BCPAC INDUSTRIES INC. Management’s Report on Financial Condition and Results of Operations (Form 10-Q)

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 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.

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We operate 26 homebuilding production lines in Millersburg and Woodburn, Oregon;
Riverside, California; Nampa, Idaho; Phoenix, 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. We
also recently opened two new production lines in Glendale, Arizona and Hamlet,
North Carolina. The majority of the homes produced are sold to, and distributed
by, independently owned retail operations located throughout the United States
and Canada. In addition, our homes are sold through 42 Company-owned U.S. retail

During fiscal 2022, we acquired an additional 20% ownership in Craftsman Homes,
LLC and Craftsman Homes Development, LLC (collectively known as "Craftsman"),
which gave us a controlling interest. Craftsman is a manufactured home retailer
with four locations in Nevada selling 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
Homes to 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

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 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

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, 2022 was $651 million compared to $1.0 billion last
quarter, a decrease of $347 million or 34.8%, and down $456 million, or 41.2%,
compared to $1.1 billion at 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

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
($ in thousands, except revenue per home     October 1,           October 


sold)                                           2022                 2021                         Change
Factory-built housing                      $   559,602          $   342,094          $ 217,508                 63.6  %
Financial services                              17,790               17,449                341                  2.0  %
                                           $   577,392          $   359,543          $ 217,849                 60.6  %
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          $  14,385                 15.1  %

                                                    Six Months Ended
 ($ in thousands, except revenue per home    October 1,           October 


sold)                                           2022                 2021                         Change
Factory-built housing                      $ 1,132,199          $   654,377          $ 477,822                 73.0  %
Financial services                              33,531               35,588             (2,057)                (5.8) %
                                           $ 1,165,730          $   689,965          $ 475,765                 69.0  %
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          $  18,594                 20.7  %

In factory-built housing, Net revenue for both the three and six months ended
October 1, 2022 increased 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 million and $208 million in 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.

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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,
2022 and 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.

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  Table of Contents

Gross Profit

                                              Three Months Ended
                                          October 1,      October 2,
     ($ in thousands)                        2022            2021                 Change
     Factory-built housing               $ 149,665       $  82,299       $  67,366        81.9  %
     Financial services                      7,934           7,629             305         4.0  %
                                         $ 157,599       $  89,928       $  67,671        75.3  %

     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       $ 140,679        94.7  %
     Financial services                     13,072          15,369          (2,297)      (14.9) %
                                         $ 302,323       $ 163,941       $ 138,382        84.4  %
     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, 2022 primarily due to higher average
sales prices.

In Financial services, Gross profit increased for the three months ended
October 1, 2022 primarily 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 Mexico and Arizona 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
                                            October 1,           October 2,
($ in thousands)                               2022                 2021                         Change
Factory-built housing                      $   61,640          $    40,347          $  21,293                 52.8  %
Financial services                              5,254                5,025                229                  4.6  %
                                           $   66,894          $    45,372          $  21,522                 47.4  %
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          $  46,719                 61.6  %
Financial services                             10,467               10,360                107                  1.0  %
                                           $  133,030          $    86,204          $  46,826                 54.3  %
Selling, general and administrative
expenses as % of Net revenue                     11.4  %              12.5  %                N/A              (1.1) %

For the three and six months ended October 1, 2022Selling, general and administrative expenses for Manufactured Homes increased between periods, primarily due to the addition of Commodore, as well as higher salaries and incentive compensation expenses on improved earnings and expenses higher legal and professional.

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.

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Other components of net income

                                         Three Months Ended
                                  October 1,            October 2,
($ in thousands)                     2022                  2021                Change
Interest expense                 $    233              $     203       $     30        14.8  %
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       $     27         7.4  %
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 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 six months ended
October 1, 2022, we recognized a $1.1 million unrealized loss on corporate
marketable investments compared to a $1.7 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.

The effective tax rate for the current year periods benefited from $2.7 million
of 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, 2021 and 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. 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 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.

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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

The following is a summary of the Company’s cash flows for the six months ended
October 1, 2022 and October 2, 2021respectively:

                                                           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          $   

244,476 $103,643

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 million to
$97.2 million for the six months ended October 1, 2022 from $85.4 million for
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.

Other topics

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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