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EX-99.1 - EXHIBIT 99.1 - CAVCO INDUSTRIES INC.a2018118-ex991.htm
EX-32 - EXHIBIT 32 - CAVCO INDUSTRIES INC.a2018929-exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - CAVCO INDUSTRIES INC.a2018929-exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CAVCO INDUSTRIES INC.a2018929-exhibit311.htm
EX-10.3 - EXHIBIT 10.3 - CAVCO INDUSTRIES INC.a2018929-exhibit103.htm
EX-10.2 - EXHIBIT 10.2 - CAVCO INDUSTRIES INC.a2018929-exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - CAVCO INDUSTRIES INC.a2018929-exhibit101.htm

 

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

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to

Commission File Number 000-08822
 
Cavco Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware
56-2405642
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3636 North Central Avenue, Suite 1200
Phoenix, Arizona 85012
(Address of principal executive offices, including zip code)
602-256-6263
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨ (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
As of November 2, 2018, 9,098,159 shares of Registrant's Common Stock, $.01 par value, were outstanding.
 





CAVCO INDUSTRIES, INC.
FORM 10-Q
September 29, 2018
TABLE OF CONTENTS




PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
September 29,
2018
 
March 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
195,488

 
$
186,766

Restricted cash, current
13,754

 
11,228

Accounts receivable, net
38,097

 
35,043

Short-term investments
13,462

 
11,866

Current portion of consumer loans receivable, net
31,327

 
31,096

Current portion of commercial loans receivable, net
10,909

 
5,481

Inventories
111,502

 
109,152

Prepaid expenses and other current assets
34,169

 
27,961

Total current assets
448,708

 
418,593

Restricted cash
453

 
1,264

Investments
33,149

 
33,573

Consumer loans receivable, net
62,021

 
63,855

Commercial loans receivable, net
22,920

 
11,120

Property, plant and equipment, net
65,108

 
63,355

Goodwill and other intangibles, net
82,856

 
83,020

Total assets
$
715,215

 
$
674,780

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,676

 
$
23,785

Accrued liabilities
130,083

 
126,500

Current portion of securitized financings and other
40,969

 
26,044

Total current liabilities
196,728

 
176,329

Securitized financings and other
15,159

 
33,768

Deferred income taxes
8,580

 
7,577

 
 
 
 
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 9,097,359 and 9,044,858 shares, respectively
91

 
90

Additional paid-in capital
248,138

 
246,197

Retained earnings
246,723

 
209,381

Accumulated other comprehensive income (loss)
(204
)
 
1,438

Total stockholders' equity
494,748

 
457,106

Total liabilities and stockholders' equity
$
715,215

 
$
674,780

See accompanying Notes to Consolidated Financial Statements

1


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

 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net revenue
$
241,530

 
$
200,507

 
$
487,933

 
$
407,323

Cost of sales
192,114

 
165,953

 
387,041

 
330,803

Gross profit
49,416

 
34,554

 
100,892

 
76,520

Selling, general and administrative expenses
30,035

 
26,153

 
59,248

 
52,458

Income from operations
19,381

 
8,401

 
41,644

 
24,062

Interest expense
(941
)
 
(1,021
)
 
(1,913
)
 
(2,069
)
Other income, net
1,077

 
1,119

 
3,922

 
2,157

Income before income taxes
19,517

 
8,499

 
43,653

 
24,150

Income tax expense
(3,941
)
 
(2,317
)
 
(8,386
)
 
(6,215
)
Net income
$
15,576

 
$
6,182

 
$
35,267

 
$
17,935

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
15,576

 
$
6,182

 
$
35,267

 
$
17,935

Reclassification adjustment for net losses (gains) realized in income
24

 
(383
)
 
24

 
(459
)
Applicable income taxes
(5
)
 
134

 
(5
)
 
161

Net change in unrealized position of investments
(57
)
 
2,275

 
(51
)
 
1,442

Applicable income taxes
12

 
(867
)
 
11

 
(540
)
Comprehensive income
$
15,550

 
$
7,341

 
$
35,246

 
$
18,539

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
1.72

 
$
0.69

 
$
3.89

 
$
1.99

Diluted
$
1.67

 
$
0.67

 
$
3.80

 
$
1.96

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
9,079,679

 
9,020,834

 
9,064,007

 
9,013,917

Diluted
9,304,188

 
9,181,899

 
9,287,730

 
9,171,515


See accompanying Notes to Consolidated Financial Statements

2


CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
35,267

 
$
17,935

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,274

 
1,950

Provision for credit losses
459

 
676

Deferred income taxes
863

 
(1,267
)
Stock-based compensation expense
2,115

 
1,535

Non-cash interest income, net
(409
)
 
(526
)
Gain on sale of property, plant and equipment, net
(51
)
 
(88
)
Gain on investments and sale of loans, net
(5,457
)
 
(5,047
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,057
)
 
(5,512
)
Consumer loans receivable originated
(64,479
)
 
