Cavco(US:CVCO)2022-05-30 16:00PART I Business Cavco Industries is a leading U.S. producer of factory-built homes, including manufactured and modular homes, with financial services - Cavco is one of the largest producers of manufactured homes in the United States, operating 26 homebuilding production lines and distributing through 45 Company-owned retail stores9 - On September 24, 2021, Cavco acquired The Commodore Corporation, expanding its presence in the Northeast, Midwest, and Mid-Atlantic markets and adding six manufacturing facilities10 - The business is divided into two segments: Factory-built Housing and Financial Services. The financial services arm includes CountryPlace for mortgages and Standard Casualty for property and casualty insurance91112 Factory-Built Homes Sold (Fiscal Years) | Fiscal Year | Homes Sold | | :--- | :--- | | 2022 | 16,697 | | 2021 | 14,214 | | 2020 | 15,100 | - The company's home order backlog increased significantly to approximately $1.1 billion as of April 2, 2022, up from $603 million a year prior. The acquisition of Commodore contributed $264 million to this increase32 - The company faces competition from other national manufacturers, including Clayton Homes, Inc. and Skyline Champion Corporation, which may have greater financial resources59 Risk Factors The company faces significant operational, economic, and regulatory risks, including supply chain disruptions, interest rate fluctuations, and ongoing SEC litigation - Business and operational risks include impacts from the COVID-19 pandemic, labor shortages, raw material price fluctuations, and potential cyber incidents99103118 - Industry and economic risks are significant, including tightened credit standards for home-only loans, rising interest rates, limited wholesale financing for distributors, and the cyclical nature of housing demand137142144 - The company faces legal and regulatory risks, including extensive government regulation, restrictive local zoning, and ongoing SEC litigation filed in September 2021 related to actions by the former CEO and CFO151152 - Contingent repurchase obligations for wholesale financing provided to distributors amounted to a maximum of approximately $141.0 million as of April 2, 2022127 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None159 Properties The company operates 26 active manufacturing facilities across the U.S., mostly owned, along with administrative offices and retail stores Overview of Core Properties | Property Type | Count | Ownership Status | | :--- | :--- | :--- | | Active Manufacturing Facilities | 26 | Mostly Owned | | Component and Supply Facilities | 2 | 1 Owned, 1 Leased | | Inactive Manufacturing Facilities | 3 | All Owned | | Administrative & Other Locations | 5 | Mostly Leased | - The company owns the land for most of its manufacturing facilities, with exceptions for the Goodyear, AZ and Dorchester, WI plants, which are leased163 Legal Proceedings Legal proceedings information, including ongoing SEC litigation against the company and former executives, is referenced from Note 16 - Information on legal proceedings is incorporated by reference from Note 16 to the Consolidated Financial Statements164 Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable165 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Cavco's common stock trades on Nasdaq, with no recent dividends, and the company actively engages in stock repurchase programs - The company's common stock is traded on the Nasdaq Global Select Market under the symbol CVCO168 - No dividends have been paid on common stock in the past two fiscal years169 Share Repurchase Activity (Q4 FY2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Value of Shares Remaining Under Program (End of Period) | | :--- | :--- | :--- | :--- | | Mar 6, 2022 to Apr 2, 2022 | 115,200 | $264.52 | $38,960,000 | - A new $100 million stock repurchase program was approved by the Board of Directors on May 25, 2022170 Management's Discussion and Analysis of Financial Condition and Results of Operations Strong housing demand drove significant revenue and net income growth in FY2022, supported by strategic acquisitions and improved operational efficiency Company Outlook The company anticipates continued strong housing demand, focusing on expanding lending programs and advocating for favorable financing policies despite supply chain challenges - Housing demand remains strong, with the home order backlog increasing to $1.1 billion as of April 2, 2022, up from $603 million a year earlier180 - The company has reduced open production positions by nearly 25% over the past year, achieving an average plant capacity utilization rate exceeding 80% in Q4 FY2022181 - Management is focused on expanding home-only lending programs and working with industry associations to encourage favorable legislative and GSE action to address financing needs for affordable homes186187 Results of Operations FY2022 saw substantial increases in net revenue, gross profit, and net income, driven by higher housing sales and a significant energy-efficient home tax credit Net Revenue (FY2022 vs. FY2021) | Segment | FY2022 (in thousands) | FY2021 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Factory-built housing | $1,556,283 | $1,037,889 | 49.9% | | Financial services | $70,875 | $70,162 | 1.0% | | Total | $1,627,158 | $1,108,051 | 46.8% | Gross Profit & Margin (FY2022 vs. FY2021) | Segment | FY2022 Gross Profit (in thousands) | FY2022 Margin | FY2021 Gross Profit (in thousands) | FY2021 Margin | | :--- | :--- | :--- | :--- | :--- | | Factory-built housing | $372,250 | 23.9% | $199,604 | 19.2% | | Financial services | $36,499 | 51.5% | $39,373 | 56.1% | | Consolidated | $408,749 | 25.1% | $238,977 | 21.6% | - Selling, general and administrative (SG&A) expenses increased by 37.4% to $206.3 million, but improved as a percentage of net revenue to 12.7% from 13.6% in the prior year197198 - Income tax expense was $14.2 million, resulting in a low effective tax rate of 6.7% for FY2022, primarily due to $35.7 million in non-recurring net tax credits related to the sale of energy-efficient homes204 Liquidity and Capital Resources Operating cash flow increased in FY2022, but overall cash decreased due to significant investing activities for acquisitions and stock repurchases Summary of Cash Flows (Fiscal Years Ended) | (in