BCPAC INDUSTRIES INC. Management’s Report on Financial Condition and Results of Operations (Form 10-Q)
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 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 the COVID-19 pandemic ("COVID-19") or any other pandemic or outbreak; 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").
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 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. 19
We operate 26 homebuilding production lines in
Millersburgand Woodburn, Oregon; Riverside, California; Nampa, Idaho; Phoenix, Goodyear, Arizona; Austin, Fort Worth, Seguinand Waco, Texas; Montevideo, Minnesota; Dorchester, Wisconsin; Nappaneeand Goshen, Indiana; Lafayette, Tennessee; Douglasand Moultrie, Georgia; Shippenvilleand Emlenton, Pennsylvania; Martinsvilleand Rocky Mount, Virginia; Cherryville, North Carolina; and Ocalaand Plant City, Florida. We also recently opened two new production lines in Glendale, Arizonaand Hamlet, North Carolina. The majority of the homes produced are sold to, and distributed by, independently owned retail operations located throughout the United Statesand Canada. In addition, our homes are sold through 42 Company-owned U.S.retail locations. During fiscal 2022, we acquired an additional 20% ownership in Craftsman Homes, LLCand Craftsman Homes Development, LLC(collectively known as "Craftsman"), which gave us a controlling interest. Craftsman is a manufactured home retailer with four locations in Nevadaselling Company and other manufacturer branded homes. We also purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation("Commodore"). Commodore added six manufacturing facilities and two wholly-owned retail locations, and also participates in commercial lending operations with its dealers. On October 26, 2022, subsequent to the end of the second fiscal quarter of 2023, we signed a binding offer to acquire the business of Solitaire Homes, Inc.and other related entities (collectively " Solitaire Homes"), including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations. The transaction is expected to close early in our fourth fiscal quarter of 2023, subject to applicable regulatory approvals and the satisfaction of certain customary conditions. The addition of Solitaire Homesto our existing manufacturing and retail system strengthens our position in the Southwest and expands our manufacturing capabilities into Mexico.
Company and industry outlook
According to data reported by the
Manufactured Housing Institute, industry home shipments increased 14.2% for the first 8 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 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. 20
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. 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 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. Our backlog at
October 1, 2022was $651 millioncompared to $1.0 billionlast quarter, a decrease of $347 millionor 34.8%, and down $456 million, or 41.2%, compared to $1.1 billionat October 2, 2021. Home order rates, net of cancellations, are down from the extreme highs we saw during the summer of 2020 to the summer of 2021. Additionally, our efforts in product simplification and production staffing improvement have increased our total average plant capacity utilization. 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. 21
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 Maeand 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 Maepermits 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 RevenueThree Months Ended ($ in thousands, except revenue per home October 1, October
sold) 2022 2021 Change Factory-built housing
$ 559,602 $ 342,094 $ 217,50863.6 % Financial services 17,790 17,449 341 2.0 % $ 577,392 $ 359,543 $ 217,84960.6 % Factory-built homes sold by Company-owned retail sales centers 860 710 150 21.1 % to independent retailers, builders, communities and developers 4,251 2,887 1,364 47.2 % 5,111 3,597 1,514 42.1 % Net factory-built housing revenue per home sold $ 109,490 $ 95,105 $ 14,38515.1 % Six Months Ended ($ in thousands, except revenue per home October 1, October
sold) 2022 2021 Change Factory-built housing
$ 1,132,199 $ 654,377 $ 477,82273.0 % Financial services 33,531 35,588 (2,057) (5.8) % $ 1,165,730 $ 689,965 $ 475,76569.0 % Factory-built homes sold by Company-owned retail sales centers 1,733 1,433 300 20.9 % to independent retailers, builders, communities and developers 8,724 5,864 2,860 48.8 % 10,457 7,297 3,160 43.3 % Net factory-built housing revenue per home sold $ 108,272 $ 89,678 $ 18,59420.7 % In factory-built housing, Net revenue for both the three and six months ended October 1, 2022increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices. Home sales volume increased from the Commodore acquisition, completed in the second quarter of fiscal year 2022, which provided $107 millionand $208 millionin Net revenue for the three and six months ended October 1, 2022, respectively. The three and six months also benefited from higher factory capacity utilization which enabled higher sales volume. 22
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 and six months ended
