CAVCO INDUSTRIES, INC. Forward-Looking Statements This Annual Report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. In general, all statements included or incorporated in this Annual Report that are not historical in nature are forward-looking. These may include statements about the Company's plans, strategies and prospects under the headings "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions. Forward-looking statements are typically included, for example, in discussions regarding the manufactured housing and site-built housing industries; the Company's financial performance and operating results; and the expected effect of certain risks and uncertainties on the Company's business, financial condition and results of operations, economic conditions and consumer confidence, operational and legal risks, how the Company may be affected by the COVID-19 pandemic, governmental regulations and legal proceedings, the availability of favorable consumer and wholesale manufactured home financing, market interest rates and Company investments and the ultimate outcome of the Company's commitments and contingencies. Forward-looking statements involve risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control. To the extent that the Company's assumptions and expectations differ from actual results, the Company's ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered. Factors that could affect the Company's results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Item 1A, "Risk Factors," and elsewhere in this Annual Report. The Company expressly disclaims any obligation to update any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise. For all of these reasons, you should not place undue reliance on any such forward-looking statements included in this Annual Report. Introduction The following should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes that appear in Part IV of this Report. References to "Note" or "Notes" pertain to the Notes to the Company's Consolidated Financial Statements. Overview Headquartered inPhoenix, Arizona , the Company designs and produces factory-built homes primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. The Company is one of the largest producers of manufactured homes inthe United States , based on reported wholesale shipments, marketed under a variety of brand names, including Cavco, Fleetwood,Palm Harbor , Fairmont, Friendship, Chariot Eagle and Destiny. The Company is also one of the leading producers of park model RVs, vacation cabins and systems-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand. Cavco's finance subsidiary, CountryPlace, is an approved Fannie Mae and Freddie Mac seller/servicer and aGinnie Mae mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Cavco's insurance subsidiary, Standard Casualty, provides property and casualty insurance to owners of manufactured homes. 31
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Company Growth From its inception in 1965, Cavco traditionally served affordable housing markets in the southwesternUnited States principally through manufactured home production. During the period from 1997 to 2000, Cavco was purchased by, and became a wholly-owned subsidiary of,Centex Corporation , which operated the Company until 2003, when Cavco became a stand-alone publicly-held company traded on the Nasdaq Global Select Market under the ticker symbol CVCO.The Company has strategically expanded its factory operations and related business activities primarily through the acquisition of other industry participants. This has enabled Cavco to meet the needs of the affordable housing market on a national basis. The purchase of the Fleetwood andPalm Harbor assets inAugust 2009 andApril 2011 , respectively, increased home production and distribution capabilities and provided for vertical integration through entry into financial services businesses specific to the Company's industry. These transactions expanded the Company's geographic reach at a national level by adding factories and retail locations serving the Northwest, West, South, South Central and Mid-Atlantic regions. The purchase of Chariot Eagle, Fairmont,Lexington and Destiny, inMarch 2015 ,May 2015 ,April 2017 andAugust 2019 , respectively, provided additional operating capacity, increased home production capabilities and further strengthened the Company's market in certain areas ofthe United States and several provinces inCanada . InApril 2020 , the Company decided to shut down production and close itsLexington, Mississippi plant. Ongoing market and operating challenges were exacerbated by decreased business and the ongoing uncertainty resulting from the COVID-19 pandemic, all of which contributed to this decision. This location has stopped accepting new orders for homes, is working to support customers by completing production of home orders already in process (which are expected to be completed inJune 2020 ) and has notified its workforce of this shut down decision in accordance with applicable legal requirements. The Company will remain available to serve wholesale customers previously served by theLexington facility, that choose to continue to purchase the Company's products, from its other production lines in the southeast. The Company does not expect that closing theLexington facility will have a significant adverse financial effect on the Company and no significant restructuring or related asset impairment charges are expected. Currently, no decisions have been made on the disposition of the production facility, which is currently leased, or related assets. The Company operates 20 homebuilding production lines located inMillersburg andWoodburn, Oregon ;Nampa, Idaho ;Riverside, California ;Phoenix andGoodyear, Arizona ;Austin ,Fort Worth ,Seguin andWaco, Texas ;Montevideo, Minnesota ;Nappanee, Indiana ;Lafayette, Tennessee ;Martinsville andRocky Mount, Virginia ;Douglas andMoultrie, Georgia ; andOcala andPlant City, Florida . The majority of the homes produced are sold to, and distributed by, independently owned and controlled retail operations located throughoutthe United States andCanada . In addition, the Company's homes are sold through 39 Company-ownedU.S. retail locations. Company operations are generally managed on a decentralized basis with oversight from the home office. This decentralization enables the Company's operators the flexibility to adapt to local market demand, be more customer focused and have the autonomy to make swift decisions, while still being held accountable for operational and financial performance. The Company regularly reviews its product offerings and strives to improve designs, production methods and marketing strategies. The Company continues to focus on gaining operational efficiencies among its operations, all of which have organic growth potential. Company Outlook The Company maintains a conservative cost structure in an effort to build added value into its homes and has worked diligently to maintain a solid financial position. The balance sheet strength, including the position in cash and cash equivalents, should help avoid liquidity problems and enable the Company to act effectively as market opportunities or challenges present themselves. 32
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The Company's manufacturing facilities are strategically positioned acrossthe United States , and utilize local market research to design homes to meet the demands of its customers. The Company has the ability to customize floor plans and designs to fulfill specific needs and interests. By offering a full range of homes from entry-level models to large custom homes and with the ability to engineer designs in-house, the Company can accommodate virtually any customer request. In addition to homes built to the federal HUD code, the Company also constructs modular homes that conform to state and local codes, park model RVs and cabins and light commercial buildings at many of the Company's manufacturing facilities. The Company seeks out niche market opportunities where its diverse product lines and custom building capabilities provide a competitive advantage. The green building initiatives involve the creation of an energy efficient envelope and higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, typically lower utility costs and sustainability. The Company also builds homes designed to use alternative energy sources, such as solar and wind. From bamboo flooring and tankless water heaters to solar-powered homes, the Company's products are diverse and tailored to a wide range of consumer interests. Innovation in housing design is a forte of the Company and it continues to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located. Based on the relatively low cost associated with manufactured home ownership, the Company's products have traditionally competed with rental housing's monthly payment affordability. Rental housing activity is reported to have continued to increase in recent years, which has contributed to a decline in tenant housing vacancy rates and a corresponding rise in rental rates. These factors, should they continue, among other market and economic factors, may cause some renters to become buyers of affordable-housing alternatives, including manufactured homes. Further, with respect to the general rise in demand for rental housing during fiscal year 2020, the Company realized a larger proportion of orders and interest from developers and community owners for new manufactured homes intended for use as rental homes, alternative dwelling units and seasonal living. The Company is responsive to the unique product requirements of these buyers and values the opportunity to provide units that are well suited for these purposes. As a result of the COVID-19 pandemic, home orders from developers and community owners have declined substantially. At this time, it is uncertain as to how long this trend could continue. Cavco maintains a backlog of orders from its network of licensed distributors, communities and developers. Distributors may cancel orders prior to production without penalty. Accordingly, until the production of a particular unit has commenced, the Company does not consider its backlog to be firm orders. The Company strives to manage its production levels, capacity and workforce size based upon current market demand. The backlog of home sales orders atMarch 28, 2020 was$124 million in total, down from$129 million one year earlier as ofMarch 30, 2019 . While the circumstances surrounding the COVID-19 pandemic have caused home sales orders to decline, production rates have also declined, causing elevated levels of order backlogs with a value of$123 million inmid-May 2020 . This backlog of home orders excludes home orders that have been paused or canceled at the request of the customer. During the onset of COVID-19, the Company continued to operate substantially all of its homebuilding and retail sales facilities while working to follow COVID-19 health guidelines. The Company adjusted its operations to manage exposure and transmission risks by implementing enhanced facility cleaning, social distancing and other related protocols while continuing to serve its customers. Operational efficiencies declined from adjusting home production processes to comply with health guidelines and managing higher factory employee absenteeism and building material supply shortages. The Company's average plant capacity utilization rate fell accordingly, fluctuating between approximately 45% and 75% since the onset of the pandemic, compared to pre-pandemic levels of more than 80%. While Company-owned retail stores and most independently owned retail sales locations remained open for business since the onset of the pandemic, customer traffic has declined. The Company received fewer home orders from its distribution channels than would be typical during the spring selling season. Home sales order volumes dropped approximately 40% inmid-April 2020 , but improved somewhat to approximately 20% lower than pre-pandemic levels bymid-May 2020 . 33
