BCPAC INDUSTRIES INC. MANAGEMENT REPORT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
Forward-Looking Statements This Annual Report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. In general, all statements included or incorporated in this Annual Report that are not historical in nature are forward-looking. These may include statements about the Company's plans, strategies and prospects under the headings "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions. Forward-looking statements are typically included, for example, in discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; our liquidity and financial resources; our outlook with respect to the Company and the manufactured housing business in general; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations; economic conditions and consumer confidence; increasing interest rates; potential acquisitions, strategic investments and other expansions; operational and legal risks; how we may be affected by the COVID-19 pandemic or any other pandemic or outbreak; labor shortages and the pricing and availability of raw materials; governmental regulations and legal proceedings; the availability of favorable consumer and wholesale manufactured home financing; and the ultimate outcome of our commitments and contingencies. Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control. To the extent that our assumptions and expectations differ from actual results, our ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Item 1A, "Risk Factors," and elsewhere in this Annual Report. We expressly disclaim any obligation to update any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise, except as required by law. For all of these reasons, you should not place undue reliance on any such forward-looking statements included in this Annual Report. Introduction
The following should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in Part IV of this report. References to the “note” or “notes” refer to the notes to the consolidated financial statements.
Housing demand remains strong as qualified individuals continue to seek affordable homeownership. Stay-at-home order rates have moderated from the extreme highs we saw in summer 2020 through summer 2021, but still remain above pre-pandemic rates, which we considered high.
We maintain a backlog of orders from our network of licensed distributors, communities and developers. Distributors may cancel orders prior to production without penalty. Accordingly, until the production of a particular unit has commenced, we do not consider our backlog to be firm orders. We strive to manage our production levels, capacity and workforce size based upon current market demand. The backlog of home sales orders at
April 2, 2022was $1.1 billionin total, up $511 millionfrom $603 millionas of April 3, 2021. The year over year increase includes $264 millionattributable to Commodore. Backlog excludes home orders that have been paused or canceled at the request of the customer. Although we continue to experience hiring challenges and other inefficiencies from building material supply disruptions, we have reduced our total open production positions needed by nearly 25% over the past year, bringing our total average plant capacity utilization rate to exceeding 80% during the fourth fiscal quarter of 2022, which is above pre-pandemic levels. 29
While it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand, and we face challenges in overcoming labor-related difficulties in the current environment to increase home production. We continually review the wage rates of our production employees and have established other monetary incentive and benefit programs, with a goal of providing competitive compensation. We are also working to more extensively use web-based recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. We believe our ability to recruit the workforce we need to help meet the overall need for affordable housing continues to improve. We continue to make certain commercial loan programs available to members of our wholesale distribution chain. Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community owners and developers (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, community owners and developers and provides additional opportunity for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they also expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners. In the financial services segment, we continue to assist customers in need by servicing existing loans and insurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations. Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced for
Ginnie Maeand Freddie Mac, and home-only loans serviced for certain other investors, we must remit scheduled monthly principal and/or interest payments and principal curtailments regardless of whether monthly mortgage payments are collected from borrowers. Ginnie Maepermits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments. Through fiscal year 2022, monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors; however, mandatory extended forbearance under the CARES Act and certain other regulations related to COVID-19 could negatively impact cash obligations in the future. The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loan and non-conforming mortgage portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities. We also develop and invest in home-only lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders. We also work independently and with industry trade associations to encourage favorable legislative and GSE action to address the financing needs of buyers of affordable homes. Federal law requires GSEs to implement the "Duty to Serve" requirements specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. In April 2022, Fannie Mae and Freddie Mac released their Underserved Markets Plans for 2022-2024 that describe, with specificity, the actions they would take over the three-year period to fulfill the "Duty to Serve" obligation. As with prior plans, the 2022-2024 plans offer enhanced mortgage loan products for manufactured homes titled as real property, including Fannie Mae's "MH Advantage" and Freddie Mac's "ChoiceHome" programs that began in the latter part of calendar year 2018. Although some progress has been made with these programs, meaningful positive impact in the form of increased home orders has yet to be realized. The plans do not include purchases of home-only loans during the three-year timeframe. Expansion of the secondary market for home-only loans through GSEs could support further demand for housing as lending options would likely become more available to home buyers. 30
The insurance subsidiary is subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity in
Texaswhere most of its policies are underwritten. Where applicable, losses from catastrophic events are mitigated by reinsurance contracts in place as part of our loss mitigation structure.
