CAVCO INDUSTRIES, INC.

(CVCO)
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CAVCO INDUSTRIES INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2022 | 04:09pm EDT

Forward-Looking Statements


Statements in this Report on Form 10-Q include "forward-looking statements,"
within the meaning of Section 27A of the Securities Act of 1933, Section 21E of
the Securities Exchange Act of 1934 (the "Exchange Act"), and the Private
Securities Litigation Reform Act of 1995. 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; our financial performance and
operating results; our liquidity and financial resources; our outlook with
respect to the Company and the manufactured housing business in general; the
expected effect of certain risks and uncertainties on our business, financial
condition and results of operations; economic conditions and consumer
confidence; increasing interest rates; inflation; potential acquisitions,
strategic investments and other expansions; the sufficiency of our liquidity;
operational and legal risks; how we may be affected by the COVID-19 pandemic
("COVID-19") or any other pandemic or outbreak; labor shortages and the pricing
and availability of raw materials; governmental regulations and legal
proceedings; the availability of favorable consumer and wholesale manufactured
home financing; and the ultimate outcome of our commitments and contingencies.
Forward-looking statements contained in this Report on Form 10-Q ("Report")
speak only as of the date of this report or, in the case of any document
incorporated by reference, the date of that document. We do not intend to
publicly update or revise any forward-looking statement contained in this Report
or in any document incorporated herein by reference to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time, except as required by law.

Forward-looking statements involve risks, uncertainties and other factors that
may cause our 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 our assumptions and
expectations differ from actual results, our 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 our
results and cause them to materially differ from those contained in the
forward-looking statements include, without limitation, those discussed under
Risk Factors in Part I, Item 1A of our 2022 Annual Report on Form 10-K filed
with the Securities and Exchange Commission ("Form 10-K").

Introduction


The following should be read in conjunction with Cavco Industries, Inc. and its
subsidiaries' (collectively, "we," "us," "our," the "Company" or "Cavco")
Consolidated Financial Statements and the related Notes that appear in Item 1 of
this Report. References to "Note" or "Notes" pertain to the Notes to our
Consolidated Financial Statements.

Company Overview


Headquartered in Phoenix, Arizona, we design and produce factory-built housing
products primarily distributed through a network of independent and
Company-owned retailers, planned community operators and residential developers.
We are one of the largest producers of manufactured homes in the United States,
based on reported wholesale shipments. Our products are marketed under a variety
of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont,
Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell,
Manorwood and MidCountry. We are also a leading producer of park model RVs,
vacation cabins and factory-built commercial structures. Our finance subsidiary,
CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National
Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation
("Freddie Mac") seller/servicer and a Government National Mortgage Association
("Ginnie Mae") mortgage-backed securities issuer that offers conforming
mortgages, non-conforming mortgages and home-only loans to purchasers of
factory-built homes. Our insurance subsidiary, Standard Casualty Company
("Standard Casualty"), provides property and casualty insurance to owners of
manufactured homes.
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We operate 26 homebuilding production lines in Millersburg and Woodburn, Oregon;
Riverside, California; Nampa, Idaho; Phoenix and Goodyear, Arizona; Austin, Fort
Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Dorchester, Wisconsin;
Nappanee and Goshen, Indiana; Lafayette, Tennessee; Douglas and Moultrie,
Georgia; Shippenville and Emlenton, Pennsylvania; Martinsville and Rocky Mount,
Virginia; Cherryville, North Carolina; and Ocala and Plant City, Florida. The
majority of the homes produced are sold to, and distributed by, independently
owned and controlled retail operations located throughout the United States and
Canada. In addition, our homes are sold through 45 Company-owned U.S. retail
locations.

Included in the above figures are two recent acquisitions. On July 4, 2021, we
purchased an additional 20% ownership in Craftsman Homes, LLC and Craftsman
Homes Development, LLC (collectively known as "Craftsman") in addition to our
existing 50% ownership, making us controlling owner. Craftsman is a manufactured
home retailer with four locations in Nevada selling Company and other
manufacturer branded homes. They also provide general construction to setup the
customer's property and assist with multi-home developments and multi-family
dwellings. The transaction was accounted for as a business combination achieved
in stages and the results of operations have been included in the accompanying
Consolidated Financial Statements since the date of the acquisition of the
additional 20% interest, with a reduction for the earnings attributable to the
noncontrolling shareholder.

On September 24, 2021, we purchased certain manufactured housing assets and
assumed certain liabilities of The Commodore Corporation ("Commodore"),
including its six manufacturing facilities and two wholly-owned retail
locations. In addition to manufacturing, Commodore also participates in
commercial lending operations with its dealers. The transaction was accounted
for as a business combination and the results of operations have been included
in the accompanying Consolidated Financial Statements since the date of
acquisition.

