NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc. and its subsidiaries (collectively, the "Company" or "Cavco") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these financial statements include all adjustments, including normal recurring adjustments that the Company believes are necessary to fairly state the results for the periods presented. Certain prior period amounts have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC, and there were no subsequent events requiring disclosure. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company's 2020 Annual Report on Form 10-K for the year ended March 28, 2020, filed with the SEC on May 27, 2020 ("Form 10-K").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements ("Notes"). The uncertainty created by the novel coronavirus COVID-19 ("COVID-19") have made such estimates more difficult and subjective. Accordingly, actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31st of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31st. The Company's current fiscal year will end on April 3, 2021.
The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designs and builds a wide variety of affordable manufactured homes, modular homes and park model RVs through 20 homebuilding production lines located throughout the United States, which are sold to a network of independent distributors, community owners and developers and through the Company's 39 Company-owned retail stores. Our financial services segment is comprised of a finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association and Federal Home Loan Mortgage Corporation seller/servicer and a Government National Mortgage Association mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Standard Casualty provides property and casualty insurance primarily to owners of manufactured homes.
Recently Issued or Adopted Accounting Standards.
On March 29, 2020, the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments and requires a forward-looking impairment model based on expected losses rather than incurred losses. We adopted the standard by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for the applicable prior periods. The cumulative effect of the changes made to our consolidated balance sheet at March 29, 2020, for the adoption of ASU 2016-13 was $733,000, net of taxes. The application of ASU 2016-13 increased our allowance for loan losses by $435,000 for commercial loans receivable and $528,000 for non-acquired consumer loans receivable. It had an insignificant impact to our allowance for credit losses for Accounts receivable, net.
The Company adopted ASU 2016-13 using the prospective transition approach for acquired consumer loans receivable assets that were previously accounted for under FASB Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). The Company determined that $1.7 million of the existing purchase discount for acquired consumer loans was related to credit factors and was reclassified to the allowance for loan loss upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will be accreted into interest income over the life of the loans.
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
For a description of other significant accounting policies used by the Company in the preparation of its Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements included in the Form 10-K.
2. Revenue from Contracts with Customers
The following table summarizes customer contract revenues disaggregated by reportable segment and the source of revenue for the three months ended June 27, 2020 and June 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Factory-built housing
|
|
|
|
|
|
|
|
U.S. Housing and Urban Development code homes
|
|
|
|
|
$
|
189,446
|
|
|
$
|
202,479
|
|
Modular homes
|
|
|
|
|
20,783
|
|
|
19,407
|
|
Park model RVs
|
|
|
|
|
13,722
|
|
|
12,861
|
|
Other (1)
|
|
|
|
|
14,139
|
|
|
14,021
|
|
Net revenue from factory-built housing
|
|
|
|
|
238,090
|
|
|
248,768
|
|
Financial services
|
|
|
|
|
|
|
|
Insurance agency commissions received from third-party insurance companies
|
|
|
|
|
770
|
|
|
1,155
|
|
Other (2)
|
|
|
|
|
15,941
|
|
|
14,119
|
|
Net revenue from financial services
|
|
|
|
|
16,711
|
|
|
15,274
|
|
Total Net revenue
|
|
|
|
|
$
|
254,801
|
|
|
$
|
264,042
|
|
(1) Other factory-built housing revenue from ancillary products and services including used homes, freight and other services.
(2) Other financial services revenue includes consumer finance and insurance revenue that is not within the scope of ASU 2014-09, Revenue from Contracts with Customers ("Topic 606").
3. Restricted Cash
Restricted cash consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Cash related to CountryPlace customer payments to be remitted to third parties
|
$
|
18,739
|
|
|
$
|
12,740
|
|
Other restricted cash
|
1,196
|
|
|
1,041
|
|
|
$
|
19,935
|
|
|
$
|
13,781
|
|
Corresponding amounts are recorded in Accounts payable and Accrued expenses and other current liabilities for customer payments and deposits, respectively.
The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported within the Consolidated Balance Sheets to the combined amounts shown on the Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
|
June 29,
2019
|
|
March 30,
2019
|
Cash and cash equivalents
|
$
|
270,547
|
|
|
$
|
241,826
|
|
|
$
|
199,820
|
|
|
$
|
187,370
|
|
Restricted cash, current
|
19,600
|
|
|
13,446
|
|
|
12,853
|
|
|
12,148
|
|
Restricted cash
|
335
|
|
|
335
|
|
|
351
|
|
|
351
|
|
Cash, cash equivalents and restricted cash per statement of cash flows
|
$
|
290,482
|
|
|
$
|
255,607
|
|
|
$
|
213,024
|
|
|
$
|
199,869
|
|
4. Investments
Investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Available-for-sale debt securities
|
$
|
13,975
|
|
|
$
|
14,774
|
|
Marketable equity securities
|
11,611
|
|
|
9,829
|
|
Non-marketable equity investments
|
21,294
|
|
|
21,536
|
|
|
$
|
46,880
|
|
|
$
|
46,139
|
|
The Company's investments in marketable equity securities consist of investments in the common stock of industrial and other companies.
As of June 27, 2020 and March 28, 2020, non-marketable equity investments included contributions of $15.0 million to equity-method investments in community-based initiatives that buy and sell the Company's homes and provide home-only financing to residents of certain manufactured home communities. Other non-marketable equity investments included investments in other distribution operations.
The Company records investments in fixed maturity securities classified as available-for-sale at fair value and records the difference between fair value and cost in Accumulated other comprehensive income.