October 1, 2022and October 2, 2021: Three Months Ended October 1, October 2, 2022 2021 Change Modules Homes Modules Homes Modules Homes U.S. Housing and Urban Development("HUD") code homes 8,099 4,639 5,548 3,154 46.0 % 47.1 % Modular homes 444 226 519 254 (14.5) % (11.0) % Park model RVs 246 246 189 189 30.2 % 30.2 % 8,789 5,111 6,256 3,597 40.5 % 42.1 % Six Months Ended October 1, October 2, 2022 2021 Change Modules Homes Modules Homes Modules Homes HUD code homes 16,614 9,493 11,200 6,430 48.3 % 47.6 % Modular homes 930 477 987 480 (5.8) % (0.6) % Park model RVs 487 487 387 387 25.8 % 25.8 % 18,031 10,457 12,574 7,297 43.4 % 43.3 % For the three months ended October 1, 2022, Financial services segment Net revenue increased 2.0% primarily due to higher volume in home loan sales in the period. For the six months ended October 1, 2022, Net revenue decreased 5.8% 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 year compared to the prior year. 23
Table of Contents Gross Profit Three Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Factory-built housing
$ 149,665 $ 82,299 $ 67,36681.9 % Financial services 7,934 7,629 305 4.0 % $ 157,599 $ 89,928 $ 67,67175.3 % Gross profit as % of Net revenue Consolidated 27.3 % 25.0 % N/A 2.3 % Factory-built housing 26.7 % 24.1 % N/A 2.6 % Financial services 44.6 % 43.7 % N/A 0.9 % Six Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Factory-built housing $ 289,251 $ 148,572 $ 140,67994.7 % Financial services 13,072 15,369 (2,297) (14.9) % $ 302,323 $ 163,941 $ 138,38284.4 %
Gross profit as % of Net revenue Consolidated 25.9 % 23.8 % N/A 2.1 % Factory-built housing 25.5 % 22.7 % N/A 2.8 % Financial services 39.0 % 43.2 % N/A (4.2) % Factory-built housing Gross profit and the Gross profit percentage increased for the three and six months ended
October 1, 2022primarily due to higher average sales prices. In Financial services, Gross profit increased for the three months ended October 1, 2022primarily due to the higher volume of home loan sales. For the six months ended October 1, 2022, Financial services gross profit decreased primarily due to higher insurance claims from New Mexicoand Arizonaweather related events, and greater unrealized losses on marketable equity securities compared to the same period last year. 24
Selling, general and administrative expenses
Three Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Factory-built housing
$ 61,640 $ 40,347 $ 21,29352.8 % Financial services 5,254 5,025 229 4.6 % $ 66,894 $ 45,372 $ 21,52247.4 % Selling, general and administrative expenses as % of Net revenue 11.6 % 12.6 % N/A (1.0) % Six Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Factory-built housing $ 122,563 $ 75,844 $ 46,71961.6 % Financial services 10,467 10,360 107 1.0 % $ 133,030 $ 86,204 $ 46,82654.3 % Selling, general and administrative expenses as % of Net revenue 11.4 % 12.5 % N/A (1.1) %
For the three and six months ended
As a percentage of Net revenue, Selling, general and administrative expenses improved by 100 and 110 basis points for the three and six months ended
October 1, 2022, respectively, from better utilization of fixed costs on higher sales. 25
Other components of net income
Three Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Interest expense
$ 233 $ 203 $ 3014.8 % Other income, net 2,339 4,668 (2,329) (49.9) % Income tax (benefit) expense 18,613 11,338 7,275 64.2 % Effective tax rate 20.1 % 23.1 % N/A (3.0) % Six Months Ended October 1, October 2, ($ in thousands) 2022 2021 Change Interest expense $ 394 $ 367 $ 277.4 % Other income, net 3,222 7,129 (3,907) (54.8) % Income tax expense 38,229 19,770 18,459 93.4 % Effective tax rate 22.2 % 23.4 % N/A (1.2) %
Interest expense primarily includes 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 milliongain 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 six months ended October 1, 2022, we recognized a $1.1 millionunrealized loss on corporate marketable investments compared to a $1.7 millionunrealized 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. The effective tax rate for the current year periods benefited from $2.7 millionof estimated non-recurring net tax credits related to the sale of energy efficient homes, available under the Internal Revenue Code §45L. This program expired on December 31, 2021and was recently renewed as part of the Inflation Reduction Act legislation through December 31, 2022.
Cash and capital resources
We believe that cash and cash equivalents at
October 1, 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. Treasuryand 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 liquid resources, 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. 26
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 six months ended
Six Months Ended October 1, October 2, (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 162,942 80,087 82,855 Net cash used in investing activities (34,933) (156,045) 121,112 Net cash used in financing activities (39,224) (18,873) (20,351) Cash, cash equivalents and restricted cash at end of the period $ 348,119$
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
$11.8 millionto $97.2 millionfor the six months ended October 1, 2022from $85.4 millionfor the six months ended October 2, 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. Cash used in the current period reflects the purchase of plant facilities in Hamlet, North Carolina. 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 used for the repurchase of common shares during the first quarter of fiscal 2023.
See Note 14 to the consolidated financial statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.
Duties and Commitments. No material changes have been made to the obligations and covenants set forth in the Form 10-K.
Critical accounting estimates
There have been no significant changes to our critical accounting estimates during the six months ended
October 1, 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.
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 Reserveto 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. 27
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