 3, 2021 | March 28, 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Factory-built housing | $78,937 | $78,531 | $406 | 0.5% | | Financial services | $17,975 | $14,448 | $3,527 | 24.4% | | Total | $96,912 | $92,979 | $3,933 | 4.2% | Liquidity and Capital Resources The company maintains strong liquidity with cash increasing by $83.7 million, supported by $114.0 million in operating cash flow Summary of Cash Flows (FY 2021 vs. FY 2020) | ($ in thousands) | April 3, 2021 | March 28, 2020 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $114,031 | $101,737 | $12,294 | | Net cash used in investing activities | ($23,349) | ($25,243) | $1,894 | | Net cash used in financing activities | ($6,982) | ($20,756) | $13,774 | | Net increase in cash | $83,700 | $55,738 | $27,962 | Contractual Obligations as of April 3, 2021 | ($ in thousands) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt obligations | $14,580 | $2,313 | $3,655 | $3,112 | $5,500 | | Operating lease obligations | $19,776 | $4,292 | $7,564 | $5,654 | $2,266 | | Finance lease obligations | $341 | $73 | $146 | $122 | — | | Total | $34,697 | $6,678 | $11,365 | $8,888 | $7,766 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure is to interest rate changes affecting housing demand and loan values - The company's primary market risk is interest rate sensitivity, as higher rates can adversely affect housing demand and the ability of customers to obtain financing[253][254] - As of April 3, 2021, the company had outstanding interest rate lock commitments (IRLCs) with a notional amount of $37.7 million, which are subject to interest rate and fallout risk[258] Interest Rate Sensitivity Analysis (Impact of 1% Unfavorable Change) | ($ in thousands) | Reduction in Fair Value | | :--- | :--- | | Consumer loans receivable | $3,317 | | Commercial loans receivable | $344 | | Securitized financings | $462 | Financial Statements and Supplementary Data This section references the company's audited consolidated financial statements and related notes beginning on page F-1 - This item references the full Consolidated Financial Statements and related notes, which are included at the end of the 10-K report, starting on page F-1[259] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management, including the CEO and Chief Accounting Officer, concluded that the company's disclosure controls and procedures were effective as of the fiscal year-end, April 3, 2021[260] - Management concluded that the company's internal control over financial reporting was effective as of April 3, 2021, based on the COSO 2013 framework[264] - The independent auditor, RSM US LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[265][269] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[277] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[279] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity plans is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[279] Equity Compensation Plan Information (as of April 3, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 251,749 | $146.86 | 295,571 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[283] Principal Accounting Fees and Services Information regarding accounting fees and services is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the 2021 Proxy Statement[284] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the report, with schedules omitted as inapplicable - The Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of the report[287] - All financial statement schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto[287] Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued unqualified opinions on the financial statements and internal controls, citing insurance reserves as a Critical Audit Matter - The auditor issued an unqualified opinion, stating the financial statements present fairly, in all material respects, the financial position of the Company[302] - The auditor also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of April 3, 2021[303] - The estimation of the Reserve for Property Casualty Insurance Claims was identified as a Critical Audit Matter, requiring a high degree of auditor judgment[306][308][309] Consolidated Financial Statements The financial statements show total assets of $951.8 million and net income of $76.6 million for fiscal 2021 Consolidated Balance Sheet Summary (as of April 3, 2021) | ($ in thousands) | April 3, 2021 | March 28, 2020 | | :--- | :--- | :--- | | Total current assets | $651,799 | $516,185 | | Total assets | $951,833 | $810,431 | | Total current liabilities | $237,104 | $172,102 | | Total liabilities | $268,193 | $202,845 | | Total stockholders' equity | $683,640 | $607,586 | Consolidated Income Statement Summary (Year Ended April 3, 2021) | ($ in thousands) | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net revenue | $1,108,051 | $1,061,774 | | Gross profit | $238,977 | $230,518 | | Income from operations | $88,825 | $84,907 | | Net income | $76,646 | $75,066 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, segment performance, and legal contingencies - Note 6 details the consumer loan portfolio, which totaled $74.8 million (net) as of April 3, 2021, with geographic concentrations in Texas (35%) and Florida (20%)[405][409] - Note 10 indicates that all of the company's $75.1 million in goodwill is attributable to the factory-built housing segment[361][434] - Note 16 discloses contingent repurchase obligations with a maximum liability of approximately $74.2 million and details the ongoing SEC investigation[457][458][467] Segment Information Summary (FY 2021) | ($ in thousands) | Factory-built Housing | Financial Services | Total | | :--- | :--- | :--- | :--- | | Net Revenue | $1,037,889 | $70,162 | $1,108,051 | | Income before taxes | $78,937 | $17,975 | $96,912 | | Total Assets (as of 4/3/21) | $711,579 | $240,254 | $951,833 |