The following tables summarize the Company's available-for-sale debt securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Residential mortgage-backed securities
|
$
|
4,637
|
|
|
$
|
65
|
|
|
$
|
(31)
|
|
|
$
|
4,671
|
|
State and political subdivision debt securities
|
4,426
|
|
|
155
|
|
|
—
|
|
|
4,581
|
|
Corporate debt securities
|
4,713
|
|
|
24
|
|
|
(14)
|
|
|
4,723
|
|
|
$
|
13,776
|
|
|
$
|
244
|
|
|
$
|
(45)
|
|
|
$
|
13,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Residential mortgage-backed securities
|
$
|
5,400
|
|
|
$
|
69
|
|
|
$
|
(26)
|
|
|
$
|
5,443
|
|
State and political subdivision debt securities
|
4,239
|
|
|
134
|
|
|
(3)
|
|
|
4,370
|
|
Corporate debt securities
|
5,021
|
|
|
5
|
|
|
(65)
|
|
|
4,961
|
|
|
|
|
|
|
|
|
|
|
$
|
14,660
|
|
|
$
|
208
|
|
|
$
|
(94)
|
|
|
$
|
14,774
|
|
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Longer
|
|
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Residential mortgage-backed securities
|
$
|
721
|
|
|
$
|
(11)
|
|
|
$
|
951
|
|
|
$
|
(20)
|
|
|
$
|
1,672
|
|
|
$
|
(31)
|
|
State and political subdivision debt securities
|
300
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
300
|
|
|
—
|
|
Corporate debt securities
|
787
|
|
|
(14)
|
|
|
—
|
|
|
—
|
|
|
787
|
|
|
(14)
|
|
|
$
|
1,808
|
|
|
$
|
(25)
|
|
|
$
|
951
|
|
|
$
|
(20)
|
|
|
$
|
2,759
|
|
|
$
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Longer
|
|
|
|
Total
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Residential mortgage-backed securities
|
$
|
133
|
|
|
$
|
—
|
|
|
$
|
1,779
|
|
|
$
|
(26)
|
|
|
$
|
1,912
|
|
|
$
|
(26)
|
|
State and political subdivision debt securities
|
601
|
|
|
(2)
|
|
|
101
|
|
|
(1)
|
|
|
702
|
|
|
(3)
|
|
Corporate debt securities
|
3,747
|
|
|
(65)
|
|
|
—
|
|
|
—
|
|
|
3,747
|
|
|
(65)
|
|
|
$
|
4,481
|
|
|
$
|
(67)
|
|
|
$
|
1,880
|
|
|
$
|
(27)
|
|
|
$
|
6,361
|
|
|
$
|
(94)
|
|
The Company is not aware of any changes to the securities or issuers that would indicate the losses above are indicative of credit impairment as of June 27, 2020, and the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost base.
The amortized cost and fair value of the Company's investments in available-for-sale debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Due in less than one year
|
$
|
4,414
|
|
|
$
|
4,431
|
|
Due after one year through five years
|
2,376
|
|
|
2,389
|
|
Due after five years through ten years
|
773
|
|
|
840
|
|
Due after ten years
|
1,576
|
|
|
1,644
|
|
Mortgage-backed securities
|
4,637
|
|
|
4,671
|
|
|
$
|
13,776
|
|
|
$
|
13,975
|
|
The Company recognizes investment gains and losses on available-for-sale debt securities when it sells or otherwise disposes of securities using the specific identification method. There were no gross gains or losses realized on the sale of available-for-sale debt securities during the three months ended June 27, 2020 or June 29, 2019.
The Company recognizes unrealized gains and losses on marketable equity securities from changes in market prices during the period as a component of earnings in the Consolidated Statements of Comprehensive Income. Net investment gains and losses on marketable equity securities for the three months ended June 27, 2020 and June 29, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Marketable equity securities:
|
|
|
|
|
|
|
|
Net gains on securities held
|
|
|
|
|
$
|
1,997
|
|
|
$
|
952
|
|
Net gains (losses) on securities sold
|
|
|
|
|
33
|
|
|
(1)
|
|
Total net gain on marketable equity securities
|
|
|
|
|
$
|
2,030
|
|
|
$
|
951
|
|
5. Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Raw materials
|
$
|
35,552
|
|
|
$
|
35,691
|
|
Work in process
|
13,120
|
|
|
13,953
|
|
Finished goods
|
57,724
|
|
|
63,891
|
|
|
$
|
106,396
|
|
|
$
|
113,535
|
|
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Loans held for investment (at Acquisition Date, defined below)
|
$
|
37,650
|
|
|
$
|
37,779
|
|
Loans held for investment (originated after Acquisition Date)
|
19,917
|
|
|
20,140
|
|
Loans held for sale
|
25,297
|
|
|
14,671
|
|
Construction advances
|
12,240
|
|
|
13,400
|
|
Consumer loans receivable
|
95,104
|
|
|
85,990
|
|
Deferred financing fees and other, net
|
(2,133)
|
|
|
(1,919)
|
|
Allowance for loan losses
|
(4,012)
|
|
|
(1,767)
|
|
|
$
|
88,959
|
|
|
$
|
82,304
|
|
The Company acquired consumer loans receivable as part of its acquisition of Palm Harbor Homes, Inc. in April 2011 ("Acquisition Date"). The allowance for loan losses is developed at the loan level and allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the loan characteristics and historical loss experience. The Company then makes a determination of the best estimate within the range of loan losses. The allowance for loan losses reflects the Company's judgment of the probable loss exposure on its loans held for investment portfolio. On March 29, 2020, the Company adopted ASU 2016-13 using the prospective transition approach for acquired consumer loans receivable assets that were previously accounted for under ASC 310-30. The Company determined that $1.7 million of the existing purchase discount for such consumer loans was related to credit factors and was reclassified to the allowance for loan loss upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will be accredited into interest income over the life of the loans.
