Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-31.1
a20181229-exhibit311.htm
EX-31.2
a20181229-exhibit312.htm
EX-32
a20181229-exhibit32.htm
Cavco Industries Earnings 2018-12-29
CVCO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 cvco-20181229x10q.htm 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-08822
Cavco Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
56-2405642
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3636 North Central Avenue, Suite 1200
Phoenix, Arizona 85012
(Address of principal executive offices, including zip code)
602-256-6263
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of February 1, 2019, 9,098,320 shares of Registrant's Common Stock, $.01 par value, were outstanding.
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc., and its subsidiaries (collectively, the "Company" or "Cavco"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these statements include all of the normal recurring adjustments necessary to fairly state the Company's Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC; and except for the events set forth in Note 22 of the Consolidated Financial Statements Notes ("Notes") of the Company's Quarterly Report on Form 10-Q for the period ended December 29, 2018 ("Form 10-Q"), there were no disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes included in the Company's 2018 Annual Report on Form 10-K for the year ended March 31, 2018, filed with the SEC on May 30, 2018 ("Form 10-K").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. Actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31 of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31. The Company's current fiscal year will end on March 30, 2019.
The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designs and builds a wide variety of affordable manufactured homes, modular homes and park model RVs in 20 factories located throughout the United States, which are sold to a network of independent retailers, through the Company's 38 Company-owned retail stores and to community owners and developers. Our financial services group is comprised of a mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer which offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Standard Casualty provides property and casualty insurance to owners of manufactured homes.
4
Adoption of New Accounting Standards.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASC 606 using the modified retrospective method for contracts that were not completed as of April 1, 2018, and recorded a reduction of $600,000 to accrued liabilities and a corresponding increase to retained earnings related to gross margin on home sales that were previously deferred for the cumulative effect of the adoption. Prior periods were not restated. There were no significant changes to processes or internal controls as a result of the adoption of ASC 606. See Note 2 for additional information.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The Company adopted ASU 2016-01 on April 1, 2018 using the modified retrospective transition method. Upon adoption, we reclassified $1.6 million in gains, net of tax, related to available-for-sale equity investment securities from accumulated other comprehensive income to retained earnings as a cumulative-effect adjustment. Under the new guidance, these securities will continue to be measured at fair value; however, the changes in unrealized net holding gains and losses will be reported in earnings instead of recording these amounts in Accumulated other comprehensive income on the
Consolidated Balance Sheet. Comparative information continues to be reported under the accounting standards in effect for the period. The effect of the change for the three and nine months ended December 29, 2018 was a decrease in income before income taxes of $2.9 million and $1.5 million, respectively, which impacts either Net revenue or Other income, net on the Consolidated Statements of Comprehensive Income, depending on the nature of the investment.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) ("ASU 2016-18"), which requires restricted cash to be included with cash and cash equivalents when reconciling beginning and ending cash on the statement of cash flows. The Company adopted ASU 2016-18 on April 1, 2018 using the retrospective transition method. The comparative information in our Consolidated Statements of Cash Flows has been adjusted accordingly. The impact from adoption of this guidance was not material to our Consolidated Statements of Cash Flows. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying Consolidated Balance Sheets to the combined amounts shown on the Consolidated Statements of Cash Flows (in thousands):
December 29, 2018
December 30, 2017
Cash and cash equivalents
$
192,869
$
138,974
Restricted cash, current
11,284
9,993
Restricted cash
454
728
$
204,607
$
149,695
Accounting Standards Issued But Not Yet Adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require balance sheet recognition of leased assets and lease liabilities for most leases, and recognition of expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. The Company will utilize the FASB's optional transition method, which allows leases to be recognized and measured at the date of adoption. The Company does not plan to early adopt the guidance and is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.
