Forward-Looking Statements Statements in this Report on Form 10-Q 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, as amended (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 are typically included, for example, in discussions regarding the manufactured housing and site-built housing industries; the Company's financial performance and operating results; and the expected effect of certain risks and uncertainties on the Company's business, financial condition and results of operations, economic conditions and consumer confidence, operational and legal risks, how the Company may be affected by the COVID-19 pandemic, governmental regulations and legal proceedings, the availability of favorable consumer and wholesale manufactured home financing, market interest rates and Company investments and the ultimate outcome of the Company's commitments and contingencies. Forward-looking statements contained in this Report on Form 10-Q speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. The Company does not intend to publicly update or revise any forward-looking statement contained in this Report on Form 10-Q 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. Forward-looking statements involve risks, uncertainties and other factors that may cause the Company's 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 the Company's assumptions and expectations differ from actual results, the Company's 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 the Company's results and cause them to materially differ from those contained in the forward-looking statements include, without limitation, those discussed in Risk Factors in Part I, Item 1A of the Company's 2020 Annual Report on Form 10-K ("Form 10-K"), which Risk Factors are incorporated herein. Introduction The following should be read in conjunction withCavco Industries, Inc. and its subsidiaries' (collectively, the "Company" or "Cavco") Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to the Company's Consolidated Financial Statements. Overview Headquartered inPhoenix, Arizona , the Company designs and produces factory-built homes primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. The Company is one of the largest producers of manufactured homes inthe United States , based on reported wholesale shipments, marketed under a variety of brand names including Cavco, Fleetwood,Palm Harbor , Fairmont, Friendship, Chariot Eagle and Destiny. The Company is also one of the leading producers of park model RVs, vacation cabins and systems-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand. Cavco's 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 aGovernment National Mortgage Association ("Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Cavco's insurance subsidiary,Standard Casualty Co. , provides property and casualty insurance to owners of manufactured homes. 26 -------------------------------------------------------------------------------- Table of Contents Company Growth From its inception in 1965, Cavco traditionally served affordable housing markets in the southwesternUnited States principally through manufactured home production. During the period from 1997 to 2000, Cavco was purchased by, and became a wholly-owned subsidiary of,Centex Corporation , which operated the Company until 2003, when Cavco became a stand-alone publicly-held company traded on the Nasdaq Global Select Market under the ticker symbol CVCO.The Company has strategically expanded its factory operations and related business activities primarily through the acquisition of other industry participants. This has enabled Cavco to meet the needs of the affordable housing market on a national basis. The purchase of the Fleetwood andPalm Harbor assets inAugust 2009 andApril 2011 , respectively, increased home production and distribution capabilities and provided for vertical integration through entry into financial services businesses specific to the Company's industry. These transactions expanded the Company's geographic reach at a national level by adding factories and retail locations serving the Northwest, West, South, South Central and Mid-Atlantic regions. The purchases of Chariot Eagle, Fairmont,Lexington and Destiny, inMarch 2015 ,May 2015 ,April 2017 andAugust 2019 , respectively, provided additional operating capacity, increased home production capabilities and further strengthened the Company's market in certain areas ofthe United States and several provinces inCanada . InApril 2020 , the Company decided to shut down production and close itsLexington, Mississippi plant. Ongoing market and operating challenges were exacerbated by decreased business and uncertainty resulting from the novel coronavirus COVID-19 ("COVID-19") pandemic. This location finalized production inJune 2020 , however, the Company remains available to fulfill the needs of wholesale customers previously served by theLexington facility from its other production lines in the southeast. The Company does not expect that closing theLexington facility will have a significant adverse financial effect on the Company. The production facility has been placed on the market for sale. The Company operates 20 homebuilding production lines located inMillersburg andWoodburn, Oregon ;Nampa, Idaho ;Riverside, California ;Phoenix andGoodyear, Arizona ;Austin ,Fort Worth ,Seguin andWaco, Texas ;Montevideo, Minnesota ;Nappanee, Indiana ;Lafayette, Tennessee ;Martinsville andRocky Mount, Virginia ;Douglas andMoultrie, Georgia ; andOcala andPlant City, Florida . The majority of the homes produced are sold to, and distributed by, independently owned and controlled retail operations located throughoutthe United States andCanada . In addition, the Company's homes are sold through 39 Company-ownedU.S. retail locations. Company operations are generally managed on a decentralized basis with oversight from the home office. This decentralization enables the Company's operators the flexibility to adapt to local market demand, be more customer focused and have the autonomy to make swift decisions, while still being held accountable for operational and financial performance. The Company regularly reviews its product offerings and strives to improve designs, production methods and marketing strategies. The Company continues to focus on gaining operational efficiencies among its operations, all of which have organic growth potential. Company Outlook The Company maintains a conservative cost structure in an effort to build added value into its homes and has worked diligently to maintain a solid financial position. The balance sheet strength, including the position in cash and cash equivalents, should help avoid liquidity problems and enable the Company to act effectively as market opportunities or challenges present themselves. 