Introduction
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the related Notes that appear in Item 1 of this Report.
References to "Note" or "Notes" refer to the Notes to the Company's Consolidated
Financial Statements.
Overview
Headquartered in Phoenix, Arizona, the Company designs and produces
factory-built homes primarily distributed through a network of independent and
company-owned retailers. We are the second largest producer of manufactured
homes in the United States, based on reported wholesale shipments, marketed
under a variety of brand names including Cavco Homes, Fleetwood Homes, and Palm
Harbor Homes. The Company is also a leading producer of modular homes built
primarily under the Nationwide Homes brand, as well as park model homes,
vacation cabins, and systems-built commercial structures. Our mortgage
subsidiary, CountryPlace, is an approved Fannie Mae and Ginnie Mae
seller/servicer and offers conforming mortgages to purchasers of factory-built
and site-built homes. Our insurance subsidiary, Standard, provides property and
casualty insurance to owners of manufactured homes.
Company Growth
On June 30, 2003, Cavco became a stand-alone publicly held company after
previously operating as a wholly-owned subsidiary of Centex Corporation. Cavco's
manufactured home factories and retail operations were historically located in
and primarily served the Southwest and South Central United States housing
markets.
On August 17, 2009, the Company and an investment partner, Third Avenue Value
Fund, acquired certain manufactured housing assets and liabilities of Fleetwood
Enterprises, Inc. through their jointly owned corporation, Fleetwood Homes, Inc.
("Fleetwood"). Third Avenue Management is an investment advisor to Third Avenue
Value Fund and is a principal stockholder of the Company, as described further
in Note 20.
On November 29, 2010, Fleetwood, through its wholly-owned subsidiary, Palm
Harbor Homes, Inc., a Delaware corporation ("Palm Harbor" or "Palm Harbor
Delaware"), entered into an agreement (the "Purchase Agreement") with Palm
Harbor Homes, Inc., a Florida corporation and certain of its subsidiaries
("Seller") to purchase substantially all of the assets and assume specified
liabilities of Seller, pursuant to an auction process under Section 363 of the
U.S. Bankruptcy Code. On April 23, 2011 (the "Palm Harbor Acquisition Date"),
Palm Harbor completed the purchase of Seller's assets and the assumption of
specified liabilities, except for Palm Harbor's acquisition of the stock of
Standard Casualty Co. ("Standard"), pursuant to the Amended and Restated Asset
Purchase Agreement dated March 1, 2011. The aggregate gross purchase price was
$83.9 million, exclusive of transaction costs, specified liabilities assumed and
post-closing adjustments (these adjustments have been recorded). Of the purchase
price, (i) approximately $45.3 million was used to retire a debtor-in-possession
loan previously made by Fleetwood to Seller; and (ii) $13.4 million was
deposited in escrow pending regulatory approval to transfer the stock of
Standard to Palm Harbor. The purchase price was funded by Fleetwood's cash on
hand along with equal contributions from the Company and Third Avenue Value
Fund. On June 7, 2011, regulatory approval of the acquisition of Standard was
received from the Texas Department of Insurance and on June 10, 2011, Palm
Harbor completed the purchase of Standard. Subsequent to the transaction, a
portion of Third Avenue Value Fund's interest in Fleetwood was transferred to an
affiliate along with the applicable rights and obligations. This transfer had no
impact on Cavco's ownership interest. Third Avenue Value Fund and its affiliate
are hereinafter collectively referred to as "Third Avenue." See Notes 19 and 20
for further information.
Financial information for Fleetwood is included in the Company's Consolidated
Financial Statements and related Notes. The Company and Third Avenue have each
contributed $71.0 million in exchange for equal ownership interests in
Fleetwood. Although the Company holds a fifty-percent financial interest in
Fleetwood, its results of operations are required to be fully consolidated.
Third Avenue's financial interest in Fleetwood is considered a "redeemable
noncontrolling interest," and is designated as such in the Consolidated
Financial Statements (see Notes 1 and 19).
