CAVCO INDUSTRIES, INC.
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, as amended (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; the expected effect of certain risks and uncertainties on our
business, financial condition and results of operations; economic conditions and
consumer confidence; operational and legal risks; how the Company may be
affected by the novel coronavirus COVID-19 pandemic ("COVID-19") or any other
pandemic or outbreak; 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 our
commitments and contingencies. Forward-looking statements contained in this
Report on Form 10-Q 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 on Form 10-Q 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.
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 in Risk
Factors in Part I, Item 1A of our 2021 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, marketed under a variety of brand names
including Cavco, Fleetwood, Palm Harbor , Fairmont, Friendship, Chariot Eagle and
Destiny. We are also one of the leading producers of park model RVs, vacation
cabins and factory-built commercial structures, as well as modular homes built
primarily under the Nationwide Homes brand. Our finance subsidiary, CountryPlace
Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage
Association 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 20 homebuilding production lines located in Millersburg and Woodburn,
Oregon ; Nampa, Idaho ; Riverside, California ; Phoenix and Goodyear, Arizona ;
Austin , Fort Worth , Seguin and Waco, Texas ; Montevideo, Minnesota ; Nappanee,
Indiana ; Lafayette, Tennessee ; Martinsville and Rocky Mount, Virginia ; Douglas
and Moultrie, Georgia ; 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 40 Company-owned U.S. retail locations.
Company and Industry Outlook
According to data reported by the Manufactured Housing Institute , industry home
shipments increased 14.9% for the first 5 months of calendar year 2021 compared
to the same period in the prior year, which was impacted by shutdowns related to
COVID-19. However, we did not experience any significant factory shutdowns in
the prior year period like some other industry participants did.
The industry offers solutions to the affordable housing crisis and these
industry shipment numbers do not represent demand; instead, they represent the
industry's ability to produce in the current environment. The average price per
square foot for a manufactured home is lower than a site-built home. Also, based
on the relatively 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 seek out niche market opportunities where our diverse product lines and
custom building capabilities provide a competitive advantage. Our 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.
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 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 opportunity for product exposure to potential home buyers.
While these initiatives support our ongoing efforts to expand product
distribution, they 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 directly with other industry participants to develop secondary market
opportunities for manufactured home-only loan portfolios and expand lending
availability in the industry. Additionally, we continue to invest in
community-based lending initiatives that provide home-only financing to new
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
financial services segment, as well as provide a means that could lead to
increased home sales for our factory-built housing operations.
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Operational efficiencies have declined from hiring challenges, higher and
largely unpredictable factory employee absenteeism and other inefficiencies from
building material supply shortages. Accordingly, our total average plant
capacity utilization rate was approximately 75% during the first fiscal quarter
of 2022, which remains consistent with that of our fourth quarter of fiscal
2021.
Sales order activity remained exceptionally strong during the first fiscal
quarter of 2022 and was nearly 50% higher than the comparable prior year
quarter. Increased order volume is the result of a higher number of
well-qualified home buyers making purchase decisions, supported by reduced home
loan interest rates. Increased orders outpaced the challenging production
environment during the quarter, raising order backlogs to $792 million at
July 3, 2021 , up 31.3% compared to $603 million at April 3, 2021 and up 404.5%
compared to $157 million at June 27, 2020 . Backlog excludes home orders that
have been paused or canceled at the request of the customer.
Key housing building materials include wood and wood products, gypsum wallboard,
steel, windows, appliances, insulation and other petroleum-based products.
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 increases may lag behind
the escalation of such costs. Availability of these products has not caused a
production halt 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.
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 also provide leadership training to
new managers and other employees in supervisory roles to enhance communication
and improve the oversight and motivation of other employees, more extensively
use online 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. Regardless, we believe our ability to recruit the workforce we need to
meet the overall need for affordable housing continues to improve.
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. Although monthly collections of principal and interest from
borrowers have exceeded scheduled principal and interest payments owed to
investors, 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.
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Results of Operations
Net Revenue.
Three Months Ended
($ in thousands, except revenue per home July 3, June 27,
sold) 2021 2020 Change Factory-built housing$ 312,283 $ 238,090 $ 74,193 31.2 % Financial services 18,139 16,711 1,428 8.5 %$ 330,422 $ 254,801 $ 75,621 29.7 % Factory-built homes sold by Company-owned retail sales centers 723 752 (29) (3.9) % to independent retailers, builders, communities & developers 2,977 2,597 380 14.6 % 3,700 3,349 351 10.5 % Net factory-built housing revenue per home sold$ 84,401 $ 71,093 $ 13,308 18.7 % In the factory-built housing segment, the increase in Net revenues was primarily due to a 10.5% increase in units sold and 18.7% increase in the average sales price. The higher home prices were driven by product price increases and a shift toward more multi-section homes. Home sales volume increased from higher factory capacity utilization. On a sequential basis, adjusting for the extra week of production in the fourth quarter of fiscal year 2021, home sales volume would have also increased from slightly 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 shipped for the three months endedJuly 3, 2021 andJune 27, 2020 : Three Months Ended July 3, June 27, 2021 2020 Change Modules Homes Modules Homes Modules Homes U.S.Housing and Urban Development code homes 5,652 3,276 4,881 2,865 15.8 % 14.3 % Modular homes 468 226 466 215 0.4 % 5.1 % Park model RVs 198 198 269 269 (26.4) % (26.4) % 6,318 3,700 5,616 3,349 12.5 % 10.5 % Financial services segment revenue increased primarily due to higher volume in home loan sales and more insurance policies in force in the current year compared to the prior year. These gains were partially offset by lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio, which were$0.4 million and$1.0 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, and lower interest income earned on the acquired consumer loan portfolios that continue to amortize. 21 --------------------------------------------------------------------------------
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Gross Profit.