(66,273
)
Proceeds from sales of consumer loans
62,245

 
59,243

Principal payments on consumer loans receivable
6,522

 
7,540

Inventories
(2,350
)
 
(5,733
)
Prepaid expenses and other current assets
(4,703
)
 
(12,448
)
Commercial loans receivable
(17,321
)
 
(5,355
)
Accounts payable and accrued liabilities
5,890

 
22,055

Net cash provided by operating activities
17,808

 
8,685

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(3,876
)
 
(1,779
)
Payments for Lexington Homes, net

 
(564
)
Proceeds from sale of property, plant and equipment
64

 
411

Purchases of investments
(4,042
)
 
(5,162
)
Proceeds from sale of investments
4,684

 
4,925

Net cash used in investing activities
(3,170
)
 
(2,169
)
FINANCING ACTIVITIES
 
 
 
Payments from exercise of stock options
(173
)
 
(1,583
)
Proceeds from secured financings and other
226

 
4,963

Payments on securitized financings
(4,254
)
 
(4,322
)
Net cash used in financing activities
(4,201
)
 
(942
)
Net increase in cash, cash equivalents and restricted cash
10,437

 
5,574

Cash, cash equivalents and restricted cash at beginning of the period
199,258

 
144,839

Cash, cash equivalents and restricted cash at end of the period
$
209,695

 
$
150,413

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
12,381

 
$
7,861

Cash paid for interest
$
1,300

 
$
1,508

Assets acquired under capital lease
$

 
$
1,749

See accompanying Notes to Consolidated Financial Statements

3


CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc., and its subsidiaries (collectively, the "Company" or "Cavco"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these statements include all of the normal recurring adjustments necessary to fairly state the Company's Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC; and except for the events set forth in the Notes to the Consolidated Financial Statements ("Notes") 16 and 22 and Part II, Item 5, Other Information, of the Company's Quarterly Report on Form 10-Q for the period ended September 29, 2018 ("Form 10-Q"), there were no disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes included in the Company's 2018 Annual Report on Form 10-K for the year ended March 31, 2018, filed with the SEC on May 30, 2018 ("Form 10-K").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. Actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31 of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31. The Company's current fiscal year will end on March 30, 2019.
The Company operates principally in two segments: (1) factory-built housing, which includes wholesale and retail systems-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designs and builds a wide variety of affordable manufactured homes, modular homes and park model RVs in 20 factories located throughout the United States, which are sold to a network of independent retailers, through the Company's 38 Company-owned retail stores and to community owners and developers. Our financial services group is comprised of a mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co. ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer which offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Standard Casualty provides property and casualty insurance to owners of manufactured homes.

4


Adoption of New Accounting Standards.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606"), which requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASC 606 using the modified retrospective method for contracts that were not completed as of April 1, 2018, and recorded a reduction of $600,000 to accrued liabilities and a corresponding increase to retained earnings related to gross margin on home sales that were previously deferred for the cumulative effect of the adoption. Prior periods were not restated. There were no significant changes to processes or internal controls as a result of the adoption of ASC 606. See Note 2 for additional information.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). The Company adopted ASU 2016-01 on April 1, 2018 using the modified retrospective transition method. Upon adoption, we reclassified $1.6 million in gains, net of tax, related to available-for-sale equity investment securities from accumulated other comprehensive income to retained earnings as a cumulative-effect adjustment. Under the new guidance, these securities will continue to be measured at fair value; however, the changes in unrealized net holding gains and losses will be reported in earnings. Comparative information continues to be reported under the accounting standards in effect for the period. The effect of the change for the three and six months ended September 29, 2018 was a decrease of $276,000 and an increase of $1.4 million to income before income taxes, respectively, which is either included in Net revenue or Other income, net on the Consolidated Statements of Comprehensive Income, depending on the nature of the investment.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) ("ASU 2016-18"), which requires restricted cash to be included with cash and cash equivalents when reconciling beginning and ending cash on the statement of cash flows. We adopted ASU 2016-18 on April 1, 2018 using the retrospective transition method. The comparative information in our Consolidated Statements of Cash Flows has been adjusted accordingly. The impact from adoption of this guidance was not material to our Consolidated Statements of Cash Flows. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying Consolidated Balance Sheets to the combined amounts shown on the Consolidated Statements of Cash Flows (in thousands):
 
September 29,
2018
 
September 30,
2017
Cash and cash equivalents
$
195,488

 
$
136,788

Restricted cash, current
13,754

 
12,899

Restricted cash
453

 
726

 
$
209,695

 
$
150,413

Accounting Standards Issued But Not Yet Adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require balance sheet recognition of leased assets and lease liabilities for most leases, and recognition of expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company does not plan to early adopt the guidance and is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.

