Following insights on the Supreme Court ruling on what falls under the category of false statements or withheld information under the Securities and Exchange Commission (SEC) Act are the contents of the latest Cavco Industries (CVCO) 10Q filing per MarketScreener. 10Qs and other formal statements and documents by Cavco or any publicly traded firm corporation are of interest because they are supposed to be free of false, misleading, or withheld information. Investor.gov said that: “The U. S. Securities and Exchange Commission (SEC) has a three-part mission: Protect investors. Maintain fair, orderly, and efficient markets. Facilitate capital formation.” The WLawGroup said: “What is the difference between the Securities Act of 1933 and the Securities Exchange Act of 1934? The 1933 Act controls the registration and sale of securities. The 1934 Act controls trading of those securities after issue. Both are governed by the Securities Exchange Commission.” The SEC website states that: “The securities laws prohibit fraudulent conduct both criminally and civilly,” meaning that certain misstatements or omissions of relevant information can result in fines and/or criminal penalties that can include prison.
Justia in a post that was dated 10.18.2022 said: “Disseminating false or misleading information on the Internet in an effort to influence stock prices is a common form of securities fraud.” As there are an array of means exists to disseminate false or misleading information online, that observation by Justia bears repeating for some publicly operated firms in MHVille: “Disseminating false or misleading information on the Internet in an effort to influence stock prices is a common form of securities fraud.” Some methods of concern raised in reports by MHProNews/MHLivingNews could include using third parties (think, for example, a misleading trade group(s), internet publication(s) or bloggers, social media posts, statements to media that omit key insights, etc.).
The American Bar Association (ABA) website under the heading of Section 10(b) Litigation: “Shareholder lawsuits for violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) are a common source of liability for public companies. These cases are often triggered by nothing more than a drop in stock price, after which shareholder plaintiffs allege that the change in price reflects newly public information that the company previously and improperly concealed.” Under the following heading, the ABA stated the below.
Pleading Requirements
Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b).” So, there is a broad array of activities that can trigger what may be alleged as a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.”
The ABA went on to say the following.
The SEC’s implementing regulation, Rule 10b-5, further defines the scope of the statutory language. The rule renders it unlawful, in connection with the purchase or sale of any security, to:
Employ any device, scheme, or artifice to defraud;
Make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading; or
Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”
There are those professionals in MHVille, investors, consumers, researchers, or others peering into the manufactured housing industry that may have privately voiced or have publicly raised concerns about the veracity (or the lack thereof) of certain trade groups, publications, bloggers, and others that have been or are being used in a “scheme” to defraud. Thus this pre-10Q segments is meant to provide a legal framework to understand Cavco’s disclosures, which could also apply to other publicly traded firms. Note that numbers of publicly traded firms are members of the Manufactured Housing Institute (MHI).
Under “Misstatement or Omission” the ABA goes on to say: “Section 10(b) requires a defendant to have made a misstatement or omission. An omission may only give rise to liability if it was necessary to render another statement not misleading, or if the defendant had a duty to disclose.”
Again, there are an array of what may appear to be misleading statements and omissions that are occurring in the manufactured housing industry space. For instance, what if the Manufactured Housing Institute (MHI) and/or an official their issues (or fails to make) a statement that impacts the performance of a public company and therefor its stock valuation?
One of many possible reasons for investors, attorneys, and others to closely follow MHProNews/MHLivingNews or the Manufactured Housing Association for Regulatory Reform (MHARR) is because there are scant few sources that are questioning or probing the reliability of remarks or behaviors by MHI and some of their dominating corporate members. Indeed, numbers of attorneys and public officials reportedly follow reports like this one, per sources at the various firms and agencies that are deemed reliable. That noted, the reach of this platform is dwarfed by mainstream media, so the point made by the ABA that “These cases [filed on behalf of shareholders] are often triggered by nothing more than a drop in stock price, after which shareholder plaintiffs allege that the change in price reflects newly public information that the company previously and improperly concealed.”
