QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-08822
CAVCO INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware
56-2405642
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3636 North Central Ave, Ste 1200
Phoenix
Arizona
85012
(Address of principal executive offices, including zip code)
(602) 256-6263
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
CVCO
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 27, 2023, 8,693,699 shares of the registrant's Common Stock, $.01 par value, were outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc. and its subsidiaries (collectively, "we," "us," "our," 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 addition, references throughout to numbered "Notes" refer to these Notes to Consolidated Financial Statements, unless otherwise stated.
In the opinion of management, these financial statements include all adjustments, including normal recurring adjustments, that are necessary to fairly state the results for the periods presented. Certain prior period amounts have been reclassified from secured financings to Accrued expenses and other current liabilities to conform to current period classification. We have evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC; and except for the events set forth in Note 23, 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 our 2022 Annual Report on Form 10-K for the year ended April 2, 2022, filed with the SEC ("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 accompanying notes. Due to uncertainties, actual results could differ from the estimates and assumptions used in preparation of the Consolidated Financial Statements. 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 current fiscal year will end on April 1, 2023 and will include 52 weeks.
We operate in two segments: (1) factory-built housing, which includes wholesale and retail factory-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. We design and build a wide variety of affordable manufactured homes, modular homes and park model RVs through 27 homebuilding production lines located throughout the United States, which are sold to a network of independent distributors, community operators and residential developers and through our 42 Company-owned retail stores. The financial services segment is comprised of a finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Company ("Standard Casualty"). 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. Standard Casualty provides property and casualty insurance primarily to owners of manufactured homes.
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 70% majority controlling ownership and therefore became a consolidated entity. We also purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore"). Craftsman is a manufactured home retailer with four locations in Nevada selling Company and other manufacturer branded homes. Commodore added six manufacturing facilities and two wholly-owned retail locations, and also participates in commercial lending operations with its dealers.
In addition to the below, for a description of significant accounting policies we used in the preparation of our Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements included in the Form 10-K.
The following table summarizes customer contract revenues disaggregated by reportable segment and source (in thousands):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Factory-built housing
U.S. Housing and Urban Development code homes
$
398,859
$
357,453
$
1,402,805
$
905,790
Modular homes
36,498
30,451
108,072
88,454
Park model RVs
20,102
10,709
44,359
30,108
Other
25,734
14,977
58,156
43,615
481,193
413,590
1,613,392
1,067,967
Financial services
Insurance agency commissions received from third-party insurance companies
887
1,304
3,313
3,027
All other sources
18,523
16,820
49,628
50,685
19,410
18,124
52,941
53,712
$
500,603
$
431,714
$
1,666,333
$
1,121,679
3. Restricted Cash
Restricted cash consisted of the following (in thousands):
December 31, 2022
April 2, 2022
Cash related to CountryPlace customer payments to be remitted to third parties
$
9,309
$
13,857
Other restricted cash
937
1,327
10,246
15,184
Current portion
(9,911)
(14,849)
$
335
$
335
Corresponding amounts for customer payments to be remitted to third parties are recorded in Accounts payable.
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 in the Consolidated Statements of Cash Flows (in thousands):
Investments consisted of the following (in thousands):
December 31, 2022
April 2, 2022
Available-for-sale debt securities
$
19,036
$
17,760
Marketable equity securities
14,103
16,780
Non-marketable equity investments
5,290
20,479
38,429
55,019
Less short-term investments
(16,607)
(20,086)
$
21,822
$
34,933
Investments in marketable equity securities consist of investments in the common stock of industrial and other companies.
Our non-marketable equity investments include investments in community-based initiatives that buy and sell our homes and provide home-only financing to residents of certain manufactured home communities and other investments in manufactured housing distributors.
The amortized cost and fair value of our investments in available-for-sale debt securities, by security type are shown in the table below (in thousands):
December 31, 2022
April 2, 2022
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Residential mortgage-backed securities
$
2,670
$
2,572
$
1,668
$
1,613
State and political subdivision debt securities
6,542
6,228
10,100
9,906
Corporate debt securities
10,765
10,236
6,502
6,241
$
19,977
$
19,036
$
18,270
$
17,760
The amortized cost and fair value of our investments in available-for-sale debt securities, by contractual maturity, are shown in the table below (in thousands). Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without penalties.