5
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to base measurement on expected losses through a forward-looking model rather than a model based on incurred losses. The guidance also requires increased disclosures. ASU 2016-13 will be effective beginning with the first quarter of the Company's fiscal year 2021 and is to be applied using a modified retrospective transition method with early adoption permitted. The Company does not plan to early adopt the guidance and is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017-08 will be effective beginning with the first quarter of the Company's fiscal year 2020. The Company is currently evaluating the effect ASU 2017-08 will have on the Company's Consolidated Financial Statements and disclosures.
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
For a description of other significant accounting policies used by the Company in the preparation of its Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements on Form 10-K.
2. Revenue from Contracts with Customers
As discussed in Note 1, the Company adopted ASC 606 on April 1, 2018. Our revenue recognition practices under ASC 606 do not differ materially from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when, or as, the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
Factory-Built Housing Revenue Recognition - Wholesale. Revenue from homes sold to independent retailers is generally recognized when the home is shipped, at which time title passes to the independent retailer and collectability is reasonably assured. Homes sold to independent retailers are generally either paid upon shipment or floor plan financed by the independent retailer through standard industry financing arrangements, which can include repurchase agreements. Manufacturing sales financed under repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 16).
Prior to the adoption of ASC 606, revenue from homes sold under commercial loan programs involving funds provided by the Company were either deferred until such time that payment for the related commercial loan was received by the Company or recognized when the home was shipped and title transferred, depending on the nature of the program and borrower. Upon adoption of ASC 606, we generally recognize home sales revenue upon shipment and transfer of title, as it is probable that substantially all of the consideration in exchange for the goods or services transferred to the customer will be collected. One consideration under the guidance requires the evaluation of the financing component of the related loan program. If it is determined that the interest rate charged under the loan program is less than the market rate, the Company will reduce the transaction price by an amount for deferred interest. In these cases, interest income will be accrued and recognized over the life of the loan using the effective interest method. A significant amount of the Company's loan programs are offered at market rates.
Factory-Built Housing Revenue Recognition - Retail. Sales by Company-owned retail locations are generally recognized when the customer has entered into a legally binding sales contract, the home is delivered and permanently located at the customer's site, accepted by the customer, title has transferred and funding is probable.
6
Site Improvements on Retail Sales. Under previous guidance, the Company recorded the sales of subcontracted ancillary services, such as preparation of the home site or other exterior enhancements, net of associated costs. Such services are provided as a convenience to the customer. As the Company is involved in the selection of subcontractors, under ASC 606, we have concluded that it is appropriate to recognize the sale of these ancillary services on a gross basis. The revenues associated with these programs for the three months ended December 29, 2018 and December 30, 2017 were $5.9 million and $5.5 million, respectively. The revenues associated with these programs for the nine months ended December 29, 2018 and December 30, 2017 were $18.7 million and $15.6 million, respectively.
Additional Items. Expected consideration, and therefore revenue, reflects reductions for returns, allowances, and other incentives, some of which may be contingent on future events. Additionally, we have a volume rebate program under which certain sales to retailers, builders and developers can qualify for cash rebates generally based on the level of sales attained during a twelve-month period. Volume rebates are accrued at the time of sale and are recorded as a reduction of revenue.
In customer contracts for retail sales of manufactured homes, consideration includes certain state and local excise taxes billed to customers when those taxes are levied directly upon us by the taxing authorities. Expected consideration excludes sales and other taxes collected on behalf of taxing authorities. The Company elects to treat consideration for shipping performed as a fulfillment activity. Therefore, revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods.
Practical Expedients and Exemptions. The Company generally expenses sales commissions when incurred because the amortization period would be one year or less. These costs are recorded within selling, general and administrative expenses. In addition, the Company does not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less.
Financial Services Revenue Recognition. Financial services revenue is generally not within the scope of ASC 606, with the exception of insurance agency commissions received from third-party insurance companies. The Company recognizes such revenue upon execution of the insurance policy, where the Company has no future or ongoing obligation.
Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the three and nine months ended December 29, 2018 (in thousands). All revenue from customers is recognized at a point in time, either when the customer takes delivery or when a third-party insurance contract is executed, as more fully discussed above. Other items included in our consolidated revenues are primarily related to financial services, including manufactured housing consumer finance and insurance, which are not within the scope of ASC 606. See Form 10-K for revenue recognition policies related to these items.
7
December 29, 2018
Three Months Ended
Nine Months Ended
Factory-built housing
U.S. Housing and Urban Development code homes
$
174,068
$
545,071
Modular homes
25,698
72,046
Park model RVs
10,037
27,743
Other (1)
10,539
35,338
Net revenue from factory-built housing
220,342
680,198
Financial services
Insurance agency commissions received from third-party insurance companies
704
1,979
Other
12,654
39,456
Net revenue from financial services
13,358
41,435
Total Net revenue
$
233,700
$
721,633
(1)
Other factory-built housing revenue from ancillary products and services including used homes, freight and other services.
Impacts on Consolidated Financial Statements. The impact to our Consolidated Financial Statements as a result of ASC 606 implementation are as follows (in thousands):
December 29, 2018
Consolidated Balance Sheet
As Reported
Adjustments
Balance without ASC 606 Adoption
Accrued liabilities
$
126,228
$
2,488
$
128,716
Total current liabilities
186,108
2,488
188,596
Deferred income taxes
7,001
(668
)
6,333
Retained earnings
260,107
(1,820
)
258,287
Total stockholders' equity
509,072
(1,820
)
507,252
Three Months Ended December 29, 2018
Consolidated Statement of Comprehensive Income
As Reported
Adjustments
Balance without ASC 606 Adoption
Net revenue
$
233,700
$
(8,149
)
$
225,551
Cost of sales
184,679
(7,647
)
177,032
Gross profit
49,021
(502
)
48,519
Selling, general and administrative expenses
30,833
(28
)
30,805
Income from operations
18,188
(474
)
17,714
Income before income taxes
16,947
(474
)
16,473
Income tax expense
(3,563
)
112
(3,451
)
Net income
13,384
(362
)
13,022
8
Nine Months Ended December 29, 2018
Consolidated Statement of Comprehensive Income
As Reported
Adjustments
Balance without ASC 606 Adoption
Net revenue
$
721,633
$
(30,978
)
$
690,655
Cost of sales
571,720
(28,727
)
542,993
Gross profit
149,913
(2,251
)
147,662
Selling, general and administrative expenses
90,081
(472
)
89,609
Income from operations
59,832
(1,779
)
58,053
Income before income taxes
60,600
(1,779
)
58,821
Income tax expense
(11,949
)
413
(11,536
)
Net income
48,651
(1,366
)
47,285
3. Restricted Cash
Restricted cash consists of the following (in thousands):
December 29, 2018
March 31, 2018
Cash related to CountryPlace customer payments to be remitted to third parties
$
9,198
$
9,180
Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders
1,090
1,311
Other restricted cash
1,450
2,001
$
11,738
$
12,492
Corresponding amounts are recorded in accounts payable and accrued liabilities for customer payments, deposits and other restricted cash.
4. Investments
Investments consist of the following (in thousands):
December 29, 2018
March 31, 2018
Available-for-sale debt securities
$
14,445
$
16,181
Marketable equity securities
9,572
10,405
Non-marketable equity investments
19,666
18,853
$
43,683
$
45,439
The Company's investments in marketable equity securities consist of common stock holdings of industrial and other companies.
Non-marketable equity investments includes $15.0 million as of December 29, 2018 and March 31, 2018, of contributions to equity-method investments in community-based initiatives that buy and sell our homes and provide home-only financing to residents of certain manufactured home communities. Other non-marketable investments include investments in other distribution operations.