With that backdrop, John Polk is a Special Counsel at Berenzweig Leonard, LLP. Reviewed a 6-2 decision by the U.S. Supreme Court under the heading of “Securities fraud; false statements; SEC Rule 10b-5.”
Notice how Polk in his review of the Lorenzo decision makes it plain that even if a subordinate is used to make a deceptive communication, that subordinate is still liable under the law, per the Supreme Court’s ruling. Why this matters in an array of possible circumstance in MHVille that may include Cavco Industries, but also goes beyond Cavco (CVCO), will be briefly noted. The highlighting below is added by MHProNews to draw additional attention to the point Polk’s case review made.
Lorenzo v. Securities and Exchange Commission, ___ U.S. ___, No. 17-1077 (27 March 2019)
SEC Rule 10b-5(b) makes it unlawful to “make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), the Supreme Court held that a person is the “maker of a statement” only if the person controls the content of the statement and whether and how to communicate the statement. On the facts of Janus Capital, that meant that any investment advisor who merely participated in the drafting of a false statement made by another could not be held liable in a private action under subsection (b) of Rule 10b-5.
In the instant case, the petitioner, Lorenzo, worked for the investment banker Charles Vista, LLC (Vista). Waste2Energy Holdings, Inc. (Waste2Energy) hired Vista to sell to investors $15 million worth of debentures, a form of debt secured only by the debtor’s earning power, not by a lien on any specific asset. Lorenzo knew that Waste2Energy’s intellectual property was worthless and its total assets amounted to only $370,552. Nonetheless, Lorenzo sent two emails to prospective investors describing the investment in Waste2Energy as having three layers of protection, including $10 million in confirmed assets. Lorenzo sent the emails at the direction of his boss, who supplied the content and approved the messages. Under the holding in Janus Capital, Lorenzo was not the “maker” of the emails and not liable under subsection (b) of SEC Rule 10b-5.
Was Lorenzo in the clear? No! There are two other subsections of Rule 10b-5. Subsection (a) makes it unlawful to employ any “device, scheme, or artifice to defraud,” and subsection (c) prohibits engaging “in any act, practice, or course of business which operates . . . as a fraud . . . .” In addition, the Securities Act of 1933 has the same prohibitions as Rule 10b-5, 15 U.S.C. §77q, and the Securities Exchange Act of 1934 prohibits the use of deceptive schemes and prohibits aiding and abetting violations of the securities laws, including the SEC’s rules. 15 U.S.C. §§ 78j, 78t. The SEC found that Lorenzo violated these regulatory and statutory provisions by sending false and misleading statements to investors with intent to defraud. The Court of Appeals affirmed.
The question before the Supreme Court was whether someone who is not a “maker” of a misstatement under Janus Capital, and therefore not in violation of Rule 10b-5(b), can nonetheless be found to have violated the subsections (a) and (c) of Rule 10b-5, and to have violated related provisions of the Securities Act and the Securities Exchange Act, when the only conduct involved concerns a misstatement.
The Supreme Court held that dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5, as well as the relevant statutes, even if the disseminator did not “make” the statements and consequently falls outside subsection (b) of the Rule.
The Court said that the words in SEC Rule 10b-5 and the related statutes are sufficiently broad to include within their scope the acts done by Lorenzo. He employed a “device, scheme” and “artifice to defraud” within the meaning of subsection (a) of the SEC’s Rule and §10(b) of the Securities Exchange Act and §17(a)(1) of the Securities Act. The Court said that a “device” is simply that “which is devised or formed by design; a “scheme” is a project, plan or program of something to be done; and an “artifice” is an artful stratagem or trick. Dissemination of false or misleading material is easily an “artful stratagem” or a “plan devised” to defraud an investor under subsection (a) of Rule 10b-5. The words “act” and “practice” in subsection (c) are similarly expansive. These provisions capture a wide range of conduct, and, in the Court’s words, there is “nothing borderline about this case.” Moreover, Lorenzo did not challenge the appeals court’s finding that he sent the emails with intent to deceive, manipulate, or defraud the recipients.