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
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Allowance for loan losses at beginning of period
$
1,739
$
2,799
$
2,115
$
3,188
Change in estimated loan losses, net
(436)
(327)
(812)
(384)
Charge-offs
(19)
(85)
(38)
(417)
Recoveries
—
—
19
—
Allowance for loan losses at end of period
$
1,284
$
2,387
$
1,284
$
2,387
The consumer loans held for investment had the following characteristics:
December 31, 2022
April 2, 2022
Weighted average contractual interest rate
8.1
%
8.3
%
Weighted average effective interest rate
8.9
%
9.2
%
Weighted average months to maturity
156
151
The following table is a consolidated summary of the delinquency status of the principal value of outstanding consumer loans receivable (in thousands):
The following tables disaggregate the principal value of consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
December 31, 2022
2023
2022
2021
2020
2019
Prior
Total
Prime- FICO score 680 and greater
$
4,788
$
1,085
$
1,059
$
2,124
$
1,198
$
17,690
$
27,944
Near Prime- FICO score 620-679
479
154
1,017
967
1,562
8,667
12,846
Sub-Prime- FICO score less than 620
125
—
20
51
—
1,106
1,302
No FICO score
69
—
—
—
25
354
448
$
5,461
$
1,239
$
2,096
$
3,142
$
2,785
$
27,817
$
42,540
April 2, 2022
2022
2021
2020
2019
2018
Prior
Total
Prime- FICO score 680 and greater
$
8,155
$
1,615
$
2,371
$
1,339
$
853
$
20,485
$
34,818
Near Prime- FICO score 620-679
1,661
1,274
1,413
1,976
617
9,266
16,207
Sub-Prime- FICO score less than 620
45
20
52
—
—
1,318
1,435
No FICO score
—
—
—
26
—
346
372
$
9,861
$
2,909
$
3,836
$
3,341
$
1,470
$
31,415
$
52,832
As of December 31, 2022 and April 2, 2022, 39% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas, and 18% and 17%, respectively, were concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the outstanding principal balance of the consumer loans receivable as of December 31, 2022 or April 2, 2022.
Repossessed homes totaled approximately $649,000 and $499,000 as of December 31, 2022 and April 2, 2022, respectively, and are included in Prepaid expenses and other current assets on the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $535,000 and $1.1 million as of December 31, 2022 and April 2, 2022, respectively.
7. Commercial Loans Receivable
The commercial loans receivable balance consists of direct financing arrangements for the home product needs of our independent distributors, community operators and residential developers.
Commercial loans receivable (including from affiliates), net consisted of the following (in thousands):
The commercial loans receivable balance had the following characteristics:
December 31, 2022
April 2, 2022
Weighted average contractual interest rate
6.7
%
6.4
%
Weighted average months outstanding
9
9
The following table represents changes in the estimated allowance for loan losses (in thousands):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Balance at beginning of period
$
1,123
$
826
$
1,011
$
816
Change in estimated loan losses, net
132
304
244
314
Balance at end of period
$
1,255
$
1,130
$
1,255
$
1,130
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. As of December 31, 2022 and April 2, 2022, there were no commercial loans considered watch list or nonperforming. The following table disaggregates the principal value of our commercial loans receivable by fiscal year of origination (in thousands):
December 31, 2022
2023
2022
2021
2020
2019
Prior
Total
Performing
$
52,498
$
18,324
$
4,770
$
2,321
$
682
$
750
$
79,345
April 2, 2022
2022
2021
2020
2019
2018
Prior
Total
Performing
$
52,592
$
10,181
$
4,031
$
1,391
$
1,498
$
—
$
69,693
As of December 31, 2022, there were no commercial loans 90 days or more past due that were still accruing interest, and we were not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance.
As of December 31, 2022 and April 2, 2022, we had concentrations of our outstanding principal balance of the commercial loans receivable balance in New York of 22% and 25%, respectively. No other state had concentrations in excess of 10% of the outstanding principal balance of the commercial loans receivable as of December 31, 2022 or April 2, 2022.
As of December 31, 2022 and April 2, 2022, one independent third-party and its affiliates comprised 12% and 14%, respectively, of the net commercial loans receivable principal balance outstanding, all of which was secured.
Property, plant and equipment, net, consisted of the following (in thousands):
December 31, 2022
April 2, 2022
Property, plant and equipment, at cost
Land
$
36,193
$
32,154
Buildings and improvements
142,420
100,775
Machinery and equipment
63,795
48,638
Construction in progress
8,713
29,281
251,121
210,848
Accumulated depreciation
(56,792)
(46,832)
$
194,329
$
164,016
Depreciation expense for the three and nine months ended December 31, 2022 was $3.4 million and $10.7 million, respectively. Depreciation expense for the three and nine months ended January 1, 2022 was $3.0 million and $5.9 million, respectively.
9. Leases
We lease certain production and retail locations, office space and equipment. The following table provides information about the financial statement classification of our lease balances reported within the Consolidated Balance Sheets as of December 31, 2022 and April 2, 2022 (in thousands):
Classification
December 31, 2022
April 2, 2022
ROU assets
Operating lease assets
Operating lease right-of-use assets
$
17,230
$
16,952
Finance lease assets
Property, plant and equipment, net (1)
6,132
7,070
Total lease assets
$
23,362
$
24,022
Lease Liabilities
Current:
Operating lease liabilities
Accrued expenses and other current liabilities
$
5,389
$
5,085
Finance lease liabilities
Accrued expenses and other current liabilities
347
347
Non-current:
Operating lease liabilities
Operating lease liabilities
13,058
13,158
Finance lease liabilities
Other liabilities
5,914
5,969
Total lease liabilities
$
24,708
$
24,559
(1) Recorded net of accumulated amortization of $219,000 and $87,000 as of December 31, 2022 and April 2, 2022, respectively.
The following table provides information about the financial statement classification of our lease expenses reported within the Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2022 and January 1, 2022 (in thousands):
Three Months Ended
Nine Months Ended
Lease Expense Category
Classification
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Operating lease expense(2):
Cost of sales
$
297
$
286
$
898
$
858
Selling, general and administrative expenses
1,057
910
3,012
2,640
Finance lease expense:
Amortization of leased assets
Cost of sales
44
9
131
26
Interest on lease liabilities
Interest expense
71
73
212
80
Total lease expense
$
1,469
$
1,278
$
4,253
$
3,604
(2) Excludes short-term and variable lease expenses, which are immaterial.