thousands) | April 2, 2022 | April 3, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $144,224 | $114,031 | | Net cash used in investing activities | ($159,102) | ($23,349) | | Net cash used in financing activities | ($65,095) | ($6,982) | | Net (decrease) increase in cash | ($79,973) | $83,700 | - The increase in cash used for investing activities was primarily due to the purchases of Commodore and Craftsman211 - The increase in cash used for financing activities was mainly related to common stock repurchases and payments of secured term loans212 Critical Accounting Estimates Critical accounting estimates involve significant judgment for warranty reserves, deferred tax asset valuation allowances, and goodwill impairment assessments - Key estimates include warranty reserves, which are sensitive to the average costs incurred to service a home219 - The determination of valuation allowances for deferred tax assets requires significant judgment based on forecasts of future taxable profits220 - Goodwill and intangible asset valuation involves significant estimates regarding future cash flows, growth rates, and discount rates. The fair value of reporting units would need to decrease by over 450% to indicate impairment221 Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate sensitivity, impacting housing demand, loan portfolio fair values, and Interest Rate Lock Commitments - The company's primary market risk is interest rate sensitivity, which can adversely affect housing demand and financing availability226 Impact of 1% Unfavorable Interest Rate Change on Fair Value | Instrument | Reduction in Fair Value (in thousands) | | :--- | :--- | | Consumer loans receivable | $2,592 | | Commercial loans receivable | $421 | | Securitized financings | $883 | - The company had outstanding Interest Rate Lock Commitments (IRLCs) with a notional amount of $51.7 million as of April 2, 2022, which are subject to interest rate and fallout risk228 Financial Statements and Supplementary Data This section incorporates the Consolidated Financial Statements, auditor's reports, and notes by reference from page F-1 - This item refers to the Consolidated Financial Statements and related notes commencing on page F-1 of the report229 Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of April 2, 2022, excluding recently acquired businesses representing approximately 17% of total assets - Management concluded that the company's disclosure controls and procedures were effective as of April 2, 2022232 - Management concluded that internal control over financial reporting was effective as of April 2, 2022. This assessment excluded the internal controls of the recently acquired Craftsman and Commodore entities235236 - The independent registered public accounting firm, RSM US LLP, provided an unqualified audit opinion on the effectiveness of the company's internal control over financial reporting as of April 2, 2022237242 PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement252 Executive Compensation Executive compensation information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement254 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details and equity compensation plan information are incorporated by reference from the 2022 Proxy Statement Equity Compensation Plan Information (as of April 2, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders | 230,614 | $131.53 | 283,208 | | Not approved by stockholders | — | — | — | | Total | 230,614 | $131.53 | 283,208 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement258 Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement259 PART IV Exhibits, Financial Statement Schedules This section lists financial statements and exhibits, noting the omission of schedules as information is provided elsewhere - Financial Statements are listed in the Index on page F-1. All schedules have been omitted262 Form 10-K Summary The company indicates no Form 10-K summary is provided - None270 Financial Statements and Notes Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the financial statements, identifying the valuation of acquired intangibles as a critical audit matter - The auditor issued an unqualified opinion on the financial statements278 - A critical audit matter was identified concerning the valuation of acquired intangible assets from The Commodore Corporation acquisition, which required significant auditor judgment to evaluate management's estimates of future cash flows, royalty rates, and discount rates284285 Consolidated Financial Statements The consolidated financial statements present Cavco's financial position, showing increased assets, equity, revenue, and net income for FY2022 Key Balance Sheet Data (as of April 2) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $744,117 | $651,799 | | Total Assets | $1,154,972 | $951,833 | | Total Current Liabilities | $294,170 | $237,104 | | Total Stockholders' Equity | $830,455 | $683,640 | Key Income Statement Data (Year Ended) | (in thousands, except EPS) | April 2, 2022 | April 3, 2021 | | :--- | :--- | :--- | | Net Revenue | $1,627,158 | $1,108,051 | | Gross Profit | $408,749 | $238,977 | | Income from Operations | $202,496 | $88,825 | | Net Income Attributable to Stockholders | $197,699 | $76,646 | | Diluted EPS | $21.34 | $8.25 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, significant estimates, acquisitions, segment information, and financial instruments - Revenue from wholesale factory-built housing is recognized upon shipment, while retail sales are recognized upon delivery, setup, and customer acceptance305307 - Goodwill is tested annually for impairment, and as of April 2, 2022, all goodwill is attributed to the factory-built housing segment. No impairment was recognized in fiscal years 2020, 2021, or 2022329330 - The company is contingently liable under repurchase agreements with financial institutions, with a maximum liability of approximately $141.0 million as of April 2, 2022334425 - The effective income tax rate for FY2022 was significantly lowered by tax credits, predominantly a $37.5 million benefit related to the sale of energy-efficient homes under IRC §45L417419 - The company acquired a controlling 70% interest in Craftsman on July 4, 2021, and purchased The Commodore Corporation on September 24, 2021, for total consideration of $146.2 million463468