5


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to base measurement on expected losses through a forward-looking model rather than a model based on incurred losses. The guidance also requires increased disclosures. ASU 2016-13 will be effective beginning with the first quarter of the Company's fiscal year 2021 and is to be applied using a modified retrospective transition method with early adoption permitted. The Company does not plan to early adopt the guidance and is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017-08 will be effective beginning with the first quarter of the Company's fiscal year 2020. The Company is currently evaluating the effect ASU 2017-08 will have on the Company's Consolidated Financial Statements and disclosures.
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
For a description of other significant accounting policies used by the Company in the preparation of its Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements on Form 10-K.
2. Revenue from Contracts with Customers
As discussed in Note 1, we adopted ASC 606 on April 1, 2018. Our revenue recognition practices under ASC 606 do not differ materially from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when, or as, the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
Factory-Built Housing Revenue Recognition - Wholesale. Revenue from homes sold to independent retailers is generally recognized when the home is shipped, at which time title passes to the independent retailer and collectability is reasonably assured. Homes sold to independent retailers are generally either paid upon shipment or floor plan financed by the independent retailer through standard industry financing arrangements, which can include repurchase agreements. Manufacturing sales financed under repurchase agreements are reduced by a provision for estimated repurchase obligations (see Note 16).
Prior to the adoption of ASC 606, revenue from homes sold under commercial loan programs involving funds provided by the Company were either deferred until such time that payment for the related commercial loan was received by the Company or recognized when the home was shipped and title transferred, depending on the nature of the program and borrower. Upon adoption of ASC 606, we generally recognize home sales revenue upon shipment and transfer of title, as it is probable that substantially all of the consideration in exchange for the goods or services transferred to the customer will be collected. One consideration under the guidance requires the evaluation of the financing component of the related loan program. If it is determined that the interest rate charged under the loan program is less than the market rate, the Company will reduce the transaction price by an amount for deferred interest. In these cases, interest income will be accrued and recognized over the life of the loan using the effective interest method. A significant amount of the Company's loan programs are offered at market rates.
Factory-Built Housing Revenue Recognition - Retail. Sales by Company-owned retail locations are generally recognized when the customer has entered into a legally binding sales contract, the home is delivered and permanently located at the customer's site, accepted by the customer, title has transferred and funding is probable.

6


Site Improvements on Retail Sales. Under previous guidance, the Company recorded the sales of subcontracted ancillary services, such as preparation of the home site or other exterior enhancements, net of associated costs. Such services are provided as a convenience to the customer. As the Company is involved in the selection of subcontractors, under ASC 606, we have concluded that it is appropriate to recognize the sale of these ancillary services on a gross basis. The revenues associated with these programs for the three months ended September 29, 2018 and September 30, 2017 were $6.2 million and $5.0 million, respectively. The revenues associated with these programs for the six months ended September 29, 2018 and September 30, 2017 were $12.8 million and $10.1 million, respectively.
Additional Items. Expected consideration, and therefore revenue, reflects reductions for returns, allowances, and other incentives, some of which may be contingent on future events. Additionally, we have a volume rebate program under which certain sales to retailers, builders and developers can qualify for cash rebates generally based on the level of sales attained during a twelve-month period. Volume rebates are accrued at the time of sale and are recorded as a reduction of revenue.
In customer contracts for retail sales of manufactured homes, consideration includes certain state and local excise taxes billed to customers when those taxes are levied directly upon us by the taxing authorities. Expected consideration excludes sales and other taxes collected on behalf of taxing authorities. We elect to treat consideration for shipping performed as a fulfillment activity. Therefore, revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods.
Practical Expedients and Exemptions. We generally expense sales commissions when incurred because the amortization period would be one year or less. These costs are recorded within selling, general and administrative expenses. In addition, we do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less.
Financial Services Revenue Recognition. Financial services revenue is generally not within the scope of ASC 606, with the exception of insurance agency commissions received from third-party insurance companies. The Company recognizes such revenue upon execution of the insurance policy, where the Company has no future or ongoing obligation.
Disaggregation of Revenue. The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the three and six months ended September 29, 2018 (in thousands). All revenue from customers is recognized at a point in time, either when the customer takes delivery or when a third-party insurance contract is executed, as more fully discussed above. Other items included in our consolidated revenues are primarily related to financial services, including manufactured housing consumer finance and insurance, which are not within the scope of ASC 606. See Form 10-K for revenue recognition policies related to these items.