The Palm Harbor transaction included five operating manufactured housing
production facilities, idled factories in nine locations, 49 operating retail
locations, one office building, real estate, all related equipment, accounts
receivable, customer deposits, inventory, certain trademarks and trade names,
intellectual property, specified contracts and leases, and certain liabilities
including debt facilities of CountryPlace. Palm Harbor purchased all of the
outstanding shares of CountryPlace Acceptance Corp. and its wholly-owned finance
subsidiaries (collectively, "CountryPlace") and all of the outstanding shares of
Standard. Neither Palm Harbor nor the Company incurred any debt in connection
with the transaction, other than the assumed CountryPlace debt facilities.
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The transaction further expanded the Company's geographic reach at a national
level by adding factories and retail locations serving the West, South Central,
and Mid and South Atlantic regions. The Company believes it will have the
opportunity to achieve certain synergies and cost efficiencies by reducing
redundant processes and overhead.
Palm Harbor's brand recognition is accompanied by its reputation for producing
high quality products with exceptional service after the sale. Strategically,
the Palm Harbor transaction strengthened the Company's position in Texas and
surrounding states, which have traditionally been among the strongest regions of
demand for manufactured housing. We also gained a direct presence in Florida,
which has improved our ability to serve a historically large market for our
industry. Nationwide Homes, a Palm Harbor brand based in Virginia, builds an
innovative and creative line of larger single and multi-story modular homes
constructed to conform to state and local building codes. Nationwide Homes sells
to local builders, developers and development projects as well as individuals.
Palm Harbor utilizes unique marketing capabilities including internet and other
methods that have begun to expand to other areas of the Company.
The purchase of the Palm Harbor assets also provided the Company entry into
financial and insurance businesses specific to our industry. Standard is
domiciled in Texas and is primarily a specialty writer of manufactured home
physical damage insurance. Standard holds insurance licenses in multiple states;
however, a significant portion of its writing occurs in Texas. In addition to
writing direct policies, Standard assumes and cedes reinsurance in the ordinary
course of business (see Note 12). In Texas, the policies are written through one
affiliated managing general agent, which produces all premiums, except surety,
through local agents, most of which are manufactured home retailers. All
business outside the state of Texas is written on a direct basis through local
agents.
CountryPlace originates and services factory-built housing mortgage loans in
connection with the retail sale of homes built and sold by the Company and
others. The loans are secured by the underlying homes. CountryPlace services,
for itself and others, conforming mortgages, non-conforming land-home mortgages
and manufactured home chattel loans. CountryPlace is authorized by the U.S.
Department of Housing and Urban Development ("HUD") to directly endorse Federal
Housing Administration ("FHA") Title I and Title II mortgage insurance, is
approved by the Government National Mortgage Association ("GNMA" or "Ginnie
Mae") to issue GNMA-insured mortgage-backed securities, and is authorized to
sell mortgages to, and service mortgages for, the Federal National Mortgage
Association ("FNMA" or "Fannie Mae").
We are in the process of expanding our product and service offerings throughout
the combined organization by sharing product knowledge, production methods and
marketing strategies, although we intend to maintain separate brand
identification and distinct product lines. The supportive response by our
customer base to the Palm Harbor and Fleetwood acquisitions has been
encouraging. We expect to continue to realize operating efficiency improvements
as a result of our larger size and buying power. We plan to place a consistent
focus on developing synergies among all operations. Overall, we believe that
these expansions and improvements will provide positive long-term strategic
benefits for the Company.
Including the factories listed above, during the quarter ended June 30, 2012,
the Company operated fifteen homebuilding facilities located in Millersburg and
Woodburn, Oregon; Nampa, Idaho; Riverside, California; Phoenix and Goodyear,
Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Lafayette, Tennessee;
Martinsville and Rocky Mount, Virginia; Douglas, Georgia; and Plant City,
Florida.