Cash payments for operating and finance leases were as follows (in thousands):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Operating leases
$
1,372
$
1,190
$
4,003
$
2,277
Finance leases
89
18
267
37
The present value of the minimum payments for future fiscal years under non-cancelable leases as of December 31, 2022 was as follows (in thousands):
The following table provides information about the weighted average remaining lease terms and weighted average discount rates as of December 31, 2022:
Remaining Lease Term (Years)
Discount Rate
Operating leases
4.9
4.6
%
Finance leases
34.9
4.5
%
10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
December 31, 2022
April 2, 2022
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Indefinite-lived
Goodwill
$
100,577
$
—
$
100,577
$
100,993
$
—
$
100,993
Trademarks and trade names
15,680
—
15,680
15,680
—
15,680
State insurance licenses
1,100
—
1,100
1,100
—
1,100
117,357
—
117,357
117,773
—
117,773
Finite-lived
Customer relationships
15,000
(5,302)
9,698
19,500
(8,392)
11,108
Other
914
(444)
470
1,924
(1,353)
571
$
133,271
$
(5,746)
$
127,525
$
139,197
$
(9,745)
$
129,452
Amortization expense recognized on intangible assets was $501,000 and $1.5 million for the three and nine months ended December 31, 2022, respectively. Amortization expense recognized on intangible assets was $523,000 and $862,000 for the three and nine months ended January 1, 2022, respectively.
Expected amortization for future fiscal years is as follows (in thousands):
On November 22, 2022, we entered into a Credit Agreement among the Company, Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the guarantors party thereto (the "Credit Agreement"), providing for a $50.0 million revolving credit facility (the "Revolving Credit Facility").
Loans under the Revolving Credit Facility will bear interest at a rate equal to (i) the Secured Overnight Financing Rate, plus a credit spread adjustment of 0.10% (as adjusted, "Term SOFR"), plus the "applicable rate" or (ii) the "base rate" (defined as the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50%, and (c) Term SOFR plus 1.00%) plus the "applicable rate." The applicable rate will be determined in accordance with a pricing grid based on the Company's Consolidated Total Leverage Ratio (as defined in the Credit Agreement) ranging from 1.125% to 1.350% per annum for Term SOFR rate loans and from 0.125% to 0.350% per annum for base rate loans. In addition, the Company will pay a commitment fee on the unused portion of the Revolving Credit Facility of 0.15% per annum.
The Revolving Credit Facility is guaranteed, on a joint and several basis, by certain of the Company’s subsidiaries.
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants (including restrictions, subject to customary exceptions, qualifications, and baskets, on the ability of the Company and its subsidiaries to incur additional indebtedness or guarantees of indebtedness, pay dividends or distributions on, redeem, repurchase, or retire capital stock, make investments, loans, advances, or acquisitions, enter into sale and leaseback transactions, engage in transactions with affiliates, create liens, transfer, or sell assets, create restrictions on the payment of dividends or other amounts from their subsidiaries, and consolidate, merge, or transfer all or substantially all of the assets of the Company and its subsidiaries taken as a whole), and events of default (as defined in the Credit Agreement).
In addition, the Credit Agreement includes the following financial covenants (i) as of the end of any fiscal quarter, the Consolidated Total Leverage Ratio (as defined in the Credit Agreement) cannot exceed 3.25 to 1.00 and (ii) a requirement to maintain Consolidated EBITDA (as defined in the Credit Agreement) for any period of four fiscal quarters of at least $75 million.
As of December 31, 2022, there were no borrowings outstanding under the Revolving Credit Facility and we were in compliance with all covenants.
15. Reinsurance and Insurance Loss Reserves
Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations.
The effects of reinsurance on premiums written and earned were as follows (in thousands):
Three Months Ended
December 31, 2022
January 1, 2022
Written
Earned
Written
Earned
Direct premiums
$
7,454
$
7,529
$
6,380
$
6,557
Assumed premiums—nonaffiliated
7,709
8,358
7,023
7,822
Ceded premiums—nonaffiliated
(4,413)
(4,413)
(3,866)
(3,866)
$
10,750
$
11,474
$
9,537
$
10,513
Nine Months Ended
December 31, 2022
January 1, 2022
Written
Earned
Written
Earned
Direct premiums
$
22,350
$
21,917
$
19,529
$
18,876
Assumed premiums—nonaffiliated
25,555
24,526
23,837
22,830
Ceded premiums—nonaffiliated
(13,056)
(13,056)
(11,227)
(11,227)
$
34,849
$
33,387
$
32,139
$
30,479
Typical insurance policies written or assumed have a maximum coverage of $300,000 per claim, of which we cede $125,000 of the risk of loss per reinsurance. Therefore, our risk of loss is limited to $175,000 per claim on typical policies, subject to the reinsurers meeting their obligations. After this limit, amounts are recoverable through reinsurance for catastrophic losses in excess of $2 million per occurrence, up to a maximum of $70 million in the aggregate for that occurrence.
