10-K 1 cvco-201741x10k.htm 10-K Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 1, 2017
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.)
 
 
1001 North Central Avenue, Suite 800
Phoenix, Arizona 85004
(Address of principal executive offices, including zip code)
602-256-6263
(Registrant’s telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01
The Nasdaq Stock Market LLC
(Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
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," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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
The aggregate market value of voting and non-voting common equity held by non-affiliates as of October 1, 2016 (based on the closing price on the Nasdaq Stock Market, LLC on October 1, 2016) was $379,959,564. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of June 9, 2017, 9,015,820 shares of Registrant’s Common Stock, $.01 par value, were outstanding.
 

DOCUMENTS INCORPORATED BY REFERENCE
Portions of Cavco Industries, Inc.’s Definitive Proxy Statement relating to its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.


CAVCO INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 1, 2017
TABLE OF CONTENTS

 
Page
 
 
 
 
 

1

PART I
ITEM 1. BUSINESS
General
Cavco Industries, Inc., a Delaware corporation, was formed on June 30, 2003 as a successor corporation to previous Cavco entities operating since 1965. Headquartered in Phoenix, 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. 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, which include Cavco Homes, Fleetwood Homes, Palm Harbor Homes, Fairmont Homes, Friendship Homes, Chariot Eagle and Lexington Homes. The Company is also a leading builder 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 mortgage subsidiary, CountryPlace Acceptance Corp. ("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 chattel loans to purchasers of factory-built and site-built homes. Our insurance subsidiary, Standard Casualty Co. ("Standard Casualty"), provides property and casualty insurance primarily to owners of manufactured homes. The terms "Cavco," "us," "we," "our," the "Company," and any other similar terms refer to Cavco Industries, Inc. and its consolidated subsidiaries, unless otherwise indicated in this Annual Report on Form 10-K ("Annual Report").
We construct our homes using an assembly-line process in which each module or floor section is assembled in stages. Our assembly-line process is designed to be flexible enough to accommodate significant customization, as requested by our customers. The Company operates 20 homebuilding facilities located in the Northwest, Southwest, South, Southeast, Midwest and Mid-Atlantic regions. These factories range in size from 79,000 to 341,000 square feet.
We distribute our homes through 43 Company-owned U.S. retail outlets and a network of independent distribution points in 48 states, Canada, Japan and Mexico. A significant number of these independent distribution points are located in Arizona, Texas, California, Florida, and Oregon. Thirty-two of our Company-owned retail stores are located in Texas. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry and Company Outlook."
CountryPlace originates single-family residential mortgages and chattel loans, and 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 an approved lender with the U.S. Department of Veteran Affairs ("VA") and the U.S. Department of Agriculture ("USDA") under its Single Family Housing Guaranteed Loan Program, is approved by the GNMA to issue GNMA-insured mortgage-backed securities and is authorized to sell mortgages to, and service mortgages for, the FNMA and the FHLMC. A conforming mortgage or loan is one that conforms to the guidelines of a Government-Sponsored Enterprise ("GSE"), such as Fannie Mae, Freddie Mac or a government agency, such as FHA; a non-conforming mortgage or loan does not conform to these guidelines (see Note 5 to the Consolidated Financial Statements).
Standard Casualty is domiciled in Texas and is primarily a specialty writer of manufactured home physical damage insurance. Standard Casualty holds insurance licenses in multiple states; however, a significant portion of its writings occur in Texas and Arizona. In addition to writing direct policies, Standard Casualty assumes and cedes reinsurance in the ordinary course of business (see Note 12 to the Consolidated Financial Statements).
See Note 20 to the Consolidated Financial Statements for financial information regarding our business segments (factory-built housing and financial services), both of which are discussed below.

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Industry Overview
General. Manufactured housing provides an alternative in urban, suburban and rural areas to other forms of new low-cost housing such as site-built housing and condominiums, and to existing housing such as pre-owned homes and apartments. According to statistics published by the Institute for Building Technology and Safety ("IBTS") and the United States Department of Commerce, Bureau of the Census, for the 2016 calendar year, manufactured housing wholesale shipments of homes constructed in accordance with the National Manufactured Home Construction and Safety Standards promulgated by HUD ("HUD code") accounted for an estimated 12.6% of all new single-family homes sold.
According to data reported by the Manufactured Housing Institute ("MHI"), during calendar year 2016, our industry shipped approximately 81,000 HUD code manufactured homes. This followed approximately 71,000 homes shipped in 2015, 64,000 in 2014, 60,000 in 2013 and 55,000 shipped in calendar year 2012, among the lowest levels since industry shipment statistics began to be recorded in 1959. Annual home shipments from 2009 to 2016 were less than the annual home shipments for each of the 40 years from 1969 to 2008. While industry HUD code manufactured home shipments improved modestly these recent years, the manufactured housing industry continues to operate at relatively low levels compared to historical shipment statistics.
We believe the segment of the housing market in which manufactured housing is most competitive includes consumers with household incomes under $60,000. This segment has a high representation of young single persons and young married couples, as well as persons age 55 and older. The comparatively low cost of fully-equipped manufactured housing is attractive to these consumers. Persons in rural areas and those who presently live in manufactured homes also make up a significant portion of the demand for new manufactured housing. Innovative engineering and design, as well as efficient production techniques, continue to position manufactured homes to meet the demand for affordable housing in markets such as rural areas and manufactured housing communities. The markets for affordable factory-built housing are very competitive as well as cyclical and seasonal. The industry is sensitive to employment levels, consumer confidence, availability of financing and general economic conditions.
Protracted Industry Downturn. Since mid-1999, the manufactured housing industry has experienced a prolonged and significant downturn. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of the manufactured homes securing defaulted loans. From 2004 to 2007, the industry’s downturn was exacerbated by the aggressive financing methods available to customers of developers and marketers of standard site-built homes, which had the effect of diverting potential manufactured housing buyers to more expensive site-built homes. Beginning in 2008, the global credit crisis and general deterioration of economic conditions have extended the depressed market conditions in which our industry operates. These factors have resulted in low wholesale shipment levels and underutilized manufacturing and retail locations. However, while the industry continues to operate at generally low levels, as discussed above, industry shipment numbers have been increasing over the past seven years.
Business Strategies
Our marketing strategy is to offer a line of manufactured homes that appeal to a wide range of home buyers. Our principal focus is on the sale of high-value homes to entry-level and move-up buyers and to persons age 55 and older. We also market to special niches such as subdivision developers and vacation home buyers.
Our production strategy is to develop and maintain the resources necessary to build varied and unique customer specifications in an efficient factory production environment. This enables us to attract retailers and consumers who want the flexibility to build homes to meet their specific needs, but still seek the value created by building a home on a factory production line.

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Our competitive strategy is to build homes of superior quality, offer innovative designs and floor plans, demonstrate exceptional value and provide the engineering and technical resources to enable custom home building and be responsive and efficient in servicing the customer after the sale. We strive to maintain a competitive advantage by reacting quickly to changes in the marketplace and to the specific needs of our retailers and consumers.
Beginning in 2007, the overall housing industry experienced a multi-year decline, which included the manufactured housing industry. Since this downturn, Cavco strategically expanded its factory operations and related business initiatives primarily through the acquisition of industry competitor operations. This development has enabled the Company to effectively participate in the ensuing housing industry recovery.
The purchase of the Fleetwood Homes, Inc. ("Fleetwood") and Palm Harbor Homes, Inc. ("Palm Harbor") assets in August 2009 and April 2011, respectively, increased home production capabilities and distribution and entry into financial and insurance businesses specific to the Company’s industry, allowing the Company to be vertically integrated. The transactions further 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 purchase of Chariot Eagle, LLC ("Chariot Eagle") and Fairmont Homes, LLC ("Fairmont Homes"), in March 2015 and May 2015, respectively, provides for further operating capacity, increased home production capabilities and distribution into new markets such as the Midwest, the western Great Plains states, the Northeast and several provinces in Canada. These acquired operations included manufacturing facilities in Ocala, Florida; Nappanee, Indiana; and two factories in Montevideo, Minnesota.
The April 3, 2017 purchase of Lexington Homes, Inc. ("Lexington Homes") in Lexington, Mississippi further increased home production capabilities and distribution in the Southeastern United States market.
Products
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, Palm Harbor Homes, Fairmont Homes, Friendship Homes, Chariot Eagle and Lexington Homes. The Company is also a leading producer of modular homes, built primarily under the Nationwide Homes brand, as well as park model RVs, vacation cabins and systems-built commercial structures.
A majority of our products are constructed in accordance with the HUD code. We also build park model RVs, constructed to standards approved by the American National Standards Institute, a private, non-profit organization that administers and coordinates a voluntary standardization and conformity program. Park model RVs are less than 400 square feet in size, are primarily used as vacation dwellings and seasonal living, and are placed in planned communities, recreational home parks and resorts. We also produce a wide variety of modular homes, which include single and multi-section/modular ranch-style dwellings, split-level homes, Cape Cod style homes, two and three story homes and multi-family units. We also build commercial modular structures, including apartment buildings, condominiums, hotels, workforce housing, schools and housing for U.S. military troops (e.g., barracks). Commercial buildings are constructed in the same facilities in which we build our residential homes using similar assembly line processes and techniques. These commercial projects are generally engineered to the purchaser’s specifications. The buildings are transported to the customer’s site in the same manner as homes and are often set by crane and finished at the site.
We produce our residential homes in a variety of floor plans. Most of these homes are single-story and generally range in size from approximately 500 to 3,300 square feet, but may be larger in the case of multi-level modular homes. In fiscal years 2017 and 2016, we sold 13,820 and 12,339 homes, respectively.

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Each home typically contains a living room, dining area, kitchen, one to five bedrooms and one or more bathrooms, and is equipped with central heating and hot water systems, kitchen appliances, carpeting and window treatments. Feature upgrades include fireplaces, central air conditioning, tile roofs, high ceilings, skylights, hardwood floors, custom cabinetry, granite countertops and energy conservation elements. We also offer a variety of structural and decorative customizations to meet the home buyer's specifications. With manufacturing centers 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 react and modify floor plans and designs to consumers’ 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.
We are focused on building quality, energy efficient homes for the modern home buyer. Green building involves the creation of an energy efficient envelope, including higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, generally lower utility costs, specially designed ventilation systems, best use of space and passive solar orientation.
Our manufactured homes are constructed and equipped at our factories. The finished home is then primarily transported by independent trucking companies either to a retail sales center, planned community, housing development, work site or the customer's site. Retailers or other independent installers are responsible for placing the home on site and, in most instances, arranging for connections to utilities and providing installation and finish-out services. Although our manufactured homes are designed to be transportable, very few are moved from their original site after installation.
We are constantly introducing new floor plans, decors, exteriors, features and accessories to appeal to changing trends in different regions of the country. Our factory-built homes are designed after extensive field research and consumer feedback. We have developed engineering systems which, through the use of computer-aided technology, permit customization of homes and assist with product development and enhancement. We work with a variety of partners, meeting an expanding range of housing needs from a home buyer’s private land to planned neighborhoods to recreational or resort properties to accommodations for workforces in agriculture and industry.
Factory-built Housing
Manufacturing Operations. Our homes are constructed in plant facilities using an assembly-line process employing from 123 to 351 employees at each facility. Most of our homes are constructed in one or more sections (also known as floors or modules) on a permanently affixed steel or wood support chassis. Each section is assembled in stages beginning with the construction of the chassis, followed by the addition of other constructed and purchased components and ending with a final quality control inspection. The efficiency of the assembly-line process and the benefits of constructing homes in a controlled factory environment enables us to produce quality homes in less time and at a lower cost per square foot than building homes on individual sites.
We operate 20 manufacturing facilities in Millersburg and Woodburn, Oregon; Nampa, Idaho; Riverside, California; Phoenix and Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Nappanee, Indiana; Lafayette, Tennessee; Lexington, Mississippi; Martinsville and Rocky Mount, Virginia; Douglas, Georgia; and Ocala and Plant City, Florida. These manufacturing facilities range from approximately 79,000 to 341,000 square feet of floor space. The production schedules for our manufacturing facilities are based on wholesale orders received from independent and Company-owned retailers, which fluctuate from week to week. In general, however, our facilities are structured to operate on a one shift per day, five days per week basis, and we currently manufacture a typical home in approximately six production days.
Manufactured housing is a regional business and the primary geographic market for a typical manufacturing facility is within a 350-mile radius. Each of our manufacturing facilities serves multiple retailers along with a large number of one-time purchasers. Because we produce homes to fill existing wholesale orders, our manufacturing plants generally do not carry finished goods inventories, except for homes awaiting delivery.

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The principal materials used in the production of our manufactured homes include wood, wood products, steel, aluminum, gypsum wallboard, windows, doors, fiberglass insulation, carpet, vinyl, fasteners, plumbing materials, appliances and electrical items. We buy these materials from various third-party manufacturers and distributors. The inability to obtain any materials used in the production of our homes, whether resulting from material shortages, limitation of supplier facilities or other events affecting production of component parts, may affect our ability to meet or maintain production requirements.
At April 1, 2017, we had a backlog of home orders with wholesale sales values of approximately $88.8 million, compared to a backlog of $47.9 million at April 2, 2016. Retailers may cancel orders prior to production without penalty. After production of a particular home has commenced, the order becomes noncancelable and the retailer is obligated to take delivery of the home. Accordingly, until production of a particular home has commenced, we do not consider our order backlog to be firm orders. Because of the seasonality of the housing market, the level of our order backlog historically declines during the winter months.
Revenue and Distribution. The Company sold 13,820, 12,339 and 9,999 homes in fiscal years 2017, 2016 and 2015, respectively, through Company-owned and independent distribution channels.
As of April 1, 2017, we had a total of 43 Company-owned retail centers, located in Oregon, Arizona, New Mexico, Texas, Oklahoma, Louisiana and Florida. Thirty-two of the Company-owned retail stores are located in Texas. Our Company-owned sales centers are generally located on main roads or highways for high visibility. Each of our Company-owned retail sales centers has a sales office, which is generally a factory-built structure, and a variety of model homes of various sizes, floor plans, features and prices. Customers may order a home that will be built at a manufacturing facility or they may purchase a home from an inventory of homes maintained at the location, including a model home. Model homes may be displayed in a residential setting with sidewalks and landscaping. Each sales center usually employs a manager and one to five salespersons, who are compensated through a combination of salary and commission. We internally finance our home inventories.
As of April 1, 2017, we had a network of independent distribution points, of which 13% were in Arizona, 10% in Texas, 8% in California, 7% in Florida, and 7% in Oregon. The remaining 55% were in 43 other states, Canada, Mexico and Japan. As is common in the industry, our independent distributors typically sell manufactured homes produced by other manufacturers in addition to those we produce. Some independent retailers operate multiple sales outlets. No independent retailer accounted for 10% or more of our factory-built housing revenue during any fiscal year within the three-year period ended April 1, 2017.
We continually seek to increase our wholesale shipments by growing sales at our existing independent retailers and by finding new independent retailers to sell our homes. We provide comprehensive sales training to retail sales associates and bring them to our manufacturing facilities for product training and to view new product designs as they are developed. These training seminars facilitate the sale of our homes by increasing the skill and knowledge of the retail sales consultants. In addition, we display our products in trade shows and support our retailers through the distribution of floor plan literature, brochures, decor selection displays, point of sale promotional material, as well as internet-based marketing assistance.
Independent retailers frequently finance a portion of their home purchases through wholesale floor plan financing arrangements. In most cases, we receive a deposit or a commitment from the retailer's lender for each home ordered. We then manufacture the home and it is shipped at the retailer's expense. Payment is due from the lender upon shipment of the product. For a description of wholesale floor plan financing arrangements used by independent retailers and our obligations in connection with these arrangements, see "Financing—Commercial Financing" below.

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Warranties. We provide the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. Our warranty does not extend to installation and setup of the home, which is generally arranged by the retailer. Appliances, carpeting, roofing and certain other components are warranted by their original manufacturer for various lengths of time. Refer to our discussion of the Magnuson-Moss Warranty Federal Trade Commission Improvement Act under "Government Regulation" below.
Financial Services
Finance. We provide a source of home buyer financing to our customers on competitive terms through our subsidiary, CountryPlace. CountryPlace offers conforming mortgages, non-conforming mortgages and chattel loans to purchasers of numerous brands of factory-built homes sold by Company-owned retail sales centers and certain independent retailers, builders, communities and developers. CountryPlace is authorized to directly endorse FHA Title I and Title II mortgage insurance, is an approved lender with the VA and the USDA under its Single Family Housing Guaranteed Loan Program, is approved to issue GNMA-insured mortgage-backed securities, and is authorized to sell mortgages to, and service mortgages for Fannie Mae and Freddie Mac. Most loans originated through CountryPlace are sold to investors. CountryPlace also provides various loan servicing functions for non-affiliated entities under contract.
All of CountryPlace’s loan contracts held are fixed rate and have monthly scheduled payments of principal and interest. The scheduled payments for each contract would, if made on their respective due dates, result in a full amortization of the contract. 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. CountryPlace has loan contracts secured by factory-built homes located in 30 states, including Texas, Florida, New Mexico and Arizona.
We believe that providing financing alternatives to our customers improves our responsiveness to the financing needs of prospective home purchasers and provides us with opportunities for additional sources of loan origination and servicing revenues. CountryPlace has expanded its chattel lending programs, partially with the support of independent third party financiers. Chattel loans originated will either be sold outright, grouped and sold as a pool of loans or held for investment.
Insurance. Standard Casualty specializes in homeowner property and casualty insurance products for the manufactured housing industry. Standard Casualty is domiciled in Texas and is primarily a specialty writer of manufactured home physical damage insurance. Standard Casualty holds insurance licenses in multiple states; however, a significant portion of its writings occur in Texas and Arizona. In addition to writing direct policies, Standard Casualty assumes and cedes reinsurance in the ordinary course of business. In Texas, the policies are written through one affiliated managing general agent, which produces all premiums, except surety, and 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.

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Financing
Commercial Financing. Certain of our wholesale factory-built housing sales to independent retailers were purchased through wholesale floor plan financing arrangements. Under a typical floor plan financing arrangement, an independent financial institution specializing in this line of business provides the retailer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. The financial institution customarily requires us, as the manufacturer of the home, to enter into a separate repurchase agreement with the financial institution under which we are obligated, upon default by the retailer and under certain other circumstances, to repurchase the financed home at declining prices over the term of the repurchase agreement (which in most cases is 18 to 36 months). The price at which we may be obligated to repurchase a home under these agreements is based upon the amount financed, plus certain administrative and shipping expenses. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $46.3 million as of April 1, 2017 compared to $46.6 million as of April 2, 2016. The risk of loss under these agreements is spread over many retailers and is further reduced by the resale value of the homes.
The availability of inventory financing for the industry’s wholesale distribution chain continues to improve. 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 and one company ceased lending activities in the industry entirely. Other finance programs are subject to more restrictive terms that continue to evolve, and in some cases, require the financial involvement of the Company. As a result, the Company has entered into certain commercial loan programs whereby 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 commercial loan arrangements with distributors of our products under which the Company provides funds for financing purchases (see Note 6 to the Consolidated Financial Statements). The Company’s involvement in commercial loans has increased the availability of manufactured home financing to distributors, communities and developers. We believe that our taking part in the wholesale financing of homes is helpful to the borrowers and allows our homes continued exposure to potential home buyers. 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, communities and inventory financing partners, many of whom may be adversely affected by volatile conditions in the economy and financial markets.
Consumer Financing. Sales of factory-built homes are significantly affected by the availability and cost of consumer financing. There are three basic types of consumer financing in the factory-built housing industry: chattel or personal property loans for purchasers of a home with no real estate involved (generally HUD code homes); non-conforming mortgages for purchasers of the home and the land on which the home is placed; and conforming mortgage loans which comply with the requirements of FHA, VA, USDA or GSE loans.
Beginning in mid-1999, lenient credit standards for chattel loans originated in prior years resulted in increased numbers of repossessions of manufactured homes and excessive inventory levels at that time. The poor performance of manufactured home loan portfolios made it difficult for consumer finance companies in the industry to obtain long-term capital in the asset-backed securitization market. As a result, many consumer finance companies curtailed their lending or exited the manufactured housing loan industry entirely. Since then, the lenders who remained in the business tightened their credit standards and, in some cases, increased fees and interest rates for chattel loans, which reduced lending volumes and lowered sales volumes of manufactured homes.
Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business. The GSEs, principally Fannie Mae, Freddie Mac, and Ginnie Mae, as well as the FHA, play a significant role in buying home mortgages and creating investment securities that are either sold to investors or held in their portfolios. These organizations provide essential liquidity to the secondary mortgage market. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that prevent or restrict these enterprises from continuing their historic businesses, could affect the ability of our customers to obtain loans or could increase home loan interest rates, fees and credit standards. This could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations.

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Consumer financing for the retail purchase of manufactured homes needs to become generally more available before marked emergence from current low home shipment levels can occur. Restrictive underwriting guidelines, irregular appraisal processes, higher interest rates compared to site-built homes, regulatory burdens, a limited number of institutions lending to manufactured home buyers and limited secondary market availability for manufactured home loans are significant constraints to industry growth. We are working directly with other industry participants to develop manufactured home consumer financing models to attract industry financiers interested in furthering or expanding lending opportunities in the industry. We have invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. CountryPlace has developed chattel lending programs to grow sales of homes through traditional distribution points as well. We believe that growing our participation in chattel lending may provide additional sales growth opportunities for our factory-built housing operation.
We are also working through industry trade associations to encourage favorable legislative and GSE action to address the mortgage financing needs of potential buyers of affordable homes. Federal law requires the GSEs to issue a regulation 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. On May 8, 2017, FNMA and FHLMC released their Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill the "Duty to Serve" obligation. The focus of each of the three-year plans is to establish steps to ensure chattel loans can be purchased in bulk prior to proceeding with a chattel loan pilot. Expansion of the secondary market for chattel lending through the GSEs could provide further demand for housing, as lending options would likely become more available to home buyers. Although some limited progress has been made in the area, meaningful positive impact in the form of increased home orders has yet to be realized.
Competition
The manufactured housing industry is highly competitive at both the manufacturing and retail levels, with competition based upon several factors, including price, product features, reputation for service and quality, depth of distribution, promotion, merchandising and the terms of retail customer financing. We compete with approximately 33 other producers of manufactured homes, as well as companies offering for sale homes repossessed from wholesalers or consumers. In addition, manufactured homes compete with new and existing site-built homes, as well as apartments, townhouses and condominiums.
There are a number of other national manufacturers competing for a significant share of the manufactured housing market in the United States, including Clayton Homes, Inc., Champion Home Builders, Inc. and Skyline Corporation. Certain of these competitors possess greater financial, manufacturing, distribution and marketing resources.
Although many lenders to factory-built home buyers have reduced their volume or exited the business, there are significant competitors to CountryPlace in the markets we serve. These competitors include national, regional and local banks, independent finance companies, mortgage brokers and mortgage banks, such as: 21st Mortgage Corporation, an affiliate of Clayton Homes, Inc. and Berkshire Hathaway, Inc.; Triad Finance Corporation; and CU Factory Built Lending, LP. Certain of these competitors are larger than CountryPlace and have access to substantially more capital and cost efficiencies.
The market for homeowners insurance is highly competitive. Standard Casualty competes principally in property and casualty insurance for owners of manufactured homes with companies such as National Lloyds and Columbia Lloyds. We compete based on price, the breadth of our product offerings, product features, customer service, claim handling and use of technology.

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Government Regulation
Our manufactured homes are subject to a number of federal, state and local laws, codes and regulations. Construction of manufactured housing is governed by the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended, or the Home Construction Act. In 1976, HUD issued regulations under the Home Construction Act establishing comprehensive national construction standards. In 1994, the codes were amended and expanded to, among other things, address specific requirements for homes destined for geographic areas subject to severe weather conditions. The HUD regulations, known collectively as the Federal Manufactured Home Construction and Safety Standards, cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection and ventilation. Such regulations preempt conflicting state and local regulations on such matters, and are subject to periodic change. Our manufacturing facilities, and the plans and specifications of the HUD code manufactured homes they produce, have been approved by a HUD-certified inspection agency. Further, an independent HUD-certified third-party inspector regularly reviews our manufactured homes for compliance with HUD regulations during construction. Failure to comply with applicable HUD regulations could expose us to a wide variety of sanctions, including mandated closings of our manufacturing facilities. We believe our manufactured homes are in substantial compliance with all present HUD requirements. Our park model RVs are not subject to HUD regulations, but we believe that our park model RVs meet all present standards of the American National Standards Institute.
Manufactured and site-built homes are all typically built with wood products that contain formaldehyde resins. HUD regulates the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers about formaldehyde-associated risks. The Environmental Protection Agency ("EPA") and other governmental agencies have in the past evaluated the effects of formaldehyde. We use materials in our manufactured homes that meet HUD standards for formaldehyde emissions and believe we comply with HUD and other applicable government regulations in this regard.
The transportation of manufactured homes on highways is subject to regulation by various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements.
We have leased space for our manufacturing facility in Goodyear, Arizona since 1993. The leased premises is part of what is referred to as the Phoenix-Goodyear Airport (South) Superfund Site ("PGAS"), which was designated as a National Priorities List ("NPL") site under the authority of the Comprehensive Environmental Response, Compensation and Liability Act in 1983. The reason for the site's NPL designation was because of extensive soil and groundwater contamination (trichloroethylene, chromium and cadmium) that resulted from historic manufacturing by the Goodyear Tire and Rubber Company ("Goodyear Tire") and the United States Department of Defense. Pursuant to a consent decree entered into with the EPA, Goodyear Tire is responsible for taking certain remedial actions at the PGAS site.
On September 30, 2015, the EPA issued its Third Five-Year Review Report for Phoenix Goodyear Airport (North and South Areas) Superfund Site (the "Third Five-Year Report") and reported that "[t]he remedy at PGAS is currently protective of human health and environment because there is no complete exposure pathway to contaminated groundwater or soil. Soil contamination has been addressed and the vapor intrusion pathway is not complete. Monitoring of COG [City of Goodyear] production wells continues to ensure that the public is not being exposed to contaminated groundwater that exceeds the MCLs [maximum contaminant levels]." In order to ensure the remedy will be protective in the long-term, the EPA has recommended that the following action be taken: modify the sampling plans to include all contaminants of concern, assess the need for new cleanup level for arsenic, and determine the necessity of institutional controls. The next five year review is due within five years of September 30, 2015. The preceding summary of the Third Five-Year Report does not purport to be complete, and is qualified in its entirety by reference to the report itself, which is available on the EPA website.