The following tables summarize the Company's available-for-sale debt securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
The following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
December 29, 2018
Less than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Treasury and government debt securities
$
—
$
—
$
295
$
(5
)
$
295
$
(5
)
Residential mortgage-backed securities
402
(6
)
5,414
(149
)
5,816
(155
)
State and political subdivision debt securities
—
—
3,379
(79
)
3,379
(79
)
Corporate debt securities
524
(28
)
1,068
(21
)
1,592
(49
)
$
926
$
(34
)
$
10,156
$
(254
)
$
11,082
$
(288
)
March 31, 2018
Less than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Treasury and government debt securities
$
293
$
(7
)
$
—
$
—
$
293
$
(7
)
Residential mortgage-backed securities
3,185
(52
)
3,909
(103
)
7,094
(155
)
State and political subdivision debt securities
2,224
(40
)
2,180
(109
)
4,404
(149
)
Corporate debt securities
1,384
(12
)
367
(18
)
1,751
(30
)
$
7,086
$
(111
)
$
6,456
$
(230
)
$
13,542
$
(341
)
Based on the Company's ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at December 29, 2018.
The amortized cost and fair value of the Company's investments in debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The Company recognizes investment gains and losses on debt securities when we sell or otherwise dispose of securities on a specific identification method. There were no gross gains or losses realized during the three and nine months ended December 29, 2018. There were no gross gains realized during the three and nine months ended December 30, 2017. Gross losses realized were $18,000 and $28,000 for three and nine months ended December 30, 2017, respectively.
Beginning in fiscal year 2019, we recognize unrealized gains and losses on marketable equity securities from changes in market prices during the period as a component of earnings in the Consolidated Statements of Comprehensive Income. See Note 1 for further discussion. Net investment gains and losses for the three and nine months ended December 29, 2018 and December 30, 2017 are as follows (in thousands):
Three Months Ended
Nine Months Ended
December 29, 2018
December 30, 2017
December 29, 2018
December 30, 2017
Marketable equity securities:
Net losses on securities held
$
(2,996
)
$
—
$
(1,698
)
$
—
Net gains (losses) on securities sold
11
—
(42
)
—
Gross realized gains
—
147
—
882
Gross realized losses
—
(23
)
—
(135
)
Total net (loss) gain on marketable equity securities
$
(2,985
)
$
124
$
(1,740
)
$
747
5. Inventories
Inventories consist of the following (in thousands):
December 29, 2018
March 31, 2018
Raw materials
$
35,693
$
36,124
Work in process
11,860
13,670
Finished goods and other
67,856
59,358
$
115,409
$
109,152
6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
December 29, 2018
March 31, 2018
Loans held for investment (at Acquisition Date)
$
46,177
$
51,798
Loans held for investment (originated after Acquisition Date)
The allowance for loan losses is developed at the loan level and allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the loan characteristics, and historical loss experience. The Company then makes a determination of the best estimate within the range of loan losses. The allowance for loan losses reflects the Company's judgment of the probable loss exposure on its loans held for investment portfolio.
As of the date of the Palm Harbor acquisition ("Acquisition Date"), the Company determined the excess of the loan pool's scheduled contractual principal and interest payments over all cash flows expected as an amount that includes interest that cannot be accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans includes interest that is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as Net revenue.
December 29, 2018
March 31, 2018
(in thousands)
Consumer loans receivable held for investment – contractual amount
$
105,677
$
120,096
Purchase discount
Accretable
(38,657
)
(44,481
)
Non-accretable
(20,672
)
(23,711
)
Less consumer loans receivable reclassified as other assets
(171
)
(106
)
Total acquired consumer loans receivable held for investment, net
$
46,177
$
51,798
Over the life of the acquired loans, the Company estimates cash flows expected to be collected to determine if an allowance for loan loss related to loans acquired subsequent to the Acquisition Date is required. The weighted averages of assumptions used in the calculation of expected cash flows to be collected were as follows:
December 29, 2018
March 31, 2018
Prepayment rate
16.8
%
16.0
%
Default rate
1.1
%
1.2
%
Assuming there was a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows for the life of the portfolio, as of December 29, 2018, would decrease by approximately $1.0 million and $2.9 million for the expected prepayment rate and expected default rate, respectively.