Standard Casualty establishes reserves for claims and claims expense on reported and incurred but not reported ("IBNR") claims of non-reinsured losses. Reserves for claims are included in the Accrued expenses and other current liabilities line item on the Consolidated Balance Sheets and claims expenses are recorded in Cost of sales on the Consolidated Statements of Comprehensive Income. The following details the activity in the reserve for the three and nine months ended December 31, 2022 and January 1, 2022 (in thousands):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Balance at beginning of period
$
7,790
$
7,350
$
8,149
$
7,451
Net incurred losses during the period
8,464
5,046
25,050
20,303
Net claim payments during the period
(7,163)
(4,916)
(24,108)
(20,274)
Balance at end of period
$
9,091
$
7,480
$
9,091
$
7,480
16. Income Taxes
For the three and nine months ended December 31, 2022, Income tax (expense) benefit included $2.4 million and $5.1 million, respectively, of estimated tax credits related to the manufacture and sale of energy efficient homes. This credit was initially established under the Federal Energy Policy Act of 2005 and most recently extended in the Consolidated Appropriations Act, 2021. The three and nine months ended January 1, 2022 included $34.4 million of such credits, which included catch up credits for homes sold between 2018 through 2021, and resulted in a net Income tax benefit of $20.7 million and $0.9 million, respectively.
Repurchase Contingencies. We are contingently liable under terms of repurchase agreements with financial institutions providing inventory financing to independent distributors of our 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 maximum amount for which the Company was liable under such agreements approximated $193.5 million and $141.0 million at December 31, 2022 and April 2, 2022, respectively, without reduction for the resale value of the homes. We had a reserve for repurchase commitments of $4.9 million at December 31, 2022 and $3.6 million at April 2, 2022, and there were no repurchases during either period.
Construction-Period Mortgages. We fund construction-period mortgages through periodic advances during home construction. At the time of initial funding, we commit to fully fund the loan contract in accordance with a predetermined schedule. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands):
December 31, 2022
April 2, 2022
Construction loan contract amount
$
3,251
$
9,330
Cumulative advances
(757)
(3,547)
$
2,494
$
5,783
Representations and Warranties of Mortgages Sold. We sell loans to Government-Sponsored Enterprises ("GSEs") and whole-loan purchasers. In connection with these activities, we provide representations and warranties related to the loans sold or financed.Upon a breach of a representation, we may be required to repurchase the loan or to indemnify a party for incurred losses. We maintain a reserve for these contingent repurchase and indemnification obligations. This reserve of $819,000 as of December 31, 2022 and $866,000 as of April 2, 2022, included in Accrued expenses and other current liabilities on the Consolidated Balance Sheets, reflects management's estimate of probable loss. There were no claim requests that resulted in the repurchase of a loan during the nine months ended December 31, 2022.
Interest Rate Lock Commitments. In originating loans for sale, we issue interest rate lock commitments ("IRLCs") to prospective borrowers. These IRLCs bind us 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 of December 31, 2022, we had outstanding IRLCs with a notional amount of $41.0 million. For the three months ended December 31, 2022, we recognized gains of $12,000on outstanding IRLCs. There were no gains or losses on outstanding IRLCs for the three months ended January 1, 2022. For the nine months ended December 31, 2022 and January 1, 2022, we recognized gains of $43,000 and $42,000, respectively.
Forward Sales Commitments. We manage the risk profiles of a portion of the outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage-backed securities and whole loan sale commitments (collectively "Commitments"). As of December 31, 2022, we had $3.9 million in outstanding Commitments. We recognized non-cash losses of $197,000 and $61,000 during the three months ended December 31, 2022 and January 1, 2022, respectively. During the nine months ended December 31, 2022 and January 1, 2022, we recognized losses of $282,000 and $329,000, respectively.
Legal Matters. We are party to certain 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 our 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 on 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 our consolidated financial position, liquidity or results of operations in any future reporting periods.