Cash and cash equivalents of the Company totaled approximately $47.1 million on
June 30, 2012. We believe this level of capitalization should provide sufficient
resources to the operations of the Company to endure continuing depressed market
conditions and to establish a solid base for continued growth as circumstances
improve.
Industry and Company Outlook
The manufactured housing industry and the Company continue to operate at low
production and shipment levels. According to data reported by the Manufactured
Housing Institute ("MHI"), during calendar year 2011, our industry shipped
approximately 52,000 HUD code manufactured homes. This followed approximately
50,000 homes shipped in both calendar years 2010 and 2009, the lowest levels
since 1959, the earliest year for which shipment statistics are available.
Yearly home shipments from 2003 to 2011 were less than the annual home shipments
for each of the 40 years from 1963 to 2002. For the past 10- and 20-year
periods, annual home shipments averaged 91,000 and 193,000, respectively.
General economic challenges including low consumer confidence levels,
unemployment and underemployment, constricted mortgage lending, and overall
housing sector weakness need to improve to spur annual industry and Company
shipment levels. Low consumer confidence in the U.S. economy is not conducive
for potential customers to commit to a home purchase. In addition, sales of our
homes have been negatively affected by high unemployment rates and
underemployment. Consumer financing for the retail purchase of manufactured
homes needs to become generally more available before marked emergence from
current lows can occur. Restrictive underwriting guidelines, irregular appraisal
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processes, higher interest rates compared to site-built homes, regulatory
burdens, reductions in the number of institutions lending to manufactured home
buyers and limited secondary market availability for manufactured home loans are
significant restraints to industry growth. We are working directly and through
industry trade associations to encourage favorable legislative and
government-sponsored enterprise action to address the mortgage financing needs
of potential buyers of affordable homes. Although limited progress has been made
in this area, a meaningful positive impact in the form of increased home orders
at our factories has yet to be realized. See "Regulatory Developments" below.
Competition from excess site-built home inventory is an issue that is also of
concern. Surplus homes creating the oversupply have various sources. Lender
inventories of repossessed site-built homes are significant and liquidation
selling prices are often lower than the current cost to build a similar home.
Some on-site home builders have added lower price point homes to their product
offerings in order to be competitive with lender foreclosure pricing in their
sales areas. The resultant price points are low enough in many cases to compete
with manufactured housing. In turn, competing manufactured home providers are
aggressively pricing their products in efforts to obtain a portion of
constricted overall housing demand. Lower home prices, restrictive underwriting
guidelines, and slow sales activity have also had an adverse impact on the
contingency contract process, wherein potential manufactured home buyers must
sell their existing home in order to facilitate the purchase of a new factory
built home.
The Company operated with low backlogs during the first quarter of fiscal year
2013. The backlog of sales orders at June 30, 2012 varied among our fifteen
factories, but in total was $20.5 million, or approximately three weeks of
current production levels, compared to $20.0 million at June 30, 2011.
Inventory financing for the industry's wholesale distribution chain continues to
be in short supply. Faced with illiquid capital markets in late calendar year
2008, each of the manufactured housing sector's remaining inventory finance
companies (floor plan lenders) initiated significant changes, including one
company's announcement to cease lending activities in this industry entirely.
The involvement of others is subject to more restrictive terms that continue to
evolve and in some cases require the financial involvement of the Company. In
connection with certain of these participation inventory finance programs, the
Company provides a significant amount of the funds that independent financiers
lend to distributors to finance retail inventories of our products. In addition,
the Company has entered into direct inventory finance arrangements with
distributors of our products under which the Company provides all of the
inventory finance funds (see Note 6). The Company's involvement in inventory
finance has increased the availability of manufactured home inventory financing
to distributors of our products. We believe that our expanding involvement in
the wholesale financing of inventory is quite helpful to retailers and allows
our homes continued exposure to potential homebuyers. These initiatives support
the Company's ongoing efforts to expand our distribution base in all of our
markets with existing and new customers. However, the initiatives expose the
Company to risks associated with the creditworthiness of certain customers and
business partners, including independent retailers, developers and inventory
financing partners, many of whom may be adversely affected by the volatile
conditions in the economy and financial markets.