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Our lease specifically refers to the consent decree with the EPA and provides that, as between our Landlord (now JRC Goodyear, LLC) and us, the Landlord will be responsible for any liabilities resulting from the existing contamination at the site and that the Landlord will indemnify, defend, and hold us, our directors, our officers, our employees, our agents, and our successors, harmless for such liabilities. During the 24 years that we have conducted manufacturing operations at the Goodyear, Arizona facility, we have never received any inquiry or notice from the EPA or the Arizona Department of Environmental Quality suggesting that we may be liable for any costs associated with the remediation of the PGAS site. There are no underground storage tanks at the Goodyear, Arizona facility.
Our manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where our homes are sold, local governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect our ability to sell homes for installation in communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulations which must be complied with by the retailer or other person installing the home.
Certain warranties we issue may be subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act ("Magnuson-Moss Warranty Act"), which regulates the descriptions of warranties on consumer products. In the case of warranties subject to the Magnuson-Moss Warranty Act, the Company is subject to a number of additional regulatory requirements. For example, warranties that are subject to the Magnuson-Moss Warranty Act must be included in a single easy-to-read document that is generally made available prior to purchase. The Magnuson-Moss Warranty Act also prohibits certain attempts to disclaim or modify implied warranties and the use of deceptive or misleading terms. A claim for a violation of the Magnuson-Moss Warranty Act can be the subject of an action in federal court in which consumers may be able to recover attorneys' fees. The description and substance of our warranties are also subject to a variety of state laws and regulations. A number of states require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims.
A variety of laws affect the financing of the homes we manufacture. The Federal Consumer Credit Protection Act ("Truth-in-Lending Act") and Regulation Z promulgated thereunder require written disclosure of information relating to such financing, including the amount of the annual percentage interest rate and the finance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act ("RESPA") and Regulation X promulgated thereunder require certain disclosures regarding the nature and costs of real estate settlements. The Consumer Financial Protection Bureau ("CFPB") has adopted or proposed various Trade Regulation Rules dealing with unfair credit and collection practices and the preservation of consumers' claims and defenses. Direct loans and mortgage loans eligible for inclusion in a Ginnie Mae program are subject to the credit underwriting requirements of the FHA. A variety of state laws also regulate the form of financing documents and the allowable deposits, finance charge and fees chargeable pursuant to financing documents.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") was passed into law. The Dodd-Frank Act is a sweeping piece of legislation, and the financial services industry continues to assess its implications and implement necessary changes in procedures and business practices. The Dodd-Frank Act established the CFPB to regulate consumer financial products and services. Although many rules have been implemented, the full impact will not be known for years as revisions and the development of additional rules continue, and Congress and the new President consider amending part of the Act. Enforcement actions are in the early stages and the effects of possible litigation related to the regulations remains unknown.

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In 2014, certain CFPB mortgage finance rules required under the Dodd-Frank Act became effective. The rules apply to consumer credit transactions secured by a dwelling, which include real property mortgages and chattel loans (financed without land) secured by manufactured homes. The rules defined standards for origination of "Qualified Mortgages," established specific requirements for lenders to prove borrowers' ability to repay loans and outlined the conditions under which Qualified Mortgages are subject to safe harbor limitations on liability to borrowers. The rules also established interest rates and other cost parameters for determining which Qualified Mortgages fall under safe harbor protection. Among other issues, Qualified Mortgages with interest rates and other costs outside the limits are deemed "rebuttable" by borrowers and expose the lender and its assignees (including investors in loans, pools of loans, and instruments secured by loans or loan pools) to possible litigation and penalties.
While many manufactured homes are currently financed with agency-conforming mortgages in which the ability to repay is verified, and interest rates and other costs are within the safe harbor limits established under the CFPB mortgage finance rules, certain loans to finance the purchase of manufactured homes, especially chattel loans and non-conforming land-home loans, may fall outside the safe harbor limits. The CFPB rules have caused some lenders to curtail underwriting such loans, and some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. As a result, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, compliance with the law and ongoing rule implementation has caused lenders to incur additional costs to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. 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.
The CFPB rules amending the Truth-in-Lending Act ("TILA") and RESPA expand the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 ("HOEPA"), revise and expand the tests for coverage under HOEPA, and impose additional restrictions on mortgages that are covered by HOEPA. As a result, certain manufactured home loans are now subject to HOEPA limits on interest rates and fees. Loans with rates or fees in excess of the limits are deemed High Cost Mortgages and provide additional protections for borrowers, including with respect to determining the value of the home. Most loans for the purchase of manufactured homes have been written at rates and fees that would not appear to be considered High Cost Mortgages under the new rule. Although some lenders may continue to offer loans that are now deemed High Cost Mortgages, the rate and fee limits appear to have deterred some lenders from offering loans to certain borrowers and may continue to make them reluctant to enter into loans subject to the provisions of HOEPA. As a result, some prospective buyers of manufactured homes may be unable to secure financing necessary to complete manufactured home purchases.
Additionally, the Dodd-Frank Act amended provisions of TILA to require rules for appraisals on principal residences securing higher-priced mortgage loans ("HPML"). Certain loans secured by manufactured homes, primarily chattel loans, could be considered HPMLs. Among other things, the rules require creditors to provide copies of appraisal reports to borrowers prior to loan closing. To implement these amendments, the CFPB adopted the HPML Appraisal Rule effective December 30, 2014 and loans secured by new manufactured homes were exempt from the rule until July 18, 2015. While effects of these new requirements are not fully known, some prospective home buyers may be deterred from completing a manufactured home purchase as a result of appraised values.
The Dodd-Frank Act also required integrating disclosures provided by lenders to borrowers under TILA and RESPA. The final rule became effective October 3, 2015. The TILA-RESPA Integrated Disclosure ("TRID") mandated extensive changes to the mortgage loan closing process and necessitated significant changes to mortgage origination systems. Since its implementation, technical ambiguities in the rule have resulted in lender and investor uncertainty regarding acceptable cures and tolerances for disclosure and estimate errors. It is not yet fully known how the GSEs and HUD will view TRID compliance, how they will apply their own interpretations of TRID to their repurchase and claims review processes, or how the market for private-label securitizations may be impacted.

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Regulation C of the Home Mortgage Disclosure Act ("HMDA") enacted in 1975 requires certain financial institutions, including non-depository institutions, to collect, record, report and disclose information about their mortgage lending activity. The data-related requirements in the HMDA and Regulation C are used to identify potential discriminatory lending patterns and enforce anti-discrimination statutes. The Dodd-Frank Act transferred rulemaking authority for HMDA to the CFPB, effective in 2011. It also amended the HMDA to require financial institutions to report additional data points and to collect, record and report additional information. The CFPB issued a final rule amending Regulation C, which becomes effective on January 1, 2018. Regulation C generally applies to consumer-purpose, closed-end loans and open-end lines of credit that are secured by a dwelling. Non-depository financial institutions are subject to Regulation C if they originate at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years. Violations of Regulation C, including incomplete, inaccurate, or omitted data are subject to administrative sanctions, including civil money penalties and compliance can be enforced by the Federal Reserve Board, Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, the National Credit Union Administration, HUD or the CFPB.
New Federal Housing Administration ("FHA") Title I program guidelines became effective on June 1, 2010 and provide Ginnie Mae the ability to securitize manufactured home FHA Title I loans. These guidelines were intended to allow lenders to obtain new capital, which can then be used to fund new loans for our customers. Chattel loans have languished for several years and these changes were meant to broaden chattel financing availability for prospective homeowners. However, we are aware of only a small number of loans currently being securitized under the Ginnie Mae program.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act") established requirements for the licensing and registration of all individuals that are Mortgage Loan Originators ("MLOs"). MLOs must be registered or licensed by the states. Traditionally, manufactured housing retailers have assisted home buyers with securing financing for the purchase of homes. This assistance may have included assisting with loan applications and presenting terms of loans. Under the SAFE Act, these activities are prohibited unless performed by a registered or licensed MLO. Although the definition of an MLO contains exemptions for administrative and other specific functions and industries, manufactured housing retailers are no longer able to negotiate rates and terms for loans unless they are licensed as MLOs. Compliance may have required manufactured housing retailers to alter business practices related to assisting home buyers in securing financing. This may have resulted in penalties assessed against or litigation costs incurred by retailers found to be in violation, reduced home sales from home buyers’ inability to secure financing without retailer assistance, or increased costs to home buyers or reduced transaction profitability for retailers as a result of the additional cost of mandatory MLO involvement.
The Housing and Economic Recovery Act of 2008 requires the GSEs to facilitate a secondary market for mortgages on housing for very low, low and moderate-income families in under-served markets, including manufactured housing. On January 30, 2017, the Federal Housing Finance Agency issued a final rule specifying the scope of GSE activities that are eligible to receive credit for compliance with the "Duty to Serve" rule after January 2018. On May 8, 2017, FNMA and FHLMC released their Underserved Markets Plan, which established steps to ensure chattel loans can be purchased in bulk prior to proceeding with a chattel loan pilot. Both GSEs have expressed interest in pursuing such pilot programs for manufactured housing; however, it is uncertain whether either GSE will conduct a pilot program or launch a chattel loan program.
If passed by Congress and signed into law, the proposed Preserving Access to Manufactured Housing Act of 2017 (House of Representatives Bill 1699) would amend some Dodd-Frank Act provisions that affect manufactured housing financing. The bill would revise the triggers by which small-sized manufactured home loans are considered "High-Cost" under HOEPA and clarify the MLO licensing requirements for manufactured home retailers and their employees.
Our sale of insurance products is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. Standard Casualty’s insurance operations are regulated by the state insurance boards where it underwrites its policies. Underwriting, premiums, investments and capital reserves (including dividend payments to stockholders) are subject to the rules and regulations of these state agencies.

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In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the "Affordable Care Act"), was passed into law. As enacted, the Affordable Care Act reforms, among other things, certain aspects of health insurance. The Affordable Care Act could continue to increase our healthcare costs, adversely impacting the Company's earnings. On March 6, 2017, the American Health Care Act of 2017 (House of Representatives Bill 1628) passed the vote of the House of Representatives, which would repeal and replace the Affordable Care Act. At this time, it is uncertain how the changes would impact our results of operations.
Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines, the entry of injunctions or both. Although we believe that our operations are in substantial compliance with the requirements of all applicable laws and regulations, these requirements have generally become more strict in recent years. Accordingly, we are unable to predict the ultimate cost of compliance with all applicable laws and enforcement policies.
See also "Regulatory Developments" in Part II, Item 7 of this Annual Report.
Seasonality
The housing industry is subject to seasonal fluctuations based on new home buyer purchasing patterns. Still, diversification among Cavco’s product lines and operations have served to partially offset the extent of seasonal fluctuations. Demand for our core single-family new home products typically peaks each spring and summer before declining in the winter, consistent with the overall housing industry. Demand patterns for park model RVs and homes used primarily for retirement seasonal living partially offset the general housing seasonality. Cabins used for camping and vacation use are placed in a variety of climates that further mitigates the effects of seasonality on our sales volume. Cavco’s Company-owned retail stores experience decreased home buyer traffic during holidays and popular vacation periods; however, the one to three month retail sales process tends to somewhat mitigate the impact of these irregular traffic patterns.
Cavco’s mortgage subsidiary experiences minimal seasonal fluctuation in its mortgage origination activities as a result of the time needed for loan application approval processes and subsequent home loan closing activities. The mortgage subsidiary realizes no seasonal impacts from its mortgage servicing operations. Revenue for the home insurance subsidiary is not impacted by seasonality as it recognizes revenue from policy sales ratably over each policy’s term year. The insurance subsidiary is subject to the effects of seasonal storms in Texas, where most of its policies are underwritten. Spring storm activity typically spikes each April and May, the prime season for Texas weather events. Where applicable, losses from catastrophic events are somewhat limited by reinsurance contracts in place as part of the Company’s loss mitigation structure. While the severity of weather events has and can be expected to vary over time, the insurance subsidiary is a well-established and time-tested business. The entity has been a solid performer for the Company over time despite occasional periods of high claims experience.
Employees
We have approximately 4,300 employees. We believe that our relationship with our employees is good.
Available Information
We make available free of charge through our Internet site, www.cavco.com, the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"): the Annual Report on Form 10-K, the Quarterly Reports on Form 10-Q, the Conflict Minerals Report on Form SD, the Current Reports on Form 8-K and amendments to those Reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act").

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ITEM 1A. RISK FACTORS
Our business involves a number of risks and uncertainties. You should carefully consider the following risks, together with the information provided elsewhere in this Annual Report. The items described below are not the only risks facing us. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations.
We operate in an industry that is currently experiencing a prolonged and significant downturn
Since mid-1999, the manufactured housing industry has experienced a prolonged and significant downturn. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of the manufactured homes securing defaulted loans. From 2004 to 2007, the industry’s downturn was exacerbated by the aggressive financing methods available to customers of developers and marketers of site-built homes, which had the effect of diverting potential manufactured housing buyers to more expensive site-built homes. Since 2008, the global credit crisis and general deterioration of economic conditions have extended the depressed market conditions in which our industry operates. These factors have resulted in reduced wholesale shipments and excess manufacturing and retail locations. However, industry shipment numbers have been increasing over the past seven years.
The availability of consumer financing for the purchase of manufactured homes continues to be constrained. If current industry conditions continue or get materially worse, we may be required to take steps in an attempt to mitigate the effect of unfavorable industry conditions, such as the closure of facilities or consolidation of existing operations. These steps could impair our ability to conduct our business in a manner consistent with past practice and could make it more difficult for us to expand our operations if and when industry conditions improve. Furthermore, some of these steps could lead to fixed asset, goodwill or other impairment charges.
We may not be able to successfully integrate past acquisitions, including the recent acquisition of Lexington Homes, or any future acquisition to attain the anticipated benefits. Past acquisitions may adversely impact the Company’s liquidity
On April 3, 2017, the Company purchased Lexington Homes, which operates one manufacturing facility in Lexington, Mississippi. This transaction provides additional home production capabilities and increased distribution into new markets in Southeast.
We may consider other strategic acquisitions if such opportunities arise. Prior acquisitions and any other acquisitions that we may consider in the future, involve a number of risks, including the diversion of our management’s attention from our existing business for those transactions that we complete, or possible adverse effects on our operating results during the integration process and on our liquidity. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage the operations or employees of past acquisitions, Lexington Homes or potential future acquisitions. We also may not be able to maintain uniform standards, controls, procedures and policies, which may lead to financial losses.
Our involvement in vertically integrated lines of business, including manufactured housing consumer finance, commercial finance and insurance, exposes the Company to certain risks
CountryPlace offers conforming mortgages, non-conforming mortgages, and chattel loans to purchasers of factory-built homes sold by Company-owned retail sales centers and independent retailers, builders, communities and developers. CountryPlace is an approved seller/servicer with Fannie Mae and Freddie Mac, is approved by HUD to originate FHA-insured mortgages under its Direct Endorsement program, and is approved to issue Ginnie Mae mortgage-backed securities. Most loans originated through CountryPlace are sold to investors. CountryPlace also provides various loan servicing functions for non-affiliated entities under contract. CountryPlace has expanded its chattel lending programs, partially with the support of independent third party financiers. Chattel loans originated will either be sold outright, grouped and sold as a pool of loans or held for investment.

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If CountryPlace’s customers are unable to repay their loans, CountryPlace may be adversely affected. CountryPlace makes loans to borrowers that it believes are creditworthy based on its underwriting guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including, but not limited to: national, regional and local economic conditions; changes or weakness in specific industry segments; natural hazard risks affecting the region in which the borrower resides; and employment, financial or unexpected life circumstances.
If customers do not repay their loans, CountryPlace may repossess or foreclose on the secured property in order to liquidate its loan collateral and minimize losses. The homes and land securing the loans are subject to fluctuating market values, and proceeds realized from liquidating repossessed or foreclosed property are highly susceptible to adverse movements in collateral values. Home price depreciation and elevated levels of unemployment may result in additional defaults and exacerbate actual loss severities upon collateral liquidation beyond those normally experienced by CountryPlace.
Some of the loans CountryPlace has originated or may originate in the future may not have a liquid market, or the market may contract rapidly and the loans may become illiquid. Although CountryPlace offers loan products and prices its loans at levels that it believes are marketable at the time of credit application approval, market conditions for its loans may deteriorate rapidly and significantly. CountryPlace’s ability to respond to changing market conditions is bound by credit approval and funding commitments it makes in advance of loan completion. In this environment, it is difficult to predict the types of loan products and characteristics that may be susceptible to future market curtailments and tailor our loan offerings accordingly. As a result, no assurances can be given that the market value of our loans will not decline in the future, or that a market will continue to exist for loan products.
CountryPlace sells loans through GSE-related programs and whole-loan purchasers and finances certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, CountryPlace provides to the GSEs, whole-loan purchasers and lenders representations and warranties related to the loans sold or financed. These representations and warranties generally relate to the ownership of the loans, the validity of the liens securing the loans, the loans' compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by buyers and CountryPlace’s ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase or indemnification. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. CountryPlace maintains a reserve for these contingent repurchase and indemnification obligations.
Standard Casualty and Standard Insurance Agency specialize in the manufactured housing industry, primarily serving the Texas, Arizona, New Mexico and Georgia markets. 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 insurance policies outside the state of Texas are written on a direct basis through local agents. Property and casualty insurance companies are subject to certain risk-based capital requirements as specified by the National Association of Insurance Commissioners. Under those requirements, the amount of capital and surplus maintained by a property and casualty insurance company is determined based on its various risk factors.
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. 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. Further, Standard Casualty’s policies in force may be subject to numerous risks including geographic concentration, adverse selection, home deterioration, unusual weather events, and regulation. Although claim amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses up to policy maximums, significant losses may be realized and our results of operations and financial condition could be adversely affected.

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Tightened credit standards, curtailed lending activity by home-only lenders and increased government lending regulations have contributed to a constrained consumer financing market
Consumers who buy our manufactured homes have historically secured retail financing from third-party lenders. Home-only financing is at times more difficult to obtain than financing for site-built homes. The availability, terms and costs of retail financing depend on the lending practices of financial institutions, governmental policies and economic and other conditions, all of which are beyond our control.
Since 1999, home-only lenders have tightened the credit underwriting standards for loans to purchase manufactured homes, which has reduced lending volumes and negatively impacted our revenue. Most of the national lenders who have historically provided home-only loans have exited the manufactured housing sector of the home loan industry. Retail sales of manufactured housing could be adversely affected if remaining retail lenders curtail industry lending activities or exit the industry altogether.
Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business. The GSEs and the FHA play significant roles in insuring or purchasing home mortgages and creating or insuring investment securities that are either sold to investors or held in their portfolios. These organizations provide significant liquidity to the secondary market. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that alter the roles of these organizations in the housing finance market could affect the ability of our customers to obtain mortgage loans or could increase mortgage interest rates, fees, and credit standards, which could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations.
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 continues to assess its implications and implement necessary changes in procedures and business practices. The Dodd-Frank Act established the CFPB to regulate consumer financial products and services. Although many rules have been implemented, the full impact will not be known for years as revisions and the development of additional rules continue, and Congress and the new President consider amending part of the Act. Enforcement actions are in the early stages and the effects of possible litigation related to the regulations remains unknown.
In 2014, certain CFPB mortgage finance rules required under the Dodd-Frank Act became effective. The rules apply to consumer credit transactions secured by a dwelling, which include real property mortgages and chattel loans (financed without land) secured by manufactured homes. The rules defined standards for origination of "Qualified Mortgages," established specific requirements for lenders to prove borrowers' ability to repay loans and outlined the conditions under which Qualified Mortgages are subject to safe harbor limitations on liability to borrowers. The rules also established interest rates and other cost parameters for determining which Qualified Mortgages fall under safe harbor protection. While many manufactured homes are currently financed with agency-conforming mortgages in which the ability to repay is verified, and interest rates and other costs are within the safe harbor limits established under the CFPB mortgage finance rules, certain loans to finance the purchase of manufactured homes, especially chattel loans and non-conforming land-home loans, may fall outside the safe harbor limits. Among other issues, Qualified Mortgages with interest rates and other costs outside the limits are deemed "rebuttable" by borrowers and expose the lender and its assignees (including investors in loans, pools of loans, and instruments secured by loans or loan pools) to possible litigation and penalties.
Overall, the rules have caused some lenders to curtail underwriting such loans, and some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. If so, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, compliance with the law and ongoing rule implementation has caused lenders to incur additional costs to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. 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.

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The CFPB rules amending the TILA and RESPA expand the types of mortgage loans that are subject to the protections of the HOEPA, revise and expand the tests for coverage under HOEPA, and impose additional restrictions on mortgages that are covered by HOEPA. As a result, certain manufactured home loans are now subject to HOEPA limits on interest rates and fees. Loans with rates or fees in excess of the limits are deemed High Cost Mortgages and provide additional protections for borrowers, including with respect to determining the value of the home. Most loans for the purchase of manufactured homes have been written at rates and fees that would not appear to be considered High Cost Mortgages under the new rule. Although some lenders may continue to offer loans that are now deemed High Cost Mortgages, the rate and fee limits appear to have deterred some lenders from offering loans to certain borrowers and may continue to make them reluctant to enter into loans subject to the provisions of HOEPA. As a result, some prospective buyers of manufactured homes may be unable to secure financing necessary to complete manufactured home purchases.
In addition, the CFPB has issued a final rule amending Regulation C of the HMDA, which becomes effective on January 1, 2018 that requires certain financial institutions, including non-depository institutions, to collect, record, report and disclose information about their mortgage lending activity. Violations of Regulation C, including incomplete, inaccurate, or omitted data are subject to administrative sanctions, including civil money penalties.
The availability of wholesale financing for industry retailers is limited due to a reduced number of floor plan lenders and reduced lending limits
Manufactured housing retailers generally finance their inventory purchases with wholesale floor plan financing provided by lending institutions. The availability of wholesale financing is significantly affected by the number of floor plan lenders and their lending limits. Since 1999, a substantial number of wholesale lenders have exited the industry or curtailed their floor plan operations. As a result, the Company’s independent retailers have relied primarily on 21st Mortgage Corporation and smaller national and regional lending institutions that have specialized in providing wholesale floor plan financing to manufactured housing retailers. Floor plan financing providers could further reduce their levels of floor plan lending. Reduced availability of floor plan lending negatively affects the inventory levels of our independent retailers, the number of retail sales center locations and related wholesale demand, and adversely affects the availability of and access to capital on an ongoing basis.
Our participation in certain financing programs for the purchase of our products by industry distributors and consumers may expose us to additional risk of credit loss, which could adversely impact the Company’s liquidity and results of operations
We are exposed to risks associated with the creditworthiness of certain independent retailers, builders, developers, community owners, inventory financing partners and home buyers, many of whom may be adversely affected by the volatile conditions in the economy and financial markets. These conditions could result in financial instability or other adverse effects. The consequences of such adverse effects could include delinquencies by customers who purchase our product under special financing initiatives, and deterioration of collateral values. In addition, we may incur losses if our collateral cannot be recovered or liquidated at prices sufficient to recover recorded commercial loan notes receivable balances. The realization of any of these factors may adversely affect our cash flow, profitability and financial condition.

Our results of operations could be adversely affected by significant warranty and construction defect claims on factory-built housing
In the ordinary course of our business, we are subject to home warranty and construction defect claims. We record a reserve for estimated future warranty costs relating to homes sold, based upon our assessment of historical experience factors. Construction defect claims may arise during a significant period of time after product completion. Although we maintain general liability insurance and reserves for such claims, based on our assessments, which to date have been adequate, there can be no assurance that warranty and construction defect claims will remain at current levels or that such reserves will continue to be adequate. A large number of warranty and construction defect claims exceeding our current levels could have a material adverse effect on our results of operations.