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Allowance for loan losses at beginning of period
|
$
|
1,767
|
|
|
$
|
415
|
|
Impact of adoption of ASU 2016-13
|
2,276
|
|
|
—
|
|
Provision for loan losses
|
161
|
|
|
6
|
|
Charge-offs
|
(192)
|
|
|
—
|
|
Recoveries
|
—
|
|
|
—
|
|
Allowance for loan losses at end of period
|
$
|
4,012
|
|
|
$
|
421
|
|
The consumer loans held for investment had the following characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Weighted average contractual interest rate
|
8.4
|
%
|
|
8.4
|
%
|
Weighted average effective interest rate
|
9.2
|
%
|
|
9.3
|
%
|
Weighted average months to maturity
|
164
|
|
164
|
The Company's policy is to place loans on non-accrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower is unable or unwilling to make payments as they become due. The Company will resume accrual of interest once these factors have been remedied. Payments received on non-accrual loans are recorded on a cash basis, first to interest and then to principal. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
The following table is a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Current
|
$
|
92,390
|
|
|
$
|
83,861
|
|
31-to-60 days
|
751
|
|
|
547
|
|
61-to-90 days
|
258
|
|
|
307
|
|
91+ days
|
1,705
|
|
|
1,275
|
|
|
$
|
95,104
|
|
|
$
|
85,990
|
|
The following tables disaggregate CountryPlace's gross consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
Prior
|
|
Total
|
|
March 28,
2020
|
Prime- FICO score 680 and greater
|
$
|
10,464
|
|
|
$
|
14,349
|
|
|
$
|
2,761
|
|
|
$
|
1,693
|
|
|
$
|
2,105
|
|
|
$
|
27,404
|
|
|
$
|
58,776
|
|
|
$
|
55,513
|
|
Near Prime- FICO score 620-679
|
6,522
|
|
|
10,390
|
|
|
2,300
|
|
|
1,263
|
|
|
667
|
|
|
11,677
|
|
|
32,819
|
|
|
27,767
|
|
Sub-Prime- FICO score less than 620
|
78
|
|
|
90
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|
2,042
|
|
|
2,296
|
|
|
2,142
|
|
No FICO score
|
637
|
|
|
21
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
526
|
|
|
1,213
|
|
|
568
|
|
|
$
|
17,701
|
|
|
$
|
24,850
|
|
|
$
|
5,090
|
|
|
$
|
2,956
|
|
|
$
|
2,858
|
|
|
$
|
41,649
|
|
|
$
|
95,104
|
|
|
$
|
85,990
|
|
Loan contracts secured by geographically concentrated collateral could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. As of June 27, 2020, 36% of the outstanding principal balance of consumer loans receivable portfolio was concentrated in Texas and 17% was concentrated in Florida. As of March 28, 2020, 36% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 16% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of June 27, 2020 or March 28, 2020.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is determined based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is recorded to the allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $842,000 and $1.5 million as of June 27, 2020 and March 28, 2020, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $674,000 and $560,000 as of June 27, 2020 and March 28, 2020, respectively.
7. Commercial Loans Receivable
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of the Company's independent distributors, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.
Under the terms of the direct programs, the Company provides funds for financed home purchases by independent distributors, communities and developers. The notes are secured by the homes as collateral and, in some instances, other security. Other terms of direct arrangements vary, depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to distributors to finance their inventory purchases. The participation commercial loans receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivable, net consisted of the following, by class of financing notes receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Direct loans receivable
|
$
|
44,915
|
|
|
$
|
47,058
|
|
Participation loans receivable
|
166
|
|
|
144
|
|
Allowance for loan losses
|
(828)
|
|
|
(393)
|
|
Deferred financing fees, net
|
(244)
|
|
|
(244)
|
|
|
$
|
44,009
|
|
|
$
|
46,565
|
|
The commercial loans receivable balance had the following characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Weighted average contractual interest rate
|
5.3
|
%
|
|
5.7
|
%
|
Weighted average months to maturity
|
11
|
|
10
|
The risk of loss is spread over numerous borrowers. Borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. The Company has historically been able to sell repossessed homes, thereby mitigating loss exposure. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. The Company evaluates the potential for loss from its commercial loan programs based on the borrower's risk rating, overall financial stability, historical experience and estimates of other economic factors. The Company has included considerations related to the COVID-19 pandemic when assessing its risk of loan loss and setting reserve amounts for its commercial finance portfolio as of June 27, 2020.
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Balance at beginning of period
|
|
|
|
|
$
|
393
|
|
|
$
|
180
|
|
Impact of adoption of ASU 2016-13
|
|
|
|
|
435
|
|
|
—
|
|
Change in estimated loan losses, net
|
|
|
|
|
—
|
|
|
11
|
|
Loans charged off, net of recoveries
|
|
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
|
|
|
$
|
828
|
|
|
$
|
191
|
|
The following table disaggregates the Company's commercial loans receivable by credit quality indicator and fiscal year of origination (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
Total
|
|
March 28,
2020
|
|
|
|
|
Risk profile based on payment activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
13,074
|
|
|
$
|
18,359
|
|
|
$
|
9,370
|
|
|
$
|
2,534
|
|
|
$
|
1,619
|
|
|
$
|
44,956
|
|
|
$
|
47,016
|
|
|
|
|
|
Watch list
|
|
—
|
|
|
—
|
|
|
125
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
186
|
|
|
|
|
|
Nonperforming
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
$
|
13,074
|
|
|
$
|
18,359
|
|
|
$
|
9,495
|
|
|
$
|
2,534
|
|
|
$
|
1,619
|
|
|
$
|
45,081
|
|
|
$
|
47,202
|
|
|
|
|
|
Loans are subject to regular review and are given management's attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments 90 days or more past due. The Company's policy is to place loans on non-accrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower is unable or unwilling to make payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At June 27, 2020, there were no commercial loans 90 days or more past due that were still accruing interest. Payments received on non-accrual loans are recorded on a cash basis, first to interest and then to principal. At June 27, 2020, the Company was not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
As of June 27, 2020 and March 28, 2020, 10.0% and 11.0%, respectively, of the Company's outstanding commercial loans receivable principal balance was concentrated in California. Other than California, no state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of June 27, 2020 or March 28, 2020.
The Company had concentrations with one independent third-party and its affiliates that equaled 19.8% and 21.0% of the net commercial loans receivables principal balance outstanding, all of which was secured, as of June 27, 2020 and March 28, 2020 respectively. The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan loss.
8. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Property, plant and equipment, at cost:
|
|
|
|
Land
|
$
|
26,827
|
|
|
$
|
26,827
|
|
Buildings and improvements
|
52,820
|
|
|
52,011
|
|
Machinery and equipment
|
31,369
|
|
|
30,984
|
|
|
111,016
|
|
|
109,822
|
|
Accumulated depreciation
|
(33,690)
|
|
|
(32,632)
|
|
|
$
|
77,326
|
|
|
$
|
77,190
|
|
Depreciation expense was $1.4 million and $1.2 million for the three months ended June 27, 2020 and June 29, 2019, respectively.
Included in the amounts above are certain assets under finance leases. See Note 9 for additional information.
9. Leases
The Company leases certain production and retail locations, office space and equipment. The Company determines if a contract or arrangement is, or contains, a lease at inception. Lease agreements with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheet. Certain lease agreements include one or more options to renew, with renewal terms that can extend the lease term by one to three years or more. Generally, the exercise of lease renewal options is at the Company's discretion. Some agreements also include options to purchase the leased property. The estimated life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option that the Company is reasonably certain to exercise.
The following table provides information about the financial statement classification of the Company's lease balances reported within the Consolidated Balance Sheets as of June 27, 2020 and March 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
June 27,
2020
|
|
March 28,
2020
|
ROU assets
|
|
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
|
$
|
18,378
|
|
|
$
|
13,894
|
|
Finance lease assets
|
Property, plant and equipment, net (1)
|
|
1,015
|
|
|
1,025
|
|
Total lease assets
|
|
|
$
|
19,393
|
|
|
$
|
14,919
|
|
|
|
|
|
|
|
Lease Liabilities
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Operating lease liabilities
|
Accrued expenses and other current liabilities
|
|
$
|
4,097
|
|
|
$
|
4,170
|
|
Finance lease liabilities
|
Current portion of secured credit facilities and other
|
|
74
|
|
|
77
|
|
Non-current:
|
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities
|
|
15,398
|
|
|
10,743
|
|
Finance lease liabilities
|
Secured credit facilities and other
|
|
275
|
|
|
289
|
|
Total lease liabilities
|
|
|
$
|
19,844
|
|
|
$
|
15,279
|
|
(1) Recorded net of accumulated amortization of $113,000 and $103,000 as of June 27, 2020 and March 28, 2020, respectively.
The balance increased from a five-year lease extension at one of our active manufacturing facilities.
The present value of the minimum payments for future fiscal years under non-cancelable leases as of June 27, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
Remainder of 2021
|
$
|
3,189
|
|
|
$
|
58
|
|
|
$
|
3,247
|
|
2022
|
4,148
|
|
|
73
|
|
|
4,221
|
|
2023
|
3,814
|
|
|
73
|
|
|
3,887
|
|
2024
|
3,480
|
|
|
73
|
|
|
3,553
|
|
2025
|
2,706
|
|
|
73
|
|
|
2,779
|
|
Thereafter
|
5,005
|
|
|
49
|
|
|
5,054
|
|
Total lease payments
|
22,342
|
|
|
399
|
|
|
22,741
|
|
Less: Amount representing interest
|
(2,847)
|
|
|
(50)
|
|
|
(2,897)
|
|
Present value of lease liabilities
|
$
|
19,495
|
|
|
$
|
349
|
|
|
$
|
19,844
|
|
The following table provides information about the weighted average remaining lease terms and weighted average discount rates as of June 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Lease Term (Years)
|
|
Discount Rate
|
Operating leases
|
5.8
|
|
4.5
|
%
|
Finance leases
|
5.3
|
|
5.0
|
%
|
10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Indefinite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
75,090
|
|
|
$
|
—
|
|
|
$
|
75,090
|
|
|
$
|
75,090
|
|
|
$
|
—
|
|
|
$
|
75,090
|
|
Trademarks and trade names
|
8,900
|
|
|
—
|
|
|
8,900
|
|
|
8,900
|
|
|
—
|
|
|
8,900
|
|
State insurance licenses
|
1,100
|
|
|
—
|
|
|
1,100
|
|
|
1,100
|
|
|
—
|
|
|
1,100
|
|
Total indefinite-lived intangible assets
|
85,090
|
|
|
—
|
|
|
85,090
|
|
|
85,090
|
|
|
—
|
|
|
85,090
|
|
Finite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
11,300
|
|
|
(6,622)
|
|
|
4,678
|
|
|
11,300
|
|
|
(6,463)
|
|
|
4,837
|
|
Other
|
1,424
|
|
|
(1,179)
|
|
|
245
|
|
|
1,424
|
|
|
(1,151)
|
|
|
273
|
|
|
$
|
97,814
|
|
|
$
|
(7,801)
|
|
|
$
|
90,013
|
|
|
$
|
97,814
|
|
|
$
|
(7,614)
|
|
|
$
|
90,200
|
|
Amortization expense recognized on intangible assets was $187,000 and $80,000 for the three months ending June 27, 2020 and June 29, 2019, respectively.