Making false statements and disseminating false statements are different violations, and, therefore, a person can violate subsections (a) and (c) of Rule 10b-5 without violating subsection (b). Furthermore, a non-maker-disseminator can be liable for aiding and abetting a violation of subsection (b). Those who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c) and can be secondarily liable under Rule 10b-5(b).
This was a six-to-two decision. Justices Thomas and Gorsuch dissented because in their opinion the majority had sown confusion and eviscerated the distinction between primary and secondary liability for false statements by holding that a person who has not “made” a fraudulent statement can nevertheless be liable for it. Justice Kavanaugh took no part in the decision. ##
Against that backdrop is this reminder of a prior report for longtime readers or new insights for new or newer readers of MHProNews/MHLivingNews.
With that foundation, the following is Cavco’s 10Q found in the report by MarketScreener published on 11.4.2022. The segment taken immediately below from their 10Q can also be found online with the SEC, but the Solitaire related item was via Cavco’s investor page.
20. Subsequent Event
As announced on October 27, 2022 in a current report on Form 8-K, we have signed a binding offer to acquire the business of Solitaire Homes, Inc. and other related entities (collectively “Solitaire Homes”), including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations.
The addition of Solitaire Homes strengthens our position in the Southwest, with high quality products that complement our existing home offerings.
The purchase price totals $93 million, before certain adjustments that will be determined upon close of the transaction. We expect to fund the acquisition entirely with cash on hand. The transaction is expected to close early in the Company’s fourth quarter of fiscal year 2023, subject to applicable regulatory approvals and the satisfaction of certain customary conditions.
CAVCO INDUSTRIES INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
11/04/2022 | 03:11pm EST
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
Statements in this Report on Form 10-Q (“Report”) include “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “will,” “intends,” “plans,” or “anticipates,” or by discussions of strategy, plans or intentions. Forward-looking statements include, for example, discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; our liquidity and financial resources; our outlook with respect to Cavco Industries, Inc. and its subsidiaries’ (collectively, “we,” “us,” “our,” the “Company” or “Cavco”) and the manufactured housing business in general; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations; economic conditions and consumer confidence; trends in interest rates and inflation; potential acquisitions, strategic investments and other expansions; the sufficiency of our liquidity; operational and legal risks; how we may be affected by the COVID-19 pandemic (“COVID-19”) or any other pandemic or outbreak; the cost and availability of labor and raw materials; governmental regulations and legal proceedings; the availability of favorable consumer and wholesale manufactured home financing; and the ultimate outcome of our commitments and contingencies. Forward-looking statements contained in this Report speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We do not intend to publicly update or revise any forward-looking statement contained in this Report or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law.
Forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, many of which are beyond our control. To the extent that our assumptions and expectations differ from actual results, our ability to meet such forward-looking statements, including the ability to generate positive cash flow from operations, may be significantly hindered. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed under Risk Factors in Part I, Item 1A of our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Form 10-K”).
Introduction
The following should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes that appear in Part I, Item 1 of this Report. References to “Note” or “Notes” pertain to the Notes to our Consolidated Financial Statements.
Company Overview
Headquartered in Phoenix, Arizona, we design and produce factory-built housing products primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. We are one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments. Our products are marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood and MidCountry. We are also a leading producer of park model RVs, vacation cabins and factory-built commercial structures. Our finance subsidiary, CountryPlace Acceptance Corp. (“CountryPlace”), is an approved Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) seller/servicer and a Government National Mortgage Association (“Ginnie Mae”) mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factorybuilt homes. Our insurance subsidiary, Standard Casualty Company (“Standard Casualty”), provides property and casualty insurance to owners of manufactured homes.
We operate 26 homebuilding production lines in Millersburg and Woodburn, Oregon; Riverside, California;
Nampa, Idaho; Phoenix, Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota;
Dorchester, Wisconsin; Nappanee and Goshen, Indiana; Lafayette, Tennessee; Douglas and Moultrie, Georgia; Shippenville and Emlenton, Pennsylvania; Martinsville and Rocky Mount, Virginia; Cherryville, North Carolina; and Ocala and Plant City, Florida. We also recently opened two new production lines in Glendale, Arizona and Hamlet, North Carolina. The majority of the homes produced are sold to, and distributed by, independently owned retail operations located throughout the United States and Canada. In addition, our homes are sold through 42 Company-owned U.S. retail locations.