27 -------------------------------------------------------------------------------- Table of Contents The Company's manufacturing facilities are strategically positioned acrossthe United States , and utilize local market research to design homes to meet the demands of its customers. The Company has the ability to customize floor plans and designs to fulfill specific needs and interests. By offering a full range of homes from entry-level models to large custom homes and with the ability to engineer designs in-house, the Company can accommodate virtually any customer request. In addition to homes built in accordance with theNational Manufacturing Home Construction and Safety Standards ("HUD code") promulgated by theU.S. Department of Housing and Urban Development ("HUD"), the Company also constructs modular homes that conform to state and local codes, park model RVs and cabins and light commercial buildings at many of its manufacturing facilities. The Company seeks out niche market opportunities where its diverse product lines and custom building capabilities provide a competitive advantage. Our green building initiatives involve the creation of an energy efficient envelope and higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, typically lower utility costs and sustainability. The Company also builds homes designed to use alternative energy sources, such as solar and wind. From bamboo flooring and tankless water heaters to solar-powered homes, the Company's products are diverse and tailored to a wide range of consumer interests. Innovation in housing design is a forte of the Company and it continues to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located. Based on the relatively low cost associated with manufactured home ownership, the Company's products have traditionally competed with rental housing's monthly payment affordability. Rental housing activity is reported to have continued to increase in recent years, which has contributed to a decline in tenant housing vacancy rates. These factors, should they persist, as well as other market and economic factors may cause some renters to become buyers of affordable-housing alternatives, including manufactured homes. Further, with respect to the general rise in demand for rental housing, during fiscal year 2020, the Company realized a larger proportion of orders and interest from developers and community owners for new manufactured homes intended for use as rental homes, alternative dwelling units and seasonal living. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. The Company continued to operate substantially all of its homebuilding and retail sales facilities while working to follow COVID-19 health guidelines. The Company has worked to minimize exposure and transmission risks by implementing enhanced facility cleaning, social distancing and related protocols while continuing to serve its customers. Operational efficiencies declined from adjusting home production processes to comply with health guidelines, managing higher factory employee absenteeism, limited new-hire availability and certain building material supply shortages. Accordingly, the Company's total average plant capacity utilization rate fell to as low as approximately 45% during the early part of the first fiscal year quarter, compared to pre-pandemic levels of more than 80%. By the end of the quarter, overall plant capacity utilization rates were approximately 70% compared to approximately 80% during last year's first fiscal quarter as the Company continues to work to increase production. Sales order activity declined substantially at the beginning of the quarter due to the onset of COVID-19. The pandemic had a cascading effect on every point in the home sales process, including delaying some orders and sales. While Company-owned retail stores and most independently owned retail sales locations remained open for business since the onset of the pandemic, customer traffic initially declined, resulting in declining home sales orders. In addition, as a result of the pandemic, home orders from developers and community owners were put (and generally remain) on hold, causing sales to these customers to decline substantially. Subsequently, retail traffic and sales activity continuously improved over the balance of the quarter to the point where sales order rates were somewhat higher than the comparable prior year at quarter's end. Increased order volume is the result of a higher number of well-qualified home-buyers making purchase decisions supported by reduced home loan interest rates. Increased orders outpaced the challenging production environment during the quarter, raising order backlogs 20% to$157 million atJune 27, 2020 , compared to$131 million atJune 29, 2019 . This backlog of home orders excludes orders that have been paused or canceled at the request of the customer. 