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Salaries, wages and benefits
|
$
|
23,958
|
|
|
$
|
25,885
|
|
Customer deposits
|
22,090
|
|
|
22,055
|
|
Unearned insurance premiums
|
21,710
|
|
|
20,614
|
|
Estimated warranties
|
18,538
|
|
|
18,678
|
|
Accrued volume rebates
|
10,155
|
|
|
9,801
|
|
Company repurchase options on certain loans sold
|
8,714
|
|
|
7,444
|
|
Insurance loss reserves
|
6,730
|
|
|
5,582
|
|
Accrued self-insurance
|
5,273
|
|
|
5,112
|
|
Operating lease liabilities
|
4,097
|
|
|
4,170
|
|
Reserve for repurchase commitments
|
2,475
|
|
|
2,679
|
|
Accrued taxes
|
2,385
|
|
|
1,908
|
|
Other
|
16,068
|
|
|
16,002
|
|
|
$
|
142,193
|
|
|
$
|
139,930
|
|
12. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Balance at beginning of period
|
|
|
|
|
$
|
18,678
|
|
|
$
|
17,069
|
|
|
|
|
|
|
|
|
|
Charged to costs and expenses
|
|
|
|
|
6,347
|
|
|
7,821
|
|
Payments and deductions
|
|
|
|
|
(6,487)
|
|
|
(7,130)
|
|
Balance at end of period
|
|
|
|
|
$
|
18,538
|
|
|
$
|
17,760
|
|
13. Debt and Finance Lease Obligations
Debt and finance lease obligations primarily consisted of secured credit facilities at the Company's finance subsidiary and lease obligations in which it is expected that the Company will obtain ownership of a leased asset at the end of the lease term. The following table summarizes debt and finance lease obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Secured credit facilities
|
$
|
10,178
|
|
|
$
|
10,474
|
|
Other secured financings
|
3,985
|
|
|
4,113
|
|
Finance lease liabilities
|
349
|
|
|
366
|
|
|
$
|
14,512
|
|
|
$
|
14,953
|
|
The Company's finance subsidiary entered into secured credit facilities with independent third-party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods, which have now expired. The proceeds were used by the Company to originate and hold consumer home-only loans secured by manufactured homes, which are pledged as collateral to the facilities. Upon completion of the draw down periods, the facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program was 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As of June 27, 2020, the outstanding balance of the converted loans was $10.2 million at a weighted average interest rate of 4.91%.
See Note 9 for further discussion of the finance lease obligations.
14. Reinsurance
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
June 29, 2019
|
|
|
|
Written
|
|
Earned
|
|
Written
|
|
Earned
|
Direct premiums
|
$
|
5,765
|
|
|
$
|
5,185
|
|
|
$
|
5,033
|
|
|
$
|
4,570
|
|
Assumed premiums—nonaffiliated
|
7,653
|
|
|
6,790
|
|
|
7,513
|
|
|
6,435
|
|
Ceded premiums—nonaffiliated
|
(3,202)
|
|
|
(3,202)
|
|
|
(2,987)
|
|
|
(2,987)
|
|
Net premiums
|
$
|
10,216
|
|
|
$
|
8,773
|
|
|
$
|
9,559
|
|
|
$
|
8,018
|
|
Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000 per claim, of which Standard Casualty cedes $175,000 of the risk of loss per reinsurance. Therefore, Standard Casualty's risk of loss is limited to $125,000 per claim on typical policies, subject to the reinsurers meeting their obligations. After this limit, amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.5 million per occurrence, up to a maximum of $43.5 million in the aggregate.
Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time. Under these agreements, the Company may be required to repurchase and reestablish its reinsurance contracts for the remainder of the year to the extent that they have been utilized.
The Company has reinsurance reinstatement premium protection coverage, which will assist in reducing premium repurchase expense in the event of a catastrophic weather claim.
15. Income Taxes
Our tax provision for interim periods is determined by estimating an annual effective tax rate, adjusted for discrete items arising in the fiscal quarters. Each quarter we update the annual effective tax rate and record a year to date adjustment to the tax provision.
Income taxes totaled $5.0 million in the first quarter of fiscal 2021, a 23.1% reported effective tax rate compared to $6.1 million in the first quarter of fiscal 2020, a 22.2% effective tax rate. The higher effective tax rate in the current quarter was primarily from lower tax benefits from the exercise of stock options compared to the same period last year.
16. Commitments and Contingencies
Repurchase Contingencies. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent distributors of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to distributors in the event of default by the distributor. The risk of loss under these agreements is spread over numerous distributors. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months, calculated from the date of sale to the distributor) and the risk of loss is further reduced by the resale value of the repurchased homes.
The maximum amount for which the Company was liable under such agreements approximated $78.8 million and $79.3 million at June 27, 2020 and March 28, 2020, respectively, without reduction for the resale value of the homes. The Company applies ASC 460, Guarantees ("ASC 460"), and ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liability for repurchase commitments. Under the provisions of ASC 460, during the period in which a home is sold (inception of the purchase commitment), the Company records the greater of the estimated value of the non-contingent obligation (accounted for pursuant to ASC 460) or a contingent liability for each repurchase arrangement (accounted for under the provisions of ASC 450-20) as a liability. The Company had a reserve for repurchase commitments of $2.5 million and $2.7 million at June 27, 2020 and March 28, 2020, respectively.
Letter of Credit. To secure certain reinsurance contracts, Standard Casualty maintains an irrevocable letter of credit of $11.0 million to provide assurance that Standard Casualty will fulfill its reinsurance obligations. This letter of credit is secured by certain of Standard Casualty's investments. There were no amounts outstanding against the letter of credit at either June 27, 2020 or March 28, 2020.
Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried on the Consolidated Balance Sheets at the amount advanced less a valuation allowance, and are included in Consumer loans receivable, net. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Construction loan contract amount
|
$
|
31,376
|
|
|
$
|
31,136
|
|
Cumulative advances
|
(12,240)
|
|
|
(13,400)
|
|
Remaining construction contingent commitment
|
$
|
19,136
|
|
|
$
|
17,736
|
|
Representations and Warranties of Mortgages Sold. CountryPlace sells loans to Government-Sponsored Enterprises ("GSEs") and whole-loan purchasers and finances certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, CountryPlace provides to the GSEs, whole-loan purchasers and lenders, representations and warranties related to the loans sold or financed. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer, and CountryPlace's ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. The Company maintains a reserve for these contingent repurchase and indemnification obligations. This reserve of $1.1 million as of June 27, 2020 and $1.0 million as of March 28, 2020, included in Accrued expenses and other current liabilities, reflects management's estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan default rates to estimate the liability for loan repurchases and indemnifications. During the three months ended June 27, 2020, no claim request resulted in the execution of an indemnification agreement or in the repurchase of a loan.
Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers. These IRLCs represent an agreement to extend credit to a loan applicant, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind the Company to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, the Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.