Three Months Ended
July 3, June 27,
($ in thousands) 2021 2020 Change
Factory-built housing $ 66,273 $ 46,992 $ 19,281 41.0 %
Financial services 7,740 8,331 (591) (7.1) %
$ 74,013 $ 55,323 $ 18,690 33.8 %
Gross profit as % of Net revenue
Consolidated 22.4 % 21.7 % N/A 0.7 %
Factory-built housing 21.2 % 19.7 % N/A 1.5 %
Financial services 42.7 % 49.9 % N/A (7.2) %
Factory-built housing gross profit increased primarily due to increased home
sales volume and higher average sales prices. 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 costs. Gross profit as a percentage of Net revenue also increased this
period from a shift toward more multi-section homes.
Financial services gross profit decreased due to higher weather-related claims
volume and lower unrealized gains on marketable equity securities.
Selling, General and Administrative Expenses.
Three Months Ended
July 3, June 27,
($ in thousands) 2021 2020 Change
Factory-built housing $ 35,497 $ 30,737 $ 4,760 15.5 %
Financial services 5,335 4,586 749 16.3 %
$ 40,832 $ 35,323 $ 5,509 15.6 %
Selling, general and administrative expenses as
% of Net revenue 12.4 % 13.9 % N/A (1.5) %
Selling, general and administrative expenses related to factory-built housing
increased between periods primarily from higher salary and incentive-based
compensation expense. This was partially offset by a reduction in the
amortization of the additional Director and Officer insurance premium, added in
the third quarter of fiscal year 2019, which was $2.1 million for the three
months ended June 27, 2020 , with no expense in the current period.
In Financial services, Selling, general and administrative expenses increased
primarily from greater expensing of deferred origination costs on higher loan
sales and higher compensation expense.
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Other Components of Net Income.
Three Months Ended
July 3, June 27,
($ in thousands) 2021 2020 Change
Interest expense $ 164 $ 196 $ (32) (16.3) %
Other income, net 2,461 1,876 585 31.2 %
Income tax expense 8,432 5,006 3,426 68.4 %
Effective tax rate 23.8 % 23.1 % N/A 0.7 %
Interest expense consists primarily of debt service on the financings of manufactured home-only loans and 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 increase is driven by more interest income earned on larger cash and commercial loan receivables than the prior year period. Liquidity and Capital Resources We believe that cash and cash equivalents atJuly 3, 2021 , together with cash flow from operations, will be sufficient to fund our operations 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. Because of our sufficient cash position, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for the home-only lending programs. Regardless, depending on our operating results and strategic opportunities, we may need 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. 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 will be restricted per state regulations. The following is a summary of the Company's cash flows for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively: Three Months Ended July 3, June 27, (in thousands) 2021 2020 $ Change Cash, cash equivalents and restricted cash at beginning of the fiscal year$ 339,307 $ 255,607 $ 83,700 Net cash provided by operating activities 24,275 35,692 (11,417) Net cash (used in) provided by investing activities (3,616) 105 (3,721) Net cash used in financing activities (13,150) (922) (12,228) Cash, cash equivalents and restricted cash at end of the period$ 346,816 $ 290,482 $ 56,334 23
-------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities decreased primarily due to the rising material costs of our raw materials and higher purchases of such materials. This was partially offset by higher proceeds from consumer loan sales of$49.6 million compared to$39.3 million in the previous year. Consumer loan originations decreased$4.7 million to$42.7 million for the three months endedJuly 3, 2021 from$47.4 million for the three months endedJune 27, 2020 due to origination personnel shortages. We enter into commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes. In addition, we enter into commercial loan arrangements with certain distributors of our products under which the Company provides funds for wholesale purchases. We have 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, we invest in and develop 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. Increased lending activity resulted in a net use of$0.2 million while the prior period net activity provided$2.6 million . Net cash used in or provided by investing activities consist 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 was used in the current period for the purchase of debt securities. Net cash used in financing activities was primarily for the repurchase of common stock. We entered into secured credit facilities with independent third-party banks to facilitate the origination of consumer home-only loans to be held for investment, secured by the manufactured homes which were subsequently pledged as collateral to the facilities. Upon completion of the draw down periods, these facilities were converted into an amortizing loan based on a 20 or 25-year amortization period with a balloon payment due upon maturity. As ofJuly 3, 2021 , the outstanding balance of the converted loans was$8.0 million with a weighted average interest rate of 4.91%. Contractual Commitments and Contingencies. There were no material changes to the contractual obligations as set forth in our Annual Report on Form 10-K. Critical Accounting Policies There have been no other significant changes to our critical accounting policies during the three months endedJuly 3, 2021 , as compared to those disclosed in Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting Policies," which provides a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements. Other Matters Related Party Transactions. See Note 18 to the Consolidated Financial Statements for a discussion of our related party transactions. Off Balance Sheet Arrangements See Note 14 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K. 24
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