28 -------------------------------------------------------------------------------- Table of Contents The financial services segment also maintained operations since the onset of the COVID-19 pandemic, largely through the implementation of work-from-home solutions. This includes accepting and processing new applications as well as servicing home loans and insurance policies. The financial services operations are complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations and are assisting customers in need. Because of changed economic conditions, loan loss reserves were increased at the end of fiscal year 2020 and continue to be adjusted as considered appropriate. Certain loans serviced by CountryPlace for investors expose the Company to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. Our primary investor,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. While monthly collections of principal and interest from borrowers has normally exceeded scheduled principal and interest payments owed to investors, given various state and local emergency orders in light of COVID-19, this could change. It is difficult to predict the future impacts of the COVID-19 pandemic on housing demand or operations at each of our locations. However, our wholesale customers have been positive about continuing the process of delivering homes and supportive of our efforts to continue to meet affordable housing needs. The Company continues to focus on developing order volume growth opportunities by working to improve its production capabilities and adjusting product offerings where appropriate. The Company strives to balance the production levels and workforce size with the demand for its product offerings to attain efficient use of its production capabilities. The Company continually reviews wage rates of its production employees and has established other monetary incentive programs to ensure competitive compensation. The Company is working to more extensively use on-line recruiting tools, update recruitment brochures and improve the appearance and appeal of its production facilities in order to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. Maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand. The Company views overcoming labor-related difficulties in the COVID-19 environment to increase home production rates as a major challenge. The Company continues to make certain commercial loan programs available to members of the Company's independent wholesale distribution chain. Under these programs, the Company provides a significant amount of the funds that independent financiers then lend to distributors to finance retail inventories of its products. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes (see Note 7 to the Consolidated Financial Statements). The Company's involvement in commercial loans helps to increase the availability of manufactured home financing to distributors, communities and developers. Participation in wholesale financing is helpful to these customers and provides additional opportunity for product exposure to potential home buyers. These initiatives support the Company's ongoing efforts to expand product distribution. However, these initiatives do expose the Company to risks associated with the creditworthiness of this customer base and the Company's inventory financing partners. The Company has included considerations related to the COVID-19 pandemic when assessing its risks of loan loss and setting reserve amounts for its commercial finance portfolio. 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. The Company is working directly with other industry participants to develop secondary market opportunities for manufactured home-only loan portfolios and expand lending availability in the industry. Additionally, the Company continues to invest in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. Our mortgage subsidiary also develops and invests in home-only lending programs to grow sales of homes through traditional distribution points. The Company believes that growing its investment and participation in home-only lending may provide additional sales growth opportunities for the financial services segment, as well as provide a means that could lead to increased home sales for its factory-built housing operations. 29 -------------------------------------------------------------------------------- Table of Contents The Company is also working through industry trade associations to encourage favorable legislative and Government-Sponsored Enterprise ("GSE") action to address the mortgage financing needs of buyers of affordable homes. Federal law requires the 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. InDecember 2017 , Fannie Mae and Freddie Mac each released their final Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill their "Duty to Serve" obligation. These plans became effective onJanuary 1, 2018 . Each of the three-year plans offers an enhanced mortgage loan product through their "MH Advantage" and "ChoiceHome" programs, respectively, that began in the latter part of calendar year 2018. Small-scale pilot programs for the purchase of home-only loans that were expected to commence towards the end of calendar year 2019 have not occurred. Expansion of the secondary market for lending through the GSEs could support further demand for housing as lending options would likely become more available to home buyers. Although some progress has been made in this area, meaningful positive impact in the form of increased home orders has yet to be realized. OnJanuary 25, 2018 , HUD announced a top-to-bottom review of its manufactured housing rules as part of a broader effort to identify regulations that may be ineffective, overly burdensome, or excessively costly given the critical need for affordable housing. In addition, onJune 25, 2019 ,President Trump signed an Executive Order directing federal agencies to work together to alleviate barriers that impede the production of affordable housing. The Executive Order created aWhite House Council on Eliminating Regulatory Barriers toAffordable Housing , consisting of members from eight federal agencies and chaired by the HUD Secretary. While there has been no timeline established, if certain changes are made, the Company may be able to serve a broader range of home buyers. 