18. Stockholders' Equity and Redeemable Noncontrolling Interest
The following table represents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest during the nine months ended December 31, 2022 (dollars in thousands):
Equity Attributable to Cavco Stockholders
Treasury stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total
Redeemable noncontrolling interest
Common Stock
Shares
Amount
Balance, April 2, 2022
9,292,278
$
93
$
(61,040)
$
263,049
$
628,756
$
(403)
$
830,455
$
825
Net income
—
—
—
—
59,602
—
59,602
92
Other comprehensive loss, net
—
—
—
—
—
(112)
(112)
—
Issuance of common stock under stock incentive plans, net
5,957
—
—
(848)
—
—
(848)
—
Stock-based compensation
—
—
—
1,425
—
—
1,425
—
Common stock repurchases
—
—
(38,960)
—
—
—
(38,960)
—
Distributions
—
—
—
—
—
—
—
(240)
Balance, July 2, 2022
9,298,235
$
93
$
(100,000)
$
263,626
$
688,358
$
(515)
$
851,562
$
677
Net income
—
—
—
—
74,116
—
74,116
82
Other comprehensive loss, net
—
—
—
—
—
(303)
(303)
—
Issuance of common stock under stock incentive plans, net
15,917
—
—
1,457
—
—
1,457
—
Stock-based compensation
—
—
—
2,100
—
—
2,100
—
Distributions
—
—
—
—
—
—
—
(240)
Subsequent valuation adjustment
—
—
—
—
—
—
—
407
Balance, October 1, 2022
9,314,152
$
93
$
(100,000)
$
267,183
$
762,474
$
(818)
$
928,932
$
926
Net income
—
—
—
—
59,524
—
59,524
65
Other comprehensive income, net
—
—
—
—
—
74
74
—
Issuance of common stock under stock incentive plans, net
The following table represents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest during the nine months ended January 1, 2022 (dollars in thousands):
Equity Attributable to Cavco Stockholders
Treasury stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total
Redeemable noncontrolling interest
Common Stock
Shares
Amount
Balance, April 3, 2021
9,241,256
$
92
$
(1,441)
$
253,835
$
431,057
$
97
$
683,640
$
—
Net income
—
—
—
—
27,046
—
27,046
—
Other comprehensive loss, net
—
—
—
—
—
(13)
(13)
—
Issuance of common stock under stock incentive plans, net
4,465
—
—
136
—
—
136
—
Stock-based compensation
—
—
—
1,100
—
—
1,100
—
Common stock repurchases
—
—
(12,842)
—
—
—
(12,842)
—
Balance, July 3, 2021
9,245,721
$
92
$
(14,283)
$
255,071
$
458,103
$
84
$
699,067
$
—
Initial value of noncontrolling interest upon transaction
—
—
—
—
—
—
—
1,235
Net income
—
—
—
—
37,610
—
37,610
73
Other comprehensive loss, net
—
—
—
—
—
(13)
(13)
—
Issuance of common stock under stock incentive plans, net
29,295
1
—
2,728
—
—
2,729
—
Stock-based compensation
—
—
—
1,317
—
—
1,317
—
Common stock repurchases
—
—
(7,594)
—
—
—
(7,594)
—
Distributions
—
—
—
—
—
—
—
(180)
Balance, October 2, 2021
9,275,016
$
93
$
(21,877)
$
259,116
$
495,713
$
71
$
733,116
$
1,128
Net income
—
—
—
—
79,419
—
79,419
196
Other comprehensive loss, net
—
—
—
—
—
(113)
(113)
—
Issuance of common stock under stock incentive plans, net
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Net income attributable to Cavco common stockholders
$
59,524
$
79,419
$
193,242
$
144,075
Weighted average shares outstanding
Basic
8,870,565
9,174,224
8,897,405
9,187,828
Effect of dilutive securities
65,510
96,214
71,699
83,027
Diluted
8,936,075
9,270,438
8,969,104
9,270,855
Net income per share attributable to Cavco common stockholders
Basic
$
6.71
$
8.66
$
21.72
$
15.68
Diluted
$
6.66
$
8.57
$
21.55
$
15.54
Anti-dilutive common stock equivalents excluded
930
1,640
776
2,449
20. Fair Value Measurements
The book value and estimated fair value of our financial instruments were as follows (in thousands):
December 31, 2022
April 2, 2022
Book Value
Estimated Fair Value
Book Value
Estimated Fair Value
Available-for-sale debt securities
$
19,036
$
19,036
$
17,760
$
17,760
Marketable equity securities
14,103
14,103
16,780
16,780
Non-marketable equity investments
5,290
5,290
20,479
20,479
Consumer loans receivable
40,666
47,039
49,884
53,354
Commercial loans receivable
77,973
73,343
68,566
65,942
Other secured financing
(2,450)
(2,357)
(2,933)
(3,119)
See Note 19, Fair Value Measurements, and the Fair Value of Financial Instruments caption in Note 1, Summary of Significant Accounting Policies, in the Form 10-K for more information on the methodologies we use in determining fair value.
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. MSRs are recorded at fair value in Prepaid expenses and other current assets on the Consolidated Balance Sheets.
In addition to our Company-owned stores, we have non-marketable equity investments in other manufactured housing distributors. In the ordinary course of business, we sell homes and lend to certain of these distributors through our commercial lending programs. For the three and nine months ended December 31, 2022, the total amount of sales to related parties was $18.7 million and $56.0 million, respectively. For the three and nine months ended January 1, 2022, the total amount of sales to related parties was $15.8 million and $44.6 million, respectively. As of December 31, 2022, receivables from related parties included $6.3 million of accounts receivable and $3.3 million of commercial loans outstanding. As of April 2, 2022, receivables from related parties included $3.3 million of accounts receivable and $2.6 million of commercial loans outstanding.
22. Business Segment Information
We operate principally in two segments: (1) factory-built housing, which includes wholesale and retail factory-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The following table provides selected financial data by segment (in thousands):
Three Months Ended
Nine Months Ended
December 31, 2022
January 1, 2022
December 31, 2022
January 1, 2022
Net revenue
Factory-built housing
$
481,193
$
413,590
$
1,613,392
$
1,067,967
Financial services
19,410
18,124
52,941
53,712
$
500,603
$
431,714
$
1,666,333
$
1,121,679
Income before income taxes
Factory-built housing
$
71,813
$
52,905
$
241,959
$
133,357
Financial services
4,268
6,030
6,243
10,077
$
76,081
$
58,935
$
248,202
$
143,434
December 31, 2022
April 2, 2022
Total assets:
Factory-built housing
$
1,072,652
$
929,535
Financial services
191,822
225,437
$
1,264,474
$
1,154,972
23. Subsequent Event
As announced on January 3, 2023 in a current report on Form 8-K, we completed the acquisition of Solitaire Inc. and other related entities (collectively "Solitaire Homes"), including their four manufacturing facilities and twenty-two retail locations. 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.