As of June 27, 2020, CountryPlace had outstanding IRLCs with a notional amount of $27.0 million, which are recorded at fair value in accordance with ASC 815, Derivatives and Hedging ("ASC 815"). ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair value of IRLCs is recorded in Prepaid expenses and other current assets in the Consolidated Balance Sheets. The fair value of IRLCs is based on the value of the underlying loan adjusted for: (1) estimated cost to complete and originate the loan and (2) the estimated percentage of IRLCs that will result in closed loans. The initial and subsequent changes in the value of IRLCs are a component of gain (loss) on loans held for sale. During the three months ended June 27, 2020 and June 29, 2019, the Company recognized losses of $125,000 and $1,000, respectively, on outstanding IRLCs.
Forward Sales Commitments. CountryPlace manages the risk profiles of a portion of its outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage-backed securities ("MBS") and whole loan sale commitments. As of June 27, 2020, CountryPlace had $60.8 million in outstanding notional forward sales of MBSs and forward sales commitments. Commitments for forward sales of whole loans are typically in an amount proportionate with the amount of IRLCs expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.
The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded within Prepaid expenses and other current assets in the Consolidated Balance Sheets. During the three months ended June 27, 2020 and June 29, 2019, the Company recognized gains of $1.0 million and $35,000 on forward sales and whole loan sale commitments, respectively.
Legal Matters. Since 2018, the Company has been cooperating with an investigation by the enforcement staff of the SEC regarding trading in personal and Company accounts directed by the Company's former Chief Executive Officer, Joseph Stegmayer. The Audit Committee of the Board conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the results of the Audit Committee's work were shared with the Company's auditors, listing exchange and the SEC staff. The Company continues to make documents and personnel available to the SEC staff and intends to continue cooperating with its investigation.
Joseph D. Robles v. Cavco Industries, Inc., was filed in the Superior Court for the State of California, Riverside on June 25, 2019 and Malik Griffin v. Fleetwood Homes, Inc., was filed in the Superior Court for the State of California, San Bernardino on September 19, 2019, seeking recovery on behalf of a putative class of current and former hourly employees for certain alleged wage-and-hour violations, including, among other things: (i) alleged failure to comply with certain wage statement formatting requirements; (ii) alleged failure to compensate employees for straight-time and overtime hours worked; and (iii) alleged failure to provide employees with all requisite work breaks.
The Company is party to certain other lawsuits in the ordinary course of business. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's consolidated financial position, liquidity or results of operations after taking into account any existing reserves, which reserves are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. However, future events or circumstances that may currently be unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company's consolidated financial position, liquidity or results of operations in any future reporting periods.
17. Stockholders' Equity
The following table represents changes in stockholders' equity during the three months ended June 27, 2020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income
|
|
Total
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
Balance, March 28, 2020
|
9,173,242
|
|
|
$
|
92
|
|
|
$
|
252,260
|
|
|
$
|
355,144
|
|
|
$
|
90
|
|
|
$
|
607,586
|
|
Cumulative effect of implementing ASU 2016-13, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(733)
|
|
|
—
|
|
|
(733)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
16,674
|
|
|
—
|
|
|
16,674
|
|
Issuance of common stock under stock incentive plans
|
3,822
|
|
|
—
|
|
|
(533)
|
|
|
—
|
|
|
—
|
|
|
(533)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
945
|
|
|
—
|
|
|
—
|
|
|
945
|
|
Other comprehensive income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68
|
|
|
68
|
|
Balance, June 27, 2020
|
9,177,064
|
|
|
$
|
92
|
|
|
$
|
252,672
|
|
|
$
|
371,085
|
|
|
$
|
158
|
|
|
$
|
624,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents changes in stockholders' equity during the three months ended June 29, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
Retained earnings
|
|
Accumulated other comprehensive income (loss)
|
|
Total
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
Balance, March 30, 2019
|
9,098,320
|
|
|
$
|
91
|
|
|
$
|
249,447
|
|
|
$
|
280,078
|
|
|
$
|
(28)
|
|
|
$
|
529,588
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
21,282
|
|
|
—
|
|
|
21,282
|
|
Issuance of common stock under stock incentive plans
|
13,304
|
|
|
—
|
|
|
(1,252)
|
|
|
—
|
|
|
—
|
|
|
(1,252)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
630
|
|
|
—
|
|
|
—
|
|
|
630
|
|
Other comprehensive income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
89
|
|
|
89
|
|
Balance, June 29, 2019
|
9,111,624
|
|
|
$
|
91
|
|
|
$
|
248,825
|
|
|
$
|
301,360
|
|
|
$
|
61
|
|
|
$
|
550,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. The plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company's common stock, of which 246,157 shares were still available for grant as of June 27, 2020. Upon option exercise, new shares of the Company's common stock are issued and when restricted stock vests, restricted stock shares issued become unrestricted. Awards may not be granted below 100% of the fair market value of the Company's common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock vest over a defined period or based on certain performance criteria, as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors), but typically is no more than five years. The stock incentive plans provide for accelerated vesting of stock options and removal of restrictions on restricted stock awards upon a change in control (as defined in the plans).
Stock-based compensation charged against income for the three months ended June 27, 2020 and June 29, 2019 was $945,000 and $630,000, respectively.
As of June 27, 2020, total unrecognized compensation cost related to stock options was approximately $5.7 million and the related weighted-average period over which it is expected to be recognized is approximately 2.49 years.
Stock Options. The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes-Merton option pricing model, which requires the input of assumptions. The Company estimates the risk-free interest rate based on the U.S. Treasury security rate in effect at the time of the grant. The expected life of the options, volatility and dividend rates are estimated based on historical data.