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 inTexas where most of its policies are underwritten. Where applicable, losses from catastrophic events are mitigated by reinsurance contracts in place as part of the Company's loss mitigation structure. As disclosed in Part II, Item 1, Legal Proceedings, since 2018, the Company has been cooperating with an investigation by the enforcement staff of theSecurities and Exchange Commission ("SEC") regarding trading in personal and Company accounts directed by the Company's former Chief Executive Officer ("CEO"),Joseph Stegmayer . The Audit Committee of the Board of Directors conducted an internal investigation led by independent legal counsel and other advisers and, following the completion of its work in early 2019, the results of the Audit Committee's work were shared with the Company's auditors, listing exchange and theSEC staff. The Company continues to make documents and personnel available to theSEC staff and intends to continue cooperating with its investigation. As a result of the ongoing independent investigation, the Company recorded$0.1 million , net of a$0.5 million insurance recovery of prior expenses, and$0.8 million of expenses related to legal and other expenses during the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and expects to continue to incur related costs pertaining to this matter. During the third quarter of fiscal year 2019, the Company also reviewed the sufficiency of its insurance coverage and as a result, Cavco's Board of Directors made a decision to purchase additional director and officer ("D&O") liability insurance coverage with 22-month terms for a total premium of$15.3 million . As a result, the Company recorded$2.1 million of additional D&O policy premium expense during each of the three months endedJune 27, 2020 andJune 29, 2019 , and expects to incur approximately$2.1 million per quarter in Selling, general and administrative expenses from the amortization of these policy premiums through the second quarter of fiscal year 2021, at which point D&O policy needs and related premium costs will be assessed further. 30 -------------------------------------------------------------------------------- Table of Contents Industry Overview According to data reported by theManufactured Housing Institute , industry home shipments decreased 0.9% for the first 5 months of calendar year 2020 compared to the same period in the prior year. During calendar year 2019, the manufactured housing industry shipped approximately 95,000 HUD code manufactured homes, a decrease of 2.1% from the approximately 97,000 units shipped in 2018. Excess inventory in the market from accelerated purchasing in 2018 slowed shipment levels in 2019. Prior to 2019, annual shipments had increased each year since calendar year 2009 when 50,000 HUD code manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD code manufactured homes have improved in recent years, the industry continues to operate at relatively low levels compared to historical shipment statistics. "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 their particular employment status to qualify for a new home loan and their down payment capability. Consumer confidence, as in indicator of retirement security, is especially important among manufactured home buyers interested in our products for seasonal or retirement living. The two largest manufactured housing consumer demographics, young adults and thosewho are age 55 and older, are both growing. TheU.S. adult population is estimated to expand by approximately 9.2 million between 2020 and 2025. Young adults born from 1976 to 1995, often referred to as Gen Y, represent a large segment of the population. Late-stage Gen Y is approximately 4.3 million people larger than the next age category born from 1966 to 1975, Gen X, and is considered to be in the peak home-buying years. Gen Y represents prime first-time home buyerswho may be attracted by the affordability, sustainability, diversity and location flexibility of factory-built homes. The age 55 and older category is reported to be the fastest growing segment of theU.S. population. This group is similarly interested in the value proposition; however, they are also motivated by the energy efficiency and low maintenance requirements of systems-built homes, and by the lifestyle offered by planned communities specifically designed for homeowners that fall into this age group. Results of Operations Three Months EndedJune 27, 2020 compared toJune 29, 2019 Net Revenue. Net revenue consisted of the following for the three months endedJune 27, 2020 andJune 29, 2019 , respectively (dollars in thousands, except net factory-built housing revenue per home sold): Three Months Ended June 27, June 29, 2020 2019 Change % Change Net revenue: Factory-built housing$ 238,090 $ 248,768 $ (10,678) (4.3) % Financial services 16,711 15,274 1,437 9.4 %$ 254,801 $ 264,042 $ (9,241) (3.5) % Total homes sold 3,349 3,807 (458) (12.0) %
Net factory-built housing revenue per home sold
8.8 % In the factory-built housing segment, the decrease in Net revenue for the three months endedJune 27, 2020 compared to the same period last year was primarily from 12% lower home sales volume from challenges related to the COVID-19 pandemic. This was partially offset by higher home selling prices and changes in product mix compared to the prior year. 31 -------------------------------------------------------------------------------- Table of Contents 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 centers ("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 these distribution channels between reporting periods impact the overall net revenue per home sold. For the three months endedJune 27, 2020 , the Company sold 2,597 homes Wholesale and 752 homes Retail versus 3,058 homes Wholesale and 749 homes Retail in the comparable prior year period. Further, fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, which result from home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Our 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, the Company has experienced, and expects to continue to experience, volatility in overall net factory-built housing revenue per home sold. Financial services segment revenue increased for the three months endedJune 27, 2020 from greater unrealized gains on investments in the insurance subsidiary's portfolio, an increase in home loan sales compared to the prior year period and more insurance policies in force in the current year compared to the prior year. The overall increase is partially offset by lower interest income earned on the acquired loan portfolios that continue to amortize. Gross Profit. Gross profit consisted of the following for the three months endedJune 27, 2020 andJune 29, 2019 , respectively (in thousands): Three Months Ended June 27, June 29, 2020 2019 $ Change % Change Gross profit: Factory-built housing$ 46,992 $ 52,135 $ (5,143) (9.9) % Financial services 8,331 8,163 168 2.1 %$ 55,323 $ 60,298 $ (4,975) (8.3) %