The purchase price totaled $93 million, before certain customary adjustments, and was funded with cash on hand. The allocation of the purchase price is still preliminary as of the date of this report and will be finalized upon completion of the analysis of the fair values of the acquired assets, liabilities assumed and intangible assets. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date. Accordingly, supplemental pro-forma information is not available and is therefore omitted.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Report on Form 10-Q ("Report") include "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions. Forward-looking statements include, for example, discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; our liquidity and financial resources; our outlook with respect to Cavco Industries, Inc. and its subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco") and the manufactured housing business in general; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations; economic conditions, including concerns of a possible recession, and consumer confidence; trends in interest rates and inflation; potential acquisitions, strategic investments and other expansions; the sufficiency of our liquidity; operational and legal risks; how we may be affected by any pandemic or outbreak; geopolitical conditions (including the continuing Russia-Ukraine conflict); the cost and availability of labor and raw materials; governmental regulations and legal proceedings; the availability of favorable consumer and wholesale manufactured home financing; and the ultimate outcome of our commitments and contingencies. Forward-looking statements contained in this Report speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document. We do not intend to publicly update or revise any forward-looking statement contained in this Report or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law.
Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control. To the extent that our assumptions and expectations differ from actual results, our ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Risk Factors in Part I, Item 1A of our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Form 10-K").
Introduction
The following should be read in conjunction with the Company's Consolidated Financial Statements and the related Notes that appear in Part I, Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to our Consolidated Financial Statements.
Company Overview
Headquartered 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, MidCountry and Solitaire. We are also a leading producer of park model RVs, vacation cabins and factory-built commercial structures. Our finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") seller/servicer and 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.
We operate 31 homebuilding production lines in Millersburg and Woodburn, Oregon; Riverside, California; Nampa, Idaho; Phoenix, Glendale and Goodyear, Arizona; Deming, New Mexico; Duncan, Oklahoma; 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 and Hamlet, North Carolina; Ocala and Plant City, Florida; and two in Ojinaga, Mexico. 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 64 Company-owned U.S. retail locations, including the 22 retail locations acquired with Solitaire Homes.
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 70% majority 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 January 3, 2023, subsequent to the end of the third fiscal quarter of 2023, we completed the acquisition of Solitaire Homes, including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations. 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 through November 2022 were 106,454, an increase of 8.9% compared to 97,745 shipments in the same period last year.
The industry offers solutions to the affordable housing crisis and these shipment numbers reflect the industry's ability to produce in the current environment. The average price per square foot for a manufactured home is usually lower than a site-built home. Also, based on the comparatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing's monthly payment affordability.
The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. "First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that are particularly affected by periods of low employment rates and underemployment. Consumer confidence is especially important among manufactured home buyers interested in our products for seasonal or retirement living.
We employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage. We are focused on building quality, energy efficient homes for the modern home buyer. Our green building initiatives involve the creation of an energy efficient envelope resulting in lower utility costs, as well as the higher utilization of renewable materials in our manufacturing process. We also build homes designed to use alternative energy sources, such as solar.
We maintain a conservative cost structure in an effort to build added value into our homes and we work diligently to maintain a solid financial position. Our balance sheet strength, including the position in cash and cash equivalents, helps avoid liquidity problems and enables us to act effectively as market opportunities or challenges present themselves.
We continue to make certain commercial loan programs available to members of our wholesale distribution chain. Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community operators and residential developers (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial lending helps to increase the availability of manufactured home financing to distributors, community operators and residential developers and provides additional opportunities for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they also expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners.
The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loan and non-conforming mortgage portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities. We also develop and invest in home-only lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders.
Key housing building materials include wood, wood products, steel, gypsum wallboard, windows, doors fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, aluminum, appliances and electrical items. Fluctuations in the cost of materials and labor may affect gross margins from home sales to the extent that costs cannot be efficiently matched to the home sales price. Pricing and availability of certain raw materials have been volatile due to a number of factors in the current environment. We continue to monitor and react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such product pricing increases may lag behind the escalation of such costs. From time to time and to varying degrees, we may experience shortages in the availability of materials and/or labor in the markets served. Availability of these inputs has not caused significant production halts in the current period, but we have experienced periodic shutdowns in other periods and shortages of primary building materials have caused production inefficiencies as we have needed to change processes in response to the delay in materials. These shortages may also result in extended order backlogs, delays in the delivery of homes and reduced gross margins from home sales.
Our backlog at December 31, 2022 was $427 million compared to $651 million last quarter, a decrease of $224 million or 34.4%, and down $678 million, or 61.4%, compared to $1.1 billion at January 1, 2022. This was largely due to lower home order rates net of cancellations. Order rates are down from the extreme highs we saw during the summer of 2020 to the summer of 2021.
While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to meeting demand. We continually review the wage rates of our production employees and have established other monetary incentive and benefit programs, with a goal of providing competitive compensation. We are also working to more extensively use web-based recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates.
