NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation. These Consolidated Financial Statements include the accounts of Cavco Industries, Inc. and its consolidated subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco"). All significant intercompany transactions and balances have been eliminated in consolidation. We have evaluated subsequent events after the balance sheet date of April 2, 2022, through the date of the filing of this report with the Securities and Exchange Commission (the "SEC") and there were no disclosable subsequent events. In addition, references throughout to numbered "Notes" refer to these Notes to Consolidated Financial Statements, unless otherwise stated.
Nature of Operations. Headquartered in Phoenix, Arizona, we design and produce factory-built housing products primarily distributed through a network of independent distributors located throughout the continental United States, as well as through Company-owned retail stores which offer our homes to retail customers. Our financial services segment is comprised of: a mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), which 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" or "GNMA") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes; and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"), which provides property and casualty insurance primarily to owners of manufactured homes.
Fiscal 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 ended on April 2, 2022 and includes 52 weeks, whereas fiscal year 2021 consisted of 53 weeks and fiscal year 2020 consisted of 52 weeks.
Accounting Estimates. Preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.
Factory-Built Housing Revenue Recognition - Wholesale. Revenue from homes sold to independent distributors, builders, communities and developers is generally recognized when the home is shipped, at which time title passes and it is probable that substantially all of the consideration will be received. Homes sold to independent distributors are generally either paid upon shipment or floor plan financed by the independent distributor through standard industry financing arrangements, which can include repurchase agreements. Manufacturing sales financed under floor plan arrangements that include repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 16).
Some of our independent distributors operate multiple sales outlets. No independent distributor accounted for 10% or more of factory-built housing revenue during any fiscal year within the three-year period ended April 2, 2022.
Factory-Built Housing Revenue Recognition - Retail. Sales by Company-owned retail stores are generally recognized when the customer has entered into a legally binding sales contract, the home is delivered and permanently located at the customer's site, the home is accepted by the customer, title has transferred and funding is probable.
Financial Services Revenue Recognition. Premium amounts collected on policies issued and assumed by Standard Casualty are amortized on a straight-line basis into Net revenue over the life of the policy. Premiums earned are net of reinsurance ceded. Policy acquisition costs are also amortized in Cost of sales over the life of the policy. Insurance agency commissions received from third-party insurance companies are recognized as revenue upon execution of the insurance policy as we have no future or ongoing obligation with respect to such policies.
Interest income on consumer loans receivables is recognized in Net revenue. Upon acquisition of the previously securitized loan portfolios (the "Acquisition Date"), we evaluated the existing consumer loans receivable held for investment to determine whether there was evidence of deterioration of credit quality and the probability that we would be able to collect all amounts due according to the loans' contractual terms. We also considered expected prepayments and estimated the amount and timing of undiscounted principal, interest and other cash flows. We determined the excess of the loan pool's scheduled contractual principal and interest payments over the undiscounted expected cash flows as of the Acquisition Date as an amount that is not accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans was accreted into interest income over the remaining life of the loans (referred to as accretable yield). We adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") on March 29, 2020. Upon adoption, we 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 losses upon adoption. The remaining discount on the acquired consumer loans was determined to be related to non-credit factors and will continue to be accreted into interest income over the life of the loans (see Note 6).
For loans originated and held for sale, loan origination fees and gains or losses on sales are recognized in Net revenue upon title transfer of the loans. We provide third-party servicing of mortgages and earn servicing fees each month based on the aggregate outstanding balances. Servicing fees are recognized in Net revenue when earned.
Cash and Cash Equivalents. Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. Our cash equivalents are primarily comprised of U.S. Treasury and other money market funds and other depository accounts, some of which are in excess of Federal Deposit Insurance Corporation insured limits.
Restricted Cash. Restricted cash primarily represents cash related to CountryPlace customer payments to be remitted to third parties and deposits received from retail customers required to be held in trust accounts. These funds cannot be accessed for general operating purposes (see Note 3).
Accounts Receivable. We extend competitive credit terms on a customer-by-customer basis in the normal course of business, subject to normal industry risk, with many requiring a cash deposit with a sales order or payment upon delivery of a home. We review accounts receivable for estimated losses that may result from customers' inability to pay. As of April 2, 2022 and April 3, 2021, there were no allowances for doubtful accounts.
Investments. Management determines the appropriate classification of its investment securities at the time of purchase. Our investments include marketable debt and equity securities and non-marketable equity investments. Changes in unrealized net holding gains and losses on equity securities are reported in earnings. Unrealized net holding gains and losses on available-for-sale debt securities are recorded in Accumulated other comprehensive income (loss) ("AOCI") in the Consolidated Balance Sheets. Realized gains and losses from the sale of securities are determined using the specific identification method (see Note 4).
As discussed above, we adopted ASU 2016-13 on March 29, 2020. Under this standard, declines in the fair value of individual available-for-sale debt securities that are related to credit losses are recorded as a valuation allowance against the investment balance, with the loss recorded in earnings. As of April 2, 2022, we have determined that all losses on available-for-sale debt securities were from market factors, and therefore we had no valuation allowance.
Consumer Loans Receivable. Consumer loans receivable consist primarily of manufactured housing loans originated by CountryPlace (held for investment or held for sale) and construction advances on mortgages.
Loans held for investment consist of loan contracts collateralized by the borrowers' homes and, in some instances, related land. Construction loans in progress are stated at the aggregate amount of cumulative funded advances. Loans held for sale are loans that, at the time of origination, are originated with the intent to resell to investors with which the Company has pre-existing purchase agreements, such as Fannie Mae and Freddie Mac, or to sell as part of a Ginnie Mae insured pool of loans and consist of loan contracts collateralized by single-family residential mortgages. Loans held for sale are stated at the lower of cost or market on an aggregate basis.
Combined land and home mortgages are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises ("GSEs") and those that are non-conforming. In most instances, our mortgages are secured by a first-lien position and are provided for the consumer purchase of a home. Consumer loans held for investment include home-only personal property loans originated under our home-only lending programs. Accordingly, we classify our loans receivable as follows: conforming mortgages, non-conforming mortgages and home-only loans.
In measuring credit quality within each segment and class, we use commercially available credit scores (such as FICO®). At the time of each loan's origination, we obtain credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, we use the mid-point of the available credit scores or, if only two scores are available, we use the lower of the two. We do not update credit bureau scores after the time of origination.
Commercial Loans Receivable. Our commercial loans receivable balance consists of amounts loaned under commercial loan programs for the benefit of our independent distributors and community operators' home purchasing needs. Under the terms of certain programs, we have entered into direct commercial loan arrangements with independent distributors and community operators wherein we provide funds to purchase home inventory or homes for placement in communities. Interest income on commercial loans receivable is recognized in Other income, net in the Consolidated Statements of Comprehensive Income on an accrual basis.
Allowance for Loan Losses. ASU 2016-13 requires a forward-looking impairment model based on expected losses rather than incurred losses. The primary portion of the allowance for loan losses reflects our judgment of the incurred loss exposure on our consumer loans receivable. As of April 2, 2022, we had an allowance for loan losses of $2.1 million. Our allowance for loan losses as of April 3, 2021 was $3.2 million (see Note 6).
Another portion of the allowance for loan losses relates to our commercial loans receivables as of the end of the reporting period. We have historically been able to resell repossessed homes, thereby mitigating loss exposure. If a default occurs and collateral is lost, we are exposed to loss of the full value of the home loan. To determine the appropriate level of the allowance for loan loss, we collectively evaluate loans based on their terms and duration. In addition to the allowance calculated under ASU 2016-13, if we determine that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan losses. We recorded allowance for loan losses of $1.0 million and $816,000 at April 2, 2022 and April 3, 2021, respectively, related to commercial loans receivable (see Note 7).
Inventories. Raw material inventories are valued at the lower of cost or market, using the first in, first out method. Finished goods and work-in-process inventories are valued at the lower of cost or market, using the specific identification method.
Property, Plant and Equipment. Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful life of each asset. Estimated useful lives for significant classes of assets are as follows: buildings and improvements, 10 to 39 years; and machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. We sell miscellaneous property, plant and equipment in the normal course of business.
Asset Impairment. We periodically evaluate the carrying value of long-lived assets to be held and used and held for sale for impairment when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset group. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are primarily determined based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose. There were no impairment losses recognized in fiscal years 2022, 2021 or 2020.