Gross profit as % of Net revenue: Consolidated 21.7 % 22.8 % N/A (1.1) % Factory-built housing 19.7 % 21.0 % N/A (1.3) % Financial services 49.9 % 53.4 % N/A (3.5) % Factory-built housing Gross profit and Gross profit as a percentage of Net revenue for the three months endedJune 27, 2020 decreased primarily from lower sales volume and production inefficiencies caused by the COVID-19 pandemic. Gross profit as a percentage of Net revenue decreased as a result of higher weather related claims volume at our insurance subsidiary and lower interest income earned on the acquired loan portfolios that continue to amortize. 32 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expenses. Selling, general and administrative expenses consisted of the following for the three months endedJune 27, 2020 andJune 29, 2019 , respectively (in thousands): Three Months Ended June 27, June 29, 2020 2019 $ Change % Change Selling, general and administrative expenses: Factory-built housing$ 30,737 $ 30,751 $ (14) - % Financial services 4,586 4,513 73 1.6 %$ 35,323 $ 35,264 $ 59 0.2 % Selling, general and administrative expenses as % of Net revenue: 13.9 % 13.4 % N/A 0.5 % Selling, general and administrative expenses related to factory-built housing remained consistent between periods. Increases in salaries and employee related expenses during the current period were offset by a reduction in legal expenses. Expenses related to theSEC inquiry during the three months endedJune 27, 2020 were$0.1 million , net of a$0.5 million insurance recovery of priorSEC related expenses. For the three months endedJune 29, 2019 , the Company incurred$0.8 million in costs related to the Company's response to theSEC inquiry. Selling, general and administrative expenses related to financial services were relatively consistent each period. Interest Expense. Interest expense was$0.2 million and$0.5 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. Interest expense consists primarily of debt service on the CountryPlace financings of manufactured home-only loans and interest related to finance leases. The decrease for the three months endedJune 27, 2020 is primarily the result of a reduction in securitized bond interest expense, as the Company exercised its right to repurchase the 2007-1 securitized loan portfolio inAugust 2019 , thereby eliminating the related interest expense. This decrease is partially offset by increases in interest expense from secured credit facilities at CountryPlace. Other Income, net. Other income primarily consists of realized and unrealized gains and losses on corporate marketable equity investments, interest income related to commercial loans receivable balances, interest income earned on cash balances and gains and losses (including impairments) from the sale of property, plant and equipment. Other income, net was$1.9 million and$2.8 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. The decrease is primarily from a$0.9 million reduction in interest earned on cash balances and commercial loans receivables, given the lower interest rate environment. Income Before Income Taxes. Income before income taxes consisted of the following for the three months endedJune 27, 2020 andJune 29, 2019 , respectively (in thousands): Three Months Ended June 27, June 29, 2020 2019 $
Change % Change
Income before income taxes:
Factory-built housing$ 18,450 $ 24,313 $ (5,863) (24.1) % Financial services 3,230 3,049 181 5.9 %$ 21,680 $ 27,362 $ (5,682) (20.8) % 33
-------------------------------------------------------------------------------- Table of Contents Income tax expense. Income tax expense was$5.0 million and$6.1 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, for an effective income tax rate for the 2021 first quarter of 23.1% compared to an effective tax rate of 22.2% for the same period last year. The higher effective tax rate in the current quarter was primarily due to lower tax benefits from the exercise of stock options, which provided a benefit of$0.3 million compared to the$0.6 million in the same period last year. Liquidity and Capital Resources The Company believes that cash and cash equivalents atJune 27, 2020 , together with cash flow from operations, will be sufficient to fund its operations and provide for growth for the next 12 months and into the foreseeable future. The Company maintains cash inU.S. Treasury and other money market funds, some of which are in excess of federally insured limits. The Company expects 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 the Company's liquidity and capital resources. The acquisition ofDestiny Homes did not have a significant impact on our liquidity or capital resources. Because of the Company's sufficient cash position, the Company has not historically sought external sources of liquidity, with the exception of certain credit facilities for its home-only lending programs. However, depending on the Company's operating results and strategic opportunities, it may need to seek additional or alternative sources of financing. 