The two largest manufactured housing consumer demographics, young adults and
those who are 55+ years old, are both growing. Young adults, a large segment of
the population sometimes referred to as the echo-boom generation, are projected
to create an increase in household formations. This group represents prime
first-time homebuyers who may be attracted by the affordability, diversity of
style choices and location flexibility of factory-built homes. The age 55 and
older category is reported to be the fastest growing segment of the U.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 that are specifically designed for manufactured-home owners in this
age group.
The national rental vacancy rate has been reported to be declining. Rental
housing competes directly with many of our product offerings, and reductions in
rental availability and increases in the cost of renting may have the effect of
shifting interested buyers to other housing alternatives, including manufactured
homes.
With manufacturing facilities strategically positioned across the nation, we
utilize local market research to design homes to meet the demands of our
customers. We have the ability to customize floor plans and designs to fulfill
specific needs. By offering a full range of homes from entry level models to
large custom homes and with the ability to engineer designs in-house, we can
accommodate virtually any customer request. In addition to homes built to the
Federal HUD code, we construct modular homes that conform to state and local
codes, park models and cabins, and light commercial buildings at many of our
manufacturing facilities.
Company-wide, we have intensified our efforts to identify niche market
opportunities where our diverse product lines and custom building capabilities
provide us with a competitive advantage. Green building involves the creation of
an energy efficient envelope including higher utilization of renewable
materials. These homes provide environmentally-friendly maintenance
requirements, high indoor air quality, specially designed ventilation systems,
passive solar orientation and sustainability. Cavco also builds homes designed
to use alternative energy sources such as solar and wind.
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Building green may significantly reduce greenhouse gas emissions without
sacrificing features, style or comfort. From bamboo flooring and tankless water
heaters to solar-powered homes, our products are diverse and tailored to a wide
range of consumer interests. Innovation in housing design is a forte of the
Company and we continue 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.
We maintain a conservative cost structure, which enables us to build added value
into our homes. We have placed a consistent focus on developing synergies among
all operations. In addition, the Company has worked diligently to maintain a
solid financial position. Our balance sheet strength and position in cash and
cash equivalents should help us to avoid the liquidity problems faced by many
other companies and enable us to act effectively as market opportunities present
themselves.
We were named the "Manufacturer of the Year" by MHI, the factory-built home
industry's national trade organization, for the third consecutive year in 2012.
In addition, both Cavco and Palm Harbor received several design awards from MHI.
These honors are a reflection of our valued employees, customers and vendors and
we appreciate the recognition.
In January 2008, we announced a stock repurchase program. A total of $10.0
million may be used to repurchase our outstanding common stock. The repurchases
may be made in the open market or in privately negotiated transactions in
compliance with applicable state and federal securities laws and other legal
requirements. The level of repurchase activity is subject to market conditions
and other investment opportunities. The plan does not obligate us to acquire any
particular amount of common stock and may be suspended or discontinued at any
time. The repurchase program will be funded using our available cash. No
repurchases have been made under this program to date.