The changes in accretable yield on acquired consumer loans receivable held for investment were as follows (in thousands):
Consumer loans held for investment had the following characteristics:
December 29, 2018
March 31, 2018
Weighted average contractual interest rate
8.49
%
8.57
%
Weighted average effective interest rate
9.19
%
9.34
%
Weighted average months to maturity
163
168
The following table disaggregates the Company's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. As of December 29, 2018, 43.7% of the outstanding principal balance of the consumer loans receivable portfolio is concentrated in Texas and 11.2% is concentrated in Florida. As of March 31, 2018, 44.2% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 11.0% was concentrated in Florida. Other than Texas and Florida, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of December 29, 2018 or March 31, 2018.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is recorded to allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $2.3 million and $1.5 million as of December 29, 2018 and March 31, 2018, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheet. Foreclosure or similar proceedings in progress totaled approximately $1.8 million and $1.1 million as of December 29, 2018 and March 31, 2018, respectively.
7. Commercial Loans Receivable and Allowance for Loan Losses
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent retailers, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.
Under the terms of the direct programs, the Company provides funds for independent retailers, communities and developers' financed home purchases. Notes are secured by the homes as collateral and, in some instances, other security depending on the circumstances. The other terms of direct arrangements vary depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases. The participation commercial loan receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivable, net, consisted of the following by class of financing notes receivable (in thousands):
December 29, 2018
March 31, 2018
Direct loans receivable
$
36,849
$
16,368
Participation loans receivable
532
275
Allowance for loan losses
(160
)
(42
)
Deferred financing fees, net
(182
)
—
$
37,039
$
16,601
The commercial loans receivable balance had the following characteristics:
December 29, 2018
March 31, 2018
Weighted average contractual interest rate
6.0
%
4.6
%
Weighted average months to maturity
6
6
The Company evaluates the potential for loss from its participation loan programs based on each independent lender's overall financial stability, as well as historical experience, and has determined that an allowance for loan losses was not needed at December 29, 2018 or March 31, 2018.
With respect to direct programs with communities and developers, borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. For direct programs with independent retailers, the risk of loss is spread over numerous borrowers. Borrower activity is monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related notes receivable, considering potential exposures, including repossession costs, remarketing expenses, impairment of value and the risk of collateral loss. The Company has historically been able to resell repossessed unused homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan losses. The Company recorded an allowance for loan losses of $160,000 and $153,000 at December 29, 2018 and December 30, 2017, respectively.
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses applicable to the direct programs (in thousands):
Three Months Ended
Nine Months Ended
December 29, 2018
December 30, 2017
December 29, 2018
December 30, 2017
Balance at beginning of period
$
135
$
242
$
42
$
210
Provision for inventory finance credit losses
25
(89
)
118
(57
)
Loans charged off, net of recoveries
—
—
—
—
Balance at end of period
$
160
$
153
$
160
$
153
The following table disaggregates commercial loans receivable and the estimated allowance for loan losses for each class of financing receivable by evaluation methodology (in thousands):
Direct Commercial Loans
Participation Commercial Loans
December 29, 2018
March 31, 2018
December 29, 2018
March 31, 2018
Inventory finance notes receivable:
Collectively evaluated for impairment
$
16,049
$
4,193
$
—
$
—
Individually evaluated for impairment
20,800
12,175
532
275
$
36,849
$
16,368
$
532
$
275
Allowance for loan losses:
Collectively evaluated for impairment
$
(160
)
$
(42
)
$
—
$
—
Individually evaluated for impairment
—
—
—
—
$
(160
)
$
(42
)
$
—
$
—
Loans are subject to regular review and are given management's attention whenever a potential default appears to be developing. Loans with indicators of possible performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments past due 90 days or more. The Company's policy is to place loans on nonaccrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At December 29, 2018, there are no commercial loans that are 90 days or more past due that are still accruing interest. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At December 29, 2018, the Company was not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
The following table disaggregates the Company's inventory finance receivables by class and credit quality indicator (in thousands):
The Company has concentrations of commercial loans receivable related to factory-built homes in excess of 10% located in the following states, measured as a percentage of commercial loans receivables principal balance outstanding:
December 29, 2018
March 31, 2018
Arizona
14.2
%
16.7
%
California
13.3
%
14.4
%
Texas
13.1
%
9.0
%
Oregon
11.0
%
14.7
%
The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan losses. The Company did not have concentrations in excess of 10% of the principal balance of the commercial loans receivables in any other states as of December 29, 2018 or March 31, 2018.