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 the Company to reevaluate its long-term operating plans to make more efficient use of its existing capital resources. The exact nature of any changes to the Company's plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of the Company's 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 the Company's insurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. The Company believes that stockholders' equity at its insurance subsidiary remains sufficient and does not believe that its ability to pay ordinary dividends to Cavco will be restricted per state regulations. The following is a summary of the Company's cash flows for the three months endedJune 27, 2020 andJune 29, 2019 , respectively (in thousands): Three Months Ended June 27, June 29, 2020 2019 $ Change Cash, cash equivalents and restricted cash at beginning of the fiscal year$ 255,607 $ 199,869 $ 55,738 Net cash provided by operating activities 35,692 16,798 18,894 Net cash provided by (used in) investing activities 105 (1,469) 1,574 Net cash used in financing activities (922) (2,174) 1,252 Cash, cash equivalents and restricted cash at end of the period$ 290,482 $
213,024
Net cash provided by operating activities increased during the three months endedJune 27, 2020 , compared to the three months endedJune 29, 2019 primarily from decreased finished goods inventories at Company-owned stores, lower levels of commercial lending, higher accrued taxes and sales of consumer loans, partially offset by lower net income and more consumer loans originated. Consumer loan originations increased by$9.8 million to$47.4 million for the three months endedJune 27, 2020 from$37.6 million for the three months endedJune 29, 2019 . Proceeds from sales of consumer loans provided$39.3 million in cash, compared to$37.6 million in the previous year. 34 -------------------------------------------------------------------------------- Table of Contents With respect to consumer lending for the purchase of manufactured housing, states may classify manufactured homes for both legal and tax purposes as personal property rather than real estate. As a result, financing for the purchase of manufactured homes is characterized by shorter loan maturities and higher interest rates. Unfavorable changes in these factors may have material negative effects on the Company's results of operations and financial condition. See Item IA, "Risk Factors" in the Company's Form 10-K. Cavco has entered into commercial loan arrangements with certain distributors of its products under which the Company provides funds for Wholesale purchases. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes. The Company has 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, the Company has invested in and developed 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. Investing activities primarily consist of buying and selling bonds and equity securities in our Financial Services segment to support the operational strategies. As compared to the same period last year, the Company used$1.0 million less on purchases, while proceeds and distributions provided$0.5 million more during the three months endedJune 27, 2020 . Financing activities used$1.3 million less cash during the period compared to the same period last year, from lower payments of taxes for employees' net exercise of stock options, as well as lower payments on securitized financings, as the Company repurchased the 2007-1 securitized loan portfolio inAugust 2019 . Financings. The Company's finance subsidiary entered into secured credit facilities with independent third-party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods, which have now expired. The proceeds were used by the Company to originate and hold consumer home-only loans secured by manufactured homes, which are pledged as collateral to the facilities. Upon completion of the draw down periods, the facilities were converted into an amortizing loan based on a 20-year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program was 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As ofJune 27, 2020 , the outstanding balance of the converted loans was$10.2 million at a weighted average interest rate of 4.91%. Contractual Commitments and Contingencies. There were no material changes to the contractual obligations as set forth in the Company's Annual Report on Form 10-K. Critical Accounting Policies OnMarch 29, 2020 , the Company adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments. We adopted the standard by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. Refer to Note 1 to the Consolidated Financial Statements for additional discussion. There have been no other significant changes to the Company's critical accounting policies during the three months endedJune 27, 2020 , as compared to those disclosed in Part II, Item 7 of the Company's Form 10-K, under the heading "Critical Accounting Policies," which provides a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements. Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements for a discussion of recently issued and adopted accounting pronouncements. 35
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Table of Contents Other Matters Related Party Transactions. See Note 21 to the Consolidated Financial Statements for a discussion of the Company's related party transactions. Off Balance Sheet Arrangements See Note 16 to the Consolidated Financial Statements for a discussion of the Company's off-balance sheet commitments, which discussion is incorporated herein by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in the Form 10-K. Item 4. Controls and Procedures (a) Disclosure Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer concluded that, as ofJune 27, 2020 , its disclosure controls and procedures were effective. (b) Changes in Internal Control over Financial Reporting There have been no changes in the Company's internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter endedJune 27, 2020 , which have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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