Company and Industry Outlook


According to data reported by the Manufactured Housing Institute, industry home
shipments increased 13.4% for the first 5 months of calendar year 2022 compared
to the same period last year.

The industry offers solutions to the affordable housing crisis and these
shipment numbers reflect the industry's ability to produce in the current
environment. The average price per square foot for a manufactured home is
usually lower than a site-built home. Also, based on the comparatively low cost
associated with manufactured home ownership, our products have traditionally
competed with rental housing's monthly payment affordability.

The two largest manufactured housing consumer demographics, young adults and
those who are age 55 and older, are both growing. "First-time" and "move-up"
buyers of affordable homes are historically among the largest segments of new
manufactured home purchasers. Included in this group are lower-income households
that are particularly affected by periods of low employment rates and
underemployment. Consumer confidence is especially important among manufactured
home buyers interested in our products for seasonal or retirement living.

We employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage. We are focused on building quality, energy efficient homes for the modern home buyer. Our green building initiatives involve the creation of an energy efficient envelope, including higher utilization of renewable materials and provide lower utility costs. We also build homes designed to use alternative energy sources, such as solar.


We maintain a conservative cost structure in an effort to build added value into
our homes and we work diligently to maintain a solid financial position. Our
balance sheet strength, including the position in cash and cash equivalents,
helps avoid liquidity problems and enables us to act effectively as market
opportunities or challenges present themselves.
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We continue to make certain commercial loan programs available to members of our
wholesale distribution chain. Under direct commercial loan arrangements, we
provide funds for financed home purchases by distributors, community owners and
developers (see Note 7 to the Consolidated Financial Statements). Our
involvement in commercial loans helps to increase the availability of
manufactured home financing to distributors, community owners and developers and
provides additional opportunities for product exposure to potential home buyers.
While these initiatives support our ongoing efforts to expand product
distribution, they also expose us to risks associated with the creditworthiness
of this customer base and our inventory financing partners.

The lack of an efficient secondary market for manufactured home-only loans and
the limited number of institutions providing such loans results in higher
borrowing costs for home-only loans and continues to constrain industry growth.
We work independently and with other industry participants to develop secondary
market opportunities for manufactured home-only loan and non-conforming mortgage
portfolios and expand lending availability in the industry. Additionally, we
continue to invest in community-based lending initiatives that provide home-only
financing to residents of certain manufactured home communities. We also develop
and invest in home-only lending programs to grow sales of homes through
traditional distribution points. We believe that growing our investment and
participation in home-only lending may provide additional sales growth
opportunities for our factory-built housing operations and reduce our exposure
to the actions of independent lenders.

Home order rates have moderated from the extreme highs we saw during the summer
of 2020 to the summer of 2021. However, our backlogs at July 2, 2022 were $1.0
billion, consistent with the sequential prior quarter of $1.1 billion and up
$206 million, or 26.3%, compared to $792 million at July 3, 2021. The year over
year increase includes $231 million attributable to Commodore. Backlogs exclude
home orders that have been paused or canceled at the request of the customer.

Key housing building materials include wood, wood products, steel, gypsum
wallboard, windows, doors fiberglass insulation, carpet, vinyl, fasteners,
plumbing materials, aluminum, appliances and electrical items. Fluctuations in
the cost of materials and labor may affect gross margins from home sales to the
extent that costs cannot be efficiently matched to the home sales price. Pricing
and availability of certain raw materials have recently been volatile due to a
number of factors in the current environment. We continue to monitor and react
to inflation in these materials by maintaining a focus on our product pricing in
response to higher materials costs, but such product pricing increases may lag
behind the escalation of such costs. From time to time and to varying degrees,
we may experience shortages in the availability of materials and/or labor in the
markets served. Availability of these inputs has not caused significant
production halts in the current period, but we have experienced periodic
shutdowns in other periods and shortages of primary building materials have
caused production inefficiencies as we have needed to change processes in
response to the delay in materials. These shortages may also result in extended
order backlogs, delays in the delivery of homes and reduced gross margins from
home sales.

