CAVCO INDUSTRIES, INC. Forward-Looking Statements
Statements in this Report on Form 10-Q ("Report") 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
include, for example, 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 Cavco
Industries, Inc. and its subsidiaries (collectively, "we," "us," "our," the
"Company" or "Cavco") 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, including concerns of
a possible recession, and consumer confidence; trends in interest rates and
inflation; potential acquisitions, strategic investments and other expansions;
the sufficiency of our liquidity; operational and legal risks; how we may be
affected by any pandemic or outbreak; geopolitical conditions (including the
continuing Russia -Ukraine conflict); the cost and availability of labor and 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 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 (the "Form 10-K").
Introduction
The following should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes that appear in Part I, Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to our Consolidated Financial Statements. Company Overview Headquartered inPhoenix, 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 inthe 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, MidCountry and Solitaire. 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 aGovernment 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. 22
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We operate 31 homebuilding production lines inMillersburg andWoodburn, Oregon ;Riverside, California ;Nampa, Idaho ;Phoenix ,Glendale andGoodyear, Arizona ;Deming, New Mexico ;Duncan, Oklahoma ;Austin ,Fort Worth ,Seguin andWaco, Texas ;Montevideo, Minnesota ;Dorchester, Wisconsin ;Nappanee andGoshen, Indiana ;Lafayette, Tennessee ;Douglas andMoultrie, Georgia ;Shippenville andEmlenton, Pennsylvania ;Martinsville andRocky Mount, Virginia ;Cherryville andHamlet, North Carolina ;Ocala andPlant City, Florida ; and two inOjinaga, Mexico . The majority of the homes produced are sold to, and distributed by, independently owned retail operations located throughoutthe United States andCanada . In addition, our homes are sold through 64 Company-ownedU.S. retail locations, including the 22 retail locations acquired withSolitaire Homes . During fiscal 2022, we acquired an additional 20% ownership inCraftsman Homes, LLC andCraftsman Homes Development, LLC (collectively known as "Craftsman"), which gave us a 70% majority controlling interest. Craftsman is a manufactured home retailer with four locations inNevada selling Company and other manufacturer branded homes. We also purchased certain manufactured housing assets and assumed certain liabilities ofThe Commodore Corporation ("Commodore"). Commodore added six manufacturing facilities and two wholly-owned retail locations, and also participates in commercial lending operations with its dealers. OnJanuary 3, 2023 , subsequent to the end of the third fiscal quarter of 2023, we completed the acquisition ofSolitaire Homes , including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations. The addition ofSolitaire Homes to our existing manufacturing and retail system strengthens our position in the Southwest and expands our manufacturing capabilities intoMexico .
Company and Industry Outlook
According to data reported by theManufactured Housing Institute , industry home shipments throughNovember 2022 were 106,454, an increase of 8.9% compared to 97,745 shipments in 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 resulting in lower utility costs, as well as the higher utilization of renewable materials in our manufacturing process. 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. 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 operators and residential developers (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial lending helps to increase the availability of manufactured home financing to distributors, community operators and residential 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. 23
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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 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. 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 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. Our backlog atDecember 31, 2022 was$427 million compared to$651 million last quarter, a decrease of$224 million or 34.4%, and down$678 million , or 61.4%, compared to$1.1 billion atJanuary 1, 2022 . This was largely due to lower home order rates net of cancellations. Order rates are down from the extreme highs we saw during the summer of 2020 to the summer of 2021. 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 meeting demand. 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. 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 forGinnie 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. 24