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We have contingent repurchase obligations related to wholesale financing provided to industry retailers
In accordance with customary business practice in the manufactured housing industry, we have entered into repurchase agreements with various financial institutions and other credit sources who provide floor plan financing to industry retailers, which provide that we will be obligated, under certain circumstances, to repurchase homes sold to retailers in the event of a default by a retailer in its obligation to such credit sources. Under these agreements, we have agreed to repurchase homes at declining prices over the term of the agreement (which in most cases is 18 to 36 months). Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $46.3 million as of April 1, 2017, without reduction for the resale value of the homes. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements.
Our operating results could be affected by market forces and declining housing demand
As a participant in the homebuilding industry, we are subject to market forces beyond our control. These market forces include employment levels, employment growth, interest rates, consumer confidence, land availability and development costs, apartment and rental housing vacancy levels, inflation, deflation and the health of the general economy. Unfavorable changes in any of the above factors or other issues could have an adverse effect on our revenue and earnings.
We have incurred net losses in certain prior periods and there can be no assurance that we will generate income in the future
Since becoming a stand-alone public company, we have generated net income each complete fiscal year, except for fiscal year 2010, in which we incurred net losses attributable in substantial part to the downturn affecting the manufactured housing industry, which is discussed in detail above. The likelihood that we will generate net income in the future must be considered in light of the difficulties facing the manufactured housing industry as a whole, economic conditions, the competitive environment in which we operate and the other risks and uncertainties discussed in this section of the Annual Report. There can be no assurance that we will generate net income in the future.
A write-off of all or part of our goodwill could adversely affect our operating results and net worth
As of April 1, 2017, 11% of our total assets consisted of goodwill, all of which is attributable to our factory-built housing operations. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other ("ASC 350"), we test goodwill annually for impairment. If goodwill has become impaired, we charge the impairment as an expense in the period in which the impairment occurred. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" and Note 1 to the Consolidated Financial Statements. Our goodwill could be impaired if developments affecting our manufacturing operations or the markets in which we produce manufactured homes lead us to conclude that the cash flows we expect to derive from our manufacturing operations will be substantially reduced. A write off of all or part of our goodwill could adversely affect our results of operations and financial condition.
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
The manufactured housing industry is highly cyclical and seasonal and is influenced by many national and regional economic and demographic factors, including the availability of consumer financing for home buyers, the availability of wholesale financing for retailers, seasonality of demand, consumer confidence, interest rates, demographic and employment trends, income levels, housing demand, general economic conditions, including inflation and recessions, and the availability of suitable home sites.
As a result of the foregoing economic, demographic and other factors, our revenues and operating results fluctuate, and we expect them to continue to fluctuate in the future. Moreover, we have experienced and could again experience operating losses during cyclical downturns in the manufactured housing market.

19

Our liquidity and ability to raise capital may be limited
We may need to obtain debt or additional equity financing in the future. The type, timing and terms of the financing selected by us will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. There can be no assurance that any of these sources will be available to us at any time or that they will be available on satisfactory terms.
The manufactured housing industry is highly competitive, and increased competition may result in lower revenue
The manufactured housing industry is highly competitive. Competition at both the manufacturing and retail levels is based upon several factors, including price, product features, reputation for service and quality, merchandising, terms of retailer promotional programs and the terms of retail customer financing. Numerous companies produce manufactured homes in our markets. In addition, our homes compete with repossessed homes that are offered for sale in our markets. Certain of our manufacturing competitors also have their own retail distribution systems and consumer finance and insurance operations. In addition, there are many independent manufactured housing retail locations in most areas where we have retail operations. We believe that where wholesale floor plan financing is available, it is relatively easy for new retailers to enter into our markets as competitors. In addition, our products compete with other forms of low- to moderate-cost housing, including new and existing site-built homes, apartments, townhouses and condominiums. If we are unable to compete effectively in this environment, our factory-built housing revenue could be reduced.
If we are unable to establish or maintain relationships with independent distributors who sell our homes, our revenue could decline
During fiscal year 2017, approximately 81% of our wholesale sales of manufactured homes were to independent distributors. As is common in the industry, independent distributors may also sell homes produced by competing manufacturers. We may not be able to establish relationships with new independent distributors or maintain good relationships with independent distributors that sell our homes. Even if we do establish and maintain relationships with independent distributors, these distributors are not obligated to sell our homes exclusively and may choose to sell our competitors' homes instead. The independent distributors with whom we have relationships can cancel these relationships on short notice. In addition, these distributors may not remain financially solvent, as they are subject to industry, economic, demographic and seasonal trends similar to those faced by us. If we do not establish and maintain relationships with solvent independent distributors in one or more of our markets, revenue in those markets could decline.
Our business and operations are concentrated in certain geographic regions, which could be impacted by market declines
Our operations are concentrated in certain states, most notably Texas, California, Florida, Arizona and Oregon. Due to the concentrated nature of our operations, there could be instances where these regions are negatively impacted by economic, natural or population changes that could, in turn, negatively impact the results of the business, more than other companies that are more geographically dispersed.
The Company operates 20 homebuilding facilities located in the Northwest, Southwest, South, Southeast, Midwest and Mid-Atlantic regions. We have a significant presence in Texas with factories in the cities of Austin, Ft. Worth, Seguin and Waco. Further, of our 43 Company-owned sales centers, 32 are located in Texas.
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. CountryPlace has loan contracts secured by factory-built homes located in 30 states, including Texas, Florida, New Mexico and Arizona.
Standard Casualty and Standard Insurance Agency specialize in the manufactured housing industry, primarily serving the Texas, Arizona, New Mexico and Georgia markets.
A decline in the economic conditions in the United States and especially the economies of Texas, California, Florida, Arizona and/or Oregon could have a material adverse effect on our results of operations.

20

Our results of operations can be adversely affected by labor shortages and the pricing and availability of raw materials
The homebuilding industry has from time to time experienced labor shortages and other labor related issues. A number of factors may adversely affect the labor force available to us and our subcontractors in one or more of our markets, including high employment levels, construction market conditions and government regulation, which include laws and regulations related to workers’ health and safety, wage and hour practices and immigration. An overall labor shortage or a lack of skilled or unskilled labor could cause significant increases in costs or delays in construction of homes, which could have a material adverse effect upon our revenue and results of operations.
Our results of operations can be affected by the pricing and availability of raw materials. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases may lag behind the escalation of materials costs. Sudden increases in price and lack of availability of raw materials can be caused by natural disaster, regulation or other market forces, as has occurred in recent years. Although we have not experienced any production halts, severe or prolonged shortages of some of our most important building materials, which include wood and wood products, gypsum wallboard, steel, insulation, and other petroleum-based products, have occurred. There can be no assurance that sufficient supplies of these and other raw materials will continue to be available to us.
If the manufactured housing industry is not able to secure favorable local zoning ordinances, our revenue could decline and our business could be adversely affected
Manufactured housing communities and individual home placements are subject to local zoning ordinances and other local regulations relating to utility service and construction of roadways. In the past, property owners often have resisted the adoption of zoning ordinances permitting the location of manufactured homes in residential areas, which we believe has restricted the growth of the industry. Manufactured homes may not achieve widespread acceptance and localities may not adopt zoning ordinances permitting the development of manufactured home communities. If the manufactured housing industry is unable to secure favorable local zoning ordinances, our revenue could decline and our business, results of operations and financial condition 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
We are dependent to a significant extent upon the efforts of our executive officers. The loss of the services of one or more of our executive officers could impair our ability to execute our business strategy and have a material adverse effect upon our business, financial condition and results of operations. We currently have no key person life or other insurance for our executive officers.
Certain provisions of our organizational documents could delay or make more difficult a change in control of our Company
Certain provisions of our restated certificate of incorporation and restated bylaws could delay or make more difficult transactions involving a change of control of our Company, and may have the effect of entrenching our current management or possibly depressing the market price of our common stock. For example, our restated certificate of incorporation and restated bylaws authorize blank series preferred stock, establish a staggered board of directors and impose certain procedural and other requirements for stockholder proposals. Furthermore, the fact that income taxes could be imposed as a result of ownership changes occurring in conjunction with a distribution may have the effect of delaying or making more difficult certain transactions involving a change of control of our Company.

21

Volatility of stock price
The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our control. These factors include: the perceived prospects of our business and the manufactured housing industry as a whole; differences between our actual financial and operating results and those expected by investors and analysts; changes in analysts' recommendations or projections; changes affecting the availability of financing in the wholesale and consumer lending markets; actions or announcements by competitors; changes in the regulatory environment in which we operate; significant sales of shares by a principal stockholder; actions taken by stockholders that may be contrary to Board of Director recommendations; and changes in general economic or market conditions. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our common stock for reasons unrelated to our performance.
Deterioration in economic conditions and turmoil in financial markets could reduce our earnings and financial condition
Deterioration in regional or global economic conditions and turmoil in financial markets could have a negative impact on our business. Among other things, unfavorable changes in employment levels, job growth, consumer confidence and income, inflation, deflation, foreign currency exchange rates and interest rates may further reduce demand for our products, which could negatively affect our business, results of operations and financial condition. Unprecedented contraction in the credit markets and the financial services industry have occurred in recent years, characterized by the bankruptcy, failure or consolidation of various financial institutions and extraordinary intervention from the federal government. These factors could have an adverse effect on the availability of financing to our customers, causing our revenues to decline.
The cost of operations could be adversely impacted by increased costs of healthcare benefits provided to employees
In 2010, the Affordable Care Act, was passed into law. As enacted, the Health Reform Law reforms, among other things, certain aspects of health insurance. The Affordable Care Act could increase our healthcare costs, adversely impacting the Company’s earnings. On March 6, 2017, the American Health Care Act of 2017 (House of Representatives Bill 1628) passed the vote of the House of Representatives, which would repeal and replace the Affordable Care Act. At this time, it is uncertain how the changes would impact our results of operations.
A prolonged delay by Congress and the President to approve budgets or continuing appropriation resolutions to facilitate the operations of the federal government could delay the completion of home sales and/or cause cancellations, and thereby negatively impact our deliveries and revenues
Congress and the President may not timely approve budgets or appropriation legislation to facilitate the operations of the federal government. As a result, many federal agencies have historically and may again cease or curtail some activities. The affected activities include Internal Revenue Service ("IRS") verification of loan applicants’ tax return information and approvals by the FHA and other government agencies to fund or insure mortgage loans under programs that these agencies operate. As a number of our home buyers use these programs to obtain financing to purchase our homes, and many lenders, including CountryPlace, require ongoing coordination with these and other governmental entities to originate home loans, a prolonged delay in the performance of their activities could prevent prospective qualified buyers of our homes from obtaining the loans they need to complete such purchases, which could lead to delays or cancellations of home sales. These and other affected governmental bodies could cause interruptions in various aspects of our business and investments. Depending on the length of disruption, such factors could have a material adverse impact on our consolidated financial statements.

22

Information technology failures or data security breaches could harm our business
We use information technology and other computer resources to carry out important operational activities and to maintain our business records. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches (through cyber-attacks from computer hackers and sophisticated organizations), catastrophic events such as fires, tornadoes and hurricanes and human error. Given the unpredictability of the timing, nature and scope of information technology disruptions, if our computer systems and our backup systems are damaged, breached, or cease to function properly, we could potentially be subject to production downtimes, operational delays, the compromising of confidential or otherwise protected information (including information about our home buyers and business partners), destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.

We are subject to extensive regulation affecting the production and sale of manufactured housing, which could adversely affect our profitability.
We are subject to a variety of federal, state and local laws and regulations affecting the production and sale of manufactured housing. Please refer to the section above under the heading "Government Regulation" for a description of many of these laws and regulations. Our failure to comply with such laws and regulations could expose us to a wide variety of sanctions, including closing one or more manufacturing facilities. Regulatory matters affecting our operations are under regular review by governmental bodies and we cannot predict what effect, if any, new laws and regulations would have on us or the manufactured housing industry. Failure to comply with applicable laws or regulations or the passage in the future of new and more stringent laws, may adversely affect our financial condition or results of operations.
Forward-Looking Statements
This Annual Report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. In general, all statements included or incorporated in this Annual Report that are not historical in nature are forward-looking. These may include statements about our plans, strategies and prospects under the headings "Business," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," or "anticipates," or by discussions of strategy, plans or intentions. Forward-looking statements are typically included, for example, in discussions regarding the manufactured housing and site-built housing industries; our financial performance and operating results; and the expected effect of certain risks and uncertainties on our business, financial condition and results of operations, economic conditions and consumer confidence, our operational and legal risks, how we may be affected by governmental regulations and legal proceedings, the expected effect of certain risks and uncertainties on our business, the availability of favorable consumer and wholesale manufactured home financing, market interest rates and our investments, and the ultimate outcome of our commitments and contingencies.
All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results or performance may differ materially from anticipated results or performance. Also, forward-looking statements are based upon management's estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences to occur include, but are not limited to, those discussed under Item 1A, "Risk Factors," and elsewhere in this Annual Report. We expressly disclaim any obligation to update any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise. For all of these reasons, you should not place any reliance on any such forward-looking statements included in this Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

23

ITEM 2. PROPERTIES
The following table sets forth certain information with respect to our core properties:
Location
 
Date of
Commencement
of Operations
 
Owned /
Leased
 
Square
Feet
Active manufacturing facilities:
 
 
 
 
 
 
Millersburg, Oregon
 
1995
 
Owned
 
169,000

Woodburn, Oregon
 
1976
 
Owned
 
221,000

Nampa, Idaho
 
1957
 
Owned
 
171,000

Riverside, California
 
1960
 
Owned
 
107,000

Goodyear, Arizona
 
1993
 
Leased
 
250,000

Phoenix, Arizona
 
1978
 
Owned
 
79,000

Austin, Texas
 
1981
 
Owned
 
104,000

Fort Worth, Texas
 
1993
 
Owned
 
121,000

Seguin, Texas
 
2006
 
Owned
 
129,000

Waco, Texas
 
1971
 
Owned
 
132,000

Montevideo, Minnesota (2 plants) (1)
 
1982
 
Owned
 
305,000

Nappanee, Indiana
 
1971
 
Owned
 
341,000

Lafayette, Tennessee
 
1996
 
Owned
 
149,000

Lexington, Mississippi
 
2004
 
Leased
 
119,800

Martinsville, Virginia
 
1969
 
Owned
 
132,000

Rocky Mount, Virginia
 
1995
 
Owned
 
137,000

Douglas, Georgia
 
1988
 
Owned
 
142,000

Ocala, Florida
 
1984
 
Leased
 
91,000

Plant City, Florida
 
1981
 
Owned
 
87,000

Component and supply facilities:
 
 
 
 
 
 
Martinsville, Virginia
 
1972
 
Owned
 
148,000

Nappanee, Indiana
 
1971
 
Leased
 
77,000

Inactive manufacturing facilities:
 
 
 
 
 
 
Austin, Texas
 
 
 
Owned
 
77,000

Lexington, Mississippi
 
 
 
Leased
 
109,300

Martinsville, Virginia
 
 
 
Owned
 
44,000

Plant City, Florida
 
 
 
Owned
 
94,000

Administrative and other locations:
 
 
 
 
 
 
Phoenix, Arizona
 
 
 
Leased
 
11,000

Addison, Texas
 
 
 
Leased
 
24,000

New Braunfels, Texas
 
 
 
Owned
 
9,000

Nappanee, Indiana
 
 
 
Leased
 
18,000

(1)This facility was purchased by the Company during fiscal year 2017.


24

We own the land on which the manufacturing facilities are located, except for the Goodyear, Arizona plant, which is currently leased through June 30, 2021 with options to extend; the Ocala, Florida plant, which is currently leased through March 29, 2018 with options to extend; and the Lexington, Mississippi plants (active and inactive), which are currently leased through October 31, 2025 and October 3, 2017, respectively, with options to extend. We also own substantially all of the machinery and equipment used at these factories. We believe that these facilities are adequately maintained and suitable for the purposes for which they are used. In addition to our production facilities, we own an office building and land in New Braunfels, Texas, which houses Standard Casualty's operations, as well as ten properties upon which six of our active retail centers are located. The remaining active sales centers and a claims office are leased under operating leases with lease terms generally ranging from monthly to five years. Our Company-owned retail centers generally range in sizes up to nine acres. We lease office space in Addison, Texas for CountryPlace operations and Palm Harbor administrative support services, pursuant to a lease that expires in 2023. Our Phoenix, Arizona corporate headquarters lease expires in January 2018. The Company has the right to terminate the lease prior to the expiration. The Company also leases an administrative office and a supply facility in Nappanee, Indiana, expiring in July 2017 with options to extend.
ITEM 3. LEGAL PROCEEDINGS
We are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Certain of the claims pending against us in these proceedings allege, among other things, breach of contract, breach of express and implied warranties, construction defects, deceptive trade practices, unfair insurance practices, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

25

SUPPLEMENTAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 of Part III of this Report)
The following is a listing of our executive officers as of June 13, 2017, as such term is defined under the rules and regulations of the Securities and Exchange Commission. Officers are generally elected by the Board of Directors at its meeting immediately following our annual stockholders’ meeting, with each officer serving until a successor has been elected and qualified. There is no family relationship between these officers.
Name
 
Age
 
Positions with Cavco or Business Experience
Joseph H. Stegmayer
 
66
 
Chairman of the Board, President and Chief Executive Officer since March 2001; Director and Officer of certain of Cavco's major subsidiaries, including Palm Harbor Homes, Inc. and Fleetwood Homes, Inc; President of Centex Manufactured Housing Group, LLC from September 2000 to June 2003; President - Retail Operations and Chief Financial Officer of Champion Enterprises, Inc. from January 1998 to September 2000; President, Vice Chairman and Chairman of the Executive Committee of Clayton Homes, Inc. from 1993 to January 1998
 
 
 
 
 
Daniel L. Urness
 
49
 
Executive Vice President, Chief Financial Officer and Treasurer since January 2006; Director and Officer of certain of Cavco's major subsidiaries, including Palm Harbor Homes, Inc. and Fleetwood Homes, Inc; Interim Chief Financial Officer of the Company from August 2005 to January 2006; Corporate Controller from May 2005 to August 2005; Financial Consultant from June 2002 to May 2005; Controller from May 1999 to June 2002; Manager and staff with Deloitte & Touche, LLP from September 1993 to May 1999
 
 
 
 
 
Charles E. Lott
 
69
 
President of Fleetwood Homes, Inc. since August 2009; President and Vice President - Housing Group of Fleetwood Enterprises, Inc. from April 2005 to August 2009; Mr. Lott has worked for Fleetwood Enterprises and subsequently Fleetwood Homes for all but six years of his over 40-year career in the manufactured housing industry
 
 
 
 
 
Steven K. Like
 
60
 
Senior Vice President since February 2009; Director of Standard Casualty Company and affiliated agencies and Officer of certain of Cavco's subsidiaries; Executive Vice President and General Counsel- Patriot Homes from 1995 to February 2009; Partner at Warrick & Boyn, LLP from 1981-1995

26

PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the Nasdaq Global Select Market ("Nasdaq") under the symbol CVCO. The following table sets forth, for each of the periods indicated, the reported high and low sale prices per share on the Nasdaq for the Company's common stock.
 
Sales Price
 
High
 
Low
Year ended April 1, 2017
 
 
 
Fourth Quarter
$
121.70

 
$
93.65

Third Quarter
105.75

 
88.65

Second Quarter
110.67

 
90.63

First Quarter
102.53

 
85.56

Year ended April 2, 2016
 
 
 
Fourth Quarter
$
95.25

 
$
70.28

Third Quarter
106.55

 
66.71

Second Quarter
78.28

 
66.22

First Quarter
78.75

 
64.54

As of June 2, 2017, the Company had 702 stockholders of record and approximately 9,100 beneficial holders of its common stock, based upon information in securities position listings by registered clearing agencies upon request of the Company's transfer agent.
In the past two fiscal years, we have not paid any dividends on our common stock. The payment of dividends to our stockholders is subject to the discretion of our board of directors and various factors may prevent us from paying dividends. Such factors include our cash requirements and liquidity and the requirements of state corporate and other laws.
Equity Compensation Plan Table
Information concerning equity compensation plans is included in Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in this Annual Report.
Issuer Purchases of Equity Securities
In 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 repurchase program 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.

27

Performance Graph
The following graph compares the yearly change in the cumulative total stockholder return on Cavco common stock during the five fiscal years ended April 1, 2017 with that of the Nasdaq Composite Index and the Nasdaq US Small Cap Home Construction Index. The comparison assumes $100 (with reinvestment of all dividends) was invested on March 31, 2012 in Cavco common stock and in each of the foregoing indices.
CAVCO INDUSTRIES, INC.
 
3/31/2012
3/30/2013
3/29/2014
3/28/2015
4/2/2016
4/1/2017
Cavco Industries, Inc.
$
100

$
102

$
169

$
161

$
200

$
250

Nasdaq Composite Index
$
100

$
106

$
134

$
158

$
159

$
191

Nasdaq US Small Cap Home Construction Index
$
100

$
181

$
166

$
169

$
133

$
166



cvco-201741_chartx22206.jpg


28

ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data regarding Cavco for the fiscal years indicated. The data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, the information presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
 
Year Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
 
March 30,
2013
 
(Dollars in thousands, except per share data)
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net revenue
$
773,797

 
$
712,352

 
$
566,659

 
$
533,339

 
$
452,300

Cost of sales
615,760

 
567,907

 
440,523

 
413,856

 
351,945

Gross profit
158,037

 
144,445

 
126,136

 
119,483

 
100,355

Selling, general and administrative expenses
101,231

 
98,103

 
87,659

 
87,938

 
79,313

Income from operations
56,806

 
46,342

 
38,477

 
31,545

 
21,042

Interest expense
(4,443
)
 
(4,363
)
 
(4,587
)
 
(4,845
)
 
(5,973
)
Other income, net
2,918

 
2,049

 
3,437

 
1,105

 
1,579

Income before income taxes
55,281

 
44,028

 
37,327

 
27,805

 
16,648

Income tax expense
(17,326
)
 
(15,487
)
 
(13,510
)
 
(9,099
)
 
(6,351
)
Net income
37,955

 
28,541

 
23,817

 
18,706

 
10,297

Less: net income attributable to redeemable noncontrolling interest
—

 
—

 
—

 
2,468

 
5,334

Net income attributable to Cavco common stockholders
$
37,955

 
$
28,541

 
$
23,817

 
$
16,238

 
$
4,963

 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
$
37,955

 
$
28,541

 
$
23,817

 
$
18,706

 
$
10,297

Unrealized gain on available-for-sale securities, net of tax
97

 
785

 
68

 
82

 
238

Comprehensive income
38,052

 
29,326

 
23,885

 
18,788

 
10,535

Comprehensive income attributable to redeemable noncontrolling interest
—

 
—

 
—

 
2,392

 
5,453

Comprehensive income attributable to Cavco common stockholders
$
38,052

 
$
29,326

 
$
23,885

 
$
16,396

 
$
5,082

 
 
 
 
 
 
 
 
 
 
Net income per share attributable to Cavco common stockholders:
 
 
 
 
 
 
 
 
 
Basic
$
4.23

 
$
3.21

 
$
2.69

 
$
1.97

 
$
0.71

Diluted
$
4.17

 
$
3.15

 
$
2.64

 
$
1.94

 
$
0.71

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
8,976,064

 
8,889,731

 
8,854,359

 
8,262,688

 
6,956,706

Diluted
9,105,743

 
9,046,347

 
9,015,779

 
8,379,024

 
7,027,204



29

 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
 
March 29,
2014
 
March 30, 2013
 
(Dollars in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
132,542

 
$
97,766

 
$
96,597

 
$
72,949

 
$
47,823

Restricted cash, current
11,573

 
10,218

 
9,997

 
7,213

 
6,773

Accounts receivable, net
31,221

 
29,113

 
26,994

 
20,766

 
18,710

Short-term investments
11,289

 
10,140

 
7,106

 
8,289

 
6,929

Current portion of consumer loans receivable, net
31,115

 
21,918

 
24,073

 
19,893

 
20,188

Current portion of commercial loans receivable, net
7,932

 
3,557

 
2,330

 
2,941

 
3,983

Inventories
93,855

 
94,813

 
75,334

 
69,729

 
68,805

Assets held for sale
—

 
—

 
—

 
1,130

 
4,180

Prepaid expenses and other current assets
28,033

 
22,196

 
14,460

 
12,623

 
10,267

Deferred income taxes, current
9,204

 
8,998

 
8,573

 
12,313

 
6,724

Total current assets
356,764

 
298,719

 
265,464

 
227,846

 
194,382

Restricted cash
724

 
1,082

 
1,081

 
1,188

 
1,179

Investments
30,256

 
28,948

 
24,813

 
17,165

 
10,769

Consumer loans receivable, net
64,686

 
67,640

 
74,085

 
78,391

 
90,802

Commercial loans receivable, net
17,901

 
21,985

 
15,751

 
18,367

 
18,967

Property, plant and equipment, net
56,964

 
55,072

 
44,712

 
48,227

 
46,223

Goodwill and other intangibles, net
80,021

 
80,389

 
76,676

 
78,055

 
79,435

Deferred income taxes
—

 
—

 
—

 
—

 
2,742

Total assets
$
607,316

 
$
553,835

 
$
502,582

 
$
469,239

 
$
444,499

 
 
 
 
 
 
 
 
 
 
Total current liabilities
140,216

 
125,089

 
101,471

 
98,993

 
87,005

Securitized financings and other
51,574

 
54,909

 
60,370

 
59,865

 
72,118

Deferred income taxes
21,118

 
20,611

 
20,587

 
19,948

 
16,492

Redeemable noncontrolling interest
—

 
—

 
—

 
—

 
91,994

Total stockholders’ equity
394,408

 
353,226

 
320,154

 
290,433

 
176,890

Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
607,316

 
$
553,835

 
$
502,582

 
$
469,239

 
$
444,499

The selected financial data set forth above includes the accounts of Cavco and its consolidated subsidiaries, CRG Holdings, LLC, and Fleetwood (Fleetwood includes Palm Harbor, Fairmont Homes, Chariot Eagle, CountryPlace, Standard Casualty, and their subsidiaries). Until July 22, 2013, the Company and its investment partners, Third Avenue Value Fund and an affiliate, jointly-owned Fleetwood Homes, Inc. Cavco and Third Avenue each owned 50 percent of Fleetwood, which has been operated by the Company since Fleetwood’s inception in 2009. Third Avenue’s financial interest in Fleetwood was reported as a "redeemable noncontrolling interest" in the Consolidated Financial Statements. During the fiscal year ended March 29, 2014, Cavco completed the purchase from Third Avenue of all noncontrolling interests in Fleetwood and its subsidiaries. The transaction closed on July 22, 2013, resulting in Cavco owning 100 percent of the Fleetwood businesses and entitling Cavco to all of the associated earnings from that date forward.
The selected financial data set forth above may not be indicative of our future performance.