Goodwill and Other Intangibles. We account for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In the fair value evaluation of intangible assets acquired, there are significant estimates and assumptions, including forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of the royalty rates and discount rates. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We account for goodwill and other intangible assets in accordance with the provisions of FASB Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other. As such, we test goodwill annually for impairment. The Company has two reporting segments: factory-built housing and financial services. As of April 2, 2022, all of our goodwill is attributable to the factory-built housing reporting segment. Certain intangibles are considered indefinite-lived and others are finite-lived and are amortized over their useful lives. Finite-lived intangibles are amortized over 3 to 15 years on a straight-line basis and are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Indefinite-lived intangible assets are assessed annually for impairment first by making a qualitative assessment, and if necessary, performing a quantitative assessment and recording an impairment charge if the fair value of the asset is less than its carrying amount.
We performed our annual goodwill impairment analysis as of April 2, 2022, and the analysis determined that the fair value of the reporting unit was greater than the carrying value. There was no impairment recognized during fiscal years 2022, 2021 or 2020.
Warranties. We provide retail home buyers, builders or developers with a one year warranty for manufacturing defects from the date of sale to the retail customer. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. Estimated warranty costs are accrued in Cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims on homes sold as of the balance sheet date. Factors used to calculate the warranty obligation are the estimated amount of homes still under warranty including homes in distributor inventories, homes purchased by consumers still within the one year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home.
Volume Rebates. Certain distributors, builders and developers can qualify for cash rebates generally based on the level of sales attained during a twelve-month period on specified products. Volume rebates are accrued at the time of sale and are recorded as a reduction of Net revenue.
Freight. Substantially all freight costs are recovered from our distributors and are included in Net revenue. Freight charges of $41.5 million, $29.3 million and $30.9 million were recognized in fiscal years 2022, 2021 and 2020, respectively.
Reserve for Repurchase Commitment. We are contingently liable under terms of repurchase agreements with the financial institutions that provide inventory financing to certain distributors of our products. These arrangements, which are customary in the industry, provide the lender a guarantee that we will repurchase our products in the event of default by the distributor. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The risk of loss under these agreements is spread over numerous distributors and the repurchase price generally declines over the period of the agreement (generally 18 to 24 months), further reduced by the resale value of repurchased homes. We apply FASB ASC 460, Guarantees ("ASC 460") to account for our liability for repurchase commitments. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period in conjunction with applicable curtailment arrangements and is eliminated once the distributor sells the home. Changes in the reserve are recorded as an adjustment to Net revenue. See Note 16 for further discussion.
Reserve for Property Casualty Insurance Claims and Claims Expense. Standard Casualty establishes reserves for claims and claims expense on reported and unreported claims of insured losses. Our reserve process takes into account known facts and interpretations of circumstances and factors, including experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix, contractual terms, changes in law and regulation, judicial decisions and economic conditions. In the normal course of business, we may also supplement our claims processes by utilizing third party adjusters, appraisers, engineers, inspectors and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process. The applicable reserve balance was $8.1 million and $7.5 million as of April 2, 2022 and April 3, 2021, respectively, of which $3.8 million and $3.7 million related to incurred but not reported ("IBNR") losses, respectively.
Insurance. We are self-insured for a significant portion of our general and products liability, auto liability, health, property and workers' compensation liability coverage. Insurance is maintained for catastrophic exposures and those risks required to be insured by law. Estimated self-insurance costs are accrued for incurred claims and estimated IBNR losses. A reserve for products liability is actuarially determined and reflected in Accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets. The determination of claims and expenses and the appropriateness of the related liabilities are regularly reviewed and updated.
Advertising. Advertising costs are expensed as incurred and were $1.4 million in fiscal year 2022, $807,000 in fiscal year 2021 and $900,000 in fiscal year 2020.
Fair Value of Financial Instruments. Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, investments, consumer loans receivable, commercial loans receivable, accounts payable, certain accrued expenses and other current liabilities and secured credit facilities and other financings.
In accordance with FASB ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
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Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
Level 2 – | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amount of cash and cash equivalents approximates fair value because their maturity is less than three months. The carrying amounts of restricted cash, accounts receivable, accounts payable and certain accrued expenses and other current liabilities approximate fair value due to the short-term maturity of the amounts. See Note 19 for the fair values of our other financial instruments and the inputs used.
Income Taxes. We account for income taxes pursuant to FASB ASC 740, Income Taxes ("ASC 740") and provide for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves considering uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period of derecognition. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. We use a two-step approach to evaluate uncertain tax positions. This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be recognized in the Consolidated Financial Statements.
Other Income, net. Other income primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivables and earned on cash balances, gains and losses on the sale of property, plant and equipment or assets held for sale and impairment of such assets, if necessary.
Stock-Based Compensation. Stock-based compensation is measured based on the fair value of the award on the date of grant and the corresponding expense is recognized over the period during which an employee is required to provide service in exchange for the award. Stock-based compensation expense is classified in the same line item of our Consolidated Statements of Comprehensive Income as other payroll-related expenses specific to the employee. Compensation expense related to service-based restricted stock units ("RSUs") is recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense related to performance-based RSUs is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards (i.e., a graded vesting basis).
We use historical data to estimate pre-vesting forfeitures and record stock-based compensation cost, using the straight-line attribution method, only for those awards that are expected to vest. Compensation expense related to performance-based awards is based on management's estimate of the probability of the performance criteria being satisfied, adjusted at each balance sheet date (see Note 17).
Redeemable Noncontrolling Interest. We have a 70% interest in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as "Craftsman" or the "Entities"). See Note 22 for a description of the transaction. As a result, we consolidate the Entities while recognizing a noncontrolling interest for the remaining third party ("Craftsman Seller") ownership.
An additional 20% of the remaining equity of Craftsman is to be purchased on December 31, 2023 by us for cash. As mandatory redemption of this ownership interest is required, the fair value of this portion of the noncontrolling interest is recorded in the long-term liabilities section of the Consolidated Balance Sheet within Secured financings and other. In each reporting period hereafter, until purchased by the Company, the mandatorily redeemable noncontrolling interest is adjusted to its current redemption value, based on a predetermined formula. Adjustments in the redemption value to the mandatorily redeemable noncontrolling interest are recorded to Interest expense.
The Craftsman Seller can require us to purchase their remaining 10% ownership ("Put Right"), after December 31, 2023, for an amount specified in the Craftsman Purchase Agreement that is designed to approximate fair value. Likewise, we can require the Craftsman Seller to sell us their remaining 10% ownership ("Call Right") based on the same timing as described above for the Put Right. As redemption of this remaining ownership is not a current obligation, the fair value of this portion of the noncontrolling interest is classified as a temporary equity mezzanine item between liabilities and stockholders' equity in the Consolidated Balance Sheets as Redeemable noncontrolling interest. The amount of income attributable to this noncontrolling interest is included on the face of the Consolidated Statements of Comprehensive Income.
Accumulated Other Comprehensive Income (loss). AOCI is comprised of unrealized gains and losses on available-for-sale debt securities (see Note 4), and is presented net of tax. Accumulated unrealized loss on available-for-sale debt securities at the end of fiscal year 2022 was $510,000 before tax, with an associated tax amount of $107,000, resulting in a net unrealized loss of $403,000. Unrealized gain on available-for-sale debt securities for fiscal year 2021 was $123,000, with an associated tax amount of $26,000, for a net unrealized gain of $97,000.
Treasury Stock. We record repurchases of our common stock as treasury stock at cost. As we do not have a formal retirement plan for the shares acquired, and the ultimate disposition has not yet been decided, we show the cost of the acquired stock separately as a deduction from equity.
Net Income Per Share. Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company's stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method (see Note 18).
Recently Issued or Adopted Accounting Pronouncements. From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted as of the specified effective dates. Unless otherwise discussed, 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.
2. Revenue from Contracts with Customers
Revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when, or as, the customer obtains control of that good or service. Revenues are based on the consideration expected to be received in connection with our promises to deliver goods and services to the customers.
Site Improvements on Retail Sales. We recognize sales of subcontracted ancillary services, such as preparation of the home site or other exterior enhancements. Such services are provided as a convenience to the customer. As we are involved in the selection of subcontractors, under FASB ASC 606, Revenue from Contracts with Customers, we recognize the sale of these ancillary services on a gross basis. The revenues associated with these programs for fiscal years 2022, 2021 and 2020 were $43.9 million, $41.1 million and $30.0 million, respectively.