7


 
September 29, 2018
 
Three Months Ended
 
Six Months Ended
Factory-built housing
 
 
 
     U.S. Housing and Urban Development code homes
$
184,687

 
$
371,003

     Modular homes
23,901

 
46,348

     Park model RVs
5,979

 
17,706

     Other (1)
12,527

 
24,799

       Net revenue from factory-built housing
227,094

 
459,856

Financial services
 
 
 
     Insurance agency commissions received from third-party insurance companies
643

 
1,275

     Other
13,793

 
26,802

       Net revenue from financial services
14,436

 
28,077

Total Net revenue
$
241,530

 
$
487,933

(1)
Other factory-built housing revenue from ancillary products and services including used homes, freight and other services.
Impacts on Consolidated Financial Statements. The impact to our consolidated financial statements as a result of ASC 606 implementation are as follows (in thousands):
 
September 29, 2018
Consolidated Balance Sheet
As Reported
 
Adjustments
 
Balance without ASC 606 Adoption
Accrued liabilities
$
130,083

 
$
2,007

 
$
132,090

Total current liabilities
196,728

 
2,007

 
198,735

Deferred income taxes
8,580

 
(549
)
 
8,031

Retained earnings
246,723

 
(1,458
)
 
245,265

Total stockholders' equity
494,748

 
(1,458
)
 
493,290


 
Three Months Ended September 29, 2018
Consolidated Statement of Comprehensive Income
As Reported
 
Adjustments
 
Balance without ASC 606 Adoption
Net revenue
$
241,530

 
$
(9,160
)
 
$
232,370

Cost of sales
192,114

 
(8,691
)
 
183,423

Gross profit
49,416

 
(469
)
 
48,947

Selling, general and administrative expenses
30,035

 
(136
)
 
29,899

Income from operations
19,381

 
(333
)
 
19,048

Income before income taxes
19,517

 
(333
)
 
19,184

Income tax expense
(3,941
)
 
76

 
(3,865
)
Net income
15,576

 
(257
)
 
15,319



8


 
Six Months Ended September 29, 2018
Consolidated Statement of Comprehensive Income
As Reported
 
Adjustments
 
Balance without ASC 606 Adoption
Net revenue
$
487,933

 
$
(22,829
)
 
$
465,104

Cost of sales
387,041

 
(21,080
)
 
365,961

Gross profit
100,892

 
(1,749
)
 
99,143

Selling, general and administrative expenses
59,248

 
(444
)
 
58,804

Income from operations
41,644

 
(1,305
)
 
40,339

Income before income taxes
43,653

 
(1,305
)
 
42,348

Income tax expense
(8,386
)
 
301

 
(8,085
)
Net income
35,267

 
(1,004
)
 
34,263

3. Restricted Cash
Restricted cash consists of the following (in thousands):
 
September 29,
2018
 
March 31,
2018
Cash related to CountryPlace customer payments to be remitted to third parties
$
11,838

 
$
9,180

Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders
979

 
1,311

Other restricted cash
1,390

 
2,001

 
$
14,207

 
$
12,492

Corresponding amounts are recorded in accounts payable and accrued liabilities for customer payments, deposits and other restricted cash.
4. Investments
Investments consist of the following (in thousands):
 
September 29,
2018
 
March 31,
2018
Available-for-sale debt securities
$
14,900

 
$
16,181

Marketable equity securities
12,409

 
10,405

Non-marketable equity investments
19,302

 
18,853

 
$
46,611

 
$
45,439

The Company's investments in marketable equity securities consist of common stock holdings of industrial and other companies.
Non-marketable equity investments includes $15.0 million as of September 29, 2018 and March 31, 2018, of contributions to equity-method investments in community-based initiatives that buy and sell our homes and provide home-only financing to residents of certain manufactured home communities. Other non-marketable investments include investments in other distribution operations.

9


The following tables summarize the Company's available-for-sale debt securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
 
September 29, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
300

 
$

 
$
(10
)
 
$
290

Residential mortgage-backed securities
7,714

 

 
(207
)
 
7,507

State and political subdivision debt securities
5,499

 
90

 
(108
)
 
5,481

Corporate debt securities
1,646

 
1

 
(25
)
 
1,622

 
$
15,159

 
$
91

 
$
(350
)
 
$
14,900


 
March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
300

 
$

 
$
(7
)
 
$
293

Residential mortgage-backed securities
7,654

 

 
(155
)
 
7,499

State and political subdivision debt securities
6,377

 
109

 
(149
)
 
6,337

Corporate debt securities
2,081

 
1

 
(30
)
 
2,052

 
$
16,412

 
$
110

 
$
(341
)
 
$
16,181


10


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):
 
September 29, 2018
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury and government debt securities
$
290

 
$
(10
)
 
$

 
$

 
$
290

 
$
(10
)
Residential mortgage-backed securities
2,738

 
(51
)
 
4,764

 
(156
)
 
7,502

 
(207
)
State and political subdivision debt securities
1,097

 
(18
)
 
2,478

 
(90
)
 
3,575

 
(108
)
Corporate debt securities
515

 
(6
)
 
855

 
(19
)
 
1,370

 
(25
)
 
$
4,640

 
$
(85
)
 
$
8,097

 
$
(265
)
 
$
12,737

 
$
(350
)

 
March 31, 2018
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. Treasury and government debt securities
$
293

 
$
(7
)
 
$

 
$

 
$
293

 
$
(7
)
Residential mortgage-backed securities
3,185

 
(52
)
 
3,909

 
(103
)
 
7,094

 
(155
)
State and political subdivision debt securities
2,224

 
(40
)
 