30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes that appear in Part IV 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, Palm Harbor Homes, Fairmont Homes, Friendship Homes, Chariot Eagle and Lexington Homes. The Company is also a leading builder 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 mortgage subsidiary, CountryPlace, is an approved Fannie Mae and Freddie Mac seller/servicer, a Ginnie Mae mortgage-backed securities issuer which offers conforming mortgages, non-conforming mortgages and chattel loans to purchasers of factory-built and site-built homes. Our insurance subsidiary, Standard Casualty, provides property and casualty insurance primarily to owners of manufactured homes.
Company Growth
From its inception in 1965, Cavco has traditionally served affordable housing markets in the southwestern United 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.
Beginning in 2007, the overall housing industry experienced a multi-year decline, which included the manufactured housing industry. Since this downturn, Cavco strategically expanded its factory operations and related business initiatives primarily through the acquisition of industry competitor operations. This development has enabled the Company to effectively participate in the ensuing housing industry recovery.
In 2009, the Company acquired certain manufactured housing assets and liabilities of Fleetwood Enterprises, Inc ("Fleetwood"). The assets purchased included seven operating production facilities as well as idle factories. During fiscal year 2011, the Company acquired certain manufactured housing assets and liabilities of Palm Harbor Homes, Inc., a Florida corporation. The assets purchased included five operating production facilities as well as idle factories, 49 operating retail locations, a manufactured housing finance company and a homeowners insurance company. These acquisitions expanded the Company's presence across the Unites States.
On March 30, 2015, the Company purchased the business and operating assets of Chariot Eagle, a Florida-based manufacturer of park model RVs and manufactured homes. This transaction has grown the Company's offering of park model RV product lines and further strengthened our market position in the Southeastern United States.
On May 1, 2015, Cavco acquired certain assets and liabilities of Fairmont Homes. Fairmont Homes is a builder of manufactured and modular homes and park model RVs, with manufacturing plants in Indiana and Minnesota selling under the Fairmont Homes and Friendship Homes brands. This transaction provides additional home production capabilities and increased distribution into new markets in the Midwest, the western Great Plains states and several provinces in Canada.
On April 3, 2017, the Company purchased Lexington Homes, which operates one manufacturing facility in Lexington, Mississippi. This transaction was accounted for as a business combination and provides additional home production capabilities and increased distribution into new markets in Southeast.

31

The Company operates 20 homebuilding facilities located in Millersburg and Woodburn, Oregon; Nampa, Idaho; Riverside, California; Phoenix and Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota (2); Nappanee, Indiana; Lafayette, Tennessee; Lexington, Mississippi; Martinsville and Rocky Mount, Virginia; Douglas, Georgia; Plant City and Ocala, Florida. The majority of the homes produced are sold to and distributed by independently owned retailers located primarily throughout the United States and Canada. In addition, our homes are sold through 43 Company-owned U.S. retail locations.
We continually review our product offerings throughout the combined organization and strive to improve product designs, production methods and marketing strategies. The supportive market response to the past and recent acquisitions has been encouraging and we believe that these expansions provide positive long-term strategic benefits for the Company. We plan to focus on developing synergies among all operations, which continue to have organic growth potential.
Industry and Company Outlook
According to data reported by the MHI, during calendar year 2016, our industry shipped approximately 81,000 HUD code manufactured homes. This followed approximately 71,000 homes shipped in 2015, 64,000 in 2014, 60,000 in 2013 and 55,000 shipped in calendar year 2012, among the lowest levels since industry shipment statistics began to be recorded in 1959. Annual home shipments from 2009 to 2016 were less than the annual home shipments for each of the 40 years from 1969 to 2008. While industry HUD code manufactured home shipments improved modestly during recent years, the manufactured housing industry is operating at relatively low production and shipment levels.
Although ongoing economic challenges continue to hinder annual industry and Company home sales, we believe that employment rates and underemployment among potential home buyers who favor affordable housing as well as low consumer confidence levels are improving from low levels reported in recent years. "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 were particularly affected by a period of persistently low employment rates and underemployment. Following such challenges, the process of repairing damaged credit among such consumers and efforts to save for a home loan down-payment often require substantial time. Improving consumer confidence in the U.S. economy is evident among manufactured home buyers interested in our products for seasonal or retirement living that have been concerned about financial stability, and appear to be less hesitant to commit to a new home purchase. We believe sales of our products may continue to increase as employment and consumer confidence levels continue to recover.
The two largest manufactured housing consumer demographics, young adults and those who are 55+ years old, are both growing. The U.S. adult population is estimated to expand by approximately 11.8 million between 2016 and 2021. Young adults born from 1976 to 1995, sometimes referred to as Gen Y, represent a large segment of the population. Late-stage Gen Y is approximately 2 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 buyers 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 homeowners that fall into this age group.

32

Consumer financing for the retail purchase of manufactured homes needs to become generally more available before marked emergence from current low home shipment levels can occur. Restrictive underwriting guidelines, irregular appraisal processes, higher interest rates compared to site-built homes, regulatory burdens, a limited number of institutions lending to manufactured home buyers and limited secondary market availability for manufactured home loans are significant constraints to industry growth. We are working directly with other industry participants to develop manufactured home consumer financing models to attract industry financiers interested in furthering or expanding lending opportunities in the industry. We have invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. CountryPlace developed chattel lending programs to grow sales of homes through traditional distribution point as well. We believe that growing our participation in chattel lending may provide additional sales growth opportunities for our factory-built housing operation.
We are also working through industry trade associations to encourage favorable legislative and GSE action to address the mortgage financing needs of potential buyers of affordable homes. Federal law requires the GSEs to issue a regulation 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. On May 8, 2017, FNMA and FHLMC released their Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill the "Duty to Serve" obligation. The focus of each of the three-year plans is to establish steps to ensure chattel loans can be purchased in bulk prior to proceeding with a chattel loan pilot. Expansion of the secondary market for chattel lending through the GSEs could provide further demand for housing, as lending options would likely become more available to home buyers. Although some limited progress has been made in the area, meaningful positive impact in the form of increased home orders has yet to be realized. See "Regulatory Developments" below.
While sales activity of existing homes has improved, the current lending environment that favors site-built housing and more affluent home buyers has not provided improved capabilities for affordable-home buyers to facilitate a new home purchase. In addition, the contingency contract process, wherein existing manufactured home owners must sell their existing manufactured home in order to facilitate the purchase of a new factory-built home continues to be somewhat impeded.
Based on the relatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing's monthly payment affordability. Rental housing activity is reported to have continued to increase in recent years. As a result, tenant housing vacancy rates appear to have declined, causing a corresponding rise in associated rental rates. These rental market factors may cause some renters to become interested buyers of affordable-housing alternatives, including manufactured homes.
Further, with respect to the general rise in demand for rental housing, we have realized a larger proportion of orders from developers and community owners for new manufactured homes intended for use as rental housing. The Company is responsive to the unique product and related requirements of these home buyers and values the opportunity to provide homes that are well suited for these purposes.
The backlog of sales orders at April 1, 2017 varied among our factories, but in total was $88.8 million, or approximately seven weeks of current production levels, compared to $47.9 million at April 2, 2016. Retailers may cancel orders prior to production without penalty. Accordingly, until the production of a particular home has commenced, we do not consider our order backlog to be firm orders.

33

The Company participates in certain commercial loan programs with 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 our 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 6 to the Consolidated Financial Statements). The Company’s involvement in commercial loans has increased the availability of manufactured home financing to distributors and users of our products. We believe that our participation in wholesale financing is helpful to retailers, communities and developers and allows our homes additional opportunities for exposure to potential home buyers. 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, communities and inventory financing partners.
With manufacturing facilities strategically positioned across the United States, 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 and interests. By offering a full range of homes from entry-level models to large custom homes 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.
We employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage. 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, specially designed ventilation systems and sustainability. Cavco also builds homes designed to use alternative energy sources, such as solar and wind. 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 in an effort 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 avoid liquidity problems and enable us to act effectively as market opportunities present themselves.
In 2008, we announced a stock repurchase program under which 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 continues to assess its implications and implement necessary changes in procedures and business practices. The Dodd-Frank Act established the CFPB to regulate consumer financial products and services. Although many rules have been implemented, the full impact will not be known for years as revisions and the development of additional rules continue, and Congress and the new President consider amending part of the Act. Enforcement actions are in the early stages and the effects of possible litigation related to the regulations remains unknown.

34

In 2014, certain CFPB mortgage finance rules required under the Dodd-Frank Act became effective. The rules apply to consumer credit transactions secured by a dwelling, which include real property mortgages and chattel loans (financed without land) secured by manufactured homes. The rules defined standards for origination of "Qualified Mortgages," established specific requirements for lenders to prove borrowers' ability to repay loans and outlined the conditions under which Qualified Mortgages are subject to safe harbor limitations on liability to borrowers. The rules also established interest rates and other cost parameters for determining which Qualified Mortgages fall under safe harbor protection. Among other issues, Qualified Mortgages with interest rates and other costs outside the limits are deemed "rebuttable" by borrowers and expose the lender and its assignees (including investors in loans, pools of loans, and instruments secured by loans or loan pools) to possible litigation and penalties.
While many manufactured homes are currently financed with agency-conforming mortgages in which the ability to repay is verified, and interest rates and other costs are within the safe harbor limits established under the CFPB mortgage finance rules, certain loans to finance the purchase of manufactured homes, especially chattel loans and non-conforming land-home loans, may fall outside the safe harbor limits. The rules have caused some lenders to curtail underwriting such loans, and some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. As a result, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, compliance with the law and ongoing rule implementation has caused lenders to incur additional costs to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. 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.
The CFPB rules amending the TILA and RESPA expand the types of mortgage loans that are subject to the protections of the HOEPA, revise and expand the tests for coverage under HOEPA, and impose additional restrictions on mortgages that are covered by HOEPA. As a result, certain manufactured home loans are now subject to HOEPA limits on interest rates and fees. Loans with rates or fees in excess of the limits are deemed High Cost Mortgages and provide additional protections for borrowers, including with respect to determining the value of the home. Most loans for the purchase of manufactured homes have been written at rates and fees that would not appear to be considered High Cost Mortgages under the new rule. Although some lenders may continue to offer loans that are now deemed High Cost Mortgages, the rate and fee limits appear to have deterred some lenders from offering loans to certain borrowers and may continue to make them reluctant to enter into loans subject to the provisions of HOEPA. As a result, some prospective buyers of manufactured homes may be unable to secure financing necessary to complete manufactured home purchases.
The Dodd-Frank Act amended provisions of TILA to require rules for appraisals on principal residences securing HPMLs. Certain loans secured by manufactured homes, primarily chattel loans, could be considered HPMLs. Among other things, the rule requires creditors to provide copies of appraisal reports to borrowers prior to loan closing. To implement these amendments, the CFPB adopted the HPML Appraisal Rule effective December 30, 2014 and loans secured by new manufactured homes were exempt from the rule until July 18, 2015. While effects of these new requirements are not fully known, some prospective home buyers may be deterred from completing a manufactured home purchase as a result of appraised values.
The Dodd-Frank Act also required integrating disclosures provided by lenders to borrowers under TILA and RESPA. The final rule became effective October 3, 2015. The TRID mandated extensive changes to the mortgage loan closing process and necessitated significant changes to mortgage origination systems. Since its implementation, technical ambiguities in the rule have resulted in lender and investor uncertainty regarding acceptable cures and tolerances for disclosure and estimate errors. It is not yet fully known how the GSEs and HUD will view TRID compliance, how they will apply their own interpretations of TRID to their repurchase and claims review processes, or how the market for private-label securitizations may be impacted.

35

Regulation C of the Home Mortgage Disclosure Act ("HMDA") enacted in 1975 requires certain financial institutions, including non-depository institutions, to collect, record, report and disclose information about their mortgage lending activity. The data-related requirements in the HMDA and Regulation C are used to identify potential discriminatory lending patterns and enforce anti-discrimination statutes. The Dodd-Frank Act transferred rulemaking authority for HMDA to the CFPB, effective in 2011. It also amended the HMDA to require financial institutions to report additional data points and to collect, record and report additional information. The CFPB issued a final rule amending Regulation C, which becomes effective on January 1, 2018. Regulation C generally applies to consumer-purpose, closed-end loans and open-end lines of credit that are secured by a dwelling. Non-depository financial institutions are subject to Regulation C if they originate at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years. Violations of Regulation C, including incomplete, inaccurate, or omitted data are subject to administrative sanctions, including civil money penalties and compliance can be enforced by the Federal Reserve Board, Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, the National Credit Union Administration, HUD, or the CFPB.
New FHA Title I program guidelines became effective on June 1, 2010 and provide Ginnie Mae the ability to securitize manufactured home FHA Title I loans. These guidelines were intended to allow lenders to obtain new capital, which can then be used to fund new loans for our customers. Chattel loans have languished for several years and these changes were meant to broaden chattel financing availability for prospective homeowners. However, we are aware of only a small number of loans currently being securitized under the Ginnie Mae program.
The SAFE Act established requirements for the licensing and registration of all individuals that are MLOs. MLOs must be registered or licensed by the states. Traditionally, manufactured housing retailers have assisted home buyers with securing financing for the purchase of homes. This assistance may have included assisting with loan applications and presenting terms of loans. Under the SAFE Act, these activities are prohibited unless performed by a registered or licensed MLO. Although the definition of an MLO contains exemptions for administrative and other specific functions and industries, manufactured housing retailers are no longer able to negotiate rates and terms for loans unless they are licensed as MLOs. Compliance may have required manufactured housing retailers to become licensed lenders and employ MLOs, or alter business practices related to assisting home buyers in securing financing. This may have resulted in increased costs for retailers who elect to employ MLOs, penalties assessed against or litigation costs incurred by retailers found to be in violation, reduced home sales from home buyers’ inability to secure financing without retailer assistance, or increased costs to home buyers or reduced transaction profitability for retailers as a result of the additional cost of mandatory MLO involvement.
The Housing and Economic Recovery Act of 2008 requires the GSEs to facilitate a secondary market for mortgages on housing for very low, low and moderate-income families in under-served markets, including manufactured housing. On January 30, 2017, the Federal Housing Finance Agency issued a final rule specifying the scope of GSE activities that are eligible to receive credit for compliance with the "Duty to Serve" rule after January 2018. On May 8, 2017, both GSEs released their Underserved Markets Plan, which included steps to ensure chattel loans can be purchased in bulk prior to proceeding with a chattel loan pilot. Both GSEs have expressed interest in pursuing such pilot programs for manufactured housing, however, it is uncertain whether either GSE will conduct a pilot program or launch a chattel loan program.
If passed by Congress and signed into law, the proposed Preserving Access to Manufactured Housing Act of 2017 (House of Representatives Bill 1699) would amend some Dodd-Frank Act provisions that affect manufactured housing financing. The bill would revise the triggers by which small-sized manufactured home loans are considered "High-Cost" under HOEPA and clarify the MLO licensing requirements for manufactured home retailers and their employees.
Our sale of insurance products is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. Standard Casualty’s insurance operations are regulated by the state insurance boards where it underwrites its policies. Underwriting, premiums, investments and capital reserves (including dividend payments to stockholders) are subject to the rules and regulations of these state agencies.

36

Our sale of insurance products is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. Standard Casualty’s insurance operations are regulated by the state insurance boards where it underwrites its policies. Underwriting, premiums, investments and capital reserves (including dividend payments to stockholders) are subject to the rules and regulations of these state agencies.
In 2010, the Affordable Care Act was passed into law. As enacted, the Affordable Care Act reforms, among other things, certain aspects of health insurance. The Affordable Care Act could continue to increase our healthcare costs, adversely impacting the Company's earnings. On March 6, 2017, the American Health Care Act of 2017 (House of Representatives Bill 1628) passed the vote of the House of Representatives, which would repeal and replace the Affordable Care Act. At this time, it is uncertain how the changes would impact our results of operations.
Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines, the entry of injunctions or both. Although we believe that our operations are in substantial compliance with the requirements of all applicable laws and regulations, these requirements have generally become more strict in recent years. Accordingly, we are unable to predict the ultimate cost of compliance with all applicable laws and enforcement policies.
Results of Operations
Fiscal Year 2017 Compared to Fiscal Year 2016
Net Revenue. The following table summarizes net revenue for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Net revenue:
 
 
 
 
 
 
 
Factory-built housing
$
720,971

 
$
655,148

 
$
65,823

 
10.0
 %
Financial services
52,826

 
57,204

 
(4,378
)
 
(7.7
)%
 
$
773,797

 
$
712,352

 
$
61,445

 
8.6
 %
 
 
 
 
 
 
 
 
Total homes sold
13,820

 
12,339

 
1,481

 
12.0
 %
 
 
 
 
 
 
 
 
Net factory-built housing revenue per home sold
$
52,169

 
$
53,096

 
$
(927
)
 
(1.7
)%
Factory-built housing segment revenue increased, driven primarily from higher home sales volume. We had improvement across all of our housing product lines, which was supported from growing market demand. In addition, the manufactured housing industry and the Company were aided by the production of a limited number of disaster relief units, which further supplemented industry and Company shipment growth. The current fiscal year also contains one additional month of Fairmont Homes operations versus the prior year, as Fairmont Homes was purchased by the Company on May 1, 2015.

37

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 retailers, 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, utilities, site improvements, landscaping and additional services. Changes to the proportion of home sales among these distribution channels between reporting periods impacts the overall net revenue per home sold. For the twelve months ending April 1, 2017, the Company sold 11,142 homes Wholesale and 2,678 Retail versus 9,953 homes Wholesale and 2,386 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 results 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, we have experienced, and expect to continue to experience, volatility in overall net factory-built housing revenue per home sold.
Financial services segment revenue decreased primarily from changes made to the recognition of certain ceded insurance commissions that took effect this fiscal year and lower interest income earned on securitized loan portfolios that continue to amortize, offset by increased higher home loan sales volume and premium revenue from a greater number of insurance policies in force.
Gross Profit. The following table summarizes gross profit for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Factory-built housing
$
130,221

 
$
116,896

 
$
13,325

 
11.4
%
Financial services
27,816

 
27,549

 
267

 
1.0
%
 
$
158,037

 
$
144,445

 
$
13,592

 
9.4
%
 
 
 
 
 
 
 
 
Gross profit as % of Net revenue:
20.4
%
 
20.3
%
 
N/A

 
0.1
%
The increase in factory-built housing gross profit was the result of higher home sales volume.
Gross profit increased for financial services mainly as a result of fewer weather-related insurance claims overall and higher home loan sales volume, offset by lower net interest income earned on securitized loan portfolios that continue to amortize.

38

Selling, General and Administrative Expenses. The following table summarizes Selling, General and Administrative Expenses for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Factory-built housing
$
86,017

 
$
83,335

 
$
2,682

 
3.2
 %
Financial services
15,214

 
14,768

 
446

 
3.0
 %
 
$
101,231

 
$
98,103

 
$
3,128

 
3.2
 %
 
 
 
 
 
 
 
 
Selling, general and administrative expenses as % of Net revenue:
13.1
%
 
13.8
%
 
N/A

 
(0.7
)%
Factory-built housing selling, general and administrative expenses increased from higher salary and incentive compensation expense from improved earnings on increased home sales.
Selling, general and administrative expenses for financial services increased primarily from higher salary and incentive compensation costs related to improved earnings.
As a percentage of net revenue, selling, general and administrative expenses declined from increased utilization on higher net revenue.
Interest Expense. The following table summarizes Interest Expense for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Interest expense
$
4,443

 
$
4,363

 
$
80

 
1.8
%
Interest expense consists primarily of debt service on the CountyPlace securitized financings of manufactured home loans and interest related to the capital lease treatment for a lease of manufacturing facilities and land entered into as part of the Fairmont acquisition during the first quarter of fiscal year 2016. On September 20, 2016, the Company purchased the assets under the capital lease, terminating the lease arrangement. While essentially flat year over year, for the year ended April 1, 2017, there were modest increases related to changes to the purchase discount market-based valuation adjustment on securitized financings, partially offset by the continued principal reductions of those financings and lower capital lease interest from the termination of the lease.
Other Income, net. The following table summarizes Other Income, net for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Other income, net
$
2,918

 
$
2,049

 
$
869

 
42.4
%
The majority of Other income, net, is attributable to interest income earned on commercial loans receivable in the factory-built housing segment and also represents gains and losses on corporate investments and property, plant and equipment. Other income, net increased for the fiscal year ended April 1, 2017 compared to the prior year mainly from realized gains on corporate investments and the sale of certain retail location assets.

39

Income Before Income Taxes. The following table summarizes Income Before Income Taxes for fiscal years 2017 and 2016.
 
Year Ended
 
 
 
 
 
April 1,
2017
 
April 2,
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
Factory-built housing
$
46,840

 
$
35,440

 
$
11,400

 
32.2
 %
Financial services
8,441

 
8,588

 
(147
)
 
(1.7
)%
 
$
55,281

 
$
44,028

 
$
11,253

 
25.6
 %
Fiscal Year 2016 Compared to Fiscal Year 2015
Net Revenue. The following table summarizes net revenue for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Net revenue:
 
 
 
 
 
 
 
Factory-built housing
$
655,148

 
$
513,707

 
$
141,441

 
27.5
%
Financial services
57,204

 
52,952

 
4,252

 
8.0
%
 
$
712,352

 
$
566,659

 
$
145,693

 
25.7
%
 
 
 
 
 
 
 
 
Total homes sold
12,339

 
9,999

 
2,340

 
23.4
%
 
 
 
 
 
 
 
 
Net revenue per home sold
$
53,096

 
$
51,376

 
$
1,720

 
3.3
%
Factory-built housing segment revenue increased, primarily from businesses acquired during the first quarter of fiscal year 2016, while the remainder of the increase was from sales growth at the Company's pre-existing factory-built housing operations.
Financial services segment revenue increased, resulting from 11.8% more insurance policies in force compared to the prior year as well as an increase of 4.3% in the number of home loan serviced for others, year over year. Financial services segment revenue is partially offset by lower interest income earned on securitized loan portfolios that continue to amortize.

40

Gross Profit. The following table summarizes gross profit for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Factory-built housing
$
116,896

 
$
94,697

 
$
22,199

 
23.4
 %
Financial services
27,549

 
31,439

 
(3,890
)
 
(12.4
)%
 
$
144,445

 
$
126,136

 
$
18,309

 
14.5
 %
 
 
 
 
 
 
 
 
Gross profit as % of Net revenue:
20.3
%
 
22.3
%
 
N/A

 
(2.0
)%
The increase in factory-built housing gross profit was primarily from higher home sales volume pertaining to businesses acquired during the first quarter of fiscal year 2016, while the remainder of the increase was from sales growth at the Company's pre-existing factory-built housing operations.
Gross profit decreased for financial services mainly from higher insurance claim losses and lower interest income earned on securitized loan portfolios that continue to amortize, partially offset by gross profit earned on increased insurance policies in force and higher loan servicing volume. Higher insurance claims losses included record setting storms in Texas during fiscal 2016. Losses on these catastrophic events were somewhat mitigated by reinsurance contracts in place.
Selling, General and Administrative Expenses. The following table summarizes Selling, General and Administrative Expenses for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Factory-built housing
$
83,335

 
$
73,169

 
$
10,166

 
13.9
 %
Financial services
14,768

 
14,490

 
278

 
1.9
 %
 
$
98,103

 
$
87,659

 
$
10,444

 
11.9
 %
 
 
 
 
 
 
 
 
Selling, general and administrative expenses as % of Net revenue:
13.8
%
 
15.5
%
 
N/A

 
(1.7
)%
Factory-built housing and general corporate expenses increased from the addition of the Fairmont Homes and Chariot Eagle factories acquired during the first quarter of the fiscal year 2016 and increased incentive compensation from increased home sales overall.
Selling, general and administrative expenses for financial services remained relatively consistent from ongoing operating stability.
As a percentage of net revenue, selling, general and administrative expenses decreased from increased utilization on higher net revenue from recently acquired businesses and pre-existing operations.