Additional Items. Expected consideration, and therefore revenue, reflects reductions for returns, allowances and other incentives, some of which may be contingent on future events. Additionally, our volume rebates are accrued at the time of sale and are recorded as a reduction of Net revenue.
In customer contracts for retail sales of manufactured homes, consideration includes certain state and local excise taxes billed to customers when those taxes are levied directly upon us by the taxing authorities. Expected consideration excludes sales and other taxes collected on behalf of taxing authorities. We elect to treat consideration for freight performed as a fulfillment activity. Therefore, Net revenue includes consideration for freight and other fulfillment activities performed prior to the customer obtaining control of the goods.
Practical Expedients and Exemptions. We generally expense sales commissions when incurred because the amortization period would be one-year or less. These costs are recorded within Selling, general and administrative expenses. In addition, we do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one-year or less.
Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by reportable segment and source (in thousands). All revenue from customers is recognized at a point in time, either when the customer takes delivery or when a third-party insurance contract is executed, as more fully discussed above.
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| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Factory-built housing | | | | | |
U.S. Housing and Urban Development code homes | $ | 1,335,904 | | | $ | 842,515 | | | $ | 813,074 | |
Modular homes | 117,817 | | | 91,896 | | | 84,498 | |
Park model RVs | 42,219 | | | 46,862 | | | 46,427 | |
Other | 60,343 | | | 56,616 | | | 55,341 | |
| 1,556,283 | | | 1,037,889 | | | 999,340 | |
Financial services | | | | | |
Insurance agency commissions received from third-party insurance companies | 4,055 | | | 3,102 | | | 3,352 | |
All other sources | 66,820 | | | 67,060 | | | 59,082 | |
| 70,875 | | | 70,162 | | | 62,434 | |
| $ | 1,627,158 | | | $ | 1,108,051 | | | $ | 1,061,774 | |
3. Restricted Cash
Restricted cash consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Cash related to CountryPlace customer payments to be remitted to third parties | $ | 13,857 | | | $ | 16,049 | |
Other restricted cash | 1,327 | | | 979 | |
| 15,184 | | | 17,028 | |
Less current portion | (14,849) | | | (16,693) | |
| $ | 335 | | | $ | 335 | |
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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):
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| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Cash and cash equivalents | $ | 244,150 | | | $ | 322,279 | | | $ | 241,826 | |
Restricted cash | 15,184 | | | 17,028 | | | 13,781 | |
| $ | 259,334 | | | $ | 339,307 | | | $ | 255,607 | |
4. Investments
Investments consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Available-for-sale debt securities | $ | 17,760 | | | $ | 14,946 | |
Marketable equity securities | 16,780 | | | 17,600 | |
Non-marketable equity investments | 20,479 | | | 21,960 | |
| 55,019 | | | 54,506 | |
Less short-term investments | (20,086) | | | (19,496) | |
| $ | 34,933 | | | $ | 35,010 | |
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 distribution operations.
We record investments in fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in AOCI.
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):
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| April 2, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Residential mortgage-backed securities | $ | 1,668 | | | $ | 2 | | | $ | (57) | | | $ | 1,613 | |
State and political subdivision debt securities | 10,100 | | | 38 | | | (232) | | | 9,906 | |
Corporate debt securities | 6,502 | | | 1 | | | (262) | | | 6,241 | |
| $ | 18,270 | | | $ | 41 | | | $ | (551) | | | $ | 17,760 | |
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| April 3, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Residential mortgage-backed securities | $ | 2,787 | | | $ | 30 | | | $ | (13) | | | $ | 2,804 | |
State and political subdivision debt securities | 7,239 | | | 125 | | | (19) | | | 7,345 | |
Corporate debt securities | 4,797 | | | 11 | | | (11) | | | 4,797 | |
| $ | 14,823 | | | $ | 166 | | | $ | (43) | | | $ | 14,946 | |
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):
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| April 2, 2022 |
| 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 | $ | 1,048 | | | $ | (45) | | | $ | 289 | | | $ | (12) | | | $ | 1,337 | | | $ | (57) | |
State and political subdivision debt securities | 3,884 | | | (164) | | | 1,246 | | | (68) | | | 5,130 | | | (232) | |
Corporate debt securities | 5,215 | | | (231) | | | 598 | | | (31) | | | 5,813 | | | (262) | |
| $ | 10,147 | | | $ | (440) | | | $ | 2,133 | | | $ | (111) | | | $ | 12,280 | | | $ | (551) | |
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| April 3, 2021 |
| 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 | $ | 927 | | | $ | (6) | | | $ | 450 | | | $ | (7) | | | $ | 1,377 | | | $ | (13) | |
State and political subdivision debt securities | 3,013 | | | (19) | | | — | | | — | | | 3,013 | | | (19) | |
Corporate debt securities | 2,153 | | | (10) | | | 249 | | | (1) | | | 2,402 | | | (11) | |
| $ | 6,093 | | | $ | (35) | | | $ | 699 | | | $ | (8) | | | $ | 6,792 | | | $ | (43) | |
We are not aware of any changes to the securities or issuers that would indicate the losses above are indicative of credit impairment as of April 2, 2022. Further, we do not intend to sell the investments, and it is more likely than not that we will not be required to sell the investments, before recovery of their amortized cost.
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). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without penalties.
| | | | | | | | | | | |
| April 2, 2022 |
| Amortized Cost | | Fair Value |
Due in less than one year | $ | 3,300 | | | $ | 3,302 | |
Due after one year through five years | 11,394 | | | 10,901 | |
Due after five years through ten years | 1,261 | | | 1,281 | |
Due after ten years | 647 | | | 663 | |
Mortgage-backed securities | 1,668 | | | 1,613 | |
| $ | 18,270 | | | $ | 17,760 | |
We recognize investment gains and losses on available-for-sale debt securities when we sell or otherwise dispose of securities using the specific identification method. Gross gains realized on the sale of available-for-sale debt securities totaled $2,000 for fiscal year 2022, and there were none in 2021 or 2020. There were no gross losses realized on the sale of available-for-sale debt securities in fiscal year 2022. Gross losses in fiscal year 2021 were $6,000 and there were none in fiscal year 2020.
We recognize 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. See Note 1 for further discussion. Net investment gains and losses on marketable equity securities for fiscal years 2022, 2021 and 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Marketable equity securities: | | | | | |
Net gain (loss) recognized during the period | $ | 2,160 | | | $ | 8,515 | | | $ | (2,264) | |
Less: Net (gains) losses recognized on securities sold during the period | (551) | | | (2,191) | | | 232 | |
Unrealized gains (losses) recognized during the period on securities still held | $ | 1,609 | | | $ | 6,324 | | | $ | (2,032) | |
5. Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Raw materials | $ | 95,929 | | | $ | 54,336 | |
Work in process | 30,638 | | | 19,149 | |
Finished goods | 117,404 | | | 57,749 | |
| $ | 243,971 | | | $ | 131,234 | |
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Loans held for investment, previously securitized | $ | 26,014 | | | $ | 31,949 | |
Loans held for investment | 14,771 | | | 18,690 | |
Loans held for sale | 8,500 | | | 15,587 | |
Construction advances | 3,547 | | | 13,801 | |
| 52,832 | | | 80,027 | |
Deferred financing fees and other, net | (833) | | | (2,041) | |
Allowance for loan losses | (2,115) | | | (3,188) | |
| 49,884 | | | 74,798 | |
Less current portion | (20,639) | | | (37,690) | |
| $ | 29,245 | | | $ | 37,108 | |
The allowance for loan losses reflects our judgment of the probable loss exposure on loans held for investment. 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): | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Allowance for loan losses at beginning of period | $ | 3,188 | | | $ | 1,767 | |
Impact of adoption of ASU 2016-13 | — | | | 2,276 | |
Change in estimated loan losses, net | (541) | | | (655) | |
Charge-offs | (532) | | | (201) | |
Recoveries | — | | | 1 | |
Allowance for loan losses at end of period | $ | 2,115 | | | $ | 3,188 | |
The consumer loans held for investment had the following characteristics: | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Weighted average contractual interest rate | 8.32 | % | | 8.26 | % |
Weighted average effective interest rate | 9.21 | % | | 9.34 | % |
Weighted average months to maturity | 151 | | 162 |
The following table is a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands): | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Current | $ | 49,546 | | | $ | 76,378 | |
31 to 60 days | 1,202 | | | 508 | |
61 to 90 days | 41 | | | 21 | |
91+ days | 2,043 | | | 3,120 | |
| $ | 52,832 | | | $ | 80,027 | |
The following table disaggregates gross consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 3, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Prime- FICO score 680 and greater | $ | 18,250 | | | $ | 3,575 | | | $ | 1,718 | | | $ | 971 | | | $ | 1,959 | | | $ | 23,375 | | | $ | 49,848 | |
Near Prime- FICO score 620-679 | 10,227 | | | 2,744 | | | 1,794 | | | 1,364 | | | 500 | | | 10,401 | | | 27,030 | |
Sub-Prime- FICO score less than 620 | 348 | | | 53 | | | — | | | — | | | 84 | | | 1,579 | | | 2,064 | |
No FICO score | 576 | | | — | | | 28 | | | — | | | — | | | 481 | | | 1,085 | |
| $ | 29,401 | | | $ | 6,372 | | | $ | 3,540 | | | $ | 2,335 | | | $ | 2,543 | | | $ | 35,836 | | | $ | 80,027 | |
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 April 2, 2022, 39% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 17% was concentrated in Florida. As of April 3, 2021, 35% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 20% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the principal balance of consumer loans receivable as of April 2, 2022 or April 3, 2021.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home less the estimated 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 $499,000 as of April 2, 2022 and $518,000 as of April 3, 2021, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $1.1 million as of April 2, 2022 and April 3, 2021.