Fiscal 2022 vs. Fiscal 2021
Net revenue consisted of the following for fiscal years 2022 and 2021, respectively: Year Ended April 2, April 3, ($ in thousands, except revenue per home sold) 2022 2021 Change Net revenue: Factory-built housing
$ 1,556,283 $ 1,037,889 $ 518,39449.9 % Financial services 70,875 70,162 713 1.0 % $ 1,627,158 $ 1,108,051 $ 519,10746.8 % Total homes sold 16,697 14,214 2,483 17.5 %
Net manufactured home revenue per home sold
27.6 % In the factory-built housing segment, the increase in Net revenue was primarily due to higher legacy home selling prices, which provided
$302.0 million, and higher legacy home sales volume from increased factory capacity utilization, which contributed $39.4 million. The higher home prices were primarily driven by product price increases, and to a lesser extent a shift toward more multi-section homes. Home sales volume also increased from the addition of Craftsman Homes, LLCand Craftsman Homes Development, LLC(together, "Craftsman") and Commodore, which provided $13.8 millionand $166.7 million, respectively. These increases were partially offset by the prior year period containing an extra week of production, given the fiscal calendar. Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers ("Wholesale") and sales of homes to consumers by Company-owned retail stores ("Retail"). Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Changes to the proportion of home sales among our distribution channels between reporting periods impacts the overall net revenue per home sold. For fiscal 2022, we sold 13,888 homes Wholesale and 2,809 Retail versus 11,225 homes Wholesale and 2,989 homes Retail in the prior year. Our homes are constructed in one or more floor sections ("modules") which are then installed on the customer's site. Fluctuations in net factory-built housing revenue per home sold are also partially the result of changes in the number of modules per home, the selection of different home types/models and optional home upgrades, creating changes in product mix. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Product prices are also periodically adjusted for the cost and availability of raw materials included in, and labor used to produce, each home. For these reasons, we have experienced, and expect to continue to experience, volatility in overall net factory-built housing revenue per home sold. The table below presents the mix of modules and homes sold for the fiscal years 2022 and 2021, respectively: 31
Table of Contents Year Ended April 2, April 3, 2022 2021 Change Modules Homes Modules Homes Modules Homes HUD code homes 24,497 14,136 20,948 12,339 16.9 % 14.6 % Modular homes 3,569 1,742 2,009 945 77.7 % 84.3 % Park model RVs 819 819 930 930 (11.9) % (11.9) % 28,885 16,697 23,887 14,214 20.9 % 17.5 % Financial services segment revenue increased 1.0% primarily due to
$4.5 millionfrom more insurance policies in force in the current year, $1.5 millionin greater loan servicing income and $1.1 millionin net higher proceeds from home loan sales. These increases were partially offset by $3.8 millionin lower interest income earned on the acquired consumer loan portfolios that continue to amortize and $2.6 millionin lower unrealized gains on marketable equity securities in the insurance subsidiary's portfolio.
Gross profit consisted of the following for fiscal years 2022 and 2021, respectively: Year Ended April 2, April 3, ($ in thousands) 2022 2021 Change Gross profit: Factory-built housing
$ 372,250 $ 199,604 $ 172,64686.5 % Financial services 36,499 39,373 (2,874) (7.3) % $ 408,749 $ 238,977 $ 169,77271.0 % Gross profit as % of Net revenue: Consolidated 25.1 % 21.6 % N/A 3.5 % Factory-built housing 23.9 % 19.2 % N/A 4.7 % Financial services 51.5 % 56.1 % N/A (4.6) % In the factory-built housing segment, Gross profit increased $323.8 millionfrom higher home sales prices and $30.1 millionfrom more units sold, partially offset by $181.3 millionfrom higher material costs. In the financial services segment, Gross profit decreased primarily due to higher weather related claims, lower interest income earned on the acquired consumer loan portfolios and lower unrealized gains on marketable equity securities compared to the prior year period. 32
Selling, general and administrative expenses.