41

Interest Expense. The following table summarizes Interest Expense for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Interest expense
$
4,363

 
$
4,587

 
$
(224
)
 
(4.9
)%
Interest expense, consisted primarily of debt service on securitization financings connected to the CountryPlace securitized manufactured home loan portfolios. Interest expense also included interest related to the capital lease of certain manufacturing facilities and land from the Fairmont acquisition. The decrease is mainly from continued principal reductions of the securitization financings, partially offset by capital lease related interest.
Other Income, net. The following table summarizes Other Income, net for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Other income, net
$
2,049

 
$
3,437

 
$
(1,388
)
 
(40.4
)%
The majority of Other income, net is attributable to interest income earned on commercial loans receivable in the factory built housing segment. Other income also includes periodic gains, losses or impairment on property, plant and equipment, including assets held for sale or sold. Other income, net decreased mainly from the sale of idle real estate properties. During the fiscal year ended March 28, 2015, the Company sold inactive manufacturing facilities in Albemarle, North Carolina and Woodland, California and two idle retail locations for a combined net gain of $1.4 million.
Income Before Income Taxes. The following table summarizes Income Before Income Taxes for fiscal years 2016 and 2015.
 
Year Ended
 
 
 
 
 
April 2,
2016
 
March 28,
2015
 
$ Change
 
% Change
 
(Dollars in thousands)
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
Factory-built housing
$
35,440

 
$
25,133

 
$
10,307

 
41.0
 %
Financial services
8,588

 
12,194

 
(3,606
)
 
(29.6
)%
 
$
44,028

 
$
37,327

 
$
6,701

 
18.0
 %

42

Liquidity and Capital Resources
We believe that cash and cash equivalents at April 1, 2017, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in various deposit accounts, the balances of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to our business. Such transactions may require the use of cash and have other impacts on the Company's liquidity and capital resources in the event of such a transaction. The recent acquisition of Lexington 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 sought external sources of liquidity, such as a credit facility; however, depending on our operating results and strategic opportunities, we 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 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.
Projected cash to be provided by or used in operations in the coming year is largely dependent on sales volume. Operating activities provided $44.8 million of cash during the year ended April 1, 2017, compared to $43.5 million during the year ended April 2, 2016. Cash provided by operating activities during the year ended April 1, 2017 was primarily the result of cash generated by operating income before non-cash charges, collections of principal payments on consumer loans receivable, higher accounts payable and accrued liabilities, including factory warranties, wages and unearned insurance premiums. These increases were partially offset by increases in prepaid and other current assets from the timing of quarterly income tax payments and higher accounts payable primarily as a result of greater home sales activity. Cash provided by operating activities during the year ended April 2, 2016 was primarily the result of cash generated by operating income before non-cash charges, collections of principal payments on consumer loans receivable, higher accounts payable and accrued liabilities, including factory warranties, wages and insurance loss reserves. These increases were partially offset by increases in commercial loans receivable from further expansion of our distribution-based lending programs.
Consumer loan originations increased $17.4 million to $116.7 million during the year ended April 1, 2017 from $99.3 million during the year ended April 2, 2016. This increase is primarily a result of increased home lending activity. Proceeds from the sale of consumer loans provided $104.4 million in cash, compared to $101.1 million in the previous year, a net increase of $3.3 million. The primary reason for the increase relates to the timing of loan origination and related sales, partially offset by an increase in consumer loans held for investment of $5.0 million.
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 and the current adverse trend in the availability and terms of financing in the industry may have material negative effects on our results of operations and financial condition. See Item IA, "Risk Factors."
Cavco has entered into programs to provide some of the capital used by inventory lenders to finance wholesale home purchases by retailers. 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 and invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities (see Note 6 to the Consolidated Financial Statements).

43

Investing activities required the use of $7.1 million of cash during the year ended April 1, 2017, compared to $38.2 million used during the year ended April 2, 2016. In the current period, cash was used for the purchase of property, plant and equipment and publicly-traded securities by Standard Casualty for its investment portfolio, as well as minority investments in distribution operations, offset by Standard Casualty's investment sales. Cash used by investing activities in the prior period included $28.1 million for the purchase of certain assets and liabilities of Fairmont Homes and Chariot Eagle as well as the purchase of publicly-traded securities by Standard Casualty for its investment portfolio and investments in community-based lending institutions that provide home-only loans to residents of certain manufactured home communities, offset by Standard Casualty's investment sales.
Financing activities used $3.0 million in cash during the year ended April 1, 2017, primarily from payments on securitized financings, offset by proceeds from other secured financings and tax benefits from stock option exercises now able to be realized. In the prior year, financing activities used $4.1 million in cash during the year ended, primarily from payments on securitized financings, offset by loan sales accounted for as other secured financings and tax benefits from stock option exercises now able to be realized.
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 the overcollateralization level 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 April 1, 2017, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at April 1, 2017, consisting of future payments under securitized financings and non-cancelable operating lease agreements. For additional information related to these obligations, see Notes 11 and 14, respectively, to the Consolidated Financial Statements. This table excludes long-term obligations for which there is no definite commitment period.
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
After 5
Years
 
(in thousands)
Debt obligations:
 
 
 
 
 
 
 
 
 
Securitized financing 2005-1 (1)
$
26,410

 
$
4,110

 
$
22,300

 
$
—

 
$
—

Securitized financing 2007-1 (1)
29,118

 
4,235

 
24,883

 
—

 
—

Commitments for future payments under noncancelable operating leases
11,129

 
3,470

 
4,586

 
2,106

 
967

Total contractual obligations
$
66,657

 
$
11,815

 
$
51,769

 
$
2,106

 
$
967

(1)
Interest is calculated by applying contractual interest rates to month-end balances. The timing of these estimated payments fluctuates based upon various factors, including estimated loan portfolio prepayment and default rates.

44

The following table summarizes our contingent commitments at April 1, 2017, consisting of contingent repurchase obligations, letters of credit and remaining construction contingent commitments. For additional information related to these contingent obligations, see Note 14 to the Consolidated Financial Statements.
 
Contingent Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
After 5
Years
 
(in thousands)
Repurchase obligations (1)
$
46,301

 
$
32,082

 
$
14,219

 
$
—

 
$
—

Letters of credit (2)
7,000

 
7,000

 
—

 
—

 
—

Construction contingent commitment (3)
11,074

 
11,074

 
—

 
—

 
—

Total contractual obligations
$
64,375

 
$
50,156

 
$
14,219

 
$
—

 
$
—

(1)
Although the repurchase obligations outstanding at April 1, 2017 have a finite life, these commitments are continually replaced as we continue to sell manufactured homes to retailers under repurchase and other recourse agreements with lending institutions which have provided wholesale floor plan financing to retailers.
(2)
While the current letters of credit have finite lives, they are subject to renewal based on their underlying requirements.
(3)
The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following accounting policies are critical to our operating results or may affect significant judgments and estimates used in the preparation of its Consolidated Financial Statements.
Factory-Built Housing Revenue Recognition. 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 for prior to shipment or floor plan financed by the independent retailer through standard industry arrangements, which can include repurchase agreements. Manufacturing sales financed under repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 14). Revenue from homes sold under commercial loan programs involving funds provided by the Company is either deferred until such time that payment for the related commercial loan receivable is received by the Company or recognized when the home is shipped, depending on the nature of the program and borrower (see Note 6 for discussion of commercial loans receivable). 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 reasonably assured.
Some of the Company’s independent retailers operate multiple sales outlets. No independent retailer accounted for 10% or more of our factory-built housing revenue during any fiscal year within the three-year period ended April 1, 2017.

45

Financial Services Revenue Recognition. Premium amounts collected on policies issued and assumed by Standard Casualty are amortized on a straight-line basis into net revenue over the life of the policy. Premiums earned are net of reinsurance ceded. Policy acquisition costs are also amortized as cost of sales over the life of the policy.
On April 23, 2011, the date of the Palm Harbor acquisition (the "Palm Harbor Acquisition Date"), management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans’ contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool’s scheduled contractual principal and contractual interest payments over all cash flows expected as of the Palm Harbor Acquisition Date 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 (see Note 5).
For loans originated by CountryPlace and held for sale, loan origination fees and gains or losses on sales are recognized as net revenue upon title transfer of the loans. CountryPlace provides third-party servicing of mortgages and earns servicing fees each month based on the aggregate outstanding balances. Servicing fees are recognized as net revenue when earned.
Warranties. We provide the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. We record a liability for estimated future warranty costs relating to homes sold, based upon our assessment of historical experience factors. Factors we use in the estimation of the warranty liability include the estimated amount of homes still under warranty including homes in retailer inventories, homes purchased by consumers still within the one-year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home. We have a reserve for estimated warranties of $15.5 million and $13.4 million at April 1, 2017 and April 2, 2016, respectively. Construction defect claims may arise during a significant period of time after product completion. Although we maintain general liability insurance and reserves for such claims, based on our assessments as described above, which to date have been adequate, there can be no assurance that warranty and construction defect claims will remain at current levels or that such reserves will continue to be adequate. A large number of warranty and construction defect claims exceeding our current levels could have a material adverse effect on our results of operations.
Reserve for Repurchase Commitments. Manufactured housing companies customarily enter into repurchase and other recourse agreements with lending institutions that have provided wholesale floor plan financing to retailers. A significant portion of our sales are made to retailers pursuant to repurchase agreements with lending institutions. These agreements generally provide that we will repurchase our new products from the lending institutions in the event such product is repossessed upon a retailer’s default. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The risk of loss under repurchase agreements is lessened by certain factors, including the following:
•
sales of our manufactured homes are spread over a relatively large number of independent retailers;
•
the price that we are obligated to pay under such repurchase agreements declines based on predetermined amounts over the period of the agreement (generally 18 to 36 months); and
•
we have historically been able to resell homes repurchased from lenders.

46

The Company applies FASB ASC 460, Guarantees ("ASC 460") and FASB ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liability for repurchase commitments. Under the provisions of ASC 460, issuance of a guarantee results in two different types of obligations: (1) a non-contingent obligation to stand ready to perform under the repurchase commitment (accounted for pursuant to ASC 460) and (2) a contingent obligation to make future payments under the conditions of the repurchase commitment (accounted for pursuant to ASC 450-20). Management reviews retailers' inventories to estimate the amount of inventory subject to repurchase obligation, which is used to calculate (1) the fair value of the non-contingent obligation for repurchase commitments and (2) the contingent liability based on historical information available at the time. During the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of these two calculations as a liability for repurchase commitments and as a reduction to revenue.
(1)
The Company estimates the fair value of the non-contingent portion of its manufacturer's inventory repurchase commitment under the provisions of ASC 460 when a home is shipped to retailers whose floor plan financing includes a repurchase commitment. The fair value of the inventory repurchase agreement is determined by calculating the net present value of the difference in (a) the Company's interest cost to carry the inventory over the maximum repurchase liability period at the prevailing floor plan note interest rate and (b) the retailer's interest cost to carry the inventory over the maximum repurchase liability period at the interest rate of a similar type loan without a manufacturer's repurchase agreement in force. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period in conjunction with applicable curtailment arrangements and is eliminated once the retailer sells the home.
(2)
The Company estimates the contingent obligation to make future payments under its manufacturer's inventory repurchase commitment for the same pool of commitments as used in the fair value calculation above and records the greater of the two calculations. This contingent obligation is estimated using historical loss factors, including the frequency of repurchases and the losses experienced by the Company for repurchased inventory.
Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and an ASC 450-20 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Based on identified changes in retailers' financial conditions, the Company evaluates the probability of default for retailers who are identified at an elevated risk of default and applies a probability of default, based on historical default rates. Commensurate with this default probability evaluation, the Company reviews repurchase notifications received from floor plan sources and reviews retailer inventory for expected repurchase notifications based on various communications from the lenders and retailers. The Company's repurchase commitments for the retailers in the category of elevated risk of default are excluded from the pool of commitments used in both of the calculations at (1) and (2) above. Changes in the reserve are recorded as an adjustment to revenue.
The maximum amount for which the Company was contingently liable under such agreements approximated $46.3 million and $46.6 million at April 1, 2017 and April 2, 2016, respectively, without reduction for the resale value of the homes. The Company had a reserve for repurchase commitments of $1.7 million at both April 1, 2017 and April 2, 2016. The Company made payments totaling $79,000 under repurchase commitments during fiscal year 2017 and $393,000 in 2016.
Retailer Volume Rebates. The Company’s manufacturing operations sponsor volume rebate programs 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 net revenue.

47

Impairment of Long-Lived Assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used and when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair values are based primarily on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose. The Company recorded no impairment charges on long-lived assets during fiscal years 2017, 2016 or 2015.
Income Taxes and Deferred Tax Assets and Liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company periodically evaluates the deferred tax assets based on the requirements established in FASB ASC 740, Income Taxes, which requires the recording of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of the need for or amount of any valuation allowance involves significant management judgment and is based upon the evaluation of both positive and negative evidence, including estimates of anticipated taxable profits in various jurisdictions with which the deferred tax assets are associated. At April 1, 2017, the Company evaluated its historical profits earned and forecasted taxable profits and determined that, except for certain state net operating loss deferred tax assets, all other deferred tax assets would be utilized in future periods. A valuation allowance of $18,000 was recorded during fiscal year 2017 against the related deferred tax asset. Ultimate realization of the deferred tax assets depends on our ability to continue to earn profits as we have historically and to meet these forecasts in future periods. Changes in events or expectations could result in significant adjustments, which could include the recording of additional valuation allowance and material changes to the provision for income taxes.
Goodwill and Other Intangibles. We test goodwill and indefinite-lived intangibles annually for impairment. Our analysis depends upon a number of judgments, estimates and assumptions. Accordingly, such testing is subject to uncertainties, which could cause the fair value to fluctuate from period to period.
As of April 1, 2017, all of our goodwill is attributable to our factory-built housing reporting unit. We performed our annual goodwill impairment analysis as of April 1, 2017 in accordance with Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The analysis determined that the fair value of the reporting unit was greater than the carrying value and thus no further procedures were considered necessary.
In the event that we are not able to achieve expected cash flow levels, or other factors indicate that goodwill is impaired, we may need to write off all or part of our goodwill, which would adversely affect our operating results and net worth. See Item 1A, "Risk Factors."
Accretable Yield on Consumer Loans Receivable and Securitized Financings. The Company acquired consumer loans receivable and securitized financings during the first quarter of fiscal 2012 as a part of the Palm Harbor transaction. Acquired consumer loans receivable held for investment and securitized financings were acquired at fair value, which resulted in a discount, and subsequently are accounted for a manner similar to FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") to accrete the discount.
The Company considers expected prepayments and default rates and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the Palm Harbor Acquisition Date cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield). For additional information, see Note 5 to the Consolidated Financial Statements.

48

Other Matters
Related Party Transactions. In July 2015, the Company’s CEO made a payment of $1.1 million to the Company, representing the repayment of performance bonuses related to fiscal 2012, 2014 and 2015 that were determined to be in excess of the 2005 Stock Incentive Plan limits and made to the CEO during those periods.
Impact of Inflation. We believe that the general inflation rate over the past several years has not had a significant impact on our revenue or profitability, but we can give no assurance that this trend will continue in the future. However, sudden increases in specific costs, such as the increases in material costs, as well as price competition, can affect our ability to increase our selling prices and adversely impact our results of operations. Therefore, we can give no assurance that inflation or the impact of rising material costs will not have a significant impact on our revenue or results of operations in the future.
Impact of Accounting Standards. In September 2013, the United States Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. These regulations have not had a material impact on our consolidated results of operations, cash flows or financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard 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 new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard will be effective for us beginning the first quarter of the Company's fiscal year 2019, with early application permitted in fiscal year 2018. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.
In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance-Disclosures about Short-Duration Contracts ("ASU 2015-09"), which would require additional disclosures in annual and interim reporting periods by insurance entities related to liabilities for claims and claim adjustment expenses, and changes in assumptions or methodologies for calculating such liabilities. The Company does not believe that these disclosures are material to the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 will be effective beginning with the Company's fiscal year 2018 annual report and interim periods thereafter, with early adoption permitted. In this update, entities are required to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. As this standard impacts presentation only, the adoption of ASU 2015-17 is not expected to have an impact on the Company's financial condition, results of operations or cash flows.

49

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"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. The amendments require certain equity investments to be measured at fair value with changes in the fair value recognized through net income. The Company is currently evaluating the effect ASU 2016-01 will have on the Company's Consolidated Financial Statements and disclosures.
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 the recognition of lease assets and lease liabilities on the balance sheet for most leases, but recognize expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 will be effective beginning with the first quarter of the Company's fiscal year 2018, with early adoption permitted. The amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Upon adoption, the Company will record any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Comprehensive Income in the reporting periods in which exercise or settlement occurs. As a result, subsequent to adoption the Company's income tax expense and effective tax rate will be impacted by fluctuations in stock price between the grant dates and exercise or settlement dates of equity awards.
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, which sets forth a new forward-looking impairment model based on expected losses rather than incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
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 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective beginning with the first quarter of the Company's fiscal year 2019. The adoption of ASU 2016-18 is not expected to have a material impact on the consolidated financial statements and will only change the presentation of the Consolidated Statement of Cash Flows.
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 date. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices and interest rates. We may from time to time be exposed to interest rate risk inherent in our financial instruments, but are not currently subject to foreign currency or commodity price risk. We manage our exposure to these market risks through our regular operating and financing activities.

50

Our operations are interest rate sensitive. As overall manufactured housing demand can be adversely affected by increases in interest rates, a significant increase in wholesale or mortgage interest rates may negatively affect the ability of retailers and home buyers to secure financing. Higher interest rates could unfavorably impact our revenues, gross margins and net earnings. Our business is also sensitive to the effects of inflation, particularly with respect to raw material and transportation costs. We may not be able to offset inflation through increased selling prices.
CountryPlace is exposed to market risk related to the accessibility and terms of long-term financing of its loans. In the past, CountryPlace accessed the asset-backed securities market to provide term financing of its chattel and non-conforming mortgage originations. At present, independent asset-backed and mortgage-backed securitization markets are not readily available to CountryPlace and other manufactured housing lenders. Accordingly, CountryPlace has not continued to securitize its loan originations as a means to obtain long-term funding.
We are also exposed to market risks related to our fixed rate consumer and commercial loan notes receivables, as well as our securitized financings balances. For fixed rate instruments, changes in interest rates do not change future earnings and cash flows. However, changes in interest rates could affect the fair value of these instruments. Assuming the level of these instruments as of April 1, 2017, is held constant, a 1% unfavorable change in average interest rates would adversely impact the fair value of these instruments, as follows (in thousands):
 
Change in Fair Value
Consumer loans receivable
$
5,026

Commercial loans receivable
$
164

Securitized financings
$
302

In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. As of April 1, 2017, CountryPlace had outstanding IRLCs with a notional amount of $17.4 million and are recorded at fair value in accordance with FASB ASC 815, Derivatives and Hedging. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assets in the consolidated balance sheets. The fair value of IRLCs is based on the value of the underlying mortgage loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage or IRLCs that will result in closed mortgage loans. The initial and subsequent changes in the value of IRLCs are a component of current income. Assuming CountryPlace’s level of IRLCs is held constant, a 1% increase in average interest rates would decrease the fair value of CountryPlace’s obligations by approximately $0.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, the Reports thereon, the Notes thereto, and the supplementary data commencing on page F-1 of this report, which Consolidated Financial Statements, Reports, Notes and data are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

51

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Controls Over Financial Reporting
The management of Cavco Industries, Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, the Company’s controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on management’s evaluation under the criteria in Internal Control—Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of April 1, 2017.
The effectiveness of the Company’s internal control over financial reporting as of April 1, 2017, has been audited by RSM US LLP, an independent registered public accounting firm, as stated in their report, which appears herein.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended April 1, 2017, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cavco Industries, Inc.
We have audited Cavco Industries, Inc. and subsidiaries' internal control over financial reporting as of April 1, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Cavco Industries, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cavco Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of April 1, 2017, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the April 1, 2017 consolidated financial statements of Cavco Industries, Inc. and subsidiaries, and our report dated June 13, 2017 expressed an unqualified opinion thereon.
/s/ RSM US LLP
 
Phoenix, Arizona
 
June 13, 2017
 

53

ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For a description of the directors of the Company and other information called for by this Item 10, see "Election of Directors," and "General - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders, which is incorporated herein by reference. Also see the information relating to executive officers of the Company that follows Item 4 of Part I of this Report, which is incorporated in this Item 10 by reference.
The Company has adopted a Code of Ethics that applies to all directors, officers and employees of the Company. A copy of the Company’s Code of Ethics is located on the Company’s website at www.cavco.com or will be mailed, at no charge, upon request submitted to James P. Glew, Secretary, Cavco Industries, Inc., 1001 North Central Avenue, Suite 800, Phoenix, Arizona, 85004. If the Company makes any amendment to, or grants any waivers of, a provision of the Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller where such amendment or waiver is required to be disclosed under applicable SEC rules, the Company intends to disclose such amendment or waiver and the reasons therefore on its Internet website at www.cavco.com.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company’s executive compensation, see "Election of Directors," and "Compensation Discussion and Analysis" (other than the "Compensation Committee Report") in the Company's Proxy Statement for the 2017 Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For a description of the security ownership of management and certain beneficial owners, see "Stock Ownership" in the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders, which is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of April 1, 2017, with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance to directors, officers, employees, consultants and certain other persons and entities in exchange for the provision to us of goods or services.
Plan Category
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants, and
Rights (a)
 
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
Equity compensation plans approved by stockholders
464,930

 
$
68.01

 
346,202

Equity compensation plans not approved by stockholders
—

 
—

 
—

Total
464,930

 
$
68.01

 
346,202



54

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For a description of certain relationships and related transactions of the Company, see "Compensation Discussion and Analysis-Compensation Committee Interlocks and Insider Participation" of the Company’s Proxy Statement for the 2017 Annual Meeting of Stockholders, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For a description of principal accounting fees and services, see "Audit Fees" and "Ratification of Appointment of Independent Auditor" in the Company's Proxy Statement for the 2017 Annual Meeting of Stockholders, which is incorporated herein by reference.

55

PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Financial Statement Schedules
Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.
All schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto.
Exhibits
The documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith.
 
Exhibit
Number
Exhibit
 
Filed/Furnished Herewith or
Incorporated by Reference
3.1
Restated Certificate of Incorporation of Cavco
 
Exhibit 3.1 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004
3.2
Certificate of Amendment to Restated Certificate of Incorporation of Cavco
 
Exhibit 3.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006
3.3
Amended and Restated Bylaws of Cavco
 
Exhibit 3.2 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004
10.1*
Stock Incentive Plan of Cavco
 
Exhibit 10.6 to the Registration Statement on Form 10/A (File No. 000-08822) filed by Cavco on April 23, 2003, as amended by Form 10/A dated May 21, 2003, Form 10/A dated May 30, 2003, Form 10/A dated June 17, 2003, and Form 10/A dated June 20, 2003
10.1.1*
Amendment to the Cavco Industries, Inc. Stock Incentive Plan
 
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010
10.1.2*
Form of Stock Option Agreement for Stock Incentive Plan
 
Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2008
10.2*
Cavco 2005 Stock Incentive Plan
 
Exhibit A to the Corporation's Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed by the Company with the Securities and Exchange Commission on May 23, 2005, and incorporated by reference herein (this Exhibit is filed as an Exhibit to the Company's Registration Statement on Form S-8 (No. 333-132925), filed with the Securities and Exchange Commission on April 3, 2006)
10.2.1*
First Amendment to Cavco Industries, Inc. 2005 Stock Incentive Plan
 
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010
10.2.2*
Second Amendment to Cavco Industries, Inc. 2005 Stock Incentive Plan
 
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 2015
10.2.3*
Representative Form of Restricted Stock Award Agreement for the applicable Cavco stock incentive plan
 
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007
10.2.4*
Form of Stock Option Agreement for Stock Incentive Plan
 
Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2008
10.2.5*
Form of Stock Option Agreement for Stock Incentive Plan
 
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012
10.3*
Amended and Restated Employment Agreement, dated June 30, 2011, between Joseph H. Stegmayer and Cavco
 
Exhibit 10.1 to the Periodic Report on Form 8-K filed on July 5, 2011
10.4*
Executive Officer Incentive Plans for Fiscal Year 2015
 
Periodic Report on Form 8-K filed on May 8, 2014
10.4.2*
Executive Officer Incentive Plans for Fiscal Year 2016
 
Periodic Report on Form 8-K filed on June 9, 2015
10.4.3*
Executive Officer Incentive Plans for Fiscal Year 2017
 
Periodic Report on Form 8-K filed on June 30, 2016
10.5
Distribution Agreement, dated May 30, 2003, among Centex, Cavco Industries, LLC, and Cavco
 
Exhibit 10.9 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004

56

Exhibit
Number
Exhibit
 
Filed/Furnished Herewith or
Incorporated by Reference
10.6
Tax Sharing Agreement, dated June 30, 2003, among Centex, Centex’s Affiliates, and Cavco
 
Exhibit 10.10 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2004
10.7
Asset Purchase Agreement dated July 2009 by and among FH Holding, Inc., Fleetwood Enterprises, Inc. and certain of its subsidiaries
 
Exhibit 10.1 to the Periodic Report on Form 8-K filed on July 23, 2009
10.8
Shareholders’ Agreement by and among FH Holding, Inc. (now known as Fleetwood Homes, Inc.) and its Shareholders dated August 17, 2009
 
Exhibit 10.10 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2012
10.8.1
First Amendment to Shareholders’ Agreement dated November 30, 2010
 
Exhibit 10.10.1 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2012
10.8.2
Second Amendment to Shareholders’ Agreement dated June 17, 2011
 
Exhibit 10.10.2 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2012
10.8.3
Third Amendment to Shareholders’ Agreement dated February 16, 2012
 
Exhibit 10.10.3 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2012
10.8.4
Fourth Amendment to Shareholders’ Agreement dated June 5, 2012
 
Exhibit 10.10.4 to the Annual Report on Form 10-K for the fiscal year ended March 31, 2012
10.9
Debtor-In-Possession Revolving Credit Agreement dated November 29, 2010
 
Exhibit 10.1 to the Periodic Report on Form 8-K filed on November 29, 2010
10.10
Security Agreement dated November 29, 2010
 
Exhibit 10.2 to the Periodic Report on Form 8-K filed on November 29, 2010
10.11
Asset Purchase Agreement dated November 29, 2010
 
Exhibit 10.3 to the Periodic Report on Form 8-K filed on November 29, 2010
10.12
Stock Purchase Agreement, dated June 14, 2013, by and among Third Avenue Trust, a Delaware Trust, the Whitman High Conviction Fund and Cavco Industries, Inc., a Delaware corporation
 
Exhibit 2.1 to the Periodic Report on Form 8-K filed on June 14, 2013

21
List of Subsidiaries of Cavco
 
Filed herewith
23.1
Consent of RSM US LLP, Independent Registered Public Accounting Firm
 
Filed herewith
23.2
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
 
Filed herewith
31.1
Certificate of Joseph H. Stegmayer, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
 
Filed herewith
31.2
Certificate of Daniel L. Urness, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
 
Filed herewith
32.1**
Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished herewith
*
Management contract or compensatory plan or arrangement
**
These certifications are not "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These certifications are not to be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless Cavco specifically incorporates them by reference.
Copies of any of the exhibits referred to above will be furnished at no cost to security holders who make a written request to James P. Glew, Secretary, Cavco Industries, Inc., 1001 North Central Avenue, Suite 800, Phoenix, Arizona, 85004 or via the Company website (www.cavco.com).