While it is difficult to predict the future of housing demand, employee
availability, supply chain and Company performance and operations, maintaining
an appropriately sized and well-trained workforce is key to increasing
production to meet increased demand, and we face challenges in overcoming
labor-related difficulties in the current environment to increase home
production. We continually review the wage rates of our production employees and
have established other monetary incentive and benefit programs, with a goal of
providing competitive compensation. We are also working to more extensively use
web-based recruiting tools, update our recruitment brochures and improve the
appearance and appeal of our manufacturing facilities to improve the recruitment
and retention of qualified production employees and reduce annualized turnover
rates. We believe our ability to recruit the workforce we need to help meet the
overall need for affordable housing continues to improve.
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In the financial services segment, we continue to assist customers in need by
servicing existing loans and insurance policies and complying with state and
federal regulations regarding loan forbearance, home foreclosures and policy
cancellations. Certain loans serviced for investors expose us to cash flow
deficits if customers do not make contractual monthly payments of principal and
interest in a timely manner. For certain loans serviced for Ginnie Mae and
Freddie Mac, and home-only loans serviced for certain other investors, we must
remit scheduled monthly principal and/or interest payments and principal
curtailments regardless of whether monthly mortgage payments are collected from
borrowers. 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. Monthly collections of principal and interest from borrowers have
exceeded scheduled principal and interest payments owed to investors; however,
mandatory extended forbearance under the Coronavirus Aid, Relief and Economic
Security Act and certain other regulations related to COVID-19 could negatively
impact cash obligations in the future.

Results of Operations

Net Revenue

                                                        Three Months Ended
                                                    July 2,             July 3,
 ($ in thousands, except revenue per home sold)      2022                2021                         Change
Factory-built housing                            $  572,597          $  312,283          $ 260,314                 83.4  %
Financial services                                   15,741              18,139             (2,398)               (13.2) %
                                                 $  588,338          $  330,422          $ 257,916                 78.1  %

Factory-built homes sold
by Company-owned retail sales centers                   873                 723                   150              20.7  %
to independent retailers, builders,
communities and developers                            4,473               2,977              1,496                 50.3  %
                                                      5,346               3,700              1,646                 44.5  %

Net factory-built housing revenue per home sold $ 107,108 $ 84,401 $ 22,707

                 26.9  %


In the factory-built housing segment, the increase in Net revenue was primarily
due to an increase in the average sales price and the number of units sold. The
higher home prices were driven by product price increases. Home sales volume
increased from the addition of Commodore, which provided $101 million in Net
revenue for the three months ended July 2, 2022, and higher factory capacity
utilization.

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 and
sales of homes to consumers by Company-owned retail stores. 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. Our homes are
constructed in one or more floor sections ("modules") which are then installed
on the customer's site. Changes in the number of modules per home, the selection
of different home types/models and optional home upgrades create changes in
product mix, also causing fluctuations in this metric. The table below presents
the mix of modules and homes sold for the three months ended July 2, 2022 and
July 3, 2021:
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                                     Three Months Ended
                          July 2,                         July 3,
                           2022                             2021                      Change
                  Modules          Homes          Modules          Homes        Modules      Homes
HUD code homes    8,515           4,854           5,652           3,276          50.7  %     48.2  %
Modular homes       486             251             468             226           3.8  %     11.1  %
Park model RVs      241             241             198             198          21.7  %     21.7  %
                  9,242           5,346           6,318           3,700          46.3  %     44.5  %


Financial services segment revenue decreased primarily due to lower interest
income earned on the acquired consumer loan portfolios that continue to
amortize, unrealized losses on marketable equity securities in the insurance
subsidiary's portfolio and lower volume of home loan sales, partially offset by
more insurance policies in force. For the three months ended July 2, 2022 and
July 3, 2021, we recognized unrealized losses on marketable equity securities of
$1.2 million and unrealized gains of $0.4 million, respectively.

Gross Profit

                                              Three Months Ended
                                            July 2,         July 3,
       ($ in thousands)                       2022           2021                Change
       Factory-built housing              $ 139,586       $ 66,273       $ 73,313       110.6  %
       Financial services                     5,138          7,740         (2,602)      (33.6) %
                                          $ 144,724       $ 74,013       $ 70,711        95.5  %
       Gross profit as % of Net revenue
       Consolidated                            24.6  %        22.4  %           N/A       2.2  %
       Factory-built housing                   24.4  %        21.2  %           N/A       3.2  %
       Financial services                      32.6  %        42.7  %           N/A     (10.1) %


Factory-built housing gross profit increased for the three months ended July 2,
2022 primarily due to higher average sales prices, increased home sales volume
and streamlining of our HUD code product offering across our network, partially
offset by higher materials costs per unit. We continue to monitor and react to
inflation in building material prices by maintaining a focus on our product
pricing; however, product price increases may lag behind the escalation of
building material costs.

For the three months ended July 2, 2022, Financial services gross profit
decreased primarily due to higher weather related claims and unrealized losses
on marketable equity securities compared to unrealized gains in the prior year
period.
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Selling, General and Administrative Expenses

                                                       Three Months Ended
                                                   July 2,             July 3,
($ in thousands)                                    2022                2021                         Change
Factory-built housing                           $   60,923          $   35,497          $  25,426                 71.6  %
Financial services                                   5,213               5,335               (122)                (2.3) %
                                                $   66,136          $   40,832          $  25,304                 62.0  %
Selling, general and administrative expenses as
% of Net revenue                                      11.2  %             12.4  %                N/A              (1.2) %


For the three months ended July 2, 2022, Selling, general and administrative
expenses related to factory-built housing increased between periods primarily
from the addition of Commodore, higher salary and incentive-based compensation
expense and expenses incurred in engaging third-party consultants in relation to
claiming the non-recurring energy efficient home net tax credits which were
recognized in the second half of fiscal 2022.