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Financial services operations have also continued to operate since the onset of the COVID-19 pandemic, largely through the implementation of work-from-home solutions. This includes accepting and processing new applications as well as servicing home loans and insurance policies. The financial services operations are complying with all state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations and are assisting customers in need. Because of changed economic conditions at the end of the fiscal year, loan loss reserves have been increased. Certain loans serviced by CountryPlace for investors expose the Company to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. Our primary investor,Ginnie Mae , permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans, such as loan pre-payments. While monthly collections of principal and interest from borrowers has normally exceeded scheduled principal and interest payments owed to investors, given various state and local emergency order changes in light of COVID-19, this could change. InApril 2020 , the Company decided to shut down production and close itsLexington, Mississippi plant. Ongoing market and operating challenges were exacerbated by decreased business and the ongoing uncertainty resulting from the COVID-19 pandemic, all of which contributed to this decision. See further discussion above. Currently, no decisions have been made on the disposition of the production facility, which is currently leased, or related assets. It is difficult to predict the future impacts on housing demand or the nature of operations at each of our locations due to the COVID-19 pandemic. We could experience further reduction of customer demand, plant utilization or production levels, increased costs resulting from our efforts to mitigate the impact of the virus, impairment or write down of assets or other consequences. However, our wholesale customers have been positive about continuing the process of delivering homes and appreciative of our efforts to continue production to meet housing needs. The Company continues to focus on developing order volume growth opportunities by working to improve its production capabilities and adjusting product offerings as appropriate. The Company strives to manage its production levels and workforce size in order to match the demand for its product offerings while ensuring efficient use of its production capabilities. The Company continually reviews wage rates of its production employees and has established other monetary incentive programs to ensure competitive compensation. The Company is working to more extensively use on-line recruiting tools, update recruitment brochures and improve the appearance and appeal of its production facilities in order to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. The Company believes its ability to help meet the overall need for affordable housing continues to improve. The Company participates in certain commercial loan programs with members of the Company's independent wholesale distribution chain. Under these programs, the Company provides a significant amount of the funds that independent financiers then lend to distributors to finance retail inventories of its products. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes (see Note 7 to the Consolidated Financial Statements). The Company's involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, communities and developers. Participation in wholesale financing is helpful to these customers and provides additional opportunity for product exposure to potential home buyers. These initiatives support the Company's ongoing efforts to expand product distribution. However, these initiatives do expose the Company to risks associated with the creditworthiness of this customer base and the Company's inventory financing partners. The Company has included considerations related to the COVID-19 pandemic when assessing its risk of loan loss and setting reserve amounts for its commercial finance portfolio. 34
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The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans result in higher borrowing costs for home-only loans, which continues to constrain industry growth. The Company is working directly with other industry participants to develop secondary market opportunities for manufactured home-only loan portfolios and expand lending availability in the industry. Additionally, the Company continues to invest in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. The Company's mortgage subsidiary also develops and invests in home-only lending programs to grow sales of homes through traditional distribution points. The Company believes that growing its investment and participation in home-only lending may provide additional sales growth opportunities for the financial services segment, as well as provide a means that could lead to increased home sales for its factory-built housing operations. The Company is also working through industry trade associations to encourage favorable legislative and GSE action to address the mortgage financing needs of buyers of affordable homes. Federal law requires the GSEs to implement the "Duty to Serve" requirements specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. InDecember 2017 , Fannie Mae and Freddie Mac each released their final Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill the "Duty to Serve" obligation. These plans became effective onJanuary 1, 2018 . Each of the three-year plans offers an enhanced mortgage loan product through their "MH Advantage" and "ChoiceHome" programs, respectively, that began in the latter part of calendar year 2018. Small-scale pilot programs for the purchase of home-only loans that were