7. Commercial Loans Receivable
The commercial loans receivable balance consists of direct financing arrangements for the home product needs of our independent distributors, community owners and developers. We also provide loans to independent floor plan lenders that then lend to distributors to finance their inventory purchases. 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.
Commercial loans receivable, net consisted of the following, by class of financing notes receivable (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Loans receivable | $ | 69,693 | | | $ | 45,377 | |
Allowance for loan losses | (1,011) | | | (816) | |
Deferred financing fees, net | (116) | | | (247) | |
| 68,566 | | | 44,314 | |
Less current portion of commercial loans receivable (including from affiliates), net | (32,644) | | | (19,232) | |
| $ | 35,922 | | | $ | 25,082 | |
The commercial loans receivable balance had the following characteristics:
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Weighted average contractual interest rate | 6.4 | % | | 6.4 | % |
Weighted average months outstanding | 9 | | 11 |
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. Historically, we have been able to sell repossessed homes, thereby mitigating loss exposure. If a default occurs and collateral is lost, we are exposed to loss of the full value of the home loan. We evaluate the potential for loss from the commercial loan programs on a collective basis, aggregating similar loans based on their terms. Our evaluation also considers the borrower's risk rating, overall financial stability, historical experience and estimates of other economic factors.
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):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Balance at beginning of period | $ | 816 | | | $ | 393 | |
Impact of adoption of ASU 2016-13 | — | | | 435 | |
Purchase accounting additions | 408 | | | — | |
Change in estimated loan losses, net | (213) | | | (12) | |
Loans charged off, net of recoveries | — | | | — | |
Balance at end of period | $ | 1,011 | | | $ | 816 | |
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. Our policy is to place loans on nonaccrual 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. We 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, and charge-offs occur when it becomes probable that outstanding amounts will not be recovered. At April 2, 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.
The following table disaggregates our commercial loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Total | | | | |
Performing | | $ | 52,592 | | | $ | 10,181 | | | $ | 4,031 | | | $ | 1,391 | | | $ | 1,498 | | | $ | 69,693 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 3, 2021 | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Total | | | | |
Performing | | $ | 30,627 | | | $ | 8,677 | | | $ | 3,206 | | | $ | 1,864 | | | $ | 1,003 | | | $ | 45,377 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
As of April 2, 2022, 24.9% of our outstanding commercial loans receivable principal balance was concentrated in New York. As of April 3, 2021, 13.1% of the outstanding commercial loans receivable principal balance was concentrated in Arizona. No other state had concentrations in excess of 10% of the principal balance of the commercial loans receivable as of April 2, 2022 or April 3, 2021.
We had concentrations with one independent third-party and its affiliates that equaled 13.7% and 17.8% of the net commercial loans receivables principal balance outstanding, all of which was secured, as of April 2, 2022 and April 3, 2021, respectively. The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan losses.
8. Property, Plant and Equipment, net
Property, plant and equipment, net, consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Property, plant and equipment, at cost: | | | |
Land | $ | 32,154 | | | $ | 28,314 | |
Buildings and improvements | 100,775 | | | 52,174 | |
Machinery and equipment | 48,638 | | | 32,528 | |
Construction in progress | 29,281 | | | 21,271 | |
| 210,848 | | | 134,287 | |
Accumulated depreciation | (46,832) | | | (37,493) | |
| $ | 164,016 | | | $ | 96,794 | |
Depreciation expense was $9.6 million in fiscal year 2022, $5.6 million in fiscal year 2021 and $5.2 million in fiscal year 2020.
Included in the balances above are certain assets under finance leases. See Note 9 for additional information.
9. Leases
We lease certain production and retail locations, office space and equipment. We determine 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 in the Consolidated Balance Sheets. 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 our 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 we are reasonably certain to exercise.
Certain of our lease agreements include rental payments adjusted periodically for inflation. These lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right Of Use ("ROU") assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments in accordance with the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since our leases do not provide a readily determinable implicit interest rate, we estimate an incremental borrowing rate. In determining the estimated incremental borrowing rate, we consider the lease period and comparable market interest rates, as well as any other information available at the lease commencement date. The lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
The following table provides information about the financial statement classification of our lease balances reported within the Consolidated Balance Sheets as of April 2, 2022 and April 3, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Classification | | April 2, 2022 | | April 3, 2021 |
ROU assets | | | | | |
Operating lease assets | Operating lease right-of-use assets | | $ | 16,952 | | | $ | 16,252 | |
Finance lease assets | Property, plant and equipment, net (1) | | 7,070 | | | 986 | |
Total lease assets | | | $ | 24,022 | | | $ | 17,238 | |
| | | | | |
Lease Liabilities | | | | | |
Current: | | | | | |
Operating lease liabilities | Accrued expenses and other current liabilities | | $ | 5,085 | | | $ | 4,184 | |
Finance lease liabilities | Current portion of secured credit facilities and other | | 347 | | | 71 | |
Non-current: | | | | | |
Operating lease liabilities | Operating lease liabilities | | 13,158 | | | 13,361 | |
Finance lease liabilities | Secured credit facilities and other | | 5,969 | | | 233 | |
Total lease liabilities | | | $ | 24,559 | | | $ | 17,849 | |
(1) Recorded net of accumulated amortization of $87,000 and $143,000 as of April 2, 2022 and April 3, 2021, 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 years ended April 2, 2022, April 3, 2021 and March 28, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
Lease Expense Category | Classification | | April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Operating lease expense (2) | | | | | | | |
| Cost of sales | | $ | 1,160 | | | $ | 1,105 | | | $ | 834 | |
| Selling, general and administrative expenses | | 3,636 | | | 3,327 | | | 3,119 | |
Finance lease expense: | | | | | | | |
Amortization of leased assets | Cost of sales | | 109 | | | 39 | | | 39 | |
Interest on lease liabilities | Interest expense | | 151 | | | 17 | | | 52 | |
Total lease expense | | | $ | 5,056 | | | $ | 4,488 | | | $ | 4,044 | |
(2) Excludes short-term and variable lease expenses, which are immaterial.