Regulatory Developments
In 2010, the Dodd-Frank Act was passed into law. The Dodd-Frank Act is a
sweeping piece of legislation, and the financial services industry is still
assessing its implications. Congress detailed some significant changes, but the
Dodd-Frank Act leaves many details to be determined by regulation and further
study. The full impact will not be fully known for months or even years, as
regulations that are intended to implement the Dodd-Frank Act are adopted by the
appropriate agencies, and the text of the Dodd-Frank Act is analyzed by impacted
stakeholders and possibly the courts. A consumer seeking to finance the purchase
of a manufactured home without land will generally pay a higher interest rate
and have a shorter loan maturity than a consumer seeking to finance the purchase
of land and the home. Provisions of the Dodd-Frank Act may change the
designation of certain manufactured home loans as "high cost mortgages," which
may adversely affect the availability and cost of manufactured home loans. On
January 21, 2012, legislation was introduced to reduce the threshold by which
small balance manufactured home personal property loans would be considered high
cost mortgages under provisions within the Dodd-Frank Act. The results of this
legislation and challenges of the Dodd-Frank Act are not yet known. The
Dodd-Frank Act also created the Consumer Financial Protection Bureau. The CFPB
has been granted significant rule-making authority in the area of consumer
financial products and services. The direction that the CFPB will take, the
regulations it will adopt, and its interpretation of existing laws and
regulations are all elements that are not yet known. Compliance with the law may
be costly and could affect operating results as the implementation of new forms,
processes, procedures and controls and infrastructure may be required to comply
with the regulations. Compliance may create operational constraints and place
limits on pricing. Failure to comply with these regulations, changes in these or
other regulations, or the imposition of additional regulations, could affect our
earnings, limit our access to capital and have a material adverse effect on our
business and results of operations.
In 2010, the Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act, was passed into law. As enacted,
the Health Reform Law reforms, among other things, certain aspects of health
insurance. Repeal of the Health Reform Law has become a theme in political
campaigns during this election year. The Health Reform Law could increase our
healthcare costs, adversely impacting the Company's earnings.
The American Housing Rescue and Foreclosure Prevention Act was enacted in 2008
to provide assistance by way of legislation for the housing industry, including
the manufactured housing industry. Among other things, the act provides for
increased loan limits for chattel (home-only Title I) loans to $69,678, up 43%
from the previous limit of $48,600 set in 1992. New FHA Title I program
guidelines became effective on June 1, 2010. On June 10, 2010, the Ginnie Mae
began accepting applications by lenders for participation as issuers of mortgage
backed securities backed by Title I loans originated under the new program.
Ginnie Mae released related pooling guidelines in November 2010. The issuance of
these guidelines provides Ginnie Mae the ability to securitize manufactured home
FHA Title I loans. This will allow lenders to obtain new capital, which can then
be used to fund new loans for our customers. Chattel loans have languished in
recent years and these changes are meant to broaden opportunities for
prospective homeowners. However, we are not aware of any loans currently being
securitized under the Ginnie Mae program.
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Results of Operations
Three months ended June 30, 2012 compared to 2011
Net Sales. Total net sales increased 20.0% to $118.8 million for the three
months ended June 30, 2012 compared to $99.0 million for the comparable quarter
last year. The quarter ended June 30, 2011 included only 68 days of Palm Harbor
activity, as the Palm Harbor operations were principally acquired on April 23,
2011, and from that date forward were included in the results of fiscal year
2012.
Factory-built housing net sales increased 16.8% to $108.4 million from $92.8
million for the comparable quarter last year. The financial services segment,
consisting of CountryPlace and Standard, contributed $10.3 million and $6.1
million in net sales for the three months ended June 30, 2012 and 2011,
respectively.
Gross Profit. Gross profit as a percent of sales increased to 20.3% for the
three months ended June 30, 2012 from 16.3% for the same period last year. The
percentage increase arose mainly from the retail and finance businesses obtained
in the Palm Harbor transaction, which have inherently higher gross margins, and
the timing of the Palm Harbor purchase last year. Higher home sales enabled the
Company to benefit somewhat from production overhead leverage in our
manufacturing business that produced homes at a capacity utilization rate of
approximately 37% this quarter. Partially offsetting these benefits this quarter
was a higher proportion of lower price-point homes in our product mix. The
Company's combined factory-built housing operations sold 2,239 homes during the
three months ended June 30, 2012 compared to 1,851 homes during the comparable
period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.6%, or $3.0 million, to $20.0 million, or
16.8% of net sales, for the three months ended June 30, 2012 versus $17.0
million, or 17.2% of net sales, for the same period last year. The dollar
increase is primarily a result of the timing of the Palm Harbor transaction last
year. The decrease in selling, general and administrative expenses as a
percentage of net sales is from greater leverage of fixed costs during the
quarter.