expected to commence towards the end of calendar year 2019 have not occurred. Expansion of the secondary market for lending through the GSEs could support further demand for housing as lending options would likely become more available to home buyers. Although some progress has been made in this area, meaningful positive impact in the form of increased home orders has yet to be realized. OnJanuary 25, 2018 , HUD announced a top-to-bottom review of its manufactured housing rules as part of a broader effort to identify regulations that may be ineffective, overly burdensome, or excessively costly given the critical need for affordable housing. In addition, onJune 25, 2019 ,President Trump signed an Executive Order directing federal agencies to work together to alleviate barriers that impede the production of affordable housing. The Executive Order created aWhite House Council on Eliminating Regulatory Barriers toAffordable Housing , consisting of members from eight federal agencies and chaired by the HUD Secretary. While there has been no timeline established, if certain changes are made, the Company may be able to serve a broader range of home buyers. The insurance subsidiary is subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity inTexas where most of its policies are underwritten. Where applicable, losses from catastrophic events are mitigated by reinsurance contracts in place as part of the Company's loss mitigation structure. As disclosed in Part I, Item 3, "Legal Proceedings," since 2018, the Company has been cooperating with an investigation by the enforcement staff of theSecurities and Exchange Commission regarding trading in personal and Company accounts directed by the Company's former CEO,Joseph Stegmayer . The Audit Committee of the Board conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the results of the Audit Committee's work were shared with the Company's auditors, listing exchange and theSEC staff. The Company continues to make documents and personnel available to theSEC staff and intends to continue cooperating with its investigation. 35
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As a result of the ongoing independent investigation, the Company recorded$2.9 million of expenses related to legal and other expenses during the fiscal year endedMarch 28, 2020 and expects to continue to incur related costs pertaining to this matter. During the third quarter of fiscal year 2019, the Company also reviewed the sufficiency of its insurance coverage and as a result, Cavco's Board of Directors made a decision to purchase additional D&O liability insurance coverage with 22 month terms for a total premium of$15.3 million . As a result, the Company recorded$8.4 million of additional D&O policy premium expense during the fiscal year endedMarch 28, 2020 , and expects to incur approximately$2.1 million per quarter in Selling, general and administrative expenses from the amortization of these policy premiums through the second quarter of fiscal year 2021, at which point D&O policy needs and related premium costs will be assessed further. Results of Operations Fiscal Year 2020 Compared to Fiscal Year 2019 Net Revenue. Net revenue consisted of the following for fiscal years 2020 and 2019, respectively (dollars in thousands): Year Ended March 28, March 30, 2020 2019 $ Change % Change Net revenue: Factory-built housing$ 999,340 $ 905,726 $ 93,614 10.3 % Financial services 62,434 57,020 5,414 9.5 %$ 1,061,774 $ 962,746 $ 99,028 10.3 % Total homes sold 15,100 14,389 711 4.9 % Net factory-built housing revenue per home sold$ 66,181 $ 62,946 $ 3,235 5.1 % In the factory-built housing segment, the increase was from improved home sales volume, including homes sold from the newDestiny Homes acquisition, which contributed$30.1 million in revenue, changes in product mix and higher home selling prices compared to the prior year. Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers ("Wholesale") and sales of homes to consumers by Company-owned retail centers ("Retail"). Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Changes to the proportion of home sales among these distribution channels between reporting periods impacts the overall net revenue per home sold. For the twelve months endedMarch 28, 2020 , the Company sold 12,247 homes Wholesale and 2,853 Retail versus 11,806 homes Wholesale and 2,583 homes Retail in the comparable prior year period. Further, fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, which results from home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Product prices are also periodically adjusted for the cost and availability of raw materials included in, and labor used to produce, each home. For these reasons, the Company has experienced, and expects to continue to experience, volatility in overall net factory-built housing revenue per home sold. Financial services segment revenue increased primarily from higher premium revenue from a greater number of insurance policies in force, more sales of consumer loans and higher interest income on loans held for investment, partially offset by unrealized losses on equity investments and lower interest income earned on securitized loan portfolios that continue to amortize. 36
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Gross Profit. Gross profit consisted of the following for fiscal years 2020 and 2019, respectively (in thousands):
Year Ended
March 28, March 30,
2020 2019 $ Change % Change
Gross profit:
Factory-built housing $ 195,244 $ 172,136 $ 23,108 13.4 %
Financial services 35,274 33,570 1,704 5.1 %
$ 230,518 $ 205,706 $ 24,812 12.1 %
Gross profit as % of Net revenue:
Consolidated 21.7 % 21.4 % N/A 0.3 %
Factory-built housing 19.5 % 19.0 % N/A 0.5 %
Financial services 56.5 % 58.9 % N/A (2.4 )%
The increase in factory-built housing gross profit was the result of higher home
sales volume and prices better suited to input cost fluctuations during the
year, as well as changes in product mix.