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Table of Contents Results of OperationsNet Revenue Three Months Ended ($ in thousands, except revenue per home December 31, January
1,
sold) 2022 2022 Change Factory-built housing$ 481,193 $ 413,590 $ 67,603 16.3 % Financial services 19,410 18,124 1,286 7.1 %$ 500,603 $ 431,714 $ 68,889 16.0 % Factory-built homes sold by Company-owned retail sales centers 748 658 90 13.7 % to independent retailers, builders, communities and developers 3,694 3,766 (72) (1.9) % 4,442 4,424 18 0.4 % Net factory-built housing revenue per home sold$ 108,328 $ 93,488 $ 14,840 15.9 % Nine Months Ended ($ in thousands, except revenue per home December 31, January
1,
sold) 2022 2022 Change Factory-built housing$ 1,613,392 $ 1,067,967 $ 545,425 51.1 % Financial services 52,941 53,712 (771) (1.4) %$ 1,666,333 $ 1,121,679 $ 544,654 48.6 % Factory-built homes sold by Company-owned retail sales centers 2,481 2,091 390 18.7 % to independent retailers, builders, communities and developers 12,418 9,630 2,788 29.0 % 14,899 11,721 3,178 27.1 % Net factory-built housing revenue per home sold$ 108,289 $ 91,116 $ 17,173 18.8 % In factory-built housing, Net revenue for both the three and nine months endedDecember 31, 2022 increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices. Also included in both current year periods is$3.9 million of home sales revenue from an equity method joint venture. This represents revenue that was previously deferred and now recognized in the third quarter upon that entity selling those homes to an unrelated third party. 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 tables below presents the mix of modules and homes sold for the three and nine months endedDecember 31, 2022 andJanuary 1, 2022 : 25
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Three Months Ended
December 31, January 1,
2022 2022 Change
Modules Homes Modules Homes Modules Homes
U.S. Housing and Urban Development
("HUD") code homes 5,852 3,454 6,166 3,583 (5.1) % (3.6) %
Modular homes 1,412 708 1,270 632 11.2 % 12.0 %
Park model RVs 280 280 209 209 34.0 % 34.0 %
7,544 4,442 7,645 4,424 (1.3) % 0.4 %
Nine Months Ended
December 31, January 1,
2022 2022 Change
Modules Homes Modules Homes Modules Homes
HUD code homes 20,474 11,925 17,366 10,013 17.9 % 19.1 %
Modular homes 4,408 2,207 2,257 1,112 95.3 % 98.5 %
Park model RVs 767 767 596 596 28.7 % 28.7 %
25,649 14,899 20,219 11,721 26.9 % 27.1 %
For the three months ended December 31, 2022 , Financial services segment Net
revenue increased 7.1% primarily due to more policies in force in the current
period, partially offset by lower interest income earned on the acquired
consumer loan portfolios. For the nine months ended December 31, 2022 , Net
revenue decreased 1.4% primarily due to realized and unrealized losses on
marketable equity securities in the insurance subsidiary's portfolio during such
period, lower interest income earned on the acquired consumer loan portfolios
and lower volume in home loan sales. These items were partially offset by more
insurance policies in force in the current period compared to the prior period.
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Gross Profit
Three Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Factory-built housing $ 122,923 $ 104,119 $ 18,804 18.1 %
Financial services 9,045 11,089 (2,044) (18.4) %
$ 131,968 $ 115,208 $ 16,760 14.5 %
Gross profit as % of Net revenue
Consolidated 26.4 % 26.7 % N/A (0.3) %
Factory-built housing 25.5 % 25.2 % N/A 0.3 %
Financial services 46.6 % 61.2 % N/A (14.6) %
Nine Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Factory-built housing $ 412,174 $ 252,691 $ 159,483 63.1 %
Financial services 22,117 26,458 (4,341) (16.4) %
$ 434,291 $ 279,149 $ 155,142 55.6 %
Gross profit as % of Net revenue
Consolidated 26.1 % 24.9 % N/A 1.2 %
Factory-built housing 25.5 % 23.7 % N/A 1.8 %
Financial services 41.8 % 49.3 % N/A (7.5) %
Factory-built housing Gross profit and Gross profit percentage increased for the
three and nine months ended December 31, 2022 primarily due to higher average
sales prices.
In Financial services, Gross profit and Gross profit percentage decreased for
the three and nine months ended December 31, 2022 primarily due to higher
insurance claims from Arizona and Texas weather related events and greater
unrealized losses on marketable equity securities compared to the same period
last year.