2,180

 
(109
)
 
4,404

 
(149
)
Corporate debt securities
1,384

 
(12
)
 
367

 
(18
)
 
1,751

 
(30
)
 
$
7,086

 
$
(111
)
 
$
6,456

 
$
(230
)
 
$
13,542

 
$
(341
)
Based on the Company's ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at September 29, 2018.
The amortized cost and fair value of the Company's investments in debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 29, 2018
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$
698

 
$
680

Due after one year through five years
3,557

 
3,465

Due after five years through ten years
375

 
361

Due after ten years
2,815

 
2,887

Mortgage-backed securities
7,714

 
7,507

 
$
15,159

 
$
14,900


11


We recognize investment gains and losses on debt securities when we sell or otherwise dispose of securities on a specific identification method. There were no gross gains or losses realized during the three and six months ended September 29, 2018. There were no gross gains or losses realized for the three months ended September 30, 2017. During the six months ended September 30, 2017, there were no gross gains realized and $10,000 in gross losses realized.
Beginning in fiscal year 2019, we have recognized unrealized gains and losses on marketable equity securities from changes in market prices during the period as a component of earnings in the Consolidated Statements of Comprehensive Income. The net investment gains and losses for the three and six months ended September 29, 2018 and September 30, 2017 are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Marketable equity securities:
 
 
 
 
 
 
 
      Net (losses) gains on securities held
$
(312
)
 
$

 
$
1,298

 
$

      Net losses on securities sold
(13
)
 

 
(53
)
 

      Gross realized gains

 
570

 

 
735

      Gross realized losses

 
(51
)
 

 
(112
)
      Total net (loss) gain on marketable equity securities
$
(325
)
 
$
519

 
$
1,245

 
$
623

5. Inventories
Inventories consist of the following (in thousands):
 
September 29,
2018
 
March 31,
2018
Raw materials
$
36,560

 
$
36,124

Work in process
14,143

 
13,670

Finished goods and other
60,799

 
59,358

 
$
111,502

 
$
109,152

6. Consumer Loans Receivable
The following table summarizes consumer loans receivable (in thousands):
 
September 29,
2018
 
March 31,
2018
Loans held for investment (at Acquisition Date)
$
47,948

 
$
51,798

Loans held for investment (originated after Acquisition Date)
23,469

 
21,183

Loans held for sale
13,258

 
12,830

Construction advances
11,001

 
11,088

Consumer loans receivable
95,676

 
96,899

Deferred financing fees and other, net
(1,917
)
 
(1,551
)
Allowance for loan losses
(411
)
 
(397
)
 
$
93,348

 
$
94,951


12


The allowance for loan losses is developed at the loan level and allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the loan characteristics, and historical loss experience. The Company then makes a determination of the best estimate within the range of loan losses. The allowance for loan losses reflects the Company's judgment of the probable loss exposure on its loans held for investment portfolio.
As of the date of the Palm Harbor acquisition ("Acquisition Date"), the Company determined the excess of the loan pool's scheduled contractual principal and interest payments over all cash flows expected as an amount that includes interest that cannot be accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans includes interest that is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as Net revenue.
 
September 29,
2018
 
March 31,
2018
 
(in thousands)
Consumer loans receivable held for investment – contractual amount
$
110,136

 
$
120,096

Purchase discount
 
 
 
Accretable
(40,937
)
 
(44,481
)
Non-accretable
(21,138
)
 
(23,711
)
Less consumer loans receivable reclassified as other assets
(113
)
 
(106
)
Total acquired consumer loans receivable held for investment, net
$
47,948

 
$
51,798

Over the life of the acquired loans, the Company estimates cash flows expected to be collected to determine if an allowance for loan loss related to loans acquired subsequent to the Acquisition Date is required. The weighted averages of assumptions used in the calculation of expected cash flows to be collected were as follows:
 
September 29,
2018
 
March 31,
2018
Prepayment rate
16.2
%
 
16.0
%
Default rate
1.2
%
 
1.2
%
Assuming there was a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows for the life of the portfolio, as of September 29, 2018, would decrease by approximately $1.1 million and $3.2 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):
 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Balance at the beginning of the period
$
42,873

 
$
54,912

 
$
44,481

 
$
56,686

Accretion
(1,968
)
 
(2,163
)
 
(3,867
)
 
(4,373
)
Reclassifications from (to) non-accretable discount
32

 
(1,569
)
 
323

 
(1,133
)
Balance at the end of the period
$
40,937

 
$
51,180

 
$
40,937

 
$
51,180


13


Consumer loans held for investment had the following characteristics:
 
September 29,
2018
 
March 31,
2018
Weighted average contractual interest rate
8.49
%
 
8.57
%
Weighted average effective interest rate
9.03
%
 
9.34
%
Weighted average months to maturity
167

 
168

The following table disaggregates the Company's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
 
September 29, 2018
 
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
$
427

 
$
263

 
$
317

 
$

 
$

 
$
1,007

620-719
9,202

 
6,584

 
10,228

 