During fiscal 2022, we acquired an additional 20% ownership in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as “Craftsman”), which gave us a controlling interest. Craftsman is a manufactured home retailer with four locations in Nevada selling Company and other manufacturer branded homes.
We also purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation (“Commodore”). Commodore added six manufacturing facilities and two wholly-owned retail locations, and also participates in commercial lending operations with its dealers.
On October 26, 2022, subsequent to the end of the second fiscal quarter of 2023, we signed a binding offer to acquire the business of Solitaire Homes, Inc. and other related entities (collectively “Solitaire Homes”), including its four manufacturing facilities, twenty-two retail locations and its dedicated transportation operations. The transaction is expected to close early in our fourth fiscal quarter of 2023, subject to applicable regulatory approvals and the satisfaction of certain customary conditions. The addition of Solitaire Homes to our existing manufacturing and retail system strengthens our position in the Southwest and expands our manufacturing capabilities into Mexico.
Company and Industry Outlook
According to data reported by the Manufactured Housing Institute, industry home shipments increased 14.2% for the first 8 months of calendar year 2022 compared to the same period last year.
The industry offers solutions to the affordable housing crisis and these shipment numbers reflect the industry’s ability to produce in the current environment. The average price per square foot for a manufactured home is usually lower than a site-built home. Also, based on the comparatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing’s monthly payment affordability.
The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. “First-time” and “move-up” buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that are particularly affected by periods of low employment rates and underemployment. Consumer confidence is especially important among manufactured home buyers interested in our products for seasonal or retirement living.
We employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage. We are focused on building quality, energy efficient homes for the modern home buyer. Our green building initiatives involve the creation of an energy efficient envelope resulting in lower utility costs, as well as the higher utilization of renewable materials in our manufacturing process. We also build homes designed to use alternative energy sources, such as solar.
We maintain a conservative cost structure in an effort to build added value into our homes and we work diligently to maintain a solid financial position. Our balance sheet strength, including the position in cash and cash equivalents, helps avoid liquidity problems and enables us to act effectively as market opportunities or challenges present themselves.
We continue to make certain commercial loan programs available to members of our wholesale distribution chain. Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community operators and residential developers (see Note 7 to the Consolidated Financial Statements). Our involvement in commercial lending helps to increase the availability of manufactured home financing to distributors, community operators and residential developers and provides additional opportunities for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they also expose us to risks associated with the creditworthiness of this customer base and our inventory financing partners.
The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. We work independently and with other industry participants to develop secondary market opportunities for manufactured home-only loan and non-conforming mortgage portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to residents of certain manufactured home communities. We also develop and invest in homeonly lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations and reduce our exposure to the actions of independent lenders.
Key housing building materials include wood, wood products, steel, gypsum wallboard, windows, doors fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, aluminum, appliances and electrical items. Fluctuations in the cost of materials and labor may affect gross margins from home sales to the extent that costs cannot be efficiently matched to the home sales price. Pricing and availability of certain raw materials have recently been volatile due to a number of factors in the current environment. We continue to monitor and react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such product pricing increases may lag behind the escalation of such costs. From time to time and to varying degrees, we may experience shortages in the availability of materials and/or labor in the markets served. Availability of these inputs has not caused significant production halts in the current period, but we have experienced periodic shutdowns in other periods and shortages of primary building materials have caused production inefficiencies as we have needed to change processes in response to the delay in materials. These shortages may also result in extended order backlogs, delays in the delivery of homes and reduced gross margins from home sales.