57

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
CAVCO INDUSTRIES, INC.
 
 
 
Date:
June 13, 2017
/s/ Joseph H. Stegmayer
 
 
Joseph H. Stegmayer – Chairman,
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
Date
 
 
 
 
/s/ Joseph H. Stegmayer
 
Chairman, President and
June 13, 2017
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Daniel L. Urness
 
Executive Vice President, Treasurer and
June 13, 2017
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
/s/ William C. Boor
 
Director
June 13, 2017
 
 
 
 
/s/ Steven G. Bunger
 
Director
June 13, 2017
 
 
 
 
/s/ David A. Greenblatt
 
Director
June 13, 2017
 
 
 
 
/s/ Jack Hanna
 
Director
June 13, 2017

58

CAVCO INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cavco Industries, Inc.
We have audited the accompanying consolidated balance sheets of Cavco Industries, Inc. and subsidiaries (the Company) as of April 1, 2017 and April 2, 2016, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for the fiscal years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cavco Industries, Inc. and subsidiaries as of April 1, 2017 and April 2, 2016, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cavco Industries Inc.’s internal control over financial reporting as of April 1, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated June 13, 2017 expressed an unqualified opinion on the effectiveness of Cavco Industries, Inc.'s internal controls over financial reporting.

/s/ RSM US LLP
 
Phoenix, Arizona
 
June 13, 2017
 


F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cavco Industries, Inc.
We have audited the accompanying consolidated statements of comprehensive income and cash flows for the year ended March 28, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended March 28, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP
 
Phoenix, Arizona
 
June 10, 2015
 


F-3

CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
April 1,
2017
 
April 2,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
132,542

 
$
97,766

Restricted cash, current
11,573

 
10,218

Accounts receivable, net
31,221

 
29,113

Short-term investments
11,289

 
10,140

Current portion of consumer loans receivable, net
31,115

 
21,918

Current portion of commercial loans receivable, net
7,932

 
3,557

Inventories
93,855

 
94,813

Prepaid expenses and other current assets
28,033

 
22,196

Deferred income taxes, current
9,204

 
8,998

Total current assets
356,764

 
298,719

Restricted cash
724

 
1,082

Investments
30,256

 
28,948

Consumer loans receivable, net
64,686

 
67,640

Commercial loans receivable, net
17,901

 
21,985

Property, plant and equipment, net
56,964

 
55,072

Goodwill and other intangibles, net
80,021

 
80,389

Total assets
$
607,316

 
$
553,835

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,010

 
$
18,513

Accrued liabilities
109,789

 
100,314

Current portion of securitized financings and other
6,417

 
6,262

Total current liabilities
140,216

 
125,089

Securitized financings and other
51,574

 
54,909

Deferred income taxes
21,118

 
20,611

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding
—

 
—

Common stock, $.01 par value; 40,000,000 shares authorized; Outstanding 8,994,968 and 8,927,989 shares, respectively
90

 
89

Additional paid-in capital
244,791

 
241,662

Retained earnings
148,141

 
110,186

Accumulated other comprehensive income
1,386

 
1,289

Total stockholders’ equity
394,408

 
353,226

Total liabilities and stockholders’ equity
$
607,316

 
$
553,835

See accompanying Notes to Consolidated Financial Statements

F-4

CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)

 
Year Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Net revenue
$
773,797

 
$
712,352

 
$
566,659

Cost of sales
615,760

 
567,907

 
440,523

Gross profit
158,037

 
144,445

 
126,136

Selling, general and administrative expenses
101,231

 
98,103

 
87,659

Income from operations
56,806

 
46,342

 
38,477

Interest expense
(4,443
)
 
(4,363
)
 
(4,587
)
Other income, net
2,918

 
2,049

 
3,437

Income before income taxes
55,281

 
44,028

 
37,327

Income tax expense
(17,326
)
 
(15,487
)
 
(13,510
)
Net income
37,955

 
28,541

 
23,817

 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
$
37,955

 
$
28,541

 
$
23,817

Unrealized gain on available-for-sale securities, net of tax
97

 
785

 
68

Comprehensive income
38,052

 
29,326

 
23,885

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
4.23

 
$
3.21

 
$
2.69

Diluted
$
4.17

 
$
3.15

 
$
2.64

Weighted average shares outstanding:
 
 
 
 
 
Basic
8,976,064

 
8,889,731

 
8,854,359

Diluted
9,105,743

 
9,046,347

 
9,015,779


See accompanying Notes to Consolidated Financial Statements

F-5

CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
 
Stockholders’ Equity
 
 
 
 
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
 
Total
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, March 29, 2014
8,844,824

 
$
88

 
$
232,081

 
$
57,828

 
$
436

 
$
290,433

Net income
—

 
—

 
—

 
23,817

 
—

 
23,817

Unrealized gain on available-for-sale securities
—

 
—

 
—

 
—

 
68

 
68

Stock option exercises and associated tax benefits
14,375

 
1

 
4,178

 
—

 
—

 
4,179

Stock-based compensation
—

 
—

 
1,657

 
—

 
—

 
1,657

Balance, March 28, 2015
8,859,199

 
89

 
237,916

 
81,645

 
504

 
320,154

Net income
—

 
—

 
—

 
28,541

 
—

 
28,541

Unrealized gain on available-for-sale securities
—

 
—

 
—

 
—

 
785

 
785

Stock option exercises and associated tax benefits
68,790

 
—

 
1,984

 


 


 
1,984

Stock-based compensation


 


 
1,762

 


 


 
1,762

Balance, April 2, 2016
8,927,989

 
89

 
241,662

 
110,186

 
1,289

 
353,226

Net income
—

 
—

 
—

 
37,955

 
—

 
37,955

Unrealized gain on available-for-sale securities
—

 
—

 
—

 
—

 
97

 
97

Stock option exercises and associated tax benefits
66,979

 
1

 
1,004

 
—

 
—

 
1,005

Stock-based compensation
—

 
—

 
2,125

 
—

 
—

 
2,125

Balance, April 1, 2017
8,994,968

 
$
90

 
$
244,791

 
$
148,141

 
$
1,386

 
$
394,408


See accompanying Notes to Consolidated Financial Statements

F-6

CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 
Year Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
37,955

 
$
28,541

 
$
23,817

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
3,687

 
3,922

 
3,757

Provision for credit losses
792

 
408

 
(149
)
Deferred income taxes
278

 
(940
)
 
4,341

Stock-based compensation expense
2,125

 
1,762

 
1,657

Non-cash interest income, net
(1,161
)
 
(1,681
)
 
(1,098
)
Incremental tax benefits from option exercises
(2,398
)
 
(1,279
)
 
(3,679
)
Gain on sale of property, plant and equipment and assets held for sale
(62
)
 
(15
)
 
(1,558
)
Gain on investments and sale of loans
(7,179
)
 
(5,836
)
 
(6,263
)
Changes in operating assets and liabilities:
 
 
 
 
 
Restricted cash
(1,682
)
 
100

 
(3,092
)
Accounts receivable
(2,145
)
 
3,332

 
(6,205
)
Consumer loans receivable originated
(116,662
)
 
(99,314
)
 
(107,957
)
Principal payments on consumer loans receivable
11,629

 
11,717

 
14,143

Proceeds from sales of consumer loans
104,446

 
101,130

 
100,380

Inventories
958

 
(3,980
)
 
(5,605
)
Prepaid expenses and other current assets
(2,779
)
 
(2,325
)
 
(233
)
Commercial loans receivable
(373
)
 
(7,515
)
 
3,293

Accounts payable and accrued liabilities
17,365

 
15,516

 
10,149

Net cash provided by operating activities
44,794

 
43,543

 
25,698

INVESTING ACTIVITIES
 
 
 
 
 
Purchases of property, plant and equipment
(5,295
)
 
(3,519
)
 
(2,210
)
Purchase of certain assets and liabilities of Fairmont Homes and Chariot Eagle
—

 
(28,121
)
 
—

Proceeds from sale of property, plant and equipment and assets held for sale
145

 
93

 
6,035

Purchases of investments
(10,930
)
 
(17,114
)
 
(16,707
)
Proceeds from sale of investments
9,018

 
10,434

 
10,783

Net cash used in investing activities
(7,062
)
 
(38,227
)
 
(2,099
)
FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from exercise of stock options
(1,393
)
 
705

 
500

Incremental tax benefits from exercise of stock options
2,398

 
1,279

 
3,679

Proceeds from secured financings and other
4,270

 
1,383

 
3,573

Payments on securitized financings and other
(8,231
)
 
(7,514
)
 
(7,703
)
Net cash (used in) provided by financing activities
(2,956
)
 
(4,147
)
 
49

Net increase in cash and cash equivalents
34,776

 
1,169

 
23,648

Cash and cash equivalents at beginning of year
97,766

 
96,597

 
72,949

Cash and cash equivalents at end of year
$
132,542

 
$
97,766

 
$
96,597

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the year for income taxes
$
18,106

 
$
15,443

 
$
7,373

Cash paid during the year for interest
$
3,402

 
$
3,862

 
$
4,103


See accompanying Notes to Consolidated Financial Statements

F-7

CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation. These Consolidated Financial Statements include the accounts of Cavco Industries, Inc. and its consolidated subsidiaries (collectively, the "Company" or "Cavco"). All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date of April 1, 2017, through the date of the filing of this report with the Securities and Exchange Commission ("SEC").
On March 30, 2015, the Company purchased certain manufactured housing assets and liabilities of Chariot Eagle, LLC, which produces park model RVs and manufactured homes distributed in the southeastern United States. On May 1, 2015, the Company also purchased certain manufactured housing assets and liabilities of Fairmont Homes, a premier builder of manufactured and modular homes and park model RVs serving the Midwest, western Great Plains states, the Northeast and several provinces in Canada. These operations include manufactured housing production facilities in Ocala, Florida; Nappanee, Indiana; and two factories in Montevideo, Minnesota, and provided for further operating capacity, increased home production capabilities and distribution in the Southeastern United States.
Subsequent to the end of fiscal year 2017, the Company purchased Lexington Homes, Inc. in April 2017. As such, the results of operations from these operations are not included in our fiscal year 2017 Consolidated Financial Statements. This operation includes a manufactured housing production facility in Lexington, Mississippi and provides for further operating capacity, increased home production capabilities and further distribution into certain markets.
Nature of Operations. Headquartered in Phoenix, Arizona, the Company designs and produces manufactured homes which are sold to a network of independent retailers located throughout the continental United States as well as through Company-owned retail sales locations which offer the Company’s homes to retail customers. Our financial services group is comprised of a mortgage subsidiary, CountryPlace, an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" and "Freddie Mac") seller/servicer, a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer which offers conforming mortgages and chattel loans to purchasers of factory-built and site-built homes. Also included is our insurance subsidiary, Standard Casualty, which provides property and casualty insurance to owners of manufactured homes.
Fiscal Year. The Company utilizes 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 consisted of 52 weeks and ended on April 1, 2017. The previous fiscal year, ending April 2, 2016, consisted of 53 weeks.
Accounting Estimates. 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 accompanying notes. Actual results could differ from the estimates and assumptions used in preparation of the consolidated financial statements.

F-8

Fair Value of Financial Instruments. The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, investments, consumer loans receivable, commercial loans receivable, accounts payable, certain accrued liabilities and securitized financings. The carrying amount of cash and cash equivalents approximates fair value because their maturity is less than three months. The carrying amounts of restricted cash, accounts receivable, accounts payable and certain accrued liabilities approximate fair value due to the short-term maturity of the amounts. The carrying amount of investments classified as available for sale is at fair value as the investments are marked to market (see Note 3). The carrying amount of the Company’s commercial loans receivable fair value is estimated based on the market value of comparable loans. The fair value of consumer loans receivable and securitized financings are both estimated to be greater than carrying value (see Note 17).
Factory-Built Housing Revenue Recognition. 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 for prior to shipment or floor plan financed by the independent retailer through standard industry arrangements, which can include repurchase agreements. Manufacturing sales financed under repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 14). Revenue from homes sold under commercial loan programs involving funds provided by the Company is either deferred until such time that payment for the related commercial loan receivable is received by the Company or recognized when the home is shipped, depending on the nature of the program and borrower (see Note 6 for discussion of commercial loans receivable). 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 reasonably assured.
Some of the Company’s independent retailers operate multiple sales outlets. No independent retailer accounted for 10% or more of our factory-built housing revenue during any fiscal year within the three-year period ended April 1, 2017.
Financial Services Revenue Recognition. Premium amounts collected on policies issued and assumed by Standard Casualty are amortized on a straight-line basis into net revenue over the life of the policy. Premiums earned are net of reinsurance ceded. Policy acquisition costs are also amortized as cost of sales over the life of the policy.
At the Palm Harbor Acquisition Date, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans’ contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool’s scheduled contractual principal and contractual interest payments over the undiscounted cash flows expected as of the Palm Harbor Acquisition Date as an amount that is not 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 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 (see Note 5).
For loans originated by CountryPlace and held for sale, loan origination fees and gains or losses on sales are recognized as net revenue upon title transfer of the loans. CountryPlace provides third-party servicing of mortgages and earns servicing fees each month based on the aggregate outstanding balances. Servicing fees are recognized as net revenue when earned.
Cash and Cash Equivalents. Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. The Company’s cash equivalents are comprised of U.S. Treasury money market funds and money market funds.

F-9

Restricted Cash. Restricted cash primarily represents cash related to CountryPlace customer payments to be remitted to third parties, cash held in trust for workers' compensation insurance and deposits received from retail customers required to be held in trust accounts. The Company cannot access restricted cash for general operating purposes (see Note 2).
Accounts Receivable. The Company extends competitive credit terms on a customer-by-customer basis in the normal course of business and its accounts receivable are subject to normal industry risk. The Company provides for reserves against accounts receivable for estimated losses that may result from customers' inability to pay. As of April 1, 2017, allowance for doubtful accounts was $7,000, attributable to factory-built housing operations, compared to $75,000 at April 2, 2016.
Investments. Management determines the appropriate classification of its investment securities at the time of purchase. The Company’s investments include marketable debt and equity securities, which are classified as available-for-sale, and non-marketable equity investments. All investments classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income, net of income tax, if applicable. Realized gains and losses from the sale of securities are determined using the specific identification method (see Note 3).
Management regularly makes an assessment to determine whether a decline in value of an individual security is other-than-temporary. The Company considers the following factors when making its assessment: (i) the Company’s ability and intent to hold the investment to maturity, or a period of time sufficient to allow for a recovery in market value; (ii) whether it is probable that the Company will be able to collect the amounts contractually due; and (iii) whether any decision has been made to dispose of the investment prior to the balance sheet date. Investments on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the loss recorded in earnings.
Consumer Loans Receivable. Consumer loans receivable consists of manufactured housing loans originated by CountryPlace (securitized, held for investment, or held for sale) and construction advances on mortgages. The fair value of consumer loans receivable held on the Palm Harbor Acquisition Date was calculated as of that date, as determined by the present value of expected future cash flows, with no allowance for loan loss recorded.
Loans held for investment consist of loan contracts collateralized by the borrowers’ homes and, in some instances, related land. Construction loans in progress are stated at the aggregate amount of cumulative funded advances. Loans held for sale consist of loan contracts collateralized by single-family residential mortgages. Loans held for sale are stated at the lower of cost or market on an aggregate basis. Loans held for sale are loans that, at the time of origination, are originated with the intent to resell in the mortgage market to investors, such as Fannie Mae and Freddie Mac, with which the Company has pre-existing purchase agreements, or to sell as part of a Ginnie Mae insured pool of loans.
Prior to being acquired by the Company, CountryPlace completed two securitizations of factory-built housing loan receivableson July 12, 2005 and March 22, 2007. These two securitizations were accounted for as financings, which use the portfolio method of accounting in accordance with FASB ASC 310, Receivables – Nonrefundable Fees and Other. The securitizations included provisions for removal of accounts, retention of certain credit loss risk by CountryPlace and other factors that preclude sale accounting of the securitizations under FASB ASC 860, Transfers and Servicing. Both securitizations were accounted for as securitized borrowings; therefore, the related consumer loans receivable and securitized financings were included in CountryPlace’s financial statements. Since the Palm Harbor Acquisition Date, the acquired consumer loans receivable and securitized financings are accounted for in a manner similar to FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30").

F-10

Allowance for Loan Losses. The primary portion of the allowance for loan losses reflects the Company’s judgment of the probable loss exposure on our commercial loans receivable as of the end of the reporting period. The allowance for loan loss is developed at a portfolio level. A range of probable losses is calculated and the Company makes a determination of the best estimate within the range of loan losses. The Company has historically been able to resell repossessed 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 loss. The Company recorded an allowance for loan loss of $210,000 and $128,000 at April 1, 2017 and April 2, 2016, respectively (see Note 6).
Another portion of the allowance for loan losses relates to consumer loans receivable originated by CountryPlace after the Palm Harbor Acquisition Date. This allowance for loan losses reflects CountryPlace’s judgment of the probable loss exposure on its loans originated since the Palm Harbor Acquisition Date in the held for investment portfolio as of the end of the reporting period.
CountryPlace accounts for the loans that were in existence at the Palm Harbor Acquisition Date in a manner similar to ASC 310-30. Management evaluated such loans as of the Palm Harbor Acquisition Date to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans’ contractual terms.
Over the life of the loans, CountryPlace continues to estimate cash flows expected to be collected. CountryPlace evaluates at the balance sheet date whether the present value of its expected cash flows, determined using the effective interest rate, has decreased and, if so, recognizes an allowance for loan loss subsequent to the Palm Harbor Acquisition Date. The present value of any subsequent increase in the loan pool’s actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool’s remaining life (see Note 5).
CountryPlace has modified payment amounts and/or interest rates for borrowers that, in management’s judgment, exhibited the willingness and ability to continue to pay and meet certain other conditions. CountryPlace considers a modified loan a troubled debt restructuring when three conditions are met: (i) the borrower is experiencing financial difficulty, (ii) concessions are made by CountryPlace that it would not otherwise consider for a borrower with similar risk characteristics, and (iii) the loan was originated after the Palm Harbor Acquisition Date. CountryPlace no longer considers modified loans to be troubled debt restructurings once the modified loan is seasoned for six months, is not delinquent under the modified terms and is at a market rate of interest at the modification date.
Commercial Loans Receivable. The Company’s commercial loans receivable balance consists of amounts loaned by the Company under commercial loan programs for the benefit of our independent retailers and community operators’ home purchasing needs. Under the terms of certain programs, the Company has entered into direct commercial loan arrangements with independent retailers and community operators wherein the Company provides funds to purchase home inventory or homes for placement in communities. In addition, the Company provides a significant amount of the funds that independent financiers lend to distributors to finance retail inventories of homes. Interest income on commercial loans receivable is recognized as Other income in the Consolidated Statements of Comprehensive Income on an accrual basis.
Inventories. Raw material inventories are valued at the lower of cost (first-in, first-out method) or market. Finished goods and work-in-process inventories are valued at the lower of cost or market, using the specific identification method.
Assets Held for Sale. As of April 1, 2017, the Company has no assets classified as held for sale.

F-11

Property, Plant and Equipment. Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful life of each asset. Estimated useful lives for significant classes of assets are as follows: buildings and improvements, 10 to 39 years; and machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. The Company sold miscellaneous property, plant and equipment in the normal course of business.
Asset Impairment. The Company periodically evaluates the carrying value of long-lived assets to be held and used and held for sale for impairment when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair values are primarily based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose. The Company recognized no impairment losses in fiscal years 2017, 2016 or 2015.
Goodwill and Other Intangibles. The Company accounts for goodwill and other intangible assets in accordance with the provisions of FASB ASC 350, Intangibles—Goodwill and Other ("ASC 350"). As such, the Company tests goodwill annually for impairment. The Company has identified two reporting units, factory-built housing and financial services. As of April 1, 2017, all of the Company's goodwill is attributable to its factory-built housing reporting unit. Certain intangibles are considered indefinite-lived and others are finite-lived and are amortized over their useful lives. Indefinite-lived intangible assets are assessed annually for impairment first by making a qualitative assessment, and if necessary, performing a quantitative assessment and recording an impairment charge if the fair value of the asset is less than its carrying amount.
The Company performed its annual goodwill impairment analysis as of April 1, 2017 in accordance with Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The analysis determined that the fair value of the reporting unit was greater than the carrying value. As a result, no impairment was determined to be necessary for fiscal years 2017 or 2016.
Warranties. The Company provides retail home buyers, builders or developers with a one-year warranty for manufacturing defects from the date of sale to the retail customer. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. Estimated warranty costs are accrued as cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims on homes sold as of the balance sheet date. Factors used to calculate the warranty obligation are the estimated amount of homes still under warranty including homes in retailer inventories, homes purchased by consumers still within the one-year warranty period, the timing in which work orders are completed and the historical average costs incurred to service a home.
Retailer Volume Rebates. The Company’s manufacturing operations sponsor volume rebate programs 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 net revenue.

F-12

Reserve for Repurchase Commitment. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months) and is further reduced by the resale value of repurchased homes. The Company applies FASB ASC 460, Guarantees ("ASC 460") and FASB ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liability for repurchase commitments. Under the provisions of ASC 460, during the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of the estimated fair value of the non-contingent obligation or a contingent liability for each repurchase arrangement under the provisions of ASC 450-20, based on historical information available, as a reduction to revenue. Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and an ASC 450-20 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period in conjunction with applicable curtailment arrangements and is eliminated once the retailer sells the home. Changes in the reserve are recorded as an adjustment to revenue.
Reserve for Property-Liability Insurance Claims and Claims Expense. Standard Casualty establishes reserves for claims and claims expense ("loss") on reported and unreported claims of insured losses. Standard Casualty’s reserving process takes into account known facts and interpretations of circumstances and factors, including Standard’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix, contractual terms, changes in law and regulation, judicial decisions and economic conditions. In the normal course of business, Standard Casualty may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process. The applicable reserve balance was $5.2 million as of April 1, 2017, of which $2.6 million related to incurred but not reported ("IBNR") losses.
Insurance. The Company is self-insured for a significant portion of its general and products liability, auto liability, health, property and workers’ compensation liability coverage. Insurance is maintained for catastrophic exposures and those risks required to be insured by law. Estimated self-insurance costs are accrued for incurred claims and estimated IBNR claims. A reserve for products liability is actuarially determined and reflected in accrued liabilities in the accompanying Consolidated Balance Sheets. The determination of claims and expenses and the appropriateness of the related liabilities are regularly reviewed and updated.
Advertising. Advertising costs are expensed as incurred and were $1.0 million in fiscal year 2017, $0.7 million in fiscal year 2016 and $1.5 million in fiscal year 2015.
Freight. Substantially all freight costs are recovered from the Company’s retailers. Freight charges of $24.3 million were recognized in net revenue and cost of sales in fiscal year 2017, $22.3 million was recognized in fiscal year 2016 and $17.6 million was recognized for in fiscal year 2015.
Income Taxes. The Company accounts for income taxes pursuant to FASB ASC 740, Income Taxes ("ASC 740"), and provides for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.