In the financial services segment, we continue to assist customers in need by servicing existing loans and insurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations. Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced 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.
to independent retailers, builders, communities and developers
3,694
3,766
(72)
(1.9)
%
4,442
4,424
18
0.4
%
Net factory-built housing revenue per home sold
$
108,328
$
93,488
$
14,840
15.9
%
Nine Months Ended
($ in thousands, except revenue per home sold)
December 31, 2022
January 1, 2022
Change
Factory-built housing
$
1,613,392
$
1,067,967
$
545,425
51.1
%
Financial services
52,941
53,712
(771)
(1.4)
%
$
1,666,333
$
1,121,679
$
544,654
48.6
%
Factory-built homes sold
by Company-owned retail sales centers
2,481
2,091
390
18.7
%
to independent retailers, builders, communities and developers
12,418
9,630
2,788
29.0
%
14,899
11,721
3,178
27.1
%
Net factory-built housing revenue per home sold
$
108,289
$
91,116
$
17,173
18.8
%
In factory-built housing, Net revenue for both the three and nine months ended December 31, 2022 increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices. Also included in both current year periods is $3.9 million of home sales revenue from an equity method joint venture. This represents revenue that was previously deferred and now recognized in the third quarter upon that entity selling those homes to an unrelated third party.
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers and sales of homes to consumers by Company-owned retail stores. Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Our homes are constructed in one or more floor sections ("modules") which are then installed on the customer's site. Changes in the number of modules per home, the selection of different home types/models and optional home upgrades create changes in product mix, also causing fluctuations in this metric. The tables below presents the mix of modules and homes sold for the three and nine months ended December 31, 2022 and January 1, 2022:
U.S. Housing and Urban Development ("HUD") code homes
5,852
3,454
6,166
3,583
(5.1)
%
(3.6)
%
Modular homes
1,412
708
1,270
632
11.2
%
12.0
%
Park model RVs
280
280
209
209
34.0
%
34.0
%
7,544
4,442
7,645
4,424
(1.3)
%
0.4
%
Nine Months Ended
December 31, 2022
January 1, 2022
Change
Modules
Homes
Modules
Homes
Modules
Homes
HUD code homes
20,474
11,925
17,366
10,013
17.9
%
19.1
%
Modular homes
4,408
2,207
2,257
1,112
95.3
%
98.5
%
Park model RVs
767
767
596
596
28.7
%
28.7
%
25,649
14,899
20,219
11,721
26.9
%
27.1
%
For the three months ended December 31, 2022, Financial services segment Net revenue increased 7.1% primarily due to more policies in force in the current period, partially offset by lower interest income earned on the acquired consumer loan portfolios. For the nine months ended December 31, 2022, Net revenue decreased 1.4% primarily due to realized and unrealized losses on marketable equity securities in the insurance subsidiary's portfolio during such period, lower interest income earned on the acquired consumer loan portfolios and lower volume in home loan sales. These items were partially offset by more insurance policies in force in the current period compared to the prior period.
Factory-built housing Gross profit and Gross profit percentage increased for the three and nine months ended December 31, 2022 primarily due to higher average sales prices.
In Financial services, Gross profit and Gross profit percentage decreased for the three and nine months ended December 31, 2022 primarily due to higher insurance claims from Arizona and Texas weather related events and greater unrealized losses on marketable equity securities compared to the same period last year.
Selling, general and administrative expenses as % of Net revenue
11.8
%
14.0
%
N/A
(2.2)
%
Nine Months Ended
($ in thousands)
December 31, 2022
January 1, 2022
Change
Factory-built housing
$
176,690
$
131,579
$
45,111
34.3
%
Financial services
15,244
14,947
297
2.0
%
$
191,934
$
146,526
$
45,408
31.0
%
Selling, general and administrative expenses as % of Net revenue
11.5
%
13.1
%
N/A
(1.6)
%
For the three months ended December 31, 2022, Selling, general and administrative expenses related to factory-built housing decreased primarily from lower legal and professional fees, partially offset by higher incentive compensation on improved earnings. For the nine months ended December 31, 2022, Selling, general and administrative expenses increased primarily from higher legal and professional fees and higher salary and incentive compensation expense on improved earnings.
As a percentage of Net revenue, Selling, general and administrative expenses improved by 220 and 160 basis points for the three and nine months ended December 31, 2022, respectively, from better utilization of fixed costs on higher sales.
Interest expense consists primarily of interest related to finance leases.
Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses from the sale of property, plant and equipment. The decrease in Other income, net is primarily due to a $3.3 million gain recognized in the second quarter of last year on the remeasurement of the assets and liabilities of Craftsman upon acquisition of a controlling interest. Additionally, for the nine months ended December 31, 2022, we recognized a $1.2 million unrealized loss on corporate marketable investments compared to a $4.0 million unrealized gain in the prior year. These items were partially offset by higher interest income earned on a larger cash balance held in high yield money market funds.
For the three and nine months ended January 1, 2022, the effective income tax rate was a benefit due to $34.4 million of energy efficient home tax credits, which included catch up credits for homes sold between 2018 through 2021. The effective tax rate for the three and nine months ended December 31, 2022 was 21.7% and 22.0%, respectively.
