CVCO-2013.12.28-10Q

 

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

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2013
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)
(Zip Code)
602-256-6263
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last year)
 

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
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of February 4, 2014, 8,839,824 shares of Registrant’s Common Stock, $.01 par value, were outstanding.
 





CAVCO INDUSTRIES, INC.
FORM 10-Q
December 28, 2013
TABLE OF CONTENTS

 
Page
 
 
 


Table of Contents

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
December 28,
2013
 
March 30,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,520

 
$
47,823

Restricted cash, current
5,951

 
6,773

Accounts receivable, net
27,041

 
18,710

Short-term investments
7,366

 
6,929

Current portion of consumer loans receivable, net
19,605

 
20,188

Current portion of inventory finance notes receivable, net
3,046

 
3,983

Inventories
67,525

 
68,805

Assets held for sale
3,889

 
4,180

Prepaid expenses and other current assets
11,525

 
10,267

Deferred income taxes, current
10,233

 
6,724

Total current assets
215,701

 
194,382

Restricted cash
1,180

 
1,179

Investments
14,214

 
10,769

Consumer loans receivable, net
82,384

 
90,802

Inventory finance notes receivable, net
19,200

 
18,967

Property, plant and equipment, net
45,681

 
46,223

Goodwill and other intangibles, net
78,400

 
79,435

Deferred income taxes

 
2,742

Total assets
$
456,760

 
$
444,499

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,580

 
$
14,118

Accrued liabilities
68,957

 
62,718

Current portion of securitized financings
9,553

 
10,169

Total current liabilities
90,090

 
87,005

Securitized financings
63,282

 
72,118

Deferred income taxes
17,873

 
16,492

Redeemable noncontrolling interest

 
91,994

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

 

Common stock, $.01 par value; 20,000,000 shares authorized; Outstanding 8,839,824 and 6,967,954 shares, respectively
88

 
70

Additional paid-in capital
231,645

 
135,053

Retained earnings
53,618

 
41,590

Accumulated other comprehensive income
164

 
177

Total stockholders’ equity
285,515

 
176,890

Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
456,760

 
$
444,499

See accompanying Notes to Consolidated Financial Statements

1

Table of Contents

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

 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Net revenue
$
138,317

 
$
114,603

 
$
402,130

 
$
343,468

Cost of sales
106,748

 
88,028

 
311,279

 
267,131

Gross profit
31,569

 
26,575

 
90,851

 
76,337

Selling, general and administrative expenses
22,019

 
20,307

 
66,581

 
60,400

Income from operations
9,550

 
6,268

 
24,270

 
15,937

Interest expense
(1,219
)
 
(1,403
)
 
(3,671
)
 
(4,656
)
Other income, net
173

 
416

 
673

 
1,199

Income before income taxes
8,504

 
5,281

 
21,272

 
12,480

Income tax expense
(2,612
)
 
(2,260
)
 
(6,776
)
 
(5,160
)
Net income
5,892

 
3,021

 
14,496

 
7,320

Less: net income attributable to redeemable noncontrolling interest

 
1,564

 
2,468

 
3,749

Net income attributable to Cavco common stockholders
$
5,892

 
$
1,457

 
$
12,028

 
$
3,571

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
5,892

 
$
3,021

 
$
14,496

 
$
7,320

Unrealized loss on available-for-sale securities, net of tax
(4
)
 
(74
)
 
(190
)
 
(12
)
Comprehensive income
5,888

 
2,947

 
14,306

 
7,308

Comprehensive income attributable to redeemable noncontrolling interest

 
1,527

 
2,392

 
3,743

Comprehensive income attributable to Cavco common stockholders
$
5,888

 
$
1,420

 
$
11,914

 
$
3,565

 
 
 
 
 
 
 
 
Net income per share attributable to Cavco common stockholders:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.21

 
$
1.49

 
$
0.51

Diluted
$
0.66

 
$
0.21

 
$
1.47

 
$
0.51

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
8,838,832

 
6,967,954

 
8,070,619

 
6,953,037

Diluted
8,991,672

 
7,037,333

 
8,183,126

 
7,018,280


See accompanying Notes to Consolidated Financial Statements

2

Table of Contents

CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
14,496

 
$
7,320

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,964

 
3,044

Provision for credit losses
44

 
270

Deferred income taxes
712

 
951

Stock-based compensation expense
2,163

 
966

Non-cash interest income, net
(576
)
 
(502
)
Impairment of property, plant and equipment including assets held for sale
560

 

Gain on sale of property, plant and equipment including assets held for sale
(44
)
 
(85
)
Gain on sale of loans
(3,985
)
 
(6,005
)
Gain on investments
(587
)
 
(105
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
821

 
(430
)
Accounts receivable
(8,424
)
 
(635
)
Consumer loans receivable originated
(77,747
)
 
(83,330
)
Principal payments on consumer loans receivable
11,386

 
9,058

Proceeds from sales of consumer loans
80,228

 
83,826

Inventories
1,280

 
(390
)
Prepaid expenses and other current assets
(1,456
)
 
(716
)
Inventory finance notes receivable
825

 
(1,107
)
Accounts payable and accrued liabilities
3,997

 
(5
)
Net cash provided by operating activities
26,657

 
12,125

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(1,671
)
 
(563
)
Proceeds from sale of property, plant and equipment including assets held for sale
59