F-13

The calculation of tax liabilities involves considering uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. The Company uses a two-step approach to evaluate uncertain tax positions. This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be recognized in the Consolidated Financial Statements.
Other Income, net. Other income, net totaled $2.9 million, $2.0 million and $3.4 million for fiscal years 2017, 2016 and 2015, respectively. Other income primarily consists interest related to commercial loan receivable balances and interest income earned on cash balances, gains and losses on the sale of corporate investments and gains and losses or impairment on property, plant and equipment, including assets held for sale or sold.
Accumulated Other Comprehensive Income. Accumulated other comprehensive income is comprised of unrealized gains and losses on available-for-sale investments (see Note 3). Unrealized gains and losses are presented net of tax. Unrealized gain on available-for-sale investments during fiscal year 2017 was $121,000 before tax, with an associated tax amount of $24,000, resulting in a net unrealized gain of $97,000. Unrealized gain on available-for-sale investments during fiscal year 2016 was $1.3 million, offset by tax effect of $539,000, for a net unrealized gain of $785,000. Unrealized gain on available-for-sale investments during fiscal year 2015 was $106,000 before tax, with an associated tax amount of $38,000, resulting in a net unrealized gain of $68,000.
Net Income Per Share Attributable to Cavco Common Stockholders. Basic earnings per common share attributable to Cavco common stockholders is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share attributable to Cavco common stockholders is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method (see Note 16).
Recent Accounting Pronouncements. In September 2013, the United States Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. These regulations have not had a material impact on our consolidated results of operations, cash flows or financial position.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard 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 new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a company’s contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard is effective for us beginning with the first quarter of the Company's fiscal year 2019, with early application permitted in fiscal year 2018. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.

F-14

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 will be effective beginning with the Company's fiscal year 2018 annual report and interim periods thereafter, with early adoption permitted. In this update, entities are required to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. As this standard impacts presentation only, the adoption of ASU 2015-17 is not expected to have an impact on the Company's financial condition, results of operations or cash flows.
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"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. The amendments require certain equity investments to be measured at fair value with changes in the fair value recognized through net income. The Company is currently evaluating the effect ASU 2016-01 will have on the Company's Consolidated Financial Statements and disclosures.
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 the recognition of lease assets and lease liabilities on the balance sheet for most leases, but recognize expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 will be effective beginning with the first quarter of the Company's fiscal year 2018, with early adoption permitted. The amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the effect ASU 2016-09 will have on the Company's Consolidated Financial Statements and disclosures.
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, which requires a new forward-looking impairment model based on expected losses rather than incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
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 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective beginning with the first quarter of the Company's fiscal year 2019. The adoption of ASU 2016-18 is not expected to have a material impact on the consolidated financial statements and will only change the presentation of the Consolidated Statement of Cash Flows.
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.

F-15

2. Restricted Cash
Restricted cash consists of the following (in thousands):
 
April 1,
2017
 
April 2,
2016
Cash related to CountryPlace customer payments to be remitted to third parties
$
9,998

 
$
8,419

Cash related to CountryPlace customers payments on securitized loans to be remitted to bondholders
1,391

 
1,747

Cash related to workers’ compensation insurance held in trust
354

 
728

Other restricted cash
554

 
406

 
$
12,297

 
$
11,300

Corresponding amounts are recorded in accounts payable and accrued liabilities for customer payments, deposits and other restricted cash.
3. Investments
Investments consist of the following (in thousands):
 
April 1,
2017
 
April 2,
2016
Available-for-sale investment securities
$
24,162

 
$
24,247

Non-marketable equity investments
17,383

 
14,841

 
$
41,545

 
$
39,088

Non-marketable equity investments includes $15.0 million as of April 1, 2017 and April 2, 2016, 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 investment securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
 
April 1, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
650

 
$
—

 
$
(1
)
 
$
649

Residential mortgage-backed securities
5,646

 
3

 
(90
)
 
5,559

State and political subdivision debt securities
7,195

 
145

 
(117
)
 
7,223

Corporate debt securities
1,698

 
4

 
(23
)
 
1,679

Marketable equity securities
5,752

 
2,430

 
(130
)
 
8,052

Certificates of deposit
1,000

 
—

 
—

 
1,000

 
$
21,941

 
$
2,582

 
$
(361
)
 
$
24,162



F-16

 
April 2, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
1,002

 
$
—

 
$
(3
)
 
$
999

Residential mortgage-backed securities
5,866

 
13

 
(60
)
 
5,819

State and political subdivision debt securities
7,231

 
239

 
(49
)
 
7,421

Corporate debt securities
1,166

 
4

 
(6
)
 
1,164

Marketable equity securities
5,882

 
2,374

 
(412
)
 
7,844

Certificates of deposit
1,000

 
—

 
—

 
1,000

 
$
22,147

 
$
2,630

 
$
(530
)
 
$
24,247


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):
 
April 1, 2017
 
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
$
349

 
$
(1
)
 
$
—

 
$
—

 
$
349

 
$
(1
)
Residential mortgage-backed securities
3,449

 
(38
)
 
1,962

 
(52
)
 
5,411

 
(90
)
State and political subdivision debt securities
1,948

 
(36
)
 
2,084

 
(81
)
 
4,032

 
(117
)
Corporate debt securities
1,424

 
(23
)
 
—

 
—

 
1,424

 
(23
)
Marketable equity securities
1,393

 
(90
)
 
157

 
(40
)
 
1,550

 
(130
)
 
$
8,563

 
$
(188
)
 
$
4,203

 
$
(173
)
 
$
12,766

 
$
(361
)

 
April 2, 2016
 
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
$
—

 
$
—

 
$
699

 
$
(3
)
 
$
699

 
$
(3
)
Residential mortgage-backed securities
3,436

 
(27
)
 
898

 
(33
)
 
4,334

 
(60
)
State and political subdivision debt securities
1,865

 
(29
)
 
1,257

 
(20
)
 
3,122

 
(49
)
Corporate debt securities
763

 
(6
)
 
—

 
—

 
763

 
(6
)
Marketable equity securities
1,780

 
(324
)
 
152

 
(88
)
 
1,932

 
(412
)
 
$
7,844

 
$
(386
)
 
$
3,006

 
$
(144
)
 
$
10,850

 
$
(530
)
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 April 1, 2017.

F-17

As of April 1, 2017, the Company’s investments in marketable equity securities consist of investments in common stock of industrial and other companies.
As of April 2, 2016, the Company’s investments in marketable equity securities consisted of investments in common stock of industrial and other companies ($7.7 million of the total fair value and $409,000 of the total unrealized losses) and bank trust, insurance, and public utility companies ($100,000 of the total fair value and $3,000 of the total unrealized losses).
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.
 
 
April 1, 2017
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$
2,251

 
$
2,238

Due after one year through five years
3,724

 
3,678

Due after five years through ten years
3,408

 
3,311

Due after ten years
5,806

 
5,883

 
$
15,189

 
$
15,110

Realized gains and losses from the sale of securities are determined using the specific identification method. Gross gains realized on the sales of investment securities for fiscal years 2017 and 2016 were approximately $1.1 million and $431,000, respectively. Gross losses realized were approximately $413,000 and $385,000 for fiscal years 2017 and 2016, respectively.
4. Inventories
Inventories consist of the following (in thousands):
 
April 1,
2017
 
April 2,
2016
Raw materials
$
31,506

 
$
28,764

Work in process
11,768

 
10,755

Finished goods and other
50,581

 
55,294

 
$
93,855

 
$
94,813


F-18

5. Consumer Loans Receivable
The Company acquired consumer loans receivable during the first quarter of fiscal year 2012 as part of the Palm Harbor transaction. Acquired consumer loans receivable held for investment were acquired at fair value and subsequently are accounted for in accordance with ASC 310-30. Consumer loans receivable held for sale are carried at the lower of cost or market and construction advances are carried at the amount advanced less a valuation allowance. The following table summarizes consumer loans receivable (in thousands):
 
April 1,
2017
 
April 2,
2016
Loans held for investment (acquired on Palm Harbor Acquisition Date)
$
60,513

 
$
68,951

Loans held for investment (originated after Palm Harbor Acquisition Date)
11,108

 
6,120

Loans held for sale
18,570

 
8,765

Construction advances
6,957

 
6,566

Consumer loans receivable
97,148

 
90,402

Deferred financing fees and other, net
(1,347
)
 
(844
)
Consumer loans receivable, net
$
95,801

 
$
89,558

As of the date of the Palm Harbor acquisition, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans' contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool’s scheduled contractual principal and contractual interest payments over all cash flows expected as of the date of the Palm Harbor transaction 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.
 
April 1,
2017
 
April 2,
2016
 
(in thousands)
Consumer loans receivable held for investment – contractual amount
$
142,391

 
$
166,793

Purchase discount:
 
 
 
Accretable
(56,686
)
 
(69,053
)
Non-accretable difference
(25,032
)
 
(28,536
)
Less consumer loans receivable reclassified as other assets
(160
)
 
(253
)
Total acquired consumer loans receivable held for investment, net
$
60,513

 
$
68,951


Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected by CountryPlace. As of the balance sheet date, the Company evaluates whether the present value of expected cash flows, determined using the effective interest rate, has decreased from the value at acquisition and, if so, recognizes an allowance for loan loss. The present value of any subsequent increase in the loan pool’s actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool’s remaining life. The weighted averages of assumptions used in the calculation of expected cash flows to be collected are as follows:

F-19

 
April 1,
2017
 
April 2,
2016
Prepayment rate
13.8
%
 
13.0
%
Default rate
1.1
%
 
1.0
%
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 April 1, 2017, would decrease by approximately $1.8 million and $4.8 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):
 
Year Ended
 
April 1,
2017
 
April 2,
2016
Balance at the beginning of the period
$
69,053

 
$
73,202

Additions
—

 
—

Accretion
(9,621
)
 
(10,720
)
Reclassifications from (to) nonaccretable discount
(2,746
)
 
6,571

Balance at the end of the period
$
56,686

 
$
69,053


The consumer loans held for investment have the following characteristics:
 
April 1,
2017
 
April 2,
2016
Weighted average contractual interest rate
8.87
%
 
9.05
%
Weighted average effective interest rate
9.35
%
 
9.39
%
Weighted average months to maturity
165

 
170

The Company's consumer loans receivable balance consists of fixed-rate, fixed-term and fully-amortizing single-family home loans. These loans are either secured by a manufactured home, excluding the land upon which the home is located (chattel personal property loans), or by a combination of the home and the land upon which the home is located (real property mortgage loans). The real property mortgage loans are primarily for manufactured homes. Combined land and home loans are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises ("GSEs"), and those that are non-conforming. In most instances, CountryPlace’s loans are secured by a first-lien position and are provided for the consumer purchase of a home. Unsecuritized consumer loans held for investment include chattel personal property loans originated under the Company's chattel lending programs. Accordingly, CountryPlace classifies its loans receivable as follows: chattel loans, conforming mortgages, non-conforming mortgages and other loans.
In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (such as FICO®). At the time of each loan’s origination, CountryPlace obtains credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, CountryPlace uses the mid-point of the available credit scores or, if only two scores are available, the Company uses the lower of the two. CountryPlace does not update credit bureau scores after the time of origination.

F-20

The following table disaggregates CountryPlace’s gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
 
April 1, 2017
 
Consumer Loans Held for Investment
 
 
 
 
 
 
 
Securitized
2005
 
Securitized
2007
 
Unsecuritized
 
Construction
Advances
 
Consumer Loans Held
For Sale
 
Total
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicator (FICO® score)
 
 
 
 
 
 
 
 
Chattel loans
 
 
 
 
 
 
 
 
 
 
 
0-619
$
705

 
$
411

 
$
393

 
$
—

 
$
—

 
$
1,509

620-719
11,681

 
8,072

 
5,406

 
—

 
697

 
25,856

720+
12,748

 
7,800

 
5,081

 
—

 
3,097

 
28,726

Other
51

 
—

 
433

 
—

 
—

 
484

Subtotal
25,185

 
16,283

 
11,313

 
—

 
3,794

 
56,575

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
—

 
—

 
161

 
261

 
99

 
521

620-719
—

 
—

 
1,792

 
4,231

 
10,553

 
16,576

720+
—

 
—

 
247

 
2,465

 
4,124

 
6,836

Subtotal
—

 
—

 
2,200

 
6,957

 
14,776

 
23,933

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
86

 
435

 
1,327

 
—

 
—

 
1,848

620-719
1,242

 
4,947

 
3,372

 
—

 
—

 
9,561

720+
1,527

 
2,909

 
484

 
—

 
—

 
4,920

Other
—

 
—

 
299

 
—

 
—

 
299

Subtotal
2,855

 
8,291

 
5,482

 
—

 
—

 
16,628

Other loans
 
 
 
 
 
 
 
 
 
 
 
Subtotal
—

 
—

 
12

 
—

 
—

 
12

 
$
28,040

 
$
24,574

 
$
19,007

 
$
6,957

 
$
18,570

 
$
97,148



F-21

 
April 2, 2016
 
Consumer Loans Held for Investment
 
 
 
 
 
 
 
Securitized
2005
 
Securitized
2007
 
Unsecuritized
 
Construction
Advances
 
Consumer Loans Held
For Sale
 
Total
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicator (FICO® score)
 
 
 
 
 
 
 
 
Chattel loans
 
 
 
 
 
 
 
 
 
 
 
0-619
$
776

 
$
543

 
$
336

 
$
—

 
$
—

 
$
1,655

620-719
13,139

 
9,100

 
3,683

 
—

 
96

 
26,018

720+
14,751

 
9,409

 
2,324

 
—

 
215

 
26,699

Other
55

 
—

 
447

 
—

 
—

 
502

Subtotal
28,721

 
19,052

 
6,790

 
—

 
311

 
54,874

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
—

 
—

 
164

 
95

 
171

 
430

620-719
—

 
—

 
1,428

 
3,355

 
5,847

 
10,630

720+
—

 
—

 
320

 
3,116

 
2,436

 
5,872

Subtotal
—

 
—

 
1,912

 
6,566

 
8,454

 
16,932

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
88

 
585

 
1,392

 
—

 
—

 
2,065

620-719
1,365

 
5,290

 
3,664

 
—

 
—

 
10,319

720+
1,684

 
3,382

 
826

 
—

 
—

 
5,892

Other
—

 
—

 
307

 
—

 
—

 
307

Subtotal
3,137

 
9,257

 
6,189

 
—

 
—

 
18,583

Other loans
 
 
 
 
 
 
 
 
 
 
 
Subtotal
—

 
—

 
13

 
—

 
—

 
13

 
$
31,858

 
$
28,309

 
$
14,904

 
$
6,566

 
$
8,765

 
$
90,402

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. Forty-three percent of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas and 12% is concentrated in Florida. No other state had concentrations in excess of 10% of the principal balance of the consumer loan receivable as of April 1, 2017.
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 charged to the 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 $1.2 million and $707,000 as of April 1, 2017 and April 2, 2016, respectively, and are included in prepaid and other assets in the consolidated balance sheets. Foreclosure or similar proceedings in progress totaled approximately $694,000 and $340,000 as of April 1, 2017 and April 2, 2016, respectively.
6. Commercial Loans Receivable and Allowance for Loan Loss
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.

F-22

Under the terms of the direct programs, the Company provides funds for the independent retailers, communities and developers’ financed home purchases. The notes are secured by the home 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, consist of the following by class of financing notes receivable (in thousands):
 
April 1,
2017
 
April 2,
2016
Direct loans receivable
$
24,959

 
$
24,392

Participation loans receivable
1,084

 
1,278

Allowance for loan loss
(210
)
 
(128
)
 
$
25,833

 
$
25,542

The commercial loans receivable balance has the following characteristics:
 
April 1,
2017
 
April 2,
2016
Weighted average contractual interest rate
5.6
%
 
6.9
%
Weighted average months to maturity
6

 
9

The Company evaluates the potential for loss from its participation loan programs based on the independent lender’s overall financial stability, as well as historical experience, and has determined that an applicable allowance for loan loss was not needed at either April 1, 2017 or April 2, 2016.
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 loans 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 loss. The Company recorded an allowance for loan loss of $210,000 and $128,000 at April 1, 2017 and April 2, 2016, respectively.

F-23

The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan loss applicable to the direct programs (in thousands):
 
Year Ended
 
April 1,
2017
 
April 2,
2016
Balance at beginning of period
$
128

 
$
73

Provision for commercial loan credit losses
82

 
55

Loans charged off, net of recoveries
—

 
—

Balance at end of period
$
210

 
$
128

The following table disaggregates commercial loans receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Commercial loans receivable:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
13,688

 
$
12,761

 
$
—

 
$
—

Individually evaluated for impairment
11,271

 
11,631

 
1,084

 
1,278

 
$
24,959

 
$
24,392

 
$
1,084

 
$
1,278

Allowance for loan loss:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
(137
)
 
$
(128
)
 
$
—

 
$
—

Individually evaluated for impairment
(73
)
 
—

 
—

 
—

 
$
(210
)
 
$
(128
)
 
$
—

 
$
—

Loans are subject to regular review and are given management’s attention whenever a problem situation appears to be developing. Loans with indicators of potential 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 April 1, 2017, 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 April 1, 2017, the Company was not aware of any potential problem loans that would have a material effect on the commercial receivables balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
The following table disaggregates the Company’s commercial loans receivable by class and credit quality indicator (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
April 1,
2017
 
April 2,
2016
 
April 1,
2017
 
April 2,
2016
Risk profile based on payment activity:
 
 
 
 
 
 
 
Performing
$
24,886

 
$
24,392

 
$
1,084

 
$
1,278

Watch list
—

 
—

 
—

 
—

Nonperforming
73

 
—

 
—

 
—

 
$
24,959

 
$
24,392

 
$
1,084

 
$
1,278


F-24

The Company has concentrations of commercial loans receivable related to factory-built homes located in the following states, measured as a percentage of commercial loans receivables principal balance outstanding:
 
April 1,
2017
 
April 2,
2016
Arizona
21.3
%
 
13.3
%
Oregon
15.7
%
 
5.4
%
Texas
11.0
%
 
33.2
%
California
11.0
%
 
5.4
%
Indiana
10.7
%
 
7.1
%
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 commercial loans receivable in any other states as of April 1, 2017 or April 2, 2016, respectively.
The Company had concentrations of commercial loans receivable with one independent third-party and its affiliates that equaled 23% and 32% of the principal balance outstanding, all of which was secured, as of April 1, 2017 and April 2, 2016, respectively.
7. Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: (i) buildings and improvements, 10 to 39 years and (ii) machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. Property, plant and equipment consist of the following (in thousands):
 
April 1,
2017
 
April 2,
2016
Property, plant and equipment, at cost:
 
 
 
Land
$
22,897

 
$
22,719

Buildings and improvements
34,180

 
32,230

Machinery and equipment
21,618

 
19,533

 
78,695

 
74,482

Accumulated depreciation
(21,731
)
 
(19,410
)
Property, plant and equipment, net
$
56,964

 
$
55,072

As of April 2, 2016, the Company had land and buildings and improvements under capital lease of $240,000 and $3.0 million, respectively, which are included in the amounts above. On September 20, 2016, the Company purchased the assets under the capital lease, terminating the lease arrangement.
8. Goodwill and Other Intangibles
Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, and other, which includes technology, insurance policies and renewal rights and other. Goodwill, trademarks and trade names and state insurance licenses are indefinite-lived intangible assets and are evaluated for impairment annually and whenever events or circumstances indicate that more likely than not impairment has occurred. During fiscal years 2017, 2016 and 2015, no impairments were recorded. Finite-lived intangibles are amortized over their estimated useful lives on a straight-line basis and are reviewed for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. The value of customer relationships is amortized over 4 to 15 years and other intangibles over 7 to 15 years.

F-25

Goodwill and other intangibles consist of the following (in thousands):
 
April 1, 2017
 
April 2, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Indefinite lived:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
69,753

 
$
—

 
$
69,753

 
$
69,753

 
$
—

 
$
69,753

Trademarks and trade names
7,000

 
—

 
7,000

 
7,000

 
—

 
7,000

State insurance licenses
1,100

 
—

 
1,100

 
1,100

 
—

 
1,100

Total indefinite-lived intangible assets
77,853

 
—

 
77,853

 
77,853

 
—

 
77,853

Finite lived:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
7,100

 
(5,543
)
 
1,557

 
7,100

 
(5,329
)
 
1,771

Other
1,384

 
(773
)
 
611

 
1,384

 
(619
)
 
765

Total goodwill and other intangible assets
$
86,337

 
$
(6,316
)
 
$
80,021

 
$
86,337

 
$
(5,948
)
 
$
80,389

Amortization expense recognized on intangible assets was $368,000 during fiscal year 2017, $454,000 during fiscal year 2016 and $1.4 million during fiscal year 2015.
Expected amortization for future fiscal years is as follows (in thousands):
2018
$
368

2019
324

2020
320

2021
318

2022
245


F-26

9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
April 1,
2017
 
April 2,
2016
Salaries, wages and benefits
$
22,029

 
$
20,675

Unearned insurance premiums
17,488

 
15,528

Customer deposits
15,986

 
14,039

Estimated warranties
15,479

 
13,371

Company repurchase options on certain loans sold
5,858

 
3,497

Accrued volume rebates
5,686

 
4,647

Insurance loss reserves
5,239

 
5,990

Accrued insurance
4,113

 
3,969

Deferred margin
2,906

 
2,823

Reserve for repurchase commitments
1,749

 
1,660

Accrued Taxes
1,682

 
1,282

Capital Lease Obligation
—

 
2,387

Other
11,574

 
10,446

 
$
109,789

 
$
100,314

10. Warranties
Homes are generally warranted against manufacturing defects for a period of one year commencing at the time of sale to the retail customer. Estimated costs relating to home warranties are provided at the date of sale. The Company has recorded a liability for estimated future warranty costs relating to homes sold based upon management’s assessment of historical experience factors, an estimate of the amount of homes in the distribution channel and current industry trends. Activity in the liability for estimated warranties was as follows (in thousands):
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Balance at beginning of period
$
13,371

 
$
9,953

 
$
9,262

Purchase accounting additions
—

 
1,111

 
—

Charged to costs and expenses
24,282

 
21,133

 
13,083

Payments and deductions
(22,174
)
 
(18,826
)
 
(12,392
)
Balance at end of period
$
15,479

 
$
13,371

 
$
9,953


F-27

11. Debt Obligations
Debt obligations consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt obligations (in thousands):
 
April 1,
2017
 
April 2,
2016
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
 
 
 
Securitized financing 2005-1
$
23,756

 
$
27,481

Securitized financing 2007-1
25,728

 
28,859

Other secured financings
4,987

 
4,831

Secured Term Loan
3,520

 
—

Total securitized financings and other, net
$
57,991

 
$
61,171

The Company acquired CountryPlace's securitized financings during the first quarter of fiscal year 2012 as a part of the Palm Harbor acquisition. 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 Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for securitized consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the date of the Palm Harbor acquisition include interest that cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield). The following table summarizes acquired securitized financings (in thousands):
 
April 1,
2017
 
April 2,
2016
Securitized financings – contractual amount
$
57,120

 
$
68,673

Purchase Discount
 
 
 
Accretable
(7,636
)
 
(12,333
)
Non-accretable (1)
—

 
—

Total acquired securitized financings, net
$
49,484

 
$
56,340

(1) There is no non-accretable difference, as the contractual payments on acquired securitized financing 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.

F-28

The changes in accretable yield on securitized financings were as follows (in thousands): 
 
Year Ended
 
April 1,
2017
 
April 2,
2016
Balance at the beginning of the period
$
12,333

 
$
12,128

Additions
—

 
—

Accretion
(3,724
)
 
(3,579
)
Adjustment to cash flows
(973
)
 
3,784

Balance at the end of the period
$
7,636

 
$
12,333

On July 12, 2005, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.66 years. For accounting purposes, this transaction was structured as a securitized borrowing. As of April 1, 2017, the Class A-1, Class A-2 and Class A-3 bonds have been retired.
On March 22, 2007, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of April 1, 2017, the Class A-1 and Class A-2 bonds have been retired.
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 the overcollateralization level 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 April 1, 2017, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
On October 24, 2016, the Company entered into an agreement with an independent third party bank for a $10.0 million secured credit facility with a one year drawn period and a maturity date of October 24, 2027. The proceeds are used by the Company to originate and hold consumer chattel loans secured by manufactured homes, which are pledged as collateral to the facility. The maximum advance for loans under this program is 80% of the outstanding collateral principal balance with the Company providing the remaining funds. The facility has a floating interest rate during a one year warehouse period in which the Company has the option to convert all or a portion of the loan to a fixed rate. During the warehouse period, the facility bears interest at an annual rate of the average one month LIBOR rates plus 3.50%. Upon conversion, converted balances bear interest at an annual rate of 10 year US Treasury bonds plus 2.75%. Payments are based on a 20 year amortization schedule with a balloon payment due upon maturity.

F-29

Scheduled maturities for future fiscal years of the Company’s debt obligations consist of the following (in thousands):
2018
$
6,409

2019
5,414

2020
39,826

2021
659

2022
612

Actual payments may vary from those above, resulting from prepayments or defaults on the underlying mortgage portfolio.
12. 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):
 
Year Ended
 
Year Ended
 
April 1, 2017
 
April 2, 2016
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
16,528

 
$
15,919

 
$
15,595

 
$
14,764

Assumed premiums—nonaffiliate
25,332

 
23,908

 
22,580

 
21,191

Ceded premiums—nonaffiliate
(12,247
)
 
(12,247
)
 
(11,088
)
 
(11,088
)
Net premiums
$
29,613

 
$
27,580

 
$
27,087

 
$
24,867

Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000 per claim, of which Standard Casualty cedes $200,000 of the risk of loss per reinsurance. Therefore, Standard Casualty maintains risk of loss limited to $100,000 per claim on typical policies. After this limit, amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.5 million per occurrence up to a maximum of $43.5 million in the aggregate.
Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time.