Cash payments for operating and finance leases were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Operating leases | $ | 4,794 | | | $ | 4,164 | | | $ | 3,375 | |
Finance leases | 220 | | | 79 | | | 142 | |
The present value minimum payments for future fiscal years under non-cancelable leases as of April 2, 2022 was as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
2023 | $ | 5,214 | | | $ | 356 | | | $ | 5,570 | |
2024 | 4,727 | | | 356 | | | 5,083 | |
2025 | 3,691 | | | 356 | | | 4,047 | |
2026 | 3,369 | | | 356 | | | 3,725 | |
2027 | 1,220 | | | 356 | | | 1,576 | |
Thereafter | 2,056 | | | 10,941 | | | 12,997 | |
| 20,277 | | | 12,721 | | | 32,998 | |
Less: Amount representing interest | (2,034) | | | (6,405) | | | (8,439) | |
| $ | 18,243 | | | $ | 6,316 | | | $ | 24,559 | |
The following table provides information about the weighted average remaining lease terms and weighted average discount rates as of April 2, 2022: | | | | | | | | | | | |
| Remaining Lease Term (Years) | | Discount Rate |
Operating leases | 4.7 | | 4.5 | % |
Finance leases | 35.7 | | 4.5 | % |
10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived: | | | | | | | | | | | |
Goodwill | $ | 100,993 | | | $ | — | | | $ | 100,993 | | | $ | 75,090 | | | $ | — | | | $ | 75,090 | |
Trademarks and trade names | 15,680 | | | — | | | 15,680 | | | 8,900 | | | — | | | 8,900 | |
State insurance licenses | 1,100 | | | — | | | 1,100 | | | 1,100 | | | — | | | 1,100 | |
| 117,773 | | | — | | | 117,773 | | | 85,090 | | | — | | | 85,090 | |
Finite lived: | | | | | | | | | | | |
Customer relationships | 19,500 | | | (8,392) | | | 11,108 | | | 11,300 | | | (7,097) | | | 4,203 | |
Other | 1,924 | | | (1,353) | | | 571 | | | 1,424 | | | (1,264) | | | 160 | |
| $ | 139,197 | | | $ | (9,745) | | | $ | 129,452 | | | $ | 97,814 | | | $ | (8,361) | | | $ | 89,453 | |
Changes in the carrying amount of Goodwill were as follows for the year ended April 2, 2022 (in thousands). See Note 22 for further information. | | | | | |
| April 2, 2022 |
Balance at beginning of period | $ | 75,090 | |
Goodwill recognized on Craftsman acquisition | 4,595 | |
Goodwill recognized on Commodore (as defined in Note 22) acquisition | 21,308 | |
Balance at end of period | $ | 100,993 | |
Amortization expense recognized on intangible assets was $1.4 million during fiscal year 2022, $747,000 during fiscal year 2021 and $606,000 during fiscal year 2020.
Expected amortization for future fiscal years is as follows (in thousands):
| | | | | |
2023 | $ | 2,013 | |
2024 | 1,339 | |
2025 | 1,300 | |
2026 | 1,258 | |
2027 | 1,185 | |
Thereafter | 4,584 | |
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Customer deposits | $ | 56,318 | | | $ | 41,835 | |
Salaries, wages and benefits | 54,172 | | | 37,737 | |
Estimated warranties | 26,250 | | | 18,032 | |
Unearned insurance premiums | 24,917 | | | 22,643 | |
Accrued volume rebates | 18,641 | | | 12,132 | |
Company repurchase options on certain loans sold | 9,375 | | | 25,938 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other | 60,631 | | | 44,816 | |
| $ | 250,304 | | | $ | 203,133 | |
12. Warranties
Activity in the liability for estimated warranties for fiscal years 2022, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Balance at beginning of period | $ | 18,032 | | | $ | 18,678 | | | $ | 17,069 | |
Purchase accounting additions | 5,909 | | | — | | | 1,192 | |
Charged to costs and expenses | 40,678 | | | 28,352 | | | 29,885 | |
Payments and deductions | (38,369) | | | (28,998) | | | (29,468) | |
Balance at end of period | $ | 26,250 | | | $ | 18,032 | | | $ | 18,678 | |
13. Secured Financings and Other
The following table summarizes secured financings and other obligations (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Finance lease payables | $ | 6,316 | | | $ | 304 | |
Other secured financing | 2,933 | | | 3,672 | |
Mandatorily redeemable noncontrolling interest | 2,371 | | | — | |
Secured term loans | — | | | 8,210 | |
| 11,620 | | | 12,186 | |
Less current portion | (784) | | | (1,851) | |
| $ | 10,836 | | | $ | 10,335 | |
We previously entered into secured credit facilities with independent third-party banks to originate and hold consumer home-only loans secured by manufactured homes Those facilities were then converted into amortizing loans, which were paid in full as of April 2, 2022.
Scheduled maturities for future fiscal years of the Company's obligations consist of the following (in thousands):
| | | | | |
2023 | $ | 510 | |
2024 | 2,828 | |
2025 | 416 | |
2026 | 379 | |
2027 | 341 | |
Thereafter | 7,146 | |
Actual payments may vary from those above, resulting from prepayments or other factors.
See Note 9 for further discussion of the finance lease obligations.
14. Reinsurance and Insurance Loss Reserves
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of our premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide increased capacity to write larger risks while maintaining exposure to loss within our capital resources. We remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of the assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| April 2, 2022 | | April 3, 2021 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 27,639 | | | $ | 25,543 | | | $ | 23,226 | | | $ | 21,424 | |
Assumed premiums—nonaffiliated | 31,693 | | | 30,579 | | | 29,167 | | | 28,160 | |
Ceded premiums—nonaffiliated | (15,232) | | | (15,232) | | | (12,604) | | | (12,604) | |
| $ | 44,100 | | | $ | 40,890 | | | $ | 39,789 | | | $ | 36,980 | |
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 $2.0 million per occurrence, up to a maximum of $70.0 million in the aggregate for that occurrence.
Purchasing reinsurance contracts mitigates the 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, we may be required to repurchase and reestablish the reinsurance contracts for the remainder of the year to the extent that they have been utilized.
Standard Casualty establishes reserves for claims and claims expense on reported and IBNR claims of non-reinsured losses. The following details the activity in the reserve for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Balance at beginning of period | $ | 7,451 | | | $ | 5,582 | | | $ | 6,686 | |
Net incurred losses during the year | 25,962 | | | 23,041 | | | 16,961 | |
Net claim payments during the year | (25,264) | | | (21,172) | | | (18,065) | |
Balance at end of period | $ | 8,149 | | | $ | 7,451 | | | $ | 5,582 | |
15. Income Taxes
The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. The following details the provision for income taxes for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | 7,271 | | | $ | 16,823 | | | $ | 14,625 | |
State | 8,768 | | | 3,128 | | | 3,084 | |
| 16,039 | | | 19,951 | | | 17,709 | |
Deferred | | | | | |
Federal | (1,257) | | | 302 | | | 246 | |
State | (535) | | | 13 | | | (42) | |
| (1,792) | | | 315 | | | 204 | |
| $ | 14,247 | | | $ | 20,266 | | | $ | 17,913 | |
A reconciliation of income taxes computed by applying the expected federal statutory income tax rate of 21% for fiscal years 2022, 2021 and 2020 to income before income taxes reported in the Consolidated Statements of Comprehensive Income is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal income tax at statutory rate | $ | 44,518 | | | $ | 20,351 | | | $ | 19,525 | |
State income taxes, net of federal benefit | 8,075 | | | 3,422 | | | 3,297 | |
Stock-based compensation | (1,421) | | | (2,710) | | | (2,994) | |
Tax credits | (37,488) | | | (1,356) | | | (2,401) | |
Other | 563 | | | 559 | | | 486 | |
| $ | 14,247 | | | $ | 20,266 | | | $ | 17,913 | |
Net deferred tax assets and liabilities were as follows (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Net deferred tax (liabilities) assets | | | |
Goodwill | $ | (16,675) | | | $ | (16,327) | |
Property, plant and equipment | (7,030) | | | (5,121) | |
Warranty reserves | 5,913 | | | 4,277 | |
Lease - Operating lease liability | 4,270 | | | 4,123 | |
Lease - Right of use assets | (3,968) | | | (3,820) | |
Salaries and wages | 3,924 | | | 3,065 | |
Accrued volume rebates | 2,600 | | | 1,494 | |
Stock-based compensation | 2,199 | | | 2,177 | |
Inventory | 2,192 | | | 1,271 | |
Unrealized gains on marketable equity investments | (1,715) | | | (1,695) | |
Loan discount | 1,275 | | | 1,631 | |
Other intangibles | — | | | (1,538) | |
Other | 1,487 | | | 3,070 | |
| $ | (5,528) | | | $ | (7,393) | |
The effective income tax rate for the current year was positively impacted by the recognition of tax credits and stock option exercises. The net tax credit benefit predominantly related to the sale of energy efficient homes between fiscal year 2018 and fiscal third quarter 2022 available under the Internal Revenue Code §45L. Of the total tax credit benefit, $30.6 million relates to fiscal year 2018 through fiscal year 2021 and $6.4 million relates to fiscal year 2022, which includes non-recurring credits that were recognized during the 2022 fiscal year. The remaining $500,000 relates to the Research and Development and Work Opportunity Tax Credits. The §45L tax credit was initially established under the Federal Energy Policy Act of 2005 and most recently extended in the Consolidated Appropriations Act, 2021. The §45L credit expired in its current form as of December 31, 2021. The Company determined eligibility for the program in consultation with third-party qualified experts and recognized the benefit for the five eligible years during fiscal year 2022.