Income Before Income Taxes. Income before income taxes decreased to $2.8 million
for the three months ended June 30, 2012 compared to $20.1 million for the
comparable quarter last year. Income before income taxes for the three months
ended June 30, 2011 included a gain on bargain purchase of $22.0 million
recorded as a result of the Palm Harbor purchase in accordance with ASC 805,
Business Combinations.
Interest Expense. Interest expense was $1.7 million for the three months ended
June 30, 2012, compared to $1.5 million for the three months ended June 30,
2011. Interest expense consisted primarily of debt service on securitization
financings connected to the CountryPlace Mortgage securitized manufactured home
loan portfolios.
Other Income. Other income primarily represents interest income earned on
inventory finance notes receivable and debtor-in-possession note receivable.
Other income increased 9.7% to $395,000 for the three months ended June 30, 2012
as compared to $360,000 during the prior year period, from a higher average
balance outstanding during the first quarter of fiscal year 2013.
Income Taxes. For the three month period ended June 30, 2012, the effective
income tax rate was approximately 42%. The gain on bargain purchase resulting
from the acquisition of Palm Harbor in the first quarter of fiscal 2012 is
excluded from taxable earnings, causing a variation in the customary
relationship between income before income taxes and income tax expense for the
three month period ended June 30, 2011. Excluding the gain on bargain purchase
from net income, the effective tax rate of would have been 32% for the three
months ended June 30, 2011.
Net Income. Net income attributable to Cavco stockholders for the three months
ended June 30, 2012 was $860,000 compared to $10.2 million for the comparable
quarter last year. Net income attributable to Cavco stockholders for the three
months ended June 30, 2011 included one half of the bargain purchase gain
recognized, consistent with Cavco's ownership percentage of Fleetwood and Palm
Harbor.
Liquidity and Capital Resources
We believe that cash and cash equivalents at June 30, 2012, together with cash
flow from operations, will be sufficient to fund our operations and provide for
growth for the next twelve months and into the foreseeable future. Because of
the Company's sufficient cash position, the Company has not sought external
sources of liquidity, such as a credit facility; however, depending on our
operating results and strategic opportunities, we may elect 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 us to reevaluate our long-term
operating plans to make more efficient use of our existing capital resources.
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.
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Projected cash to be provided by or used in operations in the coming year is
largely dependent on sales volume. Operating activities provided $9.3 million of
cash during the three months ended June 30, 2012, compared to $5.2 million
during the same period last year. Cash provided by operating activities during
the current period was primarily the result of cash generated by operating
income before non-cash charges and lower inventory levels from ongoing efforts
to effectively position manufactured home inventory levels at company-owned
locations. Cash provided by operating activities in the prior year primarily
resulted from increases in accounts payable and accrued liabilities and net
proceeds from sales and collections of principal payments on consumer loans
originated.
Investing activities required the use of $1.2 million of cash during the three
months ended June 30, 2012, compared to the use of $28.6 million of cash during
the same period last year. Cash used by investing activities in the current
period was primarily for the purchase of new investments by our insurance
subsidiary. Cash used by investing activities in the prior year period was
primarily for funds to complete the acquisition of the assets and assumption of
specified liabilities of Palm Harbor Homes, Inc. under the asset purchase
agreement and debtor-in-possession credit facility.
Financing activities required the use of $2.0 million in cash during the three
months ended June 30, 2012, consisting of $2.2 million used to repay securitized
financings and $2.0 million net repayment of the construction lending line,
offset by $2.2 million from the issuance of common stock under our stock
incentive plans. Financing activities required the use of $19.6 million in cash
during the three months ended June 30, 2011, consisting of $19.5 million used to
retire a certain debt obligation of the Company's new subsidiary, CountryPlace
Acceptance Corp., on May 10, 2011 and $2.4 million used to repay securitized
financings, offset in part by $1.4 million from the issuance of common stock
under our stock incentive plans.