The following table summarizes stock option activity for the three months ended June 27, 2020:
|
|
|
|
|
|
|
Number
of Options
|
Outstanding at March 28, 2020
|
364,174
|
|
Granted
|
15,250
|
|
Exercised
|
(9,100)
|
|
Canceled or expired
|
(6,200)
|
|
Outstanding at June 27, 2020
|
364,124
|
|
Exercisable at June 27, 2020
|
194,058
|
|
Restricted Stock Awards. The fair value of restricted stock awards is estimated as the closing price of the Company's common stock on the date of grant. A summary of restricted stock award activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
Performance-Based Awards
|
|
Service-Based Awards
|
|
Total
|
Outstanding at March 28, 2020
|
7,305
|
|
|
4,500
|
|
|
11,805
|
|
Awarded
|
7,300
|
|
|
—
|
|
|
7,300
|
|
Released
|
—
|
|
|
—
|
|
|
—
|
|
Canceled or expired
|
(350)
|
|
|
—
|
|
|
(350)
|
|
Outstanding at June 27, 2020
|
14,255
|
|
|
4,500
|
|
|
18,755
|
|
Unvested target stock awards that vest based upon performance conditions through fiscal year 2022
|
6,955
|
|
|
|
|
|
Unvested target stock awards that vest based upon performance conditions through fiscal year 2023
|
7,300
|
|
|
|
|
|
19. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Net income
|
|
|
|
|
$
|
16,674
|
|
|
$
|
21,282
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
9,174,182
|
|
|
9,102,685
|
|
Effect of dilutive securities
|
|
|
|
|
90,479
|
|
|
114,914
|
|
Diluted
|
|
|
|
|
9,264,661
|
|
|
9,217,599
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
1.82
|
|
|
$
|
2.34
|
|
Diluted
|
|
|
|
|
$
|
1.80
|
|
|
$
|
2.31
|
|
Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended June 27, 2020 and June 29, 2019 were 39,996 and 60,600, respectively. In addition, 14,255 and 7,600 outstanding restricted share awards were excluded from the calculation of diluted earnings per share for both the three months ended June 27, 2020 and June 29, 2019, respectively, because the underlying performance criteria had not yet been met.
20. Fair Value Measurements
The book value and estimated fair value of the Company's financial instruments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
March 28, 2020
|
|
|
|
Book
Value
|
|
Estimated
Fair Value
|
|
Book
Value
|
|
Estimated
Fair Value
|
Available-for-sale debt securities
|
$
|
13,975
|
|
|
$
|
13,975
|
|
|
$
|
14,774
|
|
|
$
|
14,774
|
|
Marketable equity securities
|
11,611
|
|
|
11,611
|
|
|
9,829
|
|
|
9,829
|
|
Non-marketable equity investments
|
21,294
|
|
|
21,294
|
|
|
21,536
|
|
|
21,536
|
|
Consumer loans receivable
|
88,959
|
|
|
102,578
|
|
|
82,304
|
|
|
97,395
|
|
Interest rate lock commitment derivatives
|
40
|
|
|
40
|
|
|
164
|
|
|
164
|
|
Forward loan sale commitment derivatives
|
5
|
|
|
5
|
|
|
(1,011)
|
|
|
(1,011)
|
|
Commercial loans receivable
|
44,009
|
|
|
47,503
|
|
|
46,565
|
|
|
46,819
|
|
Securitized financings and other
|
(14,512)
|
|
|
(14,099)
|
|
|
(14,953)
|
|
|
(15,592)
|
|
|
|
|
|
|
|
|
|
See Note 19, Fair Value Measurements and the Fair Value of Financial Instruments caption in Note 1, Summary of Significant Accounting Policies in our 2020 Form 10-K for more information on the input levels and methodologies we use in determining fair value.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities (1)
|
$
|
4,671
|
|
|
$
|
—
|
|
|
$
|
4,671
|
|
|
$
|
—
|
|
State and political subdivision debt securities (1)
|
4,581
|
|
|
—
|
|
|
4,581
|
|
|
—
|
|
Corporate debt securities (1)
|
4,723
|
|
|
—
|
|
|
4,723
|
|
|
—
|
|
Marketable equity securities (2)
|
11,611
|
|
|
11,611
|
|
|
—
|
|
|
—
|
|
Interest rate lock commitment derivatives (3)
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Forward loan sale commitment derivatives (3)
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Mortgage servicing rights (4)
|
1,195
|
|
|
—
|
|
|
—
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Residential mortgage-backed securities (1)
|
$
|
5,443
|
|
|
$
|
—
|
|
|
$
|
5,443
|
|
|
$
|
—
|
|
State and political subdivision debt securities (1)
|
4,370
|
|
|
—
|
|
|
4,370
|
|
|
—
|
|
Corporate debt securities (1)
|
4,961
|
|
|
—
|
|
|
4,961
|
|
|
—
|
|
Marketable equity securities (2)
|
9,829
|
|
|
9,829
|
|
|
—
|
|
|
—
|
|
Interest rate lock commitment derivatives (3)
|
164
|
|
|
—
|
|
|
—
|
|
|
164
|
|
Forward loan sale commitment derivatives (3)
|
(1,011)
|
|
|
—
|
|
|
—
|
|
|
(1,011)
|
|
Mortgage servicing rights (4)
|
1,225
|
|
|
—
|
|
|
—
|
|
|
1,225
|
|
(1)Unrealized gains or losses on investments are recorded in Accumulated other comprehensive income at each measurement date.
(2)Unrealized gains or losses on investments are recorded in earnings at each measurement date.
(3)Gains or losses on derivatives are recognized in current period earnings through Cost of sales.
(4)Changes in the fair value of mortgage servicing rights are recognized in the current period earnings through Net revenue.