We recorded an insignificant amount of unrecognized tax benefits during fiscal years 2022, 2021 and 2020, and there would be an insignificant effect on the effective tax rate if all unrecognized tax benefits were recognized. We classify interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months. We believe that our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments that will result in a material change to our financial position.
We periodically evaluate the deferred tax assets based on the requirements established in ASC 740, which requires the recording of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of the need for, or amount of, any valuation allowance involves significant management judgment and is based upon the evaluation of both positive and negative evidence, including management projections of anticipated taxable income. At April 2, 2022, we had state net operating loss carryforwards that total $8.6 million, which begin to expire in 2038. We recorded a $308,000 valuation allowance against the related deferred tax asset. At April 2, 2022, we evaluated our historical profits earned and forecasted taxable income and determined that, except as described above, all of the deferred tax assets would be utilized in future periods. Ultimate realization of the deferred tax assets depends on our ability to continue to earn profits, as we have historically, and to meet these forecasts in future periods.
Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. In general, we are no longer subject to examination by the IRS or state and local income tax examinations by tax authorities for years before fiscal year 2018.
16. Commitments and Contingencies
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 risk of loss under these agreements is spread over numerous distributors. The price we may be obligated to pay generally declines over the period of the agreement (generally 18 to 24 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 $141.0 million and $74.2 million at April 2, 2022 and April 3, 2021, respectively, without reduction for the resale value of the homes. We had a reserve for repurchase commitments of $3.6 million and $2.3 million at April 2, 2022 and April 3, 2021, respectively.
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. 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 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 to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands): | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Construction loan contract amount | $ | 9,330 | | | $ | 37,628 | |
Cumulative advances | (3,547) | | | (13,801) | |
| $ | 5,783 | | | $ | 23,827 | |
Representations and Warranties of Mortgages Sold. We sell loans to GSEs and whole-loan purchasers and finance certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, we provide to GSEs and 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 transaction, including compliance with underwriting standards or loan criteria established by the buyer, and our 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, we 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. We manage the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. We maintain a reserve for these contingent repurchase and indemnification obligations. This reserve of $866,000 as of April 2, 2022 and $1.2 million as of April 3, 2021, included in Accrued expenses and other current liabilities, reflects management's estimate of probable loss. We consider 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. There were no claim requests that resulted in the repurchase of a loan during the year ended April 2, 2022. In addition, we are subject to minimum net worth requirements and was in compliance for the year ended April 2, 2022.
Interest Rate Lock Commitments. In originating loans for sale, we issue 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 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 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 lock commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, we are 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 April 2, 2022, we had outstanding IRLCs with a notional amount of $51.7 million, which are recorded at fair value in accordance with FASB 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, if in a net favorable position, or Accrued expenses and other current liabilities, if in a net unfavorable position, 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 fiscal year 2022, we recognized a non-cash gain of $1,000 on outstanding IRLCs. During fiscal years 2021 and 2020, we recognized a non-cash loss of $208,000 and non-cash gain of $153,000, respectively, on outstanding IRLCs.
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 April 2, 2022, we had $16.7 million in outstanding 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 Commitments are based on quoted market values and are recorded within Prepaid expenses and other current assets in the Consolidated Balance Sheets. During the year ended April 2, 2022, we recognized a non-cash loss of $92,000 on Commitments. During the fiscal years ended April 3, 2021 and March 28, 2020, we recognized a non-cash gain of $1.4 million and a non-cash loss of $951,000, respectively, on Commitments.
Legal Matters. On September 2, 2021, the SEC filed a civil complaint in the United States District Court, District of Arizona, naming the Company along with the Company's former Chairman, President & Chief Executive Officer ("CEO") and the Company's former Chief Financial Officer, alleging violations of the antifraud and internal accounting control provisions of the Securities Exchange Act of 1934 based on trading in the shares of another company directed by the former CEO that resulted in an unrealized gain of approximately $260,000. In the prior year, the Company recorded an accrual relating to this loss contingency. The SEC action follows an investigation that began in 2018. On November 2, 2021, the Company filed a motion to dismiss the claim. On January 25, 2022, the court denied the motion to dismiss and the matter is now in the discovery phase of litigation. While the Company cannot predict with certainty the resolution of this matter, we do not believe that this proceeding will have a material adverse effect on the Company's Consolidated Financial Statements.
We are 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 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 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 our consolidated financial position, liquidity or results of operations in any future reporting periods.
17. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of RSUs 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 283,208 shares were still available for grant as of April 2, 2022. Upon option exercise, new shares of the Company's common stock are issued and when RSUs vest, unrestricted shares are issued. The exercise price of stock option awards may not be below 100% of the fair market value of the Company's common stock at the date of grant. Stock options generally expire seven years from the date of grant. Stock options and awards of RSUs 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 option awards and RSUs upon a change in control (as defined in the plans).
We apply the fair value recognition provisions of ASC 718. Stock compensation expense was approximately $5.1 million, $4.4 million and $3.9 million for fiscal years 2022, 2021 and 2020, respectively. As of April 2, 2022, total unrecognized compensation cost was approximately $6.3 million and the related weighted-average period over which it is expected to be recognized is approximately 1.87 years.
Stock Options. The following table summarizes stock option activity for fiscal years 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at March 30, 2019 | 411,111 | | | $ | 102.71 | | | | | |
Granted | 74,750 | | | 145.24 | | | | | |
Exercised | (120,687) | | | 63.66 | | | | | |
Canceled or expired | (1,000) | | | 99.65 | | | | | |
Outstanding at March 28, 2020 | 364,174 | | | $ | 123.93 | | | 4.02 | | $ | 49,000 | |
Granted | 39,800 | | | 177.61 | | | | | |
Exercised | (131,567) | | | 90.49 | | | | | |
Canceled or expired | (20,658) | | | 148.95 | | | | | |
Outstanding at April 3, 2021 | 251,749 | | | $ | 146.86 | | | 4.04 | | $ | 34,266 | |
Granted | — | | | — | | | | | |
Exercised | (53,550) | | | 107.58 | | | | | |
Canceled or expired | (5,286) | | | 164.49 | | | | | |
Outstanding at April 2, 2022 | 192,913 | | | $ | 157.23 | | | 3.34 | | $ | 16,724 | |
| | | | | | | |
Exercisable at March 28, 2020 | 179,133 | | | $ | 100.82 | | | 2.83 | | $ | 25,423 | |
Exercisable at April 3, 2021 | 108,588 | | | $ | 132.48 | | | 3.22 | | $ | 15,549 | |
Exercisable at April 2, 2022 | 126,948 | | | $ | 149.90 | | | 2.82 | | $ | 11,941 | |
There were no grants of stock options in fiscal year 2022. The weighted-average estimated fair value of employee stock options granted during fiscal years 2021 and 2020 was $69.65 and $46.84 per share, respectively, using the following weighted average assumptions: | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2021 | | 2020 |
Volatility | | | 47.5 | % | | 36.0 | % |
Risk-free interest rate | | | 0.3 | % | | 2.0 | % |
Dividend yield | | | — | % | | — | % |
Expected option life in years | | | 4.56 | | 4.33 |
Estimated forfeiture rate | | | 7.0 | % | | 7.0 | % |
The total intrinsic value of options exercised during fiscal years 2022, 2021 and 2020 was $7.9 million, $16.7 million and $15.7 million, respectively.