As of December 29, 2018 and March 31, 2018, the Company had concentrations with one independent third-party that equaled 16.7% and 37.4% of the principal balance outstanding, respectively, all of which was secured.
8. Property, Plant and Equipment
Property, plant and equipment, net, consisted of the following (in thousands):
December 29, 2018
March 31, 2018
Property, plant and equipment, at cost:
Land
$
24,370
$
24,001
Buildings and improvements
42,630
39,613
Machinery and equipment
26,171
24,154
93,171
87,768
Accumulated depreciation
(26,793
)
(24,413
)
$
66,378
$
63,355
Depreciation expense was $1.1 million and $3.2 million for the three and nine months ended December 29, 2018, respectively. Depreciation expense of $933,000 and $2.7 million was recognized during the three and nine months ended December 30, 2017, respectively.
Included in the amounts above are certain assets under capital leases. See Note 9 for additional information.
On April 3, 2017, in connection with the purchase of Lexington Homes, the Company recorded capital leases on manufacturing facilities and land in Lexington, Mississippi. The following amounts were recorded for the leased assets as of December 29, 2018 and March 31, 2018 (in thousands):
December 29, 2018
March 31, 2018
Land
$
699
$
699
Buildings and improvements
1,050
1,050
1,749
1,749
Accumulated amortization
(61
)
(35
)
Leased assets, net
$
1,688
$
1,714
Future minimum payments under the leases as of December 29, 2018 were as follows (in thousands):
FY 2019
$
34
FY 2020
766
FY 2021
73
FY 2022
73
FY 2023
73
Thereafter
195
Total remaining lease payments
1,214
Less: Amount representing interest
(119
)
Present value of future minimum lease payments
$
1,095
10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
December 29, 2018
March 31, 2018
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Indefinite-lived:
Goodwill
$
72,920
$
—
$
72,920
$
72,920
$
—
$
72,920
Trademarks and trade names
7,200
—
7,200
7,200
—
7,200
State insurance licenses
1,100
—
1,100
1,100
—
1,100
Total indefinite-lived intangible assets
81,220
—
81,220
81,220
—
81,220
Finite lived:
Customer relationships
7,100
(5,916
)
1,184
7,100
(5,756
)
1,344
Other
1,384
(1,012
)
372
1,384
(928
)
456
$
89,704
$
(6,928
)
$
82,776
$
89,704
$
(6,684
)
$
83,020
Amortization expense recognized on intangible assets was $80,000 and $244,000 during the three and nine months ended December 29, 2018, respectively. Amortization expense recognized on intangible assets was $92,000 and $276,000 during the three and nine months ended December 30, 2017, respectively.