In accordance with the Shareholder Agreement entered into among Fleetwood and
its shareholders (Cavco and Third Avenue), as amended (the "Shareholder
Agreement"), after the fifth anniversary of the Fleetwood Acquisition Date
(i.e., after August 17, 2014), or at any time after Fleetwood has earned net
income of at least $10.0 million in each of its two most recently completed
consecutive fiscal years, excluding the gain on bargain purchase, Third Avenue
has the right ("Put Right") to require Cavco to purchase all of Third Avenue's
shares of Fleetwood common stock for an amount based upon a calculation that is
designed to approximate fair value. Likewise, Cavco has the right ("Call Right")
to require Third Avenue to sell all of its shares of Fleetwood common stock
based on the same timing and calculation as described above for the Put Right.
Subject to certain conditions, the satisfaction of this purchase price
obligation may be in the form of cash or Cavco common stock at Cavco's
discretion if Third Avenue exercises its Put Right, or in the form of cash or
Cavco common stock at Third Avenue's discretion if Cavco exercises its Call
Right. The conditions for the Put Right or Call Right to become exercisable have
not been met as of June 30, 2012; however, in any event, these conditions will
be met on August 18, 2014 (see Note 19).
CountryPlace's securitized debt is subject to provisions which have required
acceleration of debt repayment. If cumulative loss ratios exceed levels
specified in the respective pooling and servicing agreement for the 2005-1 and
2007-1 securitizations, repayment of the principal of the related Class A bonds
is accelerated until cumulative loss ratios return to specified levels. During
periods when cumulative loss ratios exceed the specified levels, 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 debt. However, principal repayment 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 June 30, 2012, the cumulative loss ratio was within the
specified level for the 2005-1 securitized portfolio; however, the cumulative
loss ratio for the 2007-1 securitized portfolio exceeded the specified level.
The Company expects that the cumulative loss ratio for the 2007-1 securitized
portfolio may continue to exceed its specified level during the remainder of
fiscal year 2013. The resulting acceleration of securitized debt repayment is
not expected to have a materially adverse impact on our cash flows. This
specified level is scheduled to increase in October 2012, which may ameliorate
the situation.
Critical Accounting Policies
In Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting
Policies," we have provided a discussion of the critical accounting policies
that management believes affect its more significant judgments and estimates
used in the preparation of our Consolidated Financial Statements.
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Recent Accounting Pronouncements
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. The amendments in this update are
effective for public companies for fiscal years, and interim periods within
those years, beginning after December 15, 2011. In this update, an entity has
the option to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive
statements. In both choices, an entity is required to present each component of
net income along with total net income, each component of other comprehensive
income along with a total for other comprehensive income, and a total amount for
comprehensive income. This update eliminated the option to present the
components of other comprehensive income as part of the statement of changes in
stockholders' equity. As a result of adopting of ASU 2011-05, the Company now
presents consolidated statements of comprehensive income.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other
(Topic 350): Testing Goodwill for Impairment. The amendments in this update are
effective for public companies for fiscal years beginning after December 15,
2011. In this update, an entity has the option to first assess qualitative
factors to determine that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the
totality of events or circumstances, an entity determines it is more likely than
not that the fair value of a reporting unit is less than its carrying amount,
then it is required to perform the first step of the two-step impairment test.
However, if an entity concludes otherwise, then performing the two-step
impairment test is unnecessary. As of the beginning of the current fiscal year,
the Company has adopted all of the aforementioned provisions of ASU 2011-08.