Restricted Stock Awards. A summary of RSU activity for fiscal years 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| Number of Shares |
| Performance-Based Awards | | Service-Based Awards | | Total |
Outstanding at March 30, 2019 | — | | | — | | | — | |
Awarded | 7,305 | | | 4,900 | | | 12,205 | |
Released | — | | | (400) | | | (400) | |
Canceled or expired | — | | | — | | | — | |
Outstanding at March 28, 2020 | 7,305 | | | 4,500 | | | 11,805 | |
Awarded | 7,450 | | | 3,550 | | | 11,000 | |
Released | — | | | (3,465) | | | (3,465) | |
Canceled or expired | (1,816) | | | — | | | (1,816) | |
Outstanding at April 3, 2021 | 12,939 | | | 4,585 | | | 17,524 | |
Awarded | 7,920 | | | 16,902 | | | 24,822 | |
Released | — | | | (3,335) | | | (3,335) | |
Canceled or expired | (805) | | | (505) | | | (1,310) | |
Outstanding at April 2, 2022 | 20,054 | | | 17,647 | | | 37,701 | |
Unvested target performance-based RSUs that may vest based upon performance conditions through fiscal year 2022 | 6,333 | | | | | |
Unvested target performance-based RSUs that may vest based upon performance conditions through fiscal year 2023 | 6,201 | | | | | |
Unvested target performance-based RSUs that may vest based upon performance conditions through fiscal year 2024 | 7,520 | | | | | |
Grants of performance-based RSUs are shown in the table above at the target amount in the year of the award. Additional shares awarded based upon achievement above target specified performance criteria are shown in the table above when they vest, which is generally in the first quarter of the fiscal year following the performance year. Cancellations of target awards based upon achievement below target specified performance criteria are shown in the table above in the period they are canceled, which is generally in the first quarter of the fiscal year following the performance year.
Actual performance exceeded the target established for the three-year performance-based RSUs granted in fiscal year 2020. As a result, in the first quarter of fiscal year 2023, we expect 2,489 performance-based RSUs will vest and be released, in addition to the unvested target performance-based RSUs shown in the table above.
18. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for fiscal years 2022, 2021 and 2020 (dollars in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2022 | | 2021 | | 2020 |
Net income attributable to Cavco common stockholders | $ | 197,699 | | | $ | 76,646 | | | $ | 75,066 | |
Weighted average shares outstanding: | | | | | |
Basic | 9,178,593 | | | 9,189,052 | | | 9,129,639 | |
Effect of dilutive securities | 85,560 | | | 104,082 | | | 139,145 | |
Diluted | 9,264,153 | | | 9,293,134 | | | 9,268,784 | |
Net income per share attributable to Cavco common stockholders | | | | | |
Basic | $ | 21.54 | | | $ | 8.34 | | | $ | 8.22 | |
Diluted | $ | 21.34 | | | $ | 8.25 | | | $ | 8.10 | |
| | | | | |
Anti-dilutive common stock equivalents excluded | 405 | | | 19,440 | | | 23,336 | |
Outstanding RSUs excluded, as underlying performance criteria has not yet been met | 20,054 | | | 12,939 | | | 7,305 | |
19. Fair Value Measurements
The book value and estimated fair value of our financial instruments were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
| Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value |
Available-for-sale debt securities (1) | $ | 17,760 | | | $ | 17,760 | | | $ | 14,946 | | | $ | 14,946 | |
Marketable equity securities (2) | 16,780 | | | 16,780 | | | 17,600 | | | 17,600 | |
Non-marketable equity investments (3) | 20,479 | | | 20,479 | | | 21,960 | | | 21,960 | |
Consumer loans receivable (4) (5) | 49,884 | | | 53,354 | | | 74,798 | | | 86,209 | |
Commercial loans receivable (5) | 68,566 | | | 65,942 | | | 44,314 | | | 42,379 | |
Secured credit facilities and other (6) | (11,620) | | | (11,806) | | | (12,186) | | | (12,340) | |
(1) Level 2: The fair value is based on observable market prices for identical securities. When observable market prices for identical securities are not available, we price our marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data.
(2) Level 1: The fair value is based on quoted market prices.
(3) Level 3: The fair value approximates book value based on the non-marketable nature of the investments.
(4) Level 3: Includes consumer loans receivable held for investment, held for sale and construction advances.
(5) Level 3: The fair value is estimated using market interest rates of comparable loans.
(6) Level 2: The fair value is based on the discounted value of the expected remaining principal and interest cash flows.
Consumer 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, less costs to sell, 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. The cost of loans held for sale was lower than the fair value as of April 2, 2022.
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 recorded at fair value in Prepaid expenses and other current assets in the Consolidated Balance Sheets based on the present value of the expected future cash flows related to servicing these loans.
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Number of loans serviced with MSRs | 4,346 | | | 4,647 | |
Weighted average servicing fee (basis points) | 34.76 | | | 33.57 | |
Capitalized servicing multiple | 85.07 | % | | 45.93 | % |
Capitalized servicing rate (basis points) | 29.57 | | | 15.42 | |
Serviced portfolio with MSRs (in thousands) | $ | 560,178 | | | $ | 593,939 | |
MSRs (in thousands) | $ | 1,656 | | | $ | 916 | |
20. Employee Benefit Plans
We have self-funded group medical plans which are administered by third-party administrators. The medical plans have reinsurance coverage limiting liability for general individual employee loss to a maximum of $400,000. Incurred claims identified under the third-party administrator's incident reporting system and IBNR claims are accrued based on estimates that incorporate claim experience, as well as other considerations such as the nature of each claim or incident, relevant trend factors and advice from consulting actuaries when necessary. Medical claims expense was $22.8 million, $15.8 million and $15.7 million for fiscal years 2022, 2021 and 2020, respectively.
We sponsor an employee savings plan (the "401k Plan") that is intended to provide participating employees with additional income upon retirement. Employees may contribute their eligible compensation up to federal limits to the 401k Plan. The Company match is discretionary and may be up to 50% of the first 5% of eligible compensation contributed by employees up to a maximum of $1,000. For calendar year 2021, the Company match was 20% of the first 5% of eligible compensation contributed by employees. Employees are eligible to participate on the first of the month following 90 days of service and employer matching contributions are vested progressively over 4 years. Employer matching contribution expense was $1.3 million in fiscal year 2022 and $1.1 million each in fiscal year 2021 and 2020.
Certain Commodore (as defined in Note 22) manufacturing facilities participate in the IAM National Pension Fund, a multiemployer defined benefit plan. Participation in this plan is available to all hourly employees who are members of the participating collective bargaining unit. Beginning January 1, 2022, we contribute to the plan a specified amount per hour worked for each eligible employee. Benefits under this plan are based on a fixed monthly benefit rate per year of credited service. The risks of participating in this multiemployer plan differ from single-employer plans. The potential risks include, but are not limited to, the use of the Company's contributions to provide benefits to employees of other participating employers, the Company becoming obligated for other participating employers' unfunded obligations and, upon the Company's withdrawal from the plan, the Company being required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in multiemployer plans for the fiscal year ended April 2, 2022 is outlined in the table below, with the following information:
•The Employer Identification Number is 51-6031295 and the three-digit plan number assigned to a plan by the Internal Revenue Service is 002.
•The most recent Pension Protection Act Zone Status available is for plan years that ended in calendar years 2021 and 2020, based on information provided to the Company by the plan. A plan in the "red" zone has been determined to be in "critical status," based on criteria established under the Internal Revenue Code ("Code"), and is generally less than 65% funded.
•The "RP Status Pending/Implemented" column indicates whether a Rehabilitation Plan ("RP") for plans in the "red" zone, as required by the Code, is pending or has been implemented by the plan as of the end of the plan year that ended in calendar year 2021.
•The "Surcharge Imposed" column indicates whether the Company contribution rate for its fiscal year that ended on April 2, 2022 included an amount in addition to the contribution rate specified in the applicable collective bargaining agreement ("CBA"), as imposed by a plan in "critical status," in accordance with the requirements of the Code.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Pension Protection Act Zone Status | | RP Status Pending / Implemented | | Contributions by the Company by fiscal year (in thousands) | | Expiration Date of CBAs |
Pension Fund | | | | 2021 | | 2020 | | | 2022 | | 2021 | | 2020 | | Surcharge Imposed | |
IAM National Pension Fund | | | | Red | | Red | | Implemented | | $ | 312 | | | $ | — | | | $ | — | | | Yes | | (1) |
(1) The CBA for the Clarion and Colony manufacturing facilities expires in April 2023. The expiration date of the CBA for the Pennwest manufacturing facility is February 2024.
21. Related Party Transactions
We have non-marketable equity investments in other distribution operations outside of Company-owned retail stores. In the ordinary course of business, we sell homes and lend to certain of these operations through our commercial lending programs. For the years ended April 2, 2022, April 3, 2021 and March 28, 2020, the total amount of sales to related parties was $58.1 million, $46.7 million and $51.0 million, respectively. As of April 2, 2022, receivables from related parties included $3.3 million of accounts receivable and $2.6 million of commercial loans outstanding. As of April 3, 2021, receivables from related parties included $4.7 million of accounts receivable and $9.5 million of commercial loans outstanding.