Our backlog at October 1, 2022 was $651 million compared to $1.0 billion last quarter, a decrease of $347 million or 34.8%, and down $456 million, or 41.2%, compared to $1.1 billion at October 2, 2021. Home order rates, net of cancellations, are down from the extreme highs we saw during the summer of 2020 to the summer of 2021. Additionally, our efforts in product simplification and production staffing improvement have increased our total average plant capacity utilization.
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.
In the financial services segment, we continue to assist customers in need by servicing existing loans and insurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations. Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced for Ginnie Mae and Freddie Mac, and home-only loans serviced for certain other investors, we must remit scheduled monthly principal and/or interest payments and principal curtailments regardless of whether monthly mortgage payments are collected from borrowers. Ginnie Mae permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments. Monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors; however, mandatory extended forbearance under the Coronavirus Aid, Relief and Economic Security Act and certain other regulations related to COVID-19 could negatively impact cash obligations in the future. Results of Operations
Net Revenue
Three Months Ended
October 1, October 2,
($ in thousands, except revenue per home sold) 2022 2021 Change
Factory-built housing
$
559,602
$
342,094
$
217,508
63.6 %
Financial services
17,790
17,449
341
2.0 %
$
577,392
$
359,543
$
217,849
60.6 %
Factory-built homes sold
by Company-owned retail sales centers
860
710
150
21.1 %
to independent retailers, builders, communities and developers
4,251
2,887
1,364
47.2 %
5,111
3,597
1,514
42.1 %
Net factory-built housing revenue per home sold
$
109,490
$
95,105
$
14,385
15.1 %
Six Months Ended
October 1, October 2,
($ in thousands, except revenue per home sold) 2022 2021 Change
Factory-built housing
$
1,132,199
$
654,377
$
477,822
73.0 %
Financial services
33,531
35,588
(2,057)
(5.8) %
$
1,165,730
$
689,965
$
475,765
69.0 %
Factory-built homes sold
by Company-owned retail sales centers
1,733
1,433
300
20.9 %
to independent retailers, builders, communities and developers
8,724
5,864
2,860
48.8 %
10,457
7,297
3,160
43.3 %
Net factory-built housing revenue per home sold
$
108,272
$
89,678
$
18,594
20.7 %
In factory-built housing, Net revenue for both the three and six months ended October 1, 2022 increased compared to the respective periods in the prior year due to higher home sales volume and higher home selling prices. Home sales volume increased from the Commodore acquisition, completed in the second quarter of fiscal year 2022, which provided $107 million and $208 million in Net revenue for the three and six months ended October 1, 2022, respectively. The three and six months also benefited from higher factory capacity utilization which enabled higher sales volume.
22
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers and sales of homes to consumers by Company-owned retail stores. Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional services. Our homes are constructed in one or more floor sections (“modules”) which are then installed on the customer’s site. Changes in the number of modules per home, the selection of different home types/models and optional home upgrades create changes in product mix, also causing fluctuations in this metric. The table below presents the mix of modules and homes sold for the three and six months ended October 1, 2022 and October 2, 2021:
Three Months Ended
Modules Homes Modules Homes Modules Homes
U.S. Housing and Urban Development (“HUD”) code homes
8,099
4,639
5,548
3,154
46.0 %
47.1 %
Modular homes
444
226
519
254
(14.5) %
(11.0) %
Park model RVs
246
246
189
189
30.2 %
30.2 %
8,789
5,111
6,256
3,597
40.5 %
42.1 %
Six Months Ended
Modules Homes Modules Homes Modules Homes
HUD code homes
16,614
9,493
11,200
6,430
48.3 %
47.6 %
Modular homes
930
477
987
480
(5.8) %
(0.6) %
Park model RVs
487
487
387
387
25.8 %
25.8 %
18,031
10,457
12,574
7,297
43.4 %
43.3 %
For the three months ended October 1, 2022, Financial services segment Net revenue increased 2.0% primarily due to higher volume in home loan sales in the period. For the six months ended October 1, 2022, Net revenue decreased 5.8% primarily due to realized and unrealized losses on marketable equity securities in the insurance subsidiary’s portfolio during such period, lower interest income earned on the acquired consumer loan portfolios, and lower volume in home loan sales. These items were partially offset by more insurance policies in force in the current year compared to the prior year.