No transfers between Level 1, Level 2 or Level 3 occurred during the three months ended June 27, 2020. The Company's policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
Financial instruments for which fair value is disclosed but not required to be recognized in the balance sheet on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans held for investment
|
$
|
63,647
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,647
|
|
Loans held for sale
|
26,691
|
|
|
—
|
|
|
—
|
|
|
26,691
|
|
Loans held—construction advances
|
12,240
|
|
|
—
|
|
|
—
|
|
|
12,240
|
|
Commercial loans receivable
|
47,503
|
|
|
—
|
|
|
—
|
|
|
47,503
|
|
Securitized financings and other
|
(14,099)
|
|
|
—
|
|
|
(14,099)
|
|
|
—
|
|
Non-marketable equity investments
|
21,294
|
|
|
—
|
|
|
—
|
|
|
21,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans held for investment
|
$
|
68,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,503
|
|
Loans held for sale
|
15,492
|
|
|
—
|
|
|
—
|
|
|
15,492
|
|
Loans held—construction advances
|
13,400
|
|
|
—
|
|
|
—
|
|
|
13,400
|
|
Commercial loans receivable
|
46,819
|
|
|
—
|
|
|
—
|
|
|
46,819
|
|
Securitized financings and other
|
(15,592)
|
|
|
—
|
|
|
(15,592)
|
|
|
—
|
|
Non-marketable equity investments
|
21,536
|
|
|
—
|
|
|
—
|
|
|
21,536
|
|
No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics or performance. Therefore, loans held for investment are measured using Level 3 inputs that are calculated using estimated discounted future cash flows from the evaluation of loan credit quality and performance history to determine expected prepayments and defaults on the portfolio, discounted with rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using inputs that consist of quoted market prices for mortgage-backed securities or investor purchase commitments for similar types of loan commitments on hand from investors. These loans are held for relatively short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk are not a significant component of the change in fair value and changes are largely driven by changes in interest rates or investor yield requirements. The cost of loans held for sale was lower than the fair value as of June 27, 2020. As noted above, activity in the manufactured housing asset-backed securities market is infrequent with no reliable market price information. As such, to determine the fair value of securitized financings, management evaluates the credit quality and performance history of the underlying loan assets to estimate the expected prepayment of the debt and credit spreads, based on market activity for similar rated bonds from other asset classes with similar durations.
The Company records impairment losses on long-lived assets held for sale when the fair value of such long-lived assets is below their carrying values. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. No impairment charges were recorded during the three months ended June 27, 2020.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow accounts, performing loss mitigation activities on behalf of investors and otherwise administering the loan servicing portfolio. MSRs are initially recorded at fair value. Changes in fair value subsequent to the initial capitalization are recorded in the Company's results of operations. The Company recognizes MSRs on all loans sold to investors that meet the requirements for sale accounting and for which servicing rights are retained.
The Company applies fair value accounting to MSRs, with all changes in fair value recorded to Net revenue in accordance with ASC 860-50, Servicing Assets and Liabilities. The fair value of MSRs is based on the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicer advances that are consistent with the assumptions major market participants use in valuing MSRs. The expected cash flows are primarily impacted by prepayment estimates, delinquencies and market discounts. Generally, the value of MSRs is expected to increase when interest rates rise and decrease when interest rates decline, due to the effect those changes in interest rates have on prepayment estimates. Other factors noted above as well as the overall market demand for MSRs may also affect the valuation.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2020
|
|
March 28,
2020
|
Number of loans serviced with MSRs
|
4,660
|
|
|
4,688
|
|
Weighted average servicing fee (basis points)
|
31.07
|
|
|
31.12
|
|
Capitalized servicing multiple
|
65.92
|
%
|
|
67.19
|
%
|
Capitalized servicing rate (basis points)
|
20.48
|
|
|
20.91
|
|
Serviced portfolio with MSRs (in thousands)
|
$
|
583,372
|
|
|
$
|
585,777
|
|
Mortgage servicing rights (in thousands)
|
$
|
1,195
|
|
|
$
|
1,225
|
|
21. Related Party Transactions
The Company has non-marketable equity investments in other distribution operations outside of Company-owned retail locations. In the ordinary course of business, the Company sells homes and lends to certain of these operations through its commercial lending programs. For the three months ended June 27, 2020 and June 29, 2019, the total amount of sales to related parties were $12.7 million and $13.2 million, respectively. As of June 27, 2020, receivables from related parties included $2.5 million of accounts receivable and $10.3 million of commercial loans outstanding. As of March 28, 2020, receivables from related parties included $1.7 million of accounts receivable and $8.2 million of commercial loans outstanding.
22. Acquisition of Destiny Homes
On August 2, 2019, the Company purchased certain manufactured housing assets and assumed certain liabilities of Destiny Homes, which operates one manufacturing facility located in Moultrie, Georgia and produces and distributes manufactured and modular homes through a network of independent retailers in the Southeastern United States, further expanding the Company's reach. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition. The Company has not made any purchase accounting adjustments during the quarter. However, the allocation of the purchase price is still preliminary and will be finalized upon completion of the analysis of the fair values of Destiny Home's assets and specified liabilities. The Company will finalize the amounts recognized as we obtain the information necessary to complete the analysis. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.
Destiny Homes contributed Net revenue of $9.8 million and increased consolidated Net income on the Company's Consolidated Statements of Comprehensive Income by $125,000 for the three months ended June 27, 2020.
Pro Forma Impact of Acquisition. The following table presents supplemental pro forma information as if the acquisition of Destiny Homes had occurred on March 31, 2019 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Net revenue
|
|
|
|
|
$
|
254,801
|
|
|
$
|
273,713
|
|
Net income
|
|
|
|
|
16,674
|
|
|
21,855
|
|
Diluted net income per share
|
|
|
|
|
1.80
|
|
|
2.37
|
|
23. Business Segment Information
The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations and (2) financial services, which includes manufactured housing consumer finance and insurance. The following table details Net revenue and Income before income taxes by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 27,
2020
|
|
June 29,
2019
|
Net revenue:
|
|
|
|
|
|
|
|
Factory-built housing
|
|
|
|
|
$
|
238,090
|
|
|
$
|
248,768
|
|
Financial services
|
|
|
|
|
16,711
|
|
|
15,274
|
|
|
|
|
|
|
$
|
254,801
|
|
|
$
|
264,042
|
|
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
Factory-built housing
|
|
|
|
|
$
|
18,450
|
|
|
$
|
24,313
|
|
Financial services
|
|
|
|
|
3,230
|
|
|
3,049
|
|
|
|
|
|
|
$
|
21,680
|
|
|
$
|
27,362
|
|