 

 
26,014

720+
9,850

 
5,872

 
11,305

 

 
133

 
27,160

Other
48

 

 
479

 

 

 
527

Subtotal
19,527

 
12,719

 
22,329

 

 
133

 
54,708

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619

 

 
154

 
26

 

 
180

620-719

 

 
2,244

 
6,291

 
8,527

 
17,062

720+

 

 
464

 
4,684

 
4,598

 
9,746

Other

 

 
116

 

 

 
116

Subtotal

 

 
2,978

 
11,001

 
13,125

 
27,104

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
80

 
356

 
1,020

 

 

 
1,456

620-719
1,050

 
4,111

 
2,981

 

 

 
8,142

720+
1,266

 
2,394

 
375

 

 

 
4,035

Other

 

 
221

 

 

 
221

Subtotal
2,396

 
6,861

 
4,597

 

 

 
13,854

Other loans

 

 
10

 

 

 
10

 
$
21,923

 
$
19,580

 
$
29,914

 
$
11,001

 
$
13,258

 
$
95,676



14


 
March 31, 2018
 
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
$
465

 
$
354

 
$
330

 
$

 
$

 
$
1,149

620-719
10,102

 
7,107

 
8,587

 

 
245

 
26,041

720+
10,594

 
6,410

 
11,285

 

 
155

 
28,444

Other
49

 

 
403

 

 

 
452

Subtotal
21,210

 
13,871

 
20,605

 

 
400

 
56,086

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619

 

 
156

 
141

 
179

 
476

620-719

 

 
2,137

 
6,428

 
6,479

 
15,044

720+

 

 
199

 
4,519

 
5,663

 
10,381

Subtotal

 

 
2,608

 
11,088

 
12,430

 
26,126

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
0-619
82

 
405

 
1,047

 

 

 
1,534

620-719
1,120

 
4,378

 
3,093

 

 

 
8,591

720+
1,348

 
2,526

 
395

 

 

 
4,269

Other

 

 
282

 

 

 
282

Subtotal
2,550

 
7,309

 
4,817

 

 

 
14,676

Other loans

 

 
11

 

 

 
11

 
$
23,760

 
$
21,180

 
$
28,041

 
$
11,088

 
$
12,830

 
$
96,899


Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. As of September 29, 2018, 44.7% of the outstanding principal balance of the consumer loans receivable portfolio is concentrated in Texas and 10.6% is concentrated in Florida. As of March 31, 2018, 44.2% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 11.0% was concentrated in Florida. Other than Texas and Florida, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of September 29, 2018 or March 31, 2018.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is recorded to allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $1.9 million and $1.5 million as of September 29, 2018 and March 31, 2018, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheet. Foreclosure or similar proceedings in progress totaled approximately $1.4 million and $1.1 million as of September 29, 2018 and March 31, 2018, respectively.

15


7. Commercial Loans Receivable and Allowance for Loan Losses
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent retailers, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.
Under the terms of the direct programs, the Company provides funds for independent retailers, communities and developers' financed home purchases. Notes are secured by the homes as collateral and, in some instances, other security depending on the circumstances. The other terms of direct arrangements vary depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases. The participation commercial loan receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivable, net, consisted of the following by class of financing notes receivable (in thousands):
 
September 29,
2018
 
March 31,
2018
Direct loans receivable
$
33,606

 
$
16,368

Participation loans receivable
513

 
275

Allowance for loan losses
(135
)
 
(42
)
Deferred financing fees, net
(155
)
 

 
$
33,829

 
$
16,601

The commercial loans receivable balance had the following characteristics:
 
September 29,
2018
 
March 31,
2018
Weighted average contractual interest rate
5.9
%
 
4.6
%
Weighted average months to maturity
5

 
6

The Company evaluates the potential for loss from its participation loan programs based on each independent lender's overall financial stability, as well as historical experience, and has determined that an allowance for loan losses was not needed at September 29, 2018 or March 31, 2018.
With respect to direct programs with communities and developers, borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. For direct programs with independent retailers, the risk of loss is spread over numerous borrowers. Borrower activity is monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related notes receivable, considering potential exposures, including repossession costs, remarketing expenses, impairment of value and the risk of collateral loss. The Company has historically been able to resell repossessed unused homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan losses. The Company recorded an allowance for loan losses of $135,000 and $242,000 at September 29, 2018 and September 30, 2017, respectively.