Selling, general and administrative expenses consisted of the following items for fiscal years 2022 and 2021, respectively:
Year Ended April 2, April 3, ($ in thousands) 2022 2021 Change Selling, general and administrative expenses: Factory-built housing
$ 186,278 $ 130,498 $ 55,78042.7 % Financial services 19,975 19,654 321 1.6 % $ 206,253 $ 150,152 $ 56,10137.4 % Selling, general and administrative expenses as % of Net revenue: 12.7 % 13.6 % N/A (0.9) % Selling, general and administrative expenses related to factory-built housing increased primarily due to $30.4 millionin higher wages and benefits and incentive compensation expense on improved earnings, $19.0 millionattributable to acquired entities, $6.9 millionin expenses incurred in engaging third-party consultants in relation to pursuing the non-recurring energy efficient home tax credits and $2.4 millionin Commodore related acquisition transaction costs, partially offset by $4.2 millionof amortization of additional Director & Officer insurance premiums in the prior year that did not repeat.
Financial services selling, general and administrative expenses increased primarily due to higher payroll expenses resulting from continued growth and higher payroll and benefits expenses.
As a percentage of net sales, selling, general and administrative expenses increased 90 basis points due to better utilization of fixed costs on higher sales.
Interest expense was
$0.7 millionin both fiscal year 2022 and 2021, and consists primarily of debt service on the financings of manufactured home-only loans and interest related to finance leases. We realized a decrease in interest expense from the elimination of the securitized bond interest as we exercised our right to repurchase the 2007-1 securitized loan portfolio in August 2019. However, this was offset by an increase in interest expense from the secured credit facilities as well as additional finance leases.
Other income, net.
Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses from the sale of property, plant and equipment and assets held for sale. For fiscal years 2022 and 2021, Other income, net was
$10.2 millionand $8.8 million, respectively, an increase of $1.4 millionor 15.9%. This increase was primarily from a $3.3 millionrevaluation gain recognized on the consolidation of an equity method investment and $1.2 millionhigher interest income on commercial loans from the addition of Commodore, partially offset by $3.2 millionlower unrealized gains on corporate equity investments in the current year. 33
Income before taxes.
Income before income taxes consisted of the following for fiscal years 2022 and 2021, respectively: Year Ended April 2, April 3, ($ in thousands) 2022 2021 Change Income before income taxes: Factory-built housing
$ 197,282 $ 78,937 $ 118,345149.9 % Financial services 14,707 17,975 (3,268) (18.2) % $ 211,989 $ 96,912 $ 115,077118.7 % Income Tax Expense. Income tax expense was $14.2 million, resulting in an effective tax rate of 6.7% for the fiscal year ended April 2, 2022, compared to income tax expense of $20.3 millionand an effective rate of 20.9% for the fiscal year ended April 3, 2021. The lower effective tax rate in the current year period primarily relates to $35.7 millionin estimated non-recurring net tax credits related to the sale of energy efficient homes between fiscal year 2018 and fiscal third quarter 2022, available under the Internal Revenue Code §45L, offset by an increase in income before income taxes. The tax credit for energy efficient homes expired in its current form as of December 31, 2021.
Fiscal 2021 vs. Fiscal 2020
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s 2021 Annual Report on Form 10-K.
Cash and capital resources
We believe that cash and cash equivalents at
April 2, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in U.S. Treasuryand other money market funds, some of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on our liquidity and capital resources. Because of our sufficient cash position, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for the home-only lending programs. Regardless, depending on our operating results and strategic opportunities, we may choose to seek additional or alternative sources of financing in the future. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control. State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. We believe that stockholders' equity at the insurance subsidiary remains sufficient and do not believe that the ability to pay ordinary dividends to Cavco will be restricted per state regulations. 34
The following is a summary of the Company's cash flows for fiscal years 2022 and 2021, respectively: Year Ended April 2, April 3, ($ in thousands) 2022 2021 $ Change Cash, cash equivalents and restricted cash at beginning of the fiscal year
$ 339,307 $ 255,607 $ 83,700Net cash provided by operating activities 144,224 114,031 30,193 Net cash used in investing activities (159,102) (23,349) (135,753) Net cash used in financing activities (65,095) (6,982) (58,113)
Cash, cash equivalents and restricted cash at the end of the year
Net cash provided by operating activities increased primarily due to the increased profitability, partially offset by increased costs for operating activities, including rising costs of our raw materials and higher purchases of such materials, increased accounts receivables from timing of collections and increased sales and refunds related to the estimated net tax credits under the Internal Revenue Code §45L which have not been received. Consumer loan originations decreased
$2.6 millionto $159.0 millionduring the year ended April 2, 2022, from $161.6 millionduring the year ended April 3, 2021. Proceeds from the sale of consumer loans provided $184.8 millionin cash, compared to $167.1 millionin the previous year, a net increase of $17.7 million. Net cash used in investing activities for the year ended April 2, 2022included purchases of Commodore and Craftsman, as well as purchases of property, plant and equipment. Net cash used in investing activities for the year ended April 3, 2021was primarily for purchases of property, plant and equipment, including the new park model RV facility in Arizona, which is expected to be operational in mid-calendar year of 2022, partially offset by net proceeds from sales of investments. Net cash used in financing activities for the year ended April 2, 2022was primarily related to common stock repurchases and the payments of the secured term loans, which have been paid in full as of January 1, 2022, partially offset by proceeds received from the exercise of stock options. Net cash used in financing activities for the year ended April 3, 2021was mainly for the payments of tax liabilities on the exercise of stock options and payments on secured financings.