22. Acquisitions
Craftsman Acquisition
In fiscal year 2017, we purchased a 50% ownership interest in Craftsman for $1.3 million to expand our retail presence in Nevada. At that time, we concluded that we were not considered to be the primary beneficiary and therefore did not consolidate the Entities. Since the date of acquisition, we previously had recorded a non-marketable equity investment for the ownership, with changes to that investment for earnings and distributions from the Entities.
On July 4, 2021, we obtained an additional 20% ownership interest in the Entities utilizing the same pre-tax income multiple as the 2017 purchase. As we now have a controlling interest, we have consolidated the Entities and remeasured the Entities' assets and liabilities to fair value, including our previous equity investment of $2.9 million in the Entities. As a result of the remeasurement, we recorded a gain of $3.3 million in Other income, net in the Consolidated Statements of Comprehensive Income.
The purchase price on July 4, 2021 for 20% ownership was $2.5 million, valuing the Entities at $12.4 million. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands).
| | | | | |
| July 4, 2021 |
Cash | $ | 6,466 | |
Accounts receivable | 577 | |
Inventories | 7,146 | |
Property, plant and equipment | 205 | |
Other current assets | 416 | |
Indefinite lived intangible assets(1) | 2,980 | |
Total identifiable assets acquired | 17,790 | |
Accounts payable and accrued liabilities | 10,028 | |
Net identifiable assets acquired | 7,762 | |
Goodwill(2) | 4,595 | |
Net assets acquired | $ | 12,357 | |
(1) Includes $3.0 million assigned to trademarks and trade names, which are considered indefinite lived intangible assets and are not subject to amortization.
(2) Attributable to the Factory-built housing segment, all of which will be deductible for income tax purposes.
We recorded a Redeemable noncontrolling interest for the remaining 30% ownership. As 20% of this is considered mandatorily redeemable per the Craftsman Purchase Agreement, $2.5 million for the acquisition date fair value of this portion of the noncontrolling interest was recorded in the long-term liabilities section of the Consolidated Balance Sheet within Secured financings and other. As we are not currently obligated for the redemption of the remaining 10% ownership, $1.2 million for the acquisition date fair value of this portion of the noncontrolling interest is classified as a temporary equity mezzanine item between liabilities and stockholders' equity in the Consolidated Balance Sheets as Redeemable noncontrolling interest.
Since the acquisition date, Craftsman contributed Net revenue and Net income of $13.8 million and $0.4 million, respectively, for the fiscal year ended April 2, 2022. Cost of sales from the Craftsman acquisition included required purchase accounting adjustments whereby home product inventory is recorded at fair value upon acquisition.
Commodore Acquisition
On September 24, 2021, we purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore"), including its six manufacturing facilities and two wholly-owned retail locations. In addition to manufacturing, Commodore also participates in commercial lending operations with its dealers. 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 acquisition of Commodore brings beneficial geographic addition to our footprint with strong operations in the Northeast/Midwest/Mid-Atlantic markets and provides a platform for future growth, with the potential for cost and revenue synergies.
The acquisition-date fair value of the total consideration was $146.2 million, subject to future adjustments upon the finalization of closing financial statements. During the period, certain adjustments were made to these closing financial statements, which resulted in changes to the initial purchase price allocation and impacted the amount of goodwill recognized. We have expensed $2.7 million in acquisition related transaction costs in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income, and have not incurred debt in connection with the purchase or subsequent operations.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands). Certain estimated values are not yet finalized and are subject to change, which could be significant. The allocation of the purchase price is still preliminary due to the time between the acquisition date and reporting date and will be finalized upon completion of the analysis of the fair values of Commodore's acquired commercial loans, intangible assets and resulting goodwill and deferred taxes. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.
| | | | | |
| September 24, 2021 |
Cash | $ | 619 | |
Accounts receivable | 20,930 | |
Commercial loans | 30,922 | |
Inventories | 31,787 | |
Property, plant and equipment(1) | 59,106 | |
Other current assets | 534 | |
Intangible assets(2) | 12,500 | |
Total identifiable assets acquired | 156,398 | |
Accounts payable and accrued liabilities | 31,536 | |
Net identifiable assets acquired | 124,862 | |
Goodwill(3) | 21,308 | |
Net assets acquired | $ | 146,170 | |
(1) Includes assets acquired under finance leases. See Note 9 for additional information.
(2) Includes $7.2 million assigned to customer-related intangibles, subject to a useful life of 11 years amortized on a straight-line basis; $3.8 million assigned to trademarks and trade names, which are considered indefinite lived intangible assets and are not subject to amortization; $1.0 million for acquired sales order backlogs that will be amortized over the period to produce the associated backlog; and $0.5 million for a covenant not to compete from the sellers, amortized on a straight-line basis over the term of 5 years.
(3) Attributable to the Factory-built housing segment, all of which will be deductible for income tax purposes.
Since the acquisition date, Commodore contributed Net revenue and Net income of $166.7 million and $6.6 million, respectively, for the fiscal year ended April 2, 2022. Cost of sales from the Commodore acquisition included required purchase accounting adjustments whereby home product inventory is recorded at fair value upon acquisition.
Pro Forma Impact of Acquisitions (Unaudited). The following table presents supplemental pro forma information as if the above acquisitions occurred on March 29, 2020 (in thousands, except per share data):
| | | | | | | | | | | |
| Year Ended |
| April 2, 2022 | | April 3, 2021 |
Net revenue | $ | 1,793,247 | | | $ | 1,369,244 | |
Net income attributable to Cavco common stockholders | 199,820 | | | 84,448 | |
Diluted net income per share | 21.57 | | | 9.09 | |
23. 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 tables provide selected financial data by segment (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Net revenue: | | | | | |
Factory-built housing | $ | 1,556,283 | | | $ | 1,037,889 | | | $ | 999,340 | |
Financial services | 70,875 | | | 70,162 | | | 62,434 | |
| $ | 1,627,158 | | | $ | 1,108,051 | | | $ | 1,061,774 | |
Net revenue for financial services consists of: | | | | | |
Finance | $ | 23,004 | | | $ | 24,195 | | | $ | 24,894 | |
Insurance | 47,871 | | | 45,967 | | | 37,540 | |
| $ | 70,875 | | | $ | 70,162 | | | $ | 62,434 | |
Income before income taxes: | | | | | |
Factory-built housing | $ | 197,282 | | | $ | 78,937 | | | $ | 78,531 | |
Financial services | 14,707 | | | 17,975 | | | 14,448 | |
| $ | 211,989 | | | $ | 96,912 | | | $ | 92,979 | |
Depreciation: | | | | | |
Factory-built housing | $ | 9,451 | | | $ | 5,450 | | | $ | 5,120 | |
Financial services | 182 | | | 127 | | | 57 | |
| $ | 9,633 | | | $ | 5,577 | | | $ | 5,177 | |
Amortization: | | | | | |
Factory-built housing | $ | 1,270 | | | $ | 560 | | | $ | 419 | |
Financial services | 114 | | | 187 | | | 187 | |
| $ | 1,384 | | | $ | 747 | | | $ | 606 | |
Income tax expense: | | | | | |
Factory-built housing | $ | 10,853 | | | $ | 16,204 | | | $ | 14,574 | |
Financial services | 3,394 | | | 4,062 | | | 3,339 | |
| $ | 14,247 | | | $ | 20,266 | | | $ | 17,913 | |
Capital expenditures: | | | | | |
Factory-built housing | $ | 18,574 | | | $ | 25,465 | | | $ | 13,211 | |
Financial services | 79 | | | 72 | | | 1,129 | |
| $ | 18,653 | | | $ | 25,537 | | | $ | 14,340 | |
| | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 |
Total assets: | | | |
Factory-built housing | $ | 929,535 | | | $ | 711,579 | |
Financial services | 225,437 | | | 240,254 | |
| $ | 1,154,972 | | | $ | 951,833 | |
| | | | | | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | | March 28, 2020 |
Gross margin %: | | | | | |
Consolidated | 25.1 | % | | 21.6 | % | | 21.7 | % |
Factory-built housing | 23.9 | % | | 19.2 | % | | 19.5 | % |
Financial services | 51.5 | % | | 56.1 | % | | 56.5 | % |