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Selling, General and Administrative Expenses
Three Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Factory-built housing $ 54,127 $ 55,735 $ (1,608) (2.9) %
Financial services 4,777 4,587 190 4.1 %
$ 58,904 $ 60,322 $ (1,418) (2.4) %
Selling, general and administrative
expenses as % of Net revenue 11.8 % 14.0 % N/A (2.2) %
Nine Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Factory-built housing $ 176,690 $ 131,579 $ 45,111 34.3 %
Financial services 15,244 14,947 297 2.0 %
$ 191,934 $ 146,526 $ 45,408 31.0 %
Selling, general and administrative
expenses as % of Net revenue 11.5 % 13.1 % N/A (1.6) %
For the three months ended December 31, 2022 , Selling, general and
administrative expenses related to factory-built housing decreased primarily
from lower legal and professional fees, partially offset by higher incentive
compensation on improved earnings. For the nine months ended December 31, 2022 ,
Selling, general and administrative expenses increased primarily from higher
legal and professional fees and higher salary and incentive compensation expense
on improved earnings.
As a percentage of Net revenue, Selling, general and administrative expenses
improved by 220 and 160 basis points for the three and nine months ended
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Other Components of Net Income
Three Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Interest expense $ 216 $ 209 $ 7 3.3 %
Other income, net 3,233 4,258 (1,025) 24 %
Income tax (expense) benefit (16,492) 20,680 (37,172) 179.7 %
Effective tax rate 21.7 % (35.1) % N/A N/M
Nine Months Ended
December 31, January 1,
($ in thousands) 2022 2022 Change
Interest expense $ 610 $ 576 $ 34 5.9 %
Other income, net 6,455 11,387 (4,932) 43.3 %
Income tax (expense) benefit (54,721) 910 (55,631) 6,113.3 %
Effective tax rate 22.0 % (0.6) % N/A N/M
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. The decrease in Other income, net is primarily due to a$3.3 million gain recognized in the second quarter of last year on the remeasurement of the assets and liabilities of Craftsman upon acquisition of a controlling interest. Additionally, for the nine months endedDecember 31, 2022 , we recognized a$1.2 million unrealized loss on corporate marketable investments compared to a$4.0 million unrealized gain in the prior year. These items were partially offset by higher interest income earned on a larger cash balance held in high yield money market funds. For the three and nine months endedJanuary 1, 2022 , the effective income tax rate was a benefit due to$34.4 million of energy efficient home tax credits, which included catch up credits for homes sold between 2018 through 2021. The effective tax rate for the three and nine months endedDecember 31, 2022 was 21.7% and 22.0%, respectively.
Liquidity and Capital Resources
We believe that cash and cash equivalents atDecember 31, 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 inU.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. We have sufficient liquid resources including our recently implemented$50.0 million Revolving Credit Facility, of which no amounts were outstanding atDecember 31, 2022 . 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. 29
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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 nine months ended
Nine Months Ended
December 31, January 1,
(in thousands) 2022 2022 $ 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 230,119 125,967 104,152
Net cash used in investing activities (29,199) (147,842) 118,643
Net cash used in financing activities (73,860) (34,290) (39,570)
Cash, cash equivalents and restricted cash at end
of the period $ 386,394 $
283,142
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$12.7 million to$135.6 million for the nine months endedDecember 31, 2022 from$122.9 million for the nine months endedJanuary 1, 2022 , which was partially offset by increased proceeds of$3.6 million from sales of consumer loans. 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. Cash used in the current period reflects the purchase of our plant facilities inHamlet, North Carolina and development of our facility inGlendale, Arizona . These expenditures were partially offset by a$12.2 million return of invested capital from one of our equity method joint ventures. Cash used in the prior period reflects the purchase of Commodore and Craftsman.
Net cash used in financing activities for the current period was primarily for the repurchase of common stock.
See Note 17 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 the Form 10-K.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the nine months endedDecember 31, 2022 , as compared to those disclosed in Part II, Item 7 of the 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.
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