Gross Profit
Three Months Ended
October 1, October 2,
($ in thousands) 2022 2021 Change
Factory-built housing
$
149,665
$
82,299
$
67,366
81.9 %
Financial services
7,934
7,629
305
4.0 %
$
157,599
$
89,928
$
67,671
75.3 %
Gross profit as % of Net revenue
Consolidated
27.3 %
25.0 %
N/A
2.3 %
Factory-built housing
26.7 %
24.1 %
N/A
2.6 %
Financial services
44.6 %
43.7 %
N/A
0.9 %
Six Months Ended
October 1, October 2,
($ in thousands) 2022 2021 Change
Factory-built housing
$
289,251
$
148,572
$
140,679
94.7 %
Financial services
13,072
15,369
(2,297)
(14.9) %
$
302,323
$
163,941
$
138,382
84.4 %
Gross profit as % of Net revenue
Consolidated
25.9 %
23.8 %
N/A
2.1 %
Factory-built housing
25.5 %
22.7 %
N/A
2.8 %
Financial services
39.0 %
43.2 %
N/A
(4.2) %
Factory-built housing Gross profit and the Gross profit percentage increased for the three and six months ended October 1, 2022 primarily due to higher average sales prices.
In Financial services, Gross profit increased for the three months ended October 1, 2022 primarily due to the higher volume of home loan sales. For the six months ended October 1, 2022, Financial services gross profit decreased primarily due to higher insurance claims from New Mexico and Arizona weather related events, and greater unrealized losses on marketable equity securities compared to the same period last year.
Selling, General and Administrative Expenses
Three Months Ended
October 1, October 2,
($ in thousands) 2022 2021 Change
Factory-built housing
$
61,640
$
40,347
$
21,293
52.8 %
Financial services
5,254
5,025
229
4.6 %
$
66,894
$
45,372
$
21,522
47.4 %
Selling, general and administrative expenses as % of Net revenue
11.6 %
12.6 %
N/A
(1.0) %
Six Months Ended
October 1, October 2,
($ in thousands) 2022 2021 Change
Factory-built housing
$
122,563
$
75,844
$
46,719
61.6 %
Financial services
10,467
10,360
107
1.0 %
$
133,030
$
86,204
$
46,826
54.3 %
Selling, general and administrative expenses as % of Net revenue
11.4 %
12.5 %
N/A
(1.1) %
For the three and six months ended October 1, 2022, Selling, general and administrative expenses related to factory-built housing increased between periods primarily from the addition of Commodore, as well as higher salary and incentive compensation expense on improved earnings and higher legal and professional fees.
As a percentage of Net revenue, Selling, general and administrative expenses improved by 100 and 110 basis points for the three and six months ended October 1, 2022, respectively, from better utilization of fixed costs on higher sales.
Other Components of Net Income
Three Months Ended
October 1, October 2,
($ in thousands) 2022 2021 Change
Interest expense
$
233
$
203
$
30
14.8 %
Other income, net
2,339
4,668
(2,329)
(49.9) %
Income tax (benefit) expense
18,613
11,338
7,275
64.2 %
Effective tax rate
20.1 %
23.1 %
N/A
(3.0) %
Interest expense consists primarily of interest related to finance leases.
Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses from the sale of property, plant and equipment. The decrease in Other income, net is primarily due to a $3.3 million gain recognized in the second quarter of last year on the remeasurement of the assets and liabilities of Craftsman upon acquisition of a controlling interest. Additionally, for the six months ended October 1, 2022, we recognized a $1.1 million unrealized loss on corporate marketable investments compared to a $1.7 million unrealized gain in the prior year. These items were partially offset by higher interest income earned on a larger cash balance held in high yield money market funds.
The effective tax rate for the current year periods benefited from $2.7 million of estimated non-recurring net tax credits related to the sale of energy efficient homes, available under the Internal Revenue Code §45L. This program expired on December 31, 2021 and was recently renewed as part of the Inflation Reduction Act legislation through December 31, 2022.