16


The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan losses applicable to the direct programs (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Balance at beginning of period
$
113

 
$
222

 
$
42

 
$
210

Provision for inventory finance credit losses
22

 
20

 
93

 
32

Loans charged off, net of recoveries

 

 

 

Balance at end of period
$
135

 
$
242

 
$
135

 
$
242

The following table disaggregates commercial loans receivable and the estimated allowance for loan losses for each class of financing receivable by evaluation methodology (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
September 29,
2018
 
March 31,
2018
 
September 29,
2018
 
March 31,
2018
Inventory finance notes receivable:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
13,415

 
$
4,193

 
$

 
$

Individually evaluated for impairment
20,191

 
12,175

 
513

 
275

 
$
33,606

 
$
16,368

 
$
513

 
$
275

Allowance for loan losses:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
(135
)
 
$
(42
)
 
$

 
$

Individually evaluated for impairment

 

 

 

 
$
(135
)
 
$
(42
)
 
$

 
$

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 September 29, 2018, there are no commercial loans that are 90 days or more past due that are still accruing interest. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At September 29, 2018, the Company was not aware of any potential problem loans that would have a material effect on the commercial loans receivable balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.
The following table disaggregates the Company's inventory finance receivables by class and credit quality indicator (in thousands):
 
Direct Commercial Loans
 
Participation Commercial Loans
 
September 29,
2018
 
March 31,
2018
 
September 29,
2018
 
March 31,
2018
Risk profile based on payment activity:
 
 
 
 
 
 
 
Performing
$
33,606

 
$
16,368

 
$
513

 
$
275

Watch list

 

 

 

Nonperforming

 

 

 

 
$
33,606

 
$
16,368

 
$
513

 
$
275


17


The Company has concentrations of commercial loans receivable related to factory-built homes in excess of 10% located in the following states, measured as a percentage of commercial loans receivables principal balance outstanding:
 
September 29,
2018
 
March 31,
2018
California
22.1
%
 
14.4
%
Arizona
13.0
%
 
16.7
%
Texas
10.7
%
 
9.0
%
Oregon
10.0
%
 
14.7
%
The risks created by these concentrations have been considered in the determination of the adequacy of the allowance for loan losses. The Company did not have concentrations in excess of 10% of the principal balance of the commercial loans receivables in any other states as of September 29, 2018 or March 31, 2018.
As of September 29, 2018 and March 31, 2018, the Company had concentrations with one independent third-party that equaled 18.4% and 37.4% of the principal balance outstanding, respectively, all of which was secured.
8. Property, Plant and Equipment
Property, plant and equipment, net, consisted of the following (in thousands):
 
September 29,
2018
 
March 31,
2018
Property, plant and equipment, at cost:
 
 
 
Land
$
24,131

 
$
24,001

Buildings and improvements
41,058

 
39,613

Machinery and equipment
25,713

 
24,154

 
90,902

 
87,768

Accumulated depreciation
(25,794
)
 
(24,413
)
 
$
65,108

 
$
63,355

Depreciation expense was $1.1 million and $2.1 million for the three and six months ended September 29, 2018, respectively. Depreciation expense of $884,000 and $1.8 million was recognized during the three and six months ended September 30, 2017, respectively.
Included in the amounts above are certain assets under capital leases. See Note 9 for additional information.

18


9. Capital Leases
On April 3, 2017, in connection with the purchase of Lexington Homes, the Company recorded capital leases on manufacturing facilities and land in Lexington, Mississippi. The following amounts were recorded for the leased assets as of September 29, 2018 and March 31, 2018 (in thousands):
 
September 29,
2018
 
March 31,
2018
Land
$
699

 
$
699

Buildings and improvements
1,050

 
1,050

 
1,749

 
1,749

Accumulated amortization
(53
)
 
(35
)
Leased assets, net
$
1,696

 
$
1,714

Future minimum payments under the leases as of September 29, 2018 were as follows (in thousands):
FY 2019
$
68

FY 2020
766

FY 2021
73

FY 2022
73

FY 2023
73

Thereafter
195

Total remaining lease payments
1,248

Less: Amount representing interest
(134
)
Present value of future minimum lease payments
$
1,114

10. Goodwill and Other Intangibles
Goodwill and other intangibles, net, consisted of the following (in thousands):
 
September 29, 2018
 
March 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Indefinite-lived:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
72,920

 
$

 
$
72,920

 
$
72,920

 
$

 
$
72,920

Trademarks and trade names
7,200

 

 
7,200

 
7,200

 

 
7,200

State insurance licenses
1,100

 

 
1,100

 
1,100

 

 
1,100

Total indefinite-lived intangible assets
81,220

 

 
81,220

 
81,220

 

 
81,220

Finite lived:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
7,100

 
(5,863
)
 
1,237

 
7,100

 
(5,756
)
 
1,344

Other
1,384

 
(985
)
 
399

 
1,384

 
(928
)
 
456

 
$
89,704

 
$
(6,848
)
 
$
82,856

 
$
89,704

 
$
(6,684
)
 
$
83,020

Amortization expense recognized on intangible assets was $80,000 and $164,000 during the three and six months ended September 29, 2018, respectively. Amortization expense recognized on intangible assets was $92,000 and $184,000 during the three and six months ended September 30, 2017, respectively.