Financial services gross profit increased from higher premium revenue from a
greater number of insurance policies in force, more sales of consumer loans and
higher interest income on loans held for investment, partially offset by
unrealized losses on equity investments, higher claims expense and lower
interest income earned on securitized loan portfolios that continue to amortize.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consisted of the following for
fiscal years 2020 and 2019, respectively (in thousands):
Year Ended
March 28, March 30,
2020 2019 $ Change % Change
Selling, general and administrative
expenses:
Factory-built housing $ 127,174 $ 105,095 $ 22,079 21.0 %
Financial services 18,437 16,473 1,964 11.9 %
$ 145,611 $ 121,568 $ 24,043 19.8 %
Selling, general and administrative
expenses as % of Net revenue: 13.7 % 12.6 % N/A 1.1 %
Selling, general and administrative expenses related to factory-built housing
increased from higher wages and incentive compensation expense on improved
earnings, higher premium amortization related to the additional D&O insurance
purchased during the third quarter of fiscal year 2019 (
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Interest Expense. Interest expense was$1.5 million in fiscal year 2020 and$3.4 million in fiscal year 2019. Interest expense consists primarily of debt service on the CountryPlace securitized financings of manufactured home loans and interest related to finance leases. The decrease is related to a reduction in securitized bond interest expense, as the Company exercised its right to repurchase the 2005-1 and 2007-1 securitized loan portfolios inJanuary 2019 andAugust 2019 , respectively, thereby eliminating the related interest expense. These decreases are partially offset by increases in interest expense from secured credit facilities at CountryPlace. Other Income, net. For fiscal years 2020 and 2019, Other income, net was$9.6 million and$6.0 million , respectively, an increase of$3.6 million or 60.0%. Other income primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses (including impairments) from the sale of property, plant and equipment and assets held for sale. The increase was primarily from a$3.4 million net gain on the sale of idle land and an increase in interest income on larger Cash and cash equivalents balances compared to the same period last year, partially offset by unrealized losses on corporate investments. Income Before Income Taxes. Income before income taxes consisted of the following for fiscal years 2020 and 2019, respectively (in thousands): Year Ended March 28, March 30, 2020 2019 $ Change % Change Income before income taxes: Factory-built housing$ 78,531 $ 72,959 $ 5,572 7.6 % Financial services 14,448 13,717 731 5.3 %$ 92,979 $ 86,676 $ 6,303 7.3 %
Income Tax Expense.
Income tax expense was
Fiscal Year 2019 Compared to Fiscal Year 2018 See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2019 Annual Report on Form 10-K.
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Liquidity and Capital Resources The Company believes that cash and cash equivalents atMarch 28, 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. The Company maintains cash inU.S. Treasury and other money market funds, some of which are in excess of federally insured limits. The Company expects to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on the Company's liquidity and capital resources. The recent acquisition ofDestiny Homes did not have a significant impact on the Company's liquidity or capital resources. Because of the Company's sufficient cash position, the Company has not historically sought external sources of liquidity, with the exception of certain credit facilities for its home-only lending programs. Regardless, depending on the Company's operating results and strategic opportunities, it may need to seek additional or alternative sources of financing. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for the Company to reevaluate its long-term operating plans to make more efficient use of its existing capital resources. The exact nature of any changes to the Company's plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of the Company's control. State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by the Company's insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. The Company believes that stockholders' equity at its insurance subsidiary remains sufficient and does not believe that its ability to pay ordinary dividends to Cavco will be restricted per state regulations. The following is a summary of the Company's cash flows for fiscal years 2020 and 2019, respectively (in thousands): Year Ended March 28, March 30, 2020 2019 $ Change Cash, cash equivalents and restricted cash at beginning of the fiscal year$ 199,869 $ 199,258 $ 611
Net cash provided by operating activities 101,737 32,836 68,901 Net cash used in investing activities
(25,243 ) (5,815 ) (19,428 )
Net cash used in financing activities (20,756 ) (26,410 ) 5,654
Cash, cash equivalents and restricted cash at
end of the fiscal year $ 255,607 $ 199,869 $ 55,738 Net cash provided by operating activities increased during the year ended
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Cavco has entered into commercial loan agreements with certain distributors of its products under which the Company provides funds for wholesale purchases. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes. The Company has also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. For additional information regarding our commercial loans receivable, see Note 7 to the Consolidated Financial Statements. Further, the Company has invested in and developed home-only loan pools and lending programs to attract third-party financier interest in order to grow sales of new homes through traditional distribution points. Cash used in investing activities for the year endedMarch 28, 2020 included purchases of property, plant and equipment and payments forDestiny Homes . Cash used in investing activities in fiscal year 2019 was primarily used for purchases of property, plant and equipment. Net cash used in financing activities for the year endedMarch 28, 2020 was mainly for the repurchase of the 2007-1 securitization and other payments on securitized financings. Net cash used in financing activities for fiscal year 2019 was mainly for the repurchase of the 2005-1 securitization and other payments on securitized financings. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in the Company's 2019 Annual Report on Form 10-K for a discussion of changes in liquidity between fiscal years 2019 and 2018. Financings. InAugust 2019 , the Company repurchased the 2007-1 securitized loan portfolio, leaving no further securitized financing balance outstanding. The Company's finance subsidiary has entered into secured credit facilities with independent third-party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods, which have now expired. The proceeds are used by the Company to originate and hold consumer home-only loans secured by manufactured homes, which are pledged as collateral to the facilities. Upon completion of the draw down periods, the facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program was 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As ofMarch 28, 2020 , the outstanding balance of the converted loans was$10.5 million at a weighted average interest rate of 4.91%. Contractual Obligations and Commitments The following table summarizes the Company's contractual obligations atMarch 28, 2020 , to make future payments under its debt obligations and lease agreements. This table excludes long-term obligations for which there is no definite commitment period. Payments Due by Period Less than 1-3 3-5 After 5 Total 1 Year Years Years Years (in thousands) Debt obligations: Securitized financings and other borrowings, including interest (1)$ 16,694 $ 2,519 $ 3,913 $ 3,025 $ 7,237 Operating lease obligations 16,978 4,199 5,845 3,623 3,311 Finance lease obligations 420 79 146 146 49
Total contractual obligations
(1) Interest is calculated by applying contractual interest rates to month-end
balances. The timing of these estimated payments fluctuates based upon
various factors, including estimated loan portfolio prepayment and default
rates.
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Additionally, the Company has contingent commitments at
financial institutions providing inventory financing for independent
distributors of its products. The maximum amount for which the Company was
liable under such agreements approximated $79.3 million at March 28, 2020 ,
without reduction for the resale value of the homes. Although the repurchase
obligations outstanding have a finite life, these commitments are continually
replaced as the Company continues to sell manufactured homes to distributors
under repurchase and other recourse agreements with lending institutions
which have provided wholesale floor plan financing to distributors.
• The Company's insurance subsidiary maintains an irrevocable letter of credit
of $11.0 million to provide assurance that the Company will fulfill its
reinsurance obligations. This letter of credit is secured by certain of the
insurance subsidiary's investments. While the current letter of credit has a
finite life, it is subject to renewal based on the underlying requirements.
• The Company's finance subsidiary has a commitment to fund construction-period
mortgages up to $17.7 million at March 28, 2020 . The total loan contract
amount, less cumulative advances, represents an off-balance sheet contingent
commitment of CountryPlace to fund future advances.
Off Balance Sheet Arrangements
See Note 16 to the Consolidated Financial Statements for a discussion of the
Company's off-balance sheet commitments, which is incorporated herein by
reference.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon its Consolidated Financial Statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. See "Forward-Looking Statements" above.
Management believes the following accounting policies are critical to Company
operating results or may affect significant judgments and estimates used in the
preparation of the Company's Consolidated Financial Statements and should be
read in conjunction with the Notes to the Company's Consolidated Financial
Statements.
Factory-Built Housing Revenue Recognition - Wholesale. Revenue from homes sold
to independent distributors, builders, communities and developers is generally
recognized when the home is shipped, at which time title passes and it is
probable that substantially all of the consideration will be received. Homes
sold to independent distributors are generally either paid for upon shipment or
floor plan financed by the independent distributor through standard industry
financing arrangements, which can include repurchase agreements. Manufacturing
sales financed under floor plan arrangements that include repurchase agreements
are reduced by a provision for estimated repurchase obligations (see Note 16 to
the Consolidated Financial Statements).
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Prior to the adoption of FASB Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (Topic 606) ("ASC 606"), revenue from
homes sold under commercial loan programs involving funds provided by the
Company were either deferred until such time that payment for the related
commercial loan was received by the Company or recognized when the home was
shipped and title transferred, depending on the nature of the program and
borrower. Upon adoption of ASC 606, the Company generally recognizes home sales
revenue upon shipment and transfer of title, as it is probable that
substantially all of the consideration in exchange for the goods or services
transferred to the customer will be collected. One consideration under the
guidance requires the evaluation of the financing component of the related loan
program. If it is determined that the interest rate charged under the loan
program is less than the market rate, the Company will reduce the transaction
price by an amount for deferred interest. In these cases, interest income will
be accrued and recognized over the life of the loan using the effective interest
method. The Company offers a significant amount of its loan programs at market
rates.