Liquidity and Capital Resources
We believe that cash and cash equivalents at December 31, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash 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. We have sufficient liquid resources including our recently implemented $50.0 million Revolving Credit Facility, of which no amounts were outstanding at December 31, 2022. Regardless, depending on our operating results and strategic opportunities, we may choose to seek additional or alternative sources of financing in the future. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. We believe that stockholders' equity at the insurance subsidiary remains sufficient and do not believe that the ability to pay ordinary dividends to Cavco at anticipated levels will be restricted per state regulations.
The following is a summary of the Company's cash flows for the nine months ended December 31, 2022 and January 1, 2022, respectively:
Nine Months Ended
(in thousands)
December 31, 2022
January 1, 2022
$ Change
Cash, cash equivalents and restricted cash at beginning of the fiscal year
$
259,334
$
339,307
$
(79,973)
Net cash provided by operating activities
230,119
125,967
104,152
Net cash used in investing activities
(29,199)
(147,842)
118,643
Net cash used in financing activities
(73,860)
(34,290)
(39,570)
Cash, cash equivalents and restricted cash at end of the period
$
386,394
$
283,142
$
103,252
Net cash provided by operating activities increased primarily from higher net income adjusted for non-cash items. This increase was partially offset by increased lending in our Financial Services segment, as well as under our commercial loan programs. Consumer loan originations increased $12.7 million to $135.6 million for the nine months ended December 31, 2022 from $122.9 million for the nine months ended January 1, 2022, which was partially offset by increased proceeds of $3.6 million from sales of consumer loans.
Net cash used in investing activities consists of buying and selling debt and marketable equity securities in our Financial Services segment, purchases of property, plant and equipment and funding strategic growth acquisitions. Cash used in the current period reflects the purchase of our plant facilities in Hamlet, North Carolina and development of our facility in Glendale, Arizona. These expenditures were partially offset by a $12.2 million return of invested capital from one of our equity method joint ventures. Cash used in the prior period reflects the purchase of Commodore and Craftsman.
Net cash used in financing activities for the current period was primarily for the repurchase of common stock.
See Note 17 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.
Obligations and Commitments. There were no material changes to the obligations and commitments as set forth in the Form 10-K.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the nine months ended December 31, 2022, as compared to those disclosed in Part II, Item 7 of the Form 10-K, under the heading "Critical Accounting Estimates," which provides a discussion of the critical accounting estimates that management believes affect its more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K.
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its President and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Company's President and Chief Executive Officer and its Chief Financial Officer concluded that, as of December 31, 2022, its disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended December 31, 2022 which has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
See the information under the "Legal Matters" caption in Note 17 to the Consolidated Financial Statements, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in the Form 10-K, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes to the risk factors disclosed in the Form 10-K. These are also not the only risks facing the Company; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The following risk factors are added as Business and Operational Risks, Industry and Economic Risks and Legal and Regulatory Risks as noted below.
Business and Operational Risks
Shutdowns or delays at the United States/Mexico border could affect the Company's ability to ship materials to and receive finished goods from our Mexico production facilities
Our production operations in Mexico are dependent upon receiving materials from facilities in Presidio, Texas, and our sales from our Mexican operations are dependent upon shipments from our Ojinaga, Mexico facility. Shutdown or delays at the United States/Mexico border could impact our production at the Mexico facilities or our ability to receive finished goods from our Mexico facilities into the Unites States following production, each of which could adversely affect our results of operations.
Casualty losses associated with the Company's transportation operations may be large, which could adversely impact our financial performance
In the ordinary course of business, we may incur property or casualty losses during the transportation of raw materials or finished homes. Although we maintain general liability insurance, estimating the number and severity of claims, as well as related judgment or settlement amounts, is inherently difficult, and claims may ultimately prove to be more severe than our estimates. This, along with legal expenses, incurred but not reported claims, and other uncertainties can cause unfavorable differences between actual costs and our reserve estimates. Accordingly, ultimate results may differ materially from our estimates, which could result in losses and materially adversely affect our financial condition and results of operations.
Industry and Economic Risks
Changes in the exchange rates for Mexican Pesos could adversely affect the value of the Company's investments in Mexico and cause foreign exchange losses
We have production operations in Mexico, and unfavorable changes in the exchange rate for Mexican Pesos could adversely affect the reported value of our investments and/or results of operations.
Changes in existing regulations or violations of existing or future regulations could have a materially adverse effect on the Company's operations and profitability
We are subject to regulation by the United States Department of Transportation, the United States Environmental Protection Agency, the United States Department of Homeland Security and other state and federal agencies. Future laws and regulations or changes to existing laws and regulations may be more stringent, require changes in our operating practices, or require us to incur significant additional costs, which could materially adversely affect our business, financial condition, and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
As announced on May 26, 2022 in a current report on Form 8-K, the Company's Board of Directors approved a $100 million stock repurchase program with the same terms and conditions as the previous plan. The repurchase program is funded using our available cash. The following table sets forth repurchases of our common stock during the third quarter of fiscal year 2023:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of the Publicly Announced Program
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (in thousands)
October 2, 2022 to
November 5, 2022
—
$
—
—
$
100,000
November 6, 2022 to
December 3, 2022
70,467
216.96
70,467
84,712
December 4, 2022 to
December 31, 2022
81,064
234.16
81,064
65,730
151,531
151,531
Item 5. Other Information
There is no other information required to be disclosed under this item which was not previously disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