As a percentage of Net revenue, Selling, general and administrative expenses improved 120 basis points from better utilization of fixed costs on higher sales.

Other Components of Net Income


                           Three Months Ended
                       July 2,              July 3,
($ in thousands)         2022                2021               Change
Interest expense     $    161              $  164       $     (3)       (1.8) %
Other income, net         883               2,461         (1,578)      (64.1) %
Income tax expense     19,616               8,432         11,184       132.6  %
Effective tax rate       24.7   %            23.8  %           N/A       0.9  %

Interest expense consists primarily of interest related to finance leases.


Other income, net 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 from the
sale of property, plant and equipment. Other income, net declined from a $1.1
million unrealized loss on corporate marketable investments and lower interest
income on reduced cash balances.

Liquidity and Capital Resources


We believe that cash and cash equivalents at July 2, 2022, together with cash
flow from operations, will be sufficient to fund our operations, cover our
obligations and provide for growth for the next 12 months and into the
foreseeable future. We maintain cash in U.S. Treasury and other money market
funds, some of which are in excess of federally insured limits. We expect 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 our liquidity and capital resources. Because of our sufficient cash
position, we have not historically sought external sources of liquidity, with
the exception of certain credit facilities for our home-only lending programs.
Regardless, depending on our operating results and strategic opportunities, we
may choose to seek additional or alternative sources of financing in the future.
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 us to reevaluate our long-term operating plans to make more efficient use of
our existing capital resources at such time. The exact nature of any changes to
our plans that would be considered depends on various factors, such as
conditions in the factory-built housing industry and general economic conditions
outside of our control.
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State insurance regulations restrict the amount of dividends that can be paid to
stockholders of insurance companies. As a result, the assets owned by our
insurance subsidiary are generally not available to satisfy the claims of Cavco
or its legal subsidiaries. We believe that stockholders' equity at the insurance
subsidiary remains sufficient and do not believe that the ability to pay
ordinary dividends to Cavco at anticipated levels will be restricted per state
regulations.

The following is a summary of the Company's cash flows for the three months ended July 2, 2022 and July 3, 2021, respectively:

                                                         Three Months Ended
                                                     July 2,             July 3,
(in thousands)                                        2022                2021              $ Change
Cash, cash equivalents and restricted cash at
beginning of the fiscal year                      $  259,334          $  339,307          $  (79,973)
Net cash provided by operating activities             58,240              24,275              33,965
Net cash used in investing activities                (24,399)             (3,616)            (20,783)
Net cash used in financing activities                (40,213)            (13,150)            (27,063)
Cash, cash equivalents and restricted cash at end
of the period                                     $  252,962          $  

346,816 $ (93,854)



Net cash provided by operating activities increased primarily from higher net
income adjusted for non-cash items. This increase was partially offset by
increased lending in our Financial Services segment, as well as under our
commercial loan programs. Consumer loan originations increased $4.8 million to
$47.5 million for the three months ended July 2, 2022 from $42.7 million for the
three months ended July 3, 2021.

Net cash used in investing activities consists of buying and selling debt and
marketable equity securities in our Financial Services segment, purchases of
property, plant and equipment and funding strategic growth acquisitions. Greater
cash used in the current period reflects the purchase of plant facilities in
Hamlet, North Carolina.

Net cash used in financing activities for the current period was primarily for the repurchase of common stock.

See Note 14 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.

Obligations and Commitments. There were no material changes to the obligations and commitments as set forth in our Annual Report on Form 10-K.

Critical Accounting Estimates


Except as described in Note 1 to the Consolidated Financial Statements, there
have been no other significant changes to our critical accounting estimates
during the three months ended July 2, 2022, as compared to those disclosed in
Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting
Estimates," which provides a discussion of the critical accounting estimates
that management believes affect its more significant judgments and estimates
used in the preparation of the Company's Consolidated Financial Statements.

Other Matters


Impact of Inflation. At the end of the period, inflation was the highest in the
U.S. in over 30 years. Our ability to maintain certain levels of gross margin
can be adversely impacted by sudden increases in specific costs, such as the
increases in materials and labor. In addition, measures used by the Federal
Reserve to combat inflation, such as increases in interest rates, could also
have an impact on the ability of home buyers to obtain affordable financing. We
can give no assurance that inflation will not affect our future profitability
and financial position.


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