Factory-Built Housing Revenue Recognition - Retail. Sales by Company-owned
retail locations are generally recognized when the customer has entered into a
legally binding sales contract, the home is delivered and permanently located at
the customer's site, the home is accepted by the customer, title has transferred
and funding is probable.
Financial Services Revenue Recognition. Premium amounts collected on policies
issued and assumed by Standard Casualty are amortized on a straight-line basis
into Net revenue over the life of the policy. Premiums earned are net of
reinsurance ceded. Policy acquisition costs are also amortized in Cost of sales
over the life of the policy. Insurance agency commissions received from
third-party insurance companies are recognized as revenue upon execution of the
insurance policy as the Company has no future or ongoing obligation with respect
to such policies.
Upon acquisition of the securitized loan portfolios ("Acquisition Date"),
management evaluated consumer loans receivable held for investment by
CountryPlace to determine whether there was evidence of deterioration of credit
quality and if it was probable that CountryPlace would be unable to collect all
amounts due according to the loans' contractual terms. The Company also
considered expected prepayments and estimated the amount and timing of
undiscounted expected principal, interest and other cash flows. The Company
determined the excess of the loan pool's scheduled contractual principal and
contractual interest payments over the undiscounted cash flows expected as of
the Acquisition Date as an amount that is not accreted into interest income (the
non-accretable difference). The cash flow expected to be collected in excess of
the carrying value of the acquired loans is accreted into interest income over
the remaining life of the loans (referred to as accretable yield). Interest
income on consumer loans receivable is recognized in Net revenue (see Note 6 to
the Consolidated Financial Statements).
For loans originated by CountryPlace and held for sale, loan origination fees
and gains or losses on sales are recognized in Net revenue upon transfer of the
loans. CountryPlace provides third-party servicing of mortgages and earns
servicing fees each month based on the aggregate outstanding balances. Servicing
fees are recognized in Net revenue when earned.
Warranties. The Company provides the retail home buyer a one-year limited
warranty covering defects in material or workmanship in home structure, plumbing
and electrical systems. Nonstructural components of a cosmetic nature are
warranted for 120 days, except in specific cases where state laws require longer
warranty terms. The Company records a liability for estimated future warranty
costs relating to homes sold based upon an assessment of historical experience
factors. Factors used in the estimation of the warranty liability include the
estimated amount of homes still under warranty including homes in distributor
inventories, homes purchased by consumers still within the one-year warranty
period, the timing in which work orders are completed and the historical average
costs incurred to service a home. As a result of the COVID-19 pandemic, the
Company has adjusted its warranty timing requirements, allowing customers an
extension of time for repairs to be made if they were nearing the end of their
warranty period and COVID-19 related circumstances prevented the work from being
completed.
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Reserve for Repurchase Commitments. Manufactured housing companies customarily
enter into repurchase and other recourse agreements with lending institutions
that have provided wholesale floor plan financing to distributors. Significant
portions of the Company's sales are made to distributors pursuant to repurchase
agreements with lending institutions. These agreements generally provide that
the Company will repurchase its new products from the lending institutions in
the event such product is repossessed upon a distributor's default. The
Company's obligation under these repurchase agreements ceases upon the purchase
of the home by the retail customer.
The Company applies FASB ASC 460, Guarantees and FASB ASC 450-20, Loss
Contingencies ("ASC 450-20"), to account for its liability for repurchase
commitments. Additionally, subsequent to the inception of the repurchase
commitment, the Company evaluates the likelihood that it will be called on to
perform under the inventory repurchase commitments. If it becomes probable that
a distributor will default and an ASC 450-20 loss reserve should be recorded,
then such contingent liability is recorded equal to the estimated loss on
repurchase.
Distributor Volume Rebates. The Company's manufacturing operations sponsor
volume rebate programs under which certain sales to distributors, builders and
developers can qualify for cash rebates generally based on the level of sales
attained during a twelve-month period. Volume rebates are accrued at the time of
sale and are recorded as a reduction of Net revenue.