Obligations and Commitments
We enter into commercial loan agreements with distributors, communities and developers under which the Company provides funds for financing homes. In addition, we enter into commercial loan arrangements with certain distributors of our products under which the Company provides funds for wholesale purchases. We have also invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. For additional information regarding our commercial loans receivable, see Note 7 to the Consolidated Financial Statements. Further, we invest in and develop home-only loan pools and lending programs to attract third-party financier interest in order to grow sales of new homes through traditional distribution points. We have contractual lease obligations for certain production and retail locations, office space and equipment with durations ranging from monthly to 20 years. 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. For additional information related to these obligations, see Note 9 to the Consolidated Financial Statements. In addition, we also have contingent commitments at
April 2, 2022consisting of contingent repurchase obligations, construction contingent commitments, interest rate lock commitments ("IRLCs") and forward loan sale commitments. For additional information related to these contingent obligations, see Note 16 to the Consolidated Financial Statements.
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” of the Company’s 2021 Annual Report on Form 10-K for an analysis of changes in liquidity between fiscal years 2021 and 2020.
Critical accounting estimates
Our discussion and analysis of the Company's financial condition and results of operations is based upon its Consolidated Financial Statements, which have been prepared in accordance with
U.S.generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See "Forward-Looking Statements" above.
We believe that the following accounting policies are essential to the results of operations of the Company or may affect the significant judgments and estimates used in the preparation of the consolidated financial statements and should be read in conjunction with the notes to the consolidated financial statements.
Warranties. Estimates include the number 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. While the number of homes still under warranty and the timing in which work orders are completed are readily determinable, the average costs incurred will vary based on market prices and availability, which are the primary subjective inputs in estimating the reserve. We expect that a 5% increase in average costs would increase our reserve proportionally. Income Taxes and Deferred Tax Assets and Liabilities. The determination of the need for, or amount of, any valuation allowance involves significant judgment and is based upon the evaluation of both positive and negative evidence, including estimates of anticipated taxable profits in various jurisdictions with which the deferred tax assets are associated. At
April 2, 2022, based on historical profits earned and forecasted taxable profits, we determined that all deferred tax assets, except for certain state net operating loss deferred tax assets, would be utilized in future periods. Additionally, the overall state income tax rate is based on income apportionment by state, which is estimated using prior year results, along with expected current year impacts. Goodwilland Other Intangibles. We evaluate the fair value of reporting units and when we record an impairment loss on goodwill. During the fourth quarter of fiscal year 2022 we conducted our annual goodwill impairment test and no impairment charges were recorded. The estimated fair values of our two reporting units exceeded their carrying values at the date of their most recent estimated fair value determination. However, estimated fair values would need to decrease by over 450% for there to be indicators of impairment. The fair value evaluation of intangible assets acquired includes the use of acceptable valuation approaches utilizing unobservable inputs, which may lead to a high level of uncertainty. These Level 3 inputs relate to forecasts of future cash flows, pre-tax income and revenue growth rates, as well as the selection of royalty and discount rates. The analysis depends upon a number of judgments, estimates and assumptions. Accordingly, such testing is subject to uncertainties, which could cause fair value to fluctuate.
Impact of Inflation. At the end of the period, inflation was the highest in the
U.S.in over 30 years. Our ability to maintain certain levels of gross margin can be adversely impacted by sudden increases in specific costs, such as the increases in material and labor. In addition, measures used to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing. We can give no assurance that inflation will not affect future profitability.
Recent accounting pronouncements
See Note 1 to the consolidated financial statements for a discussion of recently issued and adopted accounting pronouncements.
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