Liquidity and Capital Resources
We believe that cash and cash equivalents at October 1, 2022, together with cash flow from operations, will be sufficient to fund our operations, cover our obligations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in U.S. Treasury and other money market funds, some of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on our liquidity and capital resources. Because of our sufficient liquid resources, we have not historically sought external sources of liquidity, with the exception of certain credit facilities for our home-only lending programs. Regardless, depending on our operating results and strategic opportunities, we may choose to seek additional or alternative sources of financing in the future. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. We believe that stockholders’ equity at the insurance subsidiary remains sufficient and do not believe that the ability to pay ordinary dividends to Cavco at anticipated levels will be restricted per state regulations.
The following is a summary of the Company’s cash flows for the six months ended October 1, 2022 and October 2, 2021, respectively:
Six Months Ended
October 1, October 2, (in thousands) 2022 2021 $ Change
Cash, cash equivalents and restricted cash at beginning of the fiscal year
$
259,334 $
339,307 $
(79,973)
Net cash provided by operating activities
162,942
80,087
82,855
Net cash used in investing activities
(34,933)
(156,045)
121,112
Net cash used in financing activities
(39,224)
(18,873)
(20,351)
Cash, cash equivalents and restricted cash at end of the period
$
348,119 $
244,476 $
103,643
Net cash provided by operating activities increased primarily from higher net income adjusted for non-cash items. This increase was partially offset by increased lending in our Financial Services segment, as well as under our commercial loan programs. Consumer loan originations increased $11.8 million to $97.2 million for the six months ended October 1, 2022 from $85.4 million for the six months ended October 2, 2021.
Net cash used in investing activities consists of buying and selling debt and marketable equity securities in our Financial Services segment, purchases of property, plant and equipment and funding strategic growth acquisitions. Cash used in the current period reflects the purchase of plant facilities in Hamlet, North Carolina. Cash used in the prior period reflects the purchase of Commodore and Craftsman.
Net cash used in financing activities for the current period was primarily for the repurchase of common stock during the first quarter of fiscal 2023.
See Note 14 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.
Obligations and Commitments. There were no material changes to the obligations and commitments as set forth in the Form 10-K.
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the six months ended
October 1, 2022, as compared to those disclosed in Part II, Item 7 of the Form 10-K, under the heading “Critical Accounting Estimates,” which provides a discussion of the critical accounting estimates that management believes affect its more significant judgments and estimates used in the preparation of the Company’s Consolidated Financial Statements.
Other Matters
Impact of Inflation. At the end of the period, inflation was the highest in the U.S. in over 30 years. Our ability to maintain certain levels of gross margin can be adversely impacted by sudden increases in specific costs, such as the increases in materials and labor. In addition, measures used by the Federal Reserve to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing.
We can give no assurance that inflation will not affect our future profitability and financial position. … ##
Additional Information with More MHProNews Analysis and Commentary
Note the following results from Word searches of Cavco’s most recent 10Q, shown in part above, includes a reference to the “Manufactured Housing Institute” (MHI). Indeed, it should. As has been noted previously by MHProNews, Cavco essentially has two members on MHI’s so-called “Executive Committee.” William “Bill” Boor is obvious, as he is “President and CEO at Cavco Industries, Inc.” per his LinkedIn profile. MHI’s chair at this time is Leo Poggione of Craftsman Homes. Cavco acquired a hefty stake in Craftsman with the view of owning the retail center, see that report linked below.
So, what happens at MHI is hardly a detached or irrelevant issue for Cavco, and thus for its investors. Keep in mind the foundation for today’s report on Cavco’s 10Q was a discussion of what can constitute false, misleading, or withheld information, per the SEC and the Supreme Court ruling cited herein above.