F-30

13. Income Taxes
The provision for income taxes for fiscal years 2017, 2016 and 2015 were as follows (in thousands):
 
Fiscal Year
 
2017
 
2016
 
2015
Current
 
 
 
 
 
Federal
$
15,924

 
$
15,070

 
$
8,277

State
1,131

 
1,350

 
882

Total current
17,055

 
16,420

 
9,159

Deferred
 
 
 
 
 
Federal
(13
)
 
(987
)
 
3,937

State
284

 
54

 
414

Total deferred
271

 
(933
)
 
4,351

Total income tax provision
$
17,326

 
$
15,487

 
$
13,510

A reconciliation of income taxes computed by applying the expected federal statutory income tax rates of 35% for fiscal years 2017, 2016 and 2015 to income before income taxes to the total income tax provision reported in the Consolidated Statements of Comprehensive Income is as follows (in thousands):
 
Fiscal Year
 
2017
 
2016
 
2015
Federal income tax at statutory rate
$
19,348

 
$
15,410

 
$
13,065

Tax credits
(1,826
)
 
(941
)
 
(374
)
State income taxes, net of federal benefit
1,428

 
1,427

 
1,104

Domestic production activities deduction
(1,422
)
 
(889
)
 
(561
)
Other
(202
)
 
480

 
276

Total income tax provision
$
17,326

 
$
15,487

 
$
13,510



F-31

Net current deferred tax assets and net long-term deferred tax liabilities were as follows (in thousands):
 
April 1,
2017
 
April 2,
2016
Net current deferred tax assets (liabilities)
 
 
 
Warranty reserves
$
5,784

 
$
5,019

Prepaid expenses
(2,494
)
 
(1,472
)
Salaries and wages
2,375

 
2,501

Inventory
1,466

 
1,510

Deferred revenue
1,374

 
1,206

Policy acquisition costs
(1,001
)
 
(1,201
)
Other
1,700

 
1,435

 
$
9,204

 
$
8,998

Net long-term deferred tax (liabilities) assets
 
 
 
Goodwill
$
(24,847
)
 
$
(24,635
)
Loan discount
6,419

 
7,546

Property, plant, equipment and depreciation
(4,569
)
 
(4,621
)
Stock based compensation
3,054

 
2,784

Other intangibles
(2,382
)
 
(2,418
)
Deferred margin
1,627

 
1,562

Other
(420
)
 
(829
)
 
$
(21,118
)
 
$
(20,611
)
The effective income tax rate for the current year was positively impacted by the timing of certain tax credits and deductions. As Cavco’s taxable income has grown, we have realized additional benefit from tax deductions established to favor domestic manufacturing operations. We also received benefit from tax credits, including research and development, fuel, energy efficient home and work opportunity tax credits.
The Company recorded an insignificant amount of unrecognized tax benefits during fiscal years 2017, 2016 and 2015, and there would be an insignificant effect on the effective tax rate if all unrecognized tax benefits were recognized. The Company classifies interest and penalties related to unrecognized tax benefits in income tax expense. At April 1, 2017, the Company has state net operating loss carryforwards that total $2.8 million, that began to expire in 2015. As a result, the Company recorded an $18,000 valuation allowance against the related deferred tax asset.
The Company periodically evaluates the deferred tax assets based on the requirements established in ASC 740 which requires the recording of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of the need for or amount of any valuation allowance involves significant management judgment and is based upon the evaluation of both positive and negative evidence, including management projections of anticipated taxable income. At April 1, 2017, the Company evaluated its historical profits earned and forecasted taxable income and determined that, except as described above, all of the deferred tax assets would be utilized in future periods. Ultimate realization of the deferred tax assets depends on our ability to continue to earn profits as we have historically and to meet these forecasts in future periods.

F-32

Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. The Company is no longer subject to examination by the IRS for years before fiscal year 2013. In general, the Company is no longer subject to state and local income tax examinations by tax authorities for years before fiscal year 2012. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to the Company’s financial position. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.
14. Commitments and Contingencies
Repurchase Contingencies. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months, calculated from the date of sale to the retailer) and the risk of loss is further reduced by the resale value of the repurchased homes. The Company applies ASC 460 and ASC 450-20 to account for its liability for repurchase commitments. Under the provisions of ASC 460, issuance of a guarantee results in two different types of obligations: (1) a non-contingent obligation to stand ready to perform under the repurchase commitment (accounted for pursuant to ASC 460) and (2) a contingent obligation to make future payments under the conditions of the repurchase commitment (accounted for pursuant to ASC 450-20). Management reviews the retailers' inventories to estimate the amount of inventory subject to repurchase obligation, which is used to calculate: (1) the fair value of the non-contingent obligation for repurchase commitments and (2) the contingent liability based on historical information available at the time. During the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of these two calculations as a liability for repurchase commitments and as a reduction to revenue.
(1)
The Company estimates the fair value of the non-contingent portion of its manufacturer's inventory repurchase commitment under the provisions of ASC 460 when a home is shipped to retailers whose floor plan financing includes a repurchase commitment. The fair value of the inventory repurchase agreement is determined by calculating the net present value of the difference in (a) the Company's interest cost to carry the inventory over the maximum repurchase liability period at the prevailing floor plan note interest rate and (b) the retailer's interest cost to carry the inventory over the maximum repurchase liability period at the interest rate of a similar type loan without a manufacturer's repurchase agreement in force. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period in conjunction with applicable curtailment arrangements and is eliminated once the retailer sells the home.
(2)
The Company estimates the contingent obligation to make future payments under its manufacturer's inventory repurchase commitment for the same pool of commitments as used in the fair value calculation above and records the greater of the two calculations. This contingent obligation is estimated using historical loss factors, including the frequency of repurchases and the losses experienced by the Company for repurchased inventory.
Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and an ASC 450-20 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Based on identified changes in retailers' financial conditions, the Company evaluates the probability of default for retailers who are identified at an elevated risk of default and applies a probability of default, based on historical default rates. Commensurate with this default probability evaluation, the Company reviews repurchase notifications received from floor plan sources and reviews retailer inventory for expected repurchase notifications based on various communications from the lenders and retailers. The Company's repurchase commitments for the retailers in the category of elevated risk of default are excluded from the pool of commitments used in both of the calculations at (1) and (2) above. Changes in the reserve are recorded as an adjustment to revenue.

F-33

The maximum amount for which the Company was liable under such agreements approximated $46.3 million and $46.6 million at April 1, 2017 and April 2, 2016, respectively, without reduction for the resale value of the homes. The Company had a reserve for repurchase commitments of $1.7 million at April 1, 2017 and April 2, 2016. Activity in the liability for estimated repurchase contingencies was as follows for fiscal years 2017, 2016 and 2015 (in thousands):
 
Fiscal Year
 
2017
 
2016
 
2015
Balance at beginning of period
$
1,660

 
$
2,240

 
$
1,845

(Credited) Charged to costs and expenses
168

 
(187
)
 
522

Payments and deductions
(79
)
 
(393
)
 
(127
)
Balance at end of period
$
1,749

 
$
1,660

 
$
2,240

Leases. The Company leases certain equipment and facilities under operating leases with various renewal options. Rent expense was $5.3 million, $5.1 million and $4.5 million for the fiscal years ended April 1, 2017, April 2, 2016 and March 28, 2015, respectively. Future minimum lease commitments under all noncancelable operating leases having a remaining term in excess of one year at April 1, 2017, are as follows (in thousands):
2018
$
3,470

2019
2,637

2020
1,949

2021
1,442

2022 and thereafter
1,631

 
$
11,129

Letters of Credit. To secure certain reinsurance contracts, Standard Casualty maintains an irrevocable letter of credit of $7.0 million to provide assurance that Standard Casualty will fulfill its reinsurance obligations. This letter of credit is secured by certain of the Company’s investments.
Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during the period of home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried in the consolidated balance sheet at the amount advanced less a valuation allowance, which are included in consumer loans receivable. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.

F-34

Loan contracts with off-balance sheet commitments are summarized below (in thousands):
 
April 1,
2017
 
April 2,
2016
Construction loan contract amount
$
18,031

 
$
15,109

Cumulative advances
(6,957
)
 
(6,566
)
Remaining construction contingent commitment
$
11,074

 
$
8,543

Representations and Warranties of Mortgages Sold. CountryPlace sells loans to GSEs and whole-loan purchasers and finances certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, CountryPlace provides to the GSEs, whole-loan purchasers and lenders, representations and warranties related to the loans sold or financed. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer and CountryPlace’s ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlace may be required to repurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. CountryPlace maintains a reserve for these contingent repurchase and indemnification obligations. This reserve of $885,000 and $785,000 as of April 1, 2017 and April 2, 2016, respectively, included in accrued liabilities, reflects management’s estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan defect rates to estimate the liability for loan repurchases and indemnifications. During the year ended April 1, 2017, no claim request resulted in an indemnification agreements being executed.
Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.
As of April 1, 2017 CountryPlace had outstanding IRLCs with a notional amount of $17.4 million and are recorded at fair value in accordance with FASB ASC 815, Derivatives and Hedging ("ASC 815"). ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair values of IRLCs are recorded in other assets in the consolidated balance sheets. The fair value of IRLCs is based on the value of the underlying mortgage loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage of IRLCs that will result in closed mortgage loans. The initial and subsequent changes in the value of IRLCs are a component of gain (loss) on mortgage loans held for sale. During fiscal years 2017, 2016 and 2015, CountryPlace recognized a gain of $27,000, a loss of $11,000 and a gain of $34,000, respectively, on the outstanding IRLCs.

F-35

Forward Sales Commitments. CountryPlace manages the risk profiles of a portion of its outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage-backed securities ("MBS") and whole loan sale commitments. As of April 1, 2017 CountryPlace had $34.5 million in outstanding notional forward sales of MBSs and forward sales commitments. Commitments to forward sales of whole loans are typically in an amount proportionate with the amount of IRLCs expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.
The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded within other current assets in the consolidated balance sheets. During the years ended April 1, 2017 and April 2, 2016, CountryPlace recognized a loss of $55,000, a gain of $23,000 and a loss of $78,000, respectively, on forward sales and whole loan sale commitments.
Legal Matters. The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company’s consolidated financial position, liquidity or results of operations in any future reporting periods.
15. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. The plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company’s common stock, of which 346,202 shares were still available for grant. When options are exercised, new shares of the Company’s common stock are issued. Stock options may not be granted below 100% of the fair market value of the Company’s common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock typically vest over a one to five year period as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors). The stock incentive plans provide for accelerated vesting of stock options and removal of restrictions on restricted stock awards upon a change in control (as defined in the plans).
The Company applies the fair value recognition provisions of FASB ASC 718, Compensation—Stock Compensation ("ASC 718"). Stock option compensation expense, including restricted stock, decreased income before income taxes by approximately $2.1 million, $1.8 million and $1.7 million for fiscal years 2017, 2016 and 2015, respectively. As of April 1, 2017, total unrecognized compensation cost related to stock options was approximately $4.0 million and the related weighted-average period over which it is expected to be recognized is approximately 3.47 years.

F-36

The following table summarizes the option activity within the Company’s stock-based compensation plans for the fiscal years 2017, 2016 and 2015:
 
Number
of Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at March 29, 2014
443,900

 
$
37.98

 
 
 
 
Granted
80,730

 
78.35

 
 
 
 
Exercised
(14,375
)
 
34.76

 
 
 
 
Canceled or expired
(3,275
)
 
51.13

 
 
 
 
Options outstanding at March 28, 2015
506,980

 
$
44.42

 
3.29
 
$
15,836

Granted
90,500

 
75.27

 
 
 
 
Exercised
(104,500
)
 
33.46

 
 
 
 
Canceled or expired
(1,000
)
 
75.90

 
 
 
 
Options outstanding at April 2, 2016
491,980

 
$
51.91

 
3.28
 
$
35,906

Granted
116,850

 
98.93

 
 
 
 
Exercised
(121,275
)
 
30.02

 
 
 
 
Canceled or expired
(22,625
)
 
80.21

 
 
 
 
Options outstanding at April 1, 2017
464,930

 
$
68.01

 
3.83
 
$
42,194

 
 
 
 
 
 
 
 
Exercisable at March 28, 2015
347,750

 
$
36.17

 
2.36
 
$
13,537

Exercisable at April 2, 2016
320,975

 
$
41.01

 
2.09
 
$
24,786

Exercisable at April 1, 2017
244,025

 
$
50.77

 
2.29
 
$
23,626

The weighted-average estimated fair value of employee stock options granted during fiscal years 2017, 2016 and 2015 were $35.55, $27.83 and $30.11, respectively. The total intrinsic value of options exercised during fiscal years 2017, 2016 and 2015 was $7.8 million, $4.9 million and $593,000, respectively.
The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors, the Company’s expected stock price volatility over the expected term of the awards, risk-free interest rate and expected dividends. The fair values of options granted were estimated at the date of grant using the following weighted average assumptions: 
 
Fiscal Year
 
2017
 
2016
 
2015
Volatility
38.3
%
 
39.8
%
 
42.4
%
Risk-free interest rate
1.1
%
 
1.5
%
 
1.5
%
Dividend yield
—
%
 
—
%
 
—
%
Expected option life in years
5.24

 
5.03

 
4.87


F-37

In fiscal 2017, the Company utilized historic option activity when estimating the expected term of options granted. The Company estimates the expected volatility of its common stock taking into consideration its historical stock price movement and its expected future stock price trends based on known or anticipated events. The Company bases the risk-free interest rate that it uses in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying cash dividends and therefore uses an expected dividend yield of zero in the option-pricing model. The Company is required to estimate future forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation cost only for those awards that are expected to vest. The Company recognizes stock-based compensation expense using the straight-line attribution method.
16. Earnings Per Share
Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share for fiscal years 2017, 2016 and 2015 (dollars in thousands, except per share amounts):
 
Fiscal Year
 
2017
 
2016
 
2015
Net income attributable to Cavco common stockholders
$
37,955

 
$
28,541

 
$
23,817

Weighted average shares outstanding:
 
 
 
 
 
Basic
8,976,064

 
8,889,731

 
8,854,359

Common stock equivalents—treasury stock method
129,679

 
156,616

 
161,420

Diluted
9,105,743

 
9,046,347

 
9,015,779

Net income per share attributable to Cavco common stockholders:
 
 
 
 
 
Basic
$
4.23

 
$
3.21

 
$
2.69

Diluted
$
4.17

 
$
3.15

 
$
2.64

There were 9,766 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the year ended April 1, 2017, 11,161 for the year ended April 2, 2016 and 2,669 for the year ended March 28, 2015.

F-38

17. Fair Value Measurements
The book value and estimated fair value of the Company’s financial instruments are as follows (in thousands): 
 
April 1, 2017
 
April 2, 2016
 
Book
Value
 
Estimated
Fair Value
 
Book
Value
 
Estimated
Fair Value
Available-for-sale investment securities (1)
$
24,162

 
$
24,162

 
$
24,247

 
$
24,247

Non-marketable equity investments (2)
17,383

 
17,383

 
14,841

 
14,841

Consumer loans receivable (3)
95,801

 
121,021

 
89,558

 
126,077

Interest rate lock commitment derivatives (4)
35

 
35

 
8

 
8

Forward loan sale commitment derivatives (4)
(86
)
 
(86
)
 
(31
)
 
(31
)
Commercial loans receivable (5)
25,833

 
25,841

 
25,542

 
25,688

Securitized financings and other (6)
(57,991
)
 
(61,270
)
 
(61,171
)
 
(60,220
)
Mortgage servicing rights (7)
1,110

 
1,110

 
803

 
803

(1)
For Level 1 classified securities, the fair value is based on quoted market prices. The fair value of Level 2 securities is based on other inputs, as further described below.
(2)
The fair value approximates book value based on the non-marketable nature of the investments.
(3)
Includes consumer loans receivable held for investment, held for sale and construction advances. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale are estimated based on recent GSE mortgage-backed bond prices. The fair value of the construction advances approximates book value and the sales price of these loans is estimated based on construction completed.
(4)
The fair values are based on changes in GSE mortgage-backed bond prices, and additionally for IRLCs, pull through rates.
(5)
The fair value is estimated using market interest rates of comparable loans.
(6)
The fair value is estimated using recent public transactions of similar asset-backed securities.
(7)
The fair value of the mortgage servicing rights is based on the present value of expected net cash flows related to servicing these loans.
In accordance with FASB ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 –
Quoted prices in active markets for identical assets or liabilities.
Level 2 –
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

F-39

When the Company uses observable market prices for identical securities that are traded in less active markets, it classifies such securities as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs.
Financial instruments measured at fair value on a recurring basis are summarized below (in thousands):
 
April 1, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Securities issued by the U.S Treasury and Government (1)
$
649

 
$
—

 
$
649

 
$
—

Mortgage-backed securities (1)
5,559

 
—

 
5,559

 
—

Securities issued by states and political subdivisions (1)
7,223

 
—

 
7,223

 
—

Corporate debt securities (1)
1,679

 
—

 
1,679

 
—

Marketable equity securities (1)
8,052

 
8,052

 
—

 
—

Interest rate lock commitment derivatives (2)
35

 
—

 
—

 
35

Forward loan sale commitment derivatives (2)
(86
)
 
—

 
—

 
(86
)
Mortgage servicing rights (3)
1,110

 
—

 
—

 
1,110

(1)
Unrealized gains or losses on investments are recorded in accumulated other comprehensive income (loss) at each measurement date.
(2)
Gains or losses on derivatives are recognized in current period earnings through cost of sales.
(3)
Changes in the fair value of mortgage servicing rights are recognized in the current period earnings through net revenue.
No transfers between Level 1, Level 2 or Level 3 occurred during the year ended April 1, 2017. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
Financial instruments for which fair value is disclosed but not required to be recognized in the balance sheet on a recurring basis are summarized below (in thousands):
 
April 1, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans held for investment
$
94,434

 
$
—

 
$
—

 
$
94,434

Loans held for sale
19,630

 
—

 
—

 
19,630

Loans held—construction advances
6,957

 
—

 
—

 
6,957

Commercial loans receivable
25,841

 
—

 
—

 
25,841

Securitized financings
(61,270
)
 
—

 
(61,270
)
 
—

Non-marketable equity investments
17,383

 
—

 
—

 
17,383



F-40

No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics, or performance. Therefore, loans held for investment are measured using Level 3 inputs that are calculated using estimated discounted future cash flows from the evaluation of loan credit quality and performance history to determine expected prepayments and defaults on the portfolio, discounted with rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using inputs that consist of quoted market prices for mortgage-backed securities or investor purchase commitments for similar types of loan commitments on hand from investors. These loans are held for relatively short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk are not a significant component of the change in fair value and changes are largely driven by changes in interest rates or investor yield requirements. The cost of loans held for sale is lower than the fair value as of April 1, 2017. As noted above, activity in the manufactured housing asset backed securities market is infrequent, with no reliable market price information. As such, to determine the fair value of securitized financings, management evaluates the credit quality and performance history of the underlying loan assets to estimate expected prepayment of the debt and credit spreads, based on market activity for similar rated bonds from other asset classes with similar durations.
FASB ASC 825, Financial Instruments ("ASC 825"), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company’s fair values should not be compared to those of other companies.
Under ASC 825, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying market value of the Company.
The Company records impairment losses on long-lived assets held for sale when the fair value of such long-lived assets is below their carrying values. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. The Company recorded no impairment charges on assets held for sale or used in operations during the fiscal years ended April 1, 2017 and April 2, 2016.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow accounts, performing loss mitigation activities on behalf of investors and otherwise administering the loan servicing portfolio. MSRs are initially recorded at fair value. Changes in fair value subsequent to the initial capitalization are recorded in net revenue in the Company's results of operations. The Company recognizes MSRs on all loans sold to investors that meet the requirements for sale accounting and for which servicing rights are retained.

F-41

The Company applies fair value accounting to MSRs, with all changes in fair value recorded to net revenue in accordance with FASB ASC 860-50, Servicing Assets and Liabilities. The fair value of MSRs is based on the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicer advances that the Company believes are consistent with the assumptions major market participants use in valuing MSRs. The expected cash flows are primarily impacted by prepayment estimates, delinquencies and market discounts. Generally, the value of MSRs is expected to increase when interest rates rise and decrease when interest rates decline, due to the effect those changes in interest rates have on prepayment estimates. Other factors noted above as well as the overall market demand for MSRs may also affect the valuation.
 
April 1,
2017
 
April 2,
2016
Number of loans serviced with MSRs
4,041

 
3,728

Weighted average servicing fee (basis points)
31.42

 
30.43

Capitalized servicing multiple
74.79
%
 
61.65
%
Capitalized servicing rate (basis points)
23.50

 
18.76

Serviced portfolio with MSRs (in thousands)
$
472,492

 
$
428,324

Mortgage servicing rights (in thousands)
$
1,110

 
$
803

18. Employee Benefit Plans
The Company has a self-funded group medical plan which is administered by third-party administrators. The medical plan has reinsurance coverage limiting liability for any individual employee loss to a maximum of $300,000. Incurred claims identified under the third-party administrator's incident reporting system and incurred but not reported claims are accrued based on estimates that incorporate the Company's past experience, as well as other considerations such as the nature of each claim or incident, relevant trend factors and advice from consulting actuaries when necessary. Medical claims expense was $13.8 million, $15.7 million and $6.6 million for fiscal years 2017, 2016 and 2015, respectively.
The Company sponsors an employee savings plan (the "401k Plan") that is intended to provide participating employees with additional income upon retirement. Employees may contribute their eligible compensation up to federal limits to the 401k Plan. The Company match is discretionary, and may be up to 50% of the first 5% of eligible compensation contributed by employees up to a maximum of $1,000. For calendar year 2016, the Company match was 20% of the first 4% of eligible compensation contributed by employees. Employees are eligible to participate on the first of the month following 90 days of service and employer matching contributions are vested progressively over a four-year period. Employer matching contribution expense was $728,000, $567,000 and $411,000 for fiscal years 2017, 2016 and 2015, respectively.
19. Related Party Transactions
In July 2015, the Company’s CEO made a payment of $1.1 million to the Company, representing the repayment of performance bonuses related to fiscal 2012, 2014 and 2015 that were determined to be in excess of the 2005 Stock Incentive Plan limits and made to the CEO during those periods.

F-42

20. Business Segment Information
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 following table details net revenue and income before income taxes by segment (in thousands):
 
Fiscal Year Ended
 
April 1,
2017
 
April 2,
2016
 
March 28,
2015
Net revenue:
 
 
 
 
 
Factory-built housing
$
720,971

 
$
655,148

 
$
513,707

Financial services
52,826

 
57,204

 
52,952

 
$
773,797

 
$
712,352

 
$
566,659

Net revenue for financial services consists of:
 
 
 
 
 
Consumer finance
$
20,517

 
$
20,240

 
$
19,571

Insurance
32,309

 
36,964

 
33,381

 
$
52,826

 
$
57,204

 
$
52,952

Income before income taxes:
 
 
 
 
 
Factory-built housing
$
46,840

 
$
35,440

 
$
25,133

Financial services
8,441

 
8,588

 
12,194

 
$
55,281

 
$
44,028

 
$
37,327

Depreciation:
 
 
 
 
 
Factory-built housing
$
3,221

 
$
3,376

 
$
2,307

Financial services
98

 
92

 
71

 
$
3,319

 
$
3,468

 
$
2,378

Amortization:
 
 
 
 
 
Factory-built housing
$
167

 
$
253

 
$
1,178

Financial services
201

 
201

 
201

 
$
368

 
$
454

 
$
1,379

Income tax expense:
 
 
 
 
 
Factory-built housing
$
14,349

 
$
12,369

 
$
9,160

Financial services
2,977

 
3,118

 
4,350

 
$
17,326

 
$
15,487

 
$
13,510

Capital expenditures:
 
 
 
 
 
Factory-built housing
$
5,281

 
$
3,443

 
$
2,084

Financial services
14

 
76

 
126

 
$
5,295

 
$
3,519

 
$
2,210

 
 
April 1,
2017
 
April 2,
2016
Total assets:
 
 
 
Factory-built housing
$
427,022

 
$
382,176

Financial services
180,294

 
171,659

 
$
607,316

 
$
553,835


F-43

21. Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly financial information for fiscal years 2017 and 2016.
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
Fiscal year ended April 1, 2017
 
 
 
 
 
 
 
 
 
Net revenue
$
185,141

 
$
188,348

 
$
202,310

 
$
197,998

 
$
773,797

Gross profit
33,252

 
39,107

 
43,544

 
42,134

 
158,037

Net income
5,443

 
9,341

 
12,283

 
10,888

 
37,955

Net income per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.61

 
$
1.04

 
$
1.37

 
$
1.21

 
$
4.23

Diluted
$
0.60

 
$
1.03

 
$
1.35

 
$
1.19

 
$
4.17

Fiscal year ended April 2, 2016
 
 
 
 
 
 
 
 
 
Net revenue
$
161,668

 
$
191,964

 
$
181,427

 
$
177,293

 
$
712,352

Gross profit
31,834

 
39,555

 
36,390

 
36,666

 
144,445

Net income
5,385

 
8,070

 
8,098

 
6,988

 
28,541

Net income per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.91

 
$
0.91

 
$
0.78

 
$
3.21

Diluted
$
0.60

 
$
0.89

 
$
0.89

 
$
0.77

 
$
3.15


F-44