19


11. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
 
September 29,
2018
 
March 31,
2018
Salaries, wages and benefits
$
23,916

 
$
24,416

Customer deposits
22,277

 
21,294

Unearned insurance premiums
17,804

 
17,432

Estimated warranties
16,905

 
16,638

Accrued volume rebates
10,090

 
7,778

Insurance loss reserves
6,452

 
6,157

Company repurchase option on certain loans sold
5,749

 
5,637

Accrued insurance
5,204

 
5,320

Accrued taxes
2,629

 
1,986

Reserve for repurchase commitments
2,303

 
2,207

Capital lease obligation
1,114

 
1,155

Other
15,640

 
16,480

 
$
130,083

 
$
126,500

12. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Balance at beginning of period
$
16,670

 
$
16,316

 
$
16,638

 
$
15,479

Purchase accounting additions

 

 

 
838

Charged to costs and expenses
6,713

 
7,399

 
12,942

 
12,622

Payments and deductions
(6,478
)
 
(7,245
)
 
(12,675
)
 
(12,469
)
Balance at end of period
$
16,905

 
$
16,470

 
$
16,905

 
$
16,470

13. Debt Obligations
Debt obligations primarily consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt obligations (in thousands):
 
September 29,
2018
 
March 31,
2018
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
 
 
 
Securitized financing 2005-1
$
19,115

 
$
20,524

Securitized financing 2007-1
20,722

 
22,552

Other secured financings
4,825

 
4,966

Secured credit facilities
11,466

 
11,770

 
$
56,128

 
$
59,812

Acquired securitized financings were recorded at fair value at the time of acquisition, which resulted in a discount, and subsequently are accounted for in a manner similar to ASC 310-30 to accrete the discount.

20


The following table summarizes acquired securitized financings (in thousands):
 
September 29,
2018
 
March 31,
2018
Securitized financings – contractual amount
$
41,671

 
$
46,591

Purchase discount
 
 
 
Accretable
(1,834
)
 
(3,515
)
Non-accretable (1)

 

Total acquired securitized financings, net
$
39,837

 
$
43,076

(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.
The changes in accretable yield on securitized financings were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Balance at the beginning of the period
$
2,697

 
$
6,666

 
$
3,515

 
$
7,636

Accretion
(774
)
 
(846
)
 
(1,577
)
 
(1,716
)
Adjustment to cash flows
(89
)
 
(111
)
 
(104
)
 
(211
)
Balance at the end of the period
$
1,834

 
$
5,709

 
$
1,834

 
$
5,709

Prior to the Acquisition Date, CountryPlace completed its initial securitization (2005-1), which was structured as a securitized borrowing. At the balance sheet dates of September 29, 2018 and March 31, 2018, only Class A-4, originally totaling $27.4 million with a coupon rate of 5.20%, remained outstanding, with a call date in January 2019. Additionally, CountryPlace completed its second securitized borrowing (2007-1), of which only Class A-4 originally totaling $25.1 million with a coupon rate of 5.846% remained outstanding at September 29, 2018 and March 31, 2018, with a call date in July 2019. It is anticipated that the Company will purchase or refinance these outstanding facilities at or prior to their call dates.
CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time overcollateralization reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of September 29, 2018, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.

21


The Company has entered into secured credit facilities with independent third party banks with draw periods from one to fifteen months and maturity dates of ten years after the expiration of the draw periods. The proceeds are used by the Company to originate and hold consumer home-only loans secured by manufactured homes, which are pledged as collateral to the facilities. Upon completion of the draw down period, the facilities are converted into an amortizing loan based on a 20 or 25 year amortization period with a balloon payment due upon maturity. The maximum advance for loans under this program is 80% of the outstanding collateral principal balance, with the Company providing the remaining funds. As of September 29, 2018, the outstanding balance of the converted loans was $11.5 million at a weighted average interest rate of 4.9%, with $5.0 million available to draw. Amounts drawn bear interest at 5.15%. Once converted, the initial annual interest rate of 5.15% will adjust every 5 years beginning in 2024 to Prime plus 0.40%. The per annum interest rate will never be less than 5.00% or greater than 6.00%.
14. Reinsurance
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned are as follows (in thousands):
 
Three Months Ended
 
September 29, 2018
 
September 30, 2017
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
3,820

 
$
4,249

 
$
3,628

 
$
4,137

Assumed premiums—nonaffiliate
6,280

 
6,350

 
6,210

 
6,326

Ceded premiums—nonaffiliate
(3,135
)
 
(3,135
)
 
(4,309
)
 
(4,309
)
Net premiums
$
6,965

 
$
7,464

 
$
5,529

 
$
6,154

 
Six Months Ended
 
September 29, 2018
 
September 30, 2017
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
8,361

 
$
8,460

 
$
7,994

 
$
8,287

Assumed premiums—nonaffiliate
13,214

 
12,584

 
12,470

 
12,593

Ceded premiums—nonaffiliate
(5,982
)
 
(5,982
)
 
(7,257
)
 
(7,257
)
Net premiums
$
15,593

 
$
15,062

 
$