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic
350): Testing Indefinite-Lived Intangible Assets for Impairment. The amendments
are effective for annual and interim impairment tests performed for fiscal years
beginning after September 15, 2012. In this update, an entity has the option
first to assess qualitative factors to determine whether the existence of events
and circumstances indicates that it is more likely than not that the
indefinite-lived intangible asset is impaired. If, after assessing the totality
of events and circumstances, an entity concludes that it is more likely than not
that the indefinite-lived intangible asset is impaired, then the entity is
required to determine the fair value of the indefinite-lived intangible asset
and perform the quantitative impairment test by comparing the fair value with
the carrying amount in accordance with Subtopic 350-30. However, if an entity
concludes otherwise, then no further action is required. The Company will
consider this guidance as it completes its annual evaluation.
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.
Forward-looking Statements
Forward-looking statements involve risks, uncertainties and other factors, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward-looking statements. In
addition to the Risk Factors described in Part I, Item 1A. Risk Factors in our
Form 10-K, factors that could affect our results and cause them to materially
differ from those contained in the forward-looking statements include, but are
not limited to:
• We operate in an industry that is currently experiencing a prolonged and
significant downturn;
• Tightened credit standards and curtailed lending activity by home-only
lenders and increased government lending regulations have contributed to a
constrained consumer financing market;
• The availability of wholesale financing for industry retailers is limited
due to a reduced number of floor plan lenders and reduced lending limits;
• Our operating results could be affected by market forces and declining
housing demand;
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• We have incurred net losses in certain prior periods and there can be no
assurance that we will generate income in the future;
• A write-off of all or part of our goodwill could adversely affect our
operating results and net worth;
• The cyclical and seasonal nature of the manufactured housing industry
causes our revenues and operating results to fluctuate, and we expect this
cyclicality and seasonality to continue in the future;
• Our liquidity and ability to raise capital may be limited;
• We have contingent repurchase obligations related to wholesale financing
provided to industry retailers;
• The manufactured housing industry is highly competitive, and increased
competition may result in lower sales;
• If we are unable to establish or maintain relationships with independent
retailers who sell our homes, our sales could decline;
• Our results of operations can be adversely affected by labor shortages and
the pricing and availability of raw materials;
• If the manufactured housing industry is not able to secure favorable local
zoning ordinances, our sales could decline and our business could be
adversely affected;
• The loss of any of our executive officers could reduce our ability to
execute our business strategy and could have a material adverse effect on
our business and results of operations;
• Certain provisions of our organizational documents could delay or make
more difficult a change in control of our Company;
• Volatility of stock price;
• Deterioration in economic conditions in general and continued turmoil in
the credit markets could reduce our earnings and financial condition;
• We may not be able to successfully integrate Fleetwood, Palm Harbor, and
any future acquisition or attain the anticipated benefits and the
acquisition of Fleetwood, Palm Harbor and other future acquisitions may
adversely impact the Company's liquidity;
• Our participation in certain wholesale financing programs for the purchase
of our products by industry retailers may expose us to additional risk of
credit loss, which could adversely impact the Company's liquidity and
results of operations;
• Our expansion of retail and manufacturing businesses and entry into new
lines of business, namely manufactured housing consumer finance and
insurance, through the Palm Harbor transaction exposes the Company to
additional risks; and
• The cost of operations could be adversely impacted by increased costs of
heathcare benefits provided to employees.
We may make additional written or oral forward-looking statements from time to
time in filings with the SEC or in public news releases or statements. Such
additional statements may include, but are not limited to, projections of
revenues, income or loss, capital expenditures, acquisitions, plans for future
operations, financing needs or plans, the impact of inflation and plans relating
to our products or services, as well as assumptions relating to the foregoing.
Statements in this Report on Form 10-Q, including those set forth in this
section, may be considered "forward looking statements" within the meaning of
Section 21E of the Securities Act of 1934. These forward-looking statements are
often identified by words such as "estimate," "predict," "hope," "may,"
"believe," "anticipate," "plan," "expect," "require," "intend," "assume," and
similar words.
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. We do 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.
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