Then, note this remark by Cavco’s leadership from the above:
“We also develop and invest in homeonly 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.” Those home only, chattel or personal property loans are indeed a possible source for growth. MHI admits it, and the Manufactured Housing Association for Regulatory Reform (MHARR) routinely presses the matter. But the two national trade groups arguably do not do so in the same way. How so? Per Doug Ryan with the nonprofit that was rebranded as Prosperity Now, MHI is deliberately working to keep the Duty to Serve (DTS) manufactured housing enacted by Congress from being properly implemented with regards to home only manufactured home loans.
While Ryan’s phrasing might have been refined, the thrust of his point is apt. Who says? In a de facto fashion, Samuel Strommen with Knudson Law. Strommen pointed out Cavco by name as one of the Big Three (Big 3) firms at MHI that are working to keep the FHFA and HUD from properly implementing laws that would cause robust growth.
When asked by MHProNews about such vexing issues, MHI and Cavco and other corporate leaders alike have routinely been silent. This may well fall into the category of information that is wrongfully being withheld by Cavco, MHI, and other corporate leaders from their shareholders. As Cavco’s own 10Q stated, more home only lending should lead to higher sales. This is an area that is not known to have been mentioned by the various law firms which have probed Cavco on behalf of shareholders.
Given Cavco’s troubled history on SEC and legal issues, which ought to reflect on MHI too, since prior Cavco leader Joseph “Joe” Stegmayer never bothered to step down as MHI chair in the wake of the SEC probe and eventual litigation, it is not a merely hypothetical notion.
Additionally, Cavco’s own Manuel “Manny” Santana has in remarks to Congress made the point that “HUD has failed…manufactured housing.” Santana has served Cavco for years since those comments which related to the failure of HUD to implement that Manufactured Housing Improvement Act of 2000 (MHIA). A specific area of concern, at least on paper, are zoning and placement barriers in jurisdictions across the country that are ignorant of or ignore the MHIA’s “enhanced preemption” over local zoning.
Where is the Cavco discussion of that topic in their 10Q or elsewhere of late? The Cavco 10Q, linked here, doesn’t even mention zoning once, per a WORD search. How is that possible, given the gravity of the issue for manufactured housing? Nor is the Manufactured Housing Improvement Act (MHIA) mentioned. Nor is “preemption.” There is no mention of “Department of Energy” in a word search; odd at best given the looming implementation of DOE energy rule on manufactured housing, which MHI admits could dampen manufactured housing demand. How can Cavco leaders fail to disclose or address such significant important issues?
The argument can be made that such omissions might prove to be actionable. Cavco leaders can’t reasonably claim ignorance, given that informed sources say the follow MHProNews/MHLivingNews regularly, and because they hold key spots on the MHI board of directors.
What lies ahead for Cavco legally is uncertain. But what ought to be obvious to critical and analytical thinkers – which should include investors and their current or potential legal advocates – is that Cavco is hardly doing them justice. Additionally, these failures harm consumers by the millions.
Note: depending on your browser or device, many images in this report and others on MHProNews can be clicked to expand. Click the image and follow the prompts. For example, in some browsers/devices you click the image and select ‘open in a new window.’ After clicking that selection, you click the image in the open window to expand the image to a larger size. To return to this page, use your back key, escape or follow the prompts.
As the report immediately above reflects, credible third-parties looking into manufactured housing and the lack of affordable housing have made specific and general charges of wrongdoing. Why hasn’t Cavco leaders addressed the concerns about HUD, MHI, or other failures harming the public, taxpayers, and shareholders? See the various linked related reports to learn more. ###
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Our son has grown quite a bit since this 12.2019 photo. All on Capitol Hill were welcoming and interested in our manufactured housing industry related concerns. But Congressman Al Green’s office was tremendous in their hospitality. Our son’s hand is on a package that included the Constitution of the United States, bottled water, and other goodies.
Tony earned a journalism scholarship and earned numerous awards in history and in manufactured housing.
For example, he earned the prestigious Lottinville Award in history from the University of Oklahoma, where he studied history and business management. He’s a managing member and co-founder of LifeStyle Factory Homes, LLC, the parent company to MHProNews, and MHLivingNews.com.
This article reflects the LLC’s and/or the writer’s position, and may or may not reflect the views of sponsors or supporters.