Impairment of Long-Lived Assets. The Company periodically evaluates the carrying
value of long-lived assets to be held and used and held for sale for impairment
when events and circumstances warrant such a review. The carrying value of
long-lived assets is considered impaired when the anticipated undiscounted cash
flow from such assets is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived assets. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that the fair values are based primarily on independent
appraisals and preliminary or definitive contractual arrangements less costs to
dispose. The Company recorded no impairment charges on long-lived assets during
fiscal years 2020, 2019 or 2018.
Income Taxes and Deferred Tax Assets and Liabilities. Deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement amounts and the tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company periodically evaluates the deferred tax assets based on the
requirements established in FASB ASC 740, Income Taxes, which requires the
recording of a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
determination of the need for or amount of any valuation allowance involves
significant management judgment and is based upon the evaluation of both
positive and negative evidence, including estimates of anticipated taxable
profits in various jurisdictions with which the deferred tax assets are
associated. At March 28, 2020 , the Company evaluated its historical profits
earned and forecasted taxable profits and determined that, except for certain
state net operating loss deferred tax assets, all other deferred tax assets
would be utilized in future periods.
Goodwill and Other Intangibles. Goodwill and indefinite-lived intangibles are
tested annually for impairment. The Company's analysis depends upon a number of
judgments, estimates and assumptions. Accordingly, such testing is subject to
uncertainties, which could cause the fair value to fluctuate from period to
period.
As of March 28, 2020 , all of the Company's goodwill is attributable to the
factory-built housing segment. The Company performed the annual goodwill
impairment analysis as of March 28, 2020 , in accordance with ASU No. 2011-08,
Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The
analysis determined that the fair value of the reporting unit was greater than
the carrying value and thus no further procedures were considered necessary.
In the event that the Company is not able to achieve expected cash flow levels,
or other factors indicate that goodwill is impaired, the Company may need to
write off all or part of its goodwill, which would adversely affect its
operating results and net worth. See Part I, Item 1A, "Risk Factors."
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Accretable Yield on Consumer Loans Receivable and Securitized Financings. The Company acquired consumer loans receivable and securitized financings during the first quarter of fiscal 2012 as a part of thePalm Harbor transaction. Acquired consumer loans receivable held for investment and securitized financings were acquired at fair value, which resulted in a discount, and subsequently are accounted for in a manner similar to FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality to accrete the discount. The Company considers expected prepayments and default rates and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the Acquisition Date cannot be accreted into interest income (the non-accretable difference). The remaining amount is accreted into interest income over the remaining life of the obligation (referred to as accretable yield). For additional information, see Note 6 to the Consolidated Financial Statements. Other Matters Related Party Transactions. The Company has non-marketable equity investments in other distribution operations outside of Company-owned retail locations. In the ordinary course of business, the Company sells homes and lends to certain of these operations through its commercial lending programs. For the year endedMarch 28, 2020 ,March 30, 2019 andMarch 31, 2018 , the total amount of sales to related parties was$51.0 million ,$42.2 million and$38.8 million , respectively. As ofMarch 28, 2020 , receivables from related parties included$1.7 million of accounts receivable and$8.2 million of commercial loans outstanding. As ofMarch 30, 2019 , receivables from related parties included$1.5 million of accounts receivable and$6.2 million of commercial loans outstanding. In fiscal year 2018, the Company recorded a gain of$1.9 million on the sale of equity securities to a related party in which the Company owns a 10% minority ownership interest. The arm's length transaction occurred at market rates. Impact of Inflation. Sudden increases in specific costs, such as the increases in material and labor, as well as price competition, can affect the Company's ability to efficiently increase its selling prices and may adversely impact its results of operations. The Company can give no assurance that inflation will not affect its profitability in the future. Income Taxes. OnDecember 22, 2017 , theU.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to theU.S. tax code that affect the Company and include, but are not limited to: (1) reducing theU.S. federal corporate tax rate, (2) allowing bonus depreciation for full expensing of qualified property and (3) eliminating the manufacturing deduction. The Tax Act reduced the federal corporate tax rate to 21%. The Company's federal corporate tax rate for the fiscal year endedMarch 31, 2018 was 31.54%, reflecting a 35% tax rate that was applicable prior to the passage of the Tax Act and the new 21% rate that was effective after passage of the Tax Act. OnMarch 27, 2020 , the CARES Act was signed into law. Among other items, the CARES Act contains corporate income tax provisions that will be advantageous to the Company, including providing temporary suspension of certain payment requirements for the employer portion of social security taxes and the creation of certain refundable employee retention credits. The Company will continue to evaluate the CARES Act for opportunities as additional information is released. Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements. 44
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