Accrued liabilities consisted of the following (in thousands):
December 29, 2018
March 31, 2018
Salaries, wages and benefits
$
22,654
$
24,416
Customer deposits
17,916
21,294
Estimated warranties
17,542
16,638
Unearned insurance premiums
17,312
17,432
Accrued volume rebates
11,191
7,778
Insurance loss reserves
7,465
6,157
Company repurchase option on certain loans sold
4,711
5,637
Accrued insurance
4,522
5,320
Reserve for repurchase commitments
2,399
2,207
Accrued taxes
1,239
1,986
Capital lease obligation
1,095
1,155
Other
18,182
16,480
$
126,228
$
126,500
12. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
Three Months Ended
Nine Months Ended
December 29, 2018
December 30, 2017
December 29, 2018
December 30, 2017
Balance at beginning of period
$
16,905
$
16,470
$
16,638
$
15,479
Purchase accounting additions
—
—
—
838
Charged to costs and expenses
10,665
5,907
23,607
18,529
Payments and deductions
(10,028
)
(6,337
)
(22,703
)
(18,806
)
Balance at end of period
$
17,542
$
16,040
$
17,542
$
16,040
13. Debt Obligations
Debt obligations primarily consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt obligations (in thousands):
December 29, 2018
March 31, 2018
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
Securitized financing 2005-1
$
19,195
$
20,524
Securitized financing 2007-1
19,248
22,552
Other secured financings
4,813
4,966
Secured credit facilities
11,360
11,770
$
54,616
$
59,812
Acquired securitized financings were recorded at fair value at the time of acquisition, which resulted in a discount, and subsequently are accounted for in a manner similar to ASC 310-30 to accrete the discount.
The following table summarizes acquired securitized financings (in thousands):
December 29, 2018
March 31, 2018
Securitized financings – contractual amount
$
39,511
$
46,591
Purchase discount
Accretable
(1,068
)
(3,515
)
Non-accretable (1)
—
—
Total acquired securitized financings, net
$
38,443
$
43,076
(1) There is no non-accretable difference, as the contractual payments on acquired securitized financings are determined by the cash collections from the underlying loans.
Over the life of the loans, the Company continues to estimate cash flows expected to be paid on securitized financings. The Company evaluates at the balance sheet date whether the present value of its securitized financings, determined using the effective interest rate, has increased or decreased. The present value of any subsequent change in cash flows expected to be paid adjusts the amount of accretable yield recognized on a prospective basis over the securitized financing's remaining life.
The changes in accretable yield on securitized financings were as follows (in thousands):
Three Months Ended
Nine Months Ended
December 29, 2018
December 30, 2017
December 29, 2018
December 30, 2017
Balance at the beginning of the period
$
1,834
$
5,709
$
3,515
$
7,636
Accretion
(764
)
(820
)
(2,341
)
(2,536
)
Adjustment to cash flows
(2
)
(110
)
(106
)
(321
)
Balance at the end of the period
$
1,068
$
4,779
$
1,068
$
4,779
Prior to the Acquisition Date, CountryPlace completed its initial securitization (2005-1), which was structured as a securitized borrowing. At the balance sheet dates of December 29, 2018 and March 31, 2018, only Class A-4, originally totaling $27.4 million with a coupon rate of 5.20%, remained outstanding, with a call date in January 2019. On January 15, 2019, the Company exercised its right to repurchase the 2005-1 securitized loan portfolio for $19.4 million in cash, which includes $210,000 in interest and fees. Additionally, CountryPlace completed its second securitized borrowing (2007-1), of which only Class A-4 originally totaling $25.1 million with a coupon rate of 5.846% remained outstanding at December 29, 2018 and March 31, 2018, with a call date in July 2019. It is anticipated that the Company will repurchase or refinance this outstanding facility at or prior to the call date.
CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time overcollateralization reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of December 29, 2018, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
The Company has 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. The proceeds are 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 period, the facilities are converted into an amortizing loan based on a 20 or 25 year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program is 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As of December 29, 2018, the outstanding balance of the converted loans was $11.4 million at a weighted average interest rate of 4.9%, with $5.0 million available to draw. Upon draw, amounts will bear interest at 5.15%. Once converted, the initial annual interest rate of 5.15% will adjust every 5 years beginning in 2024 to Prime plus 0.40%. The per annum interest rate will never be less than 5.00% or greater than 6.00%.
14. Reinsurance
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned are as follows (in thousands):