 
1,767

Purchases of investments
(12,078
)
 
(5,416
)
Proceeds from sale of investments
8,098

 
3,042

Net cash used in investing activities
(5,592
)
 
(1,170
)
FINANCING ACTIVITIES
 
 
 
Proceeds from exercise of stock options
162

 
2,199

Net repayment of construction lending line

 
(4,550
)
Payments on securitized financings
(9,530
)
 
(7,247
)
Net cash used in financing activities
(9,368
)
 
(9,598
)
Net increase in cash and cash equivalents
11,697

 
1,357

Cash and cash equivalents at beginning of the period
47,823

 
41,094

Cash and cash equivalents at end of the period
$
59,520

 
$
42,451

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the year for income taxes
$
6,693

 
$
4,958

Cash paid during the year for interest
$
3,597

 
$
4,243

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Issuance of common stock to acquire noncontrolling interest
$
94,386

 
$

See accompanying Notes to Consolidated Financial Statements

3

Table of Contents

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 presentation. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC; there were no disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended March 30, 2013 filed with the SEC on June 11, 2013 (the “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 29, 2014.
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 related consumer finance and insurance. The Company builds a wide variety of affordable modular homes, manufactured homes and park model seasonal homes in 15 factories located throughout the United States, primarily distributed through a network of independent and company-owned retailers. The Company operates 49 company-owned retail stores in the United States. The Company's mortgage subsidiary (“CountryPlace”) is an approved Fannie Mae and Ginnie Mae seller/servicer and offers conforming mortgages to purchasers of factory-built and site-built homes. The Company’s insurance subsidiary (“Standard”) provides property and casualty insurance to owners of manufactured homes.
Historically, the Company's subsidiary, Fleetwood Homes, Inc. (“Fleetwood”), was jointly owned by the Company and its investment partners, Third Avenue Value Fund and an affiliate (collectively, “Third Avenue”) further discussed in Note 20. Third Avenue’s financial interest in Fleetwood was reported as a “redeemable noncontrolling interest” in the Consolidated Financial Statements. As discussed in Note 19, during the quarter ended September 28, 2013, Cavco completed the purchase from Third Avenue of all noncontrolling interests in Fleetwood, which owns Fleetwood Homes, Palm Harbor Homes, CountryPlace and Standard. The Company satisfied the purchase price with 1,867,370 shares of Company common stock issued to Third Avenue. The acquisition 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.
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 in the Form 10-K.

4

Table of Contents

2. Restricted Cash
Restricted cash consists of the following (in thousands):
 
December 28,
2013
 
March 30,
2013
Cash related to CountryPlace customer payments to be remitted to third parties
$
4,224

 
$
4,870

Cash related to CountryPlace customers’ principal and interest payments on securitized loans to be remitted to bondholders
1,690

 
1,768

Cash related to workers’ compensation insurance held in trust
726

 
725

Other restricted cash
491

 
589

 
$
7,131

 
$
7,952


5

Table of Contents

3. Investments
Investments consist of the following (in thousands):
 
December 28,
2013
 
March 30,
2013
Available-for-sale investment securities
$
19,337

 
$
17,698

Equity method investment
2,243

 

 
$
21,580

 
$
17,698

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):
 
December 28, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
2,324

 
$
3

 
$
(95
)
 
$
2,232

Residential mortgage-backed securities
3,966

 
12

 
(248
)
 
3,730

State and political subdivision debt securities
5,934

 
36

 
(37
)
 
5,933

Corporate debt securities
1,811

 
31

 

 
1,842

Marketable equity securities
5,050

 
622

 
(72
)
 
5,600

 
$
19,085

 
$
704

 
$
(452
)
 
$
19,337


 
March 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury and government debt securities
$
2,682

 
$
11

 
$
(6
)
 
$
2,687

Residential mortgage-backed securities
5,226

 
21

 
(108
)
 
5,139

State and political subdivision debt securities
1,681

 
32

 

 
1,713

Corporate debt securities
2,788

 
48

 

 
2,836

Marketable equity securities
4,782

 
609

 
(68
)
 
5,323

 
$
17,159

 
$
721

 
$
(182
)
 
$
17,698


6

Table of Contents

The following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
 
December 28, 2013
 
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
$
1,456

 
$
(95
)
 
$

 
$

 
$
1,456

 
$
(95
)
Residential mortgage-backed securities
2,872

 
(239
)
 
341

 
(9
)
 
3,213

 
(248
)
States and political subdivisions
2,931

 
(37
)
 

 

 
2,931

 
(37
)
Marketable equity securities
965

 
(63
)
 
212

 
(9
)
 
1,177

 
(72
)
 
$
8,224

 
$
(434
)
 
$
553

 
$
(18
)
 
$
8,777

 
$
(452
)

 
March 30, 2013
 
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
$
1,084

 
$
(6
)
 
$

 
$

 
$
1,084

 
$
(6
)
Residential mortgage-backed securities
1,460

 
(108
)
 

 

 
1,460

 
(108
)
Marketable equity securities
413

 
(13
)
 
304

 
(55
)
 
717

 
(68
)
 
$
2,957

 
$
(127
)
 
$
304

 
$
(55
)
 
$
3,261

 
$
(182
)
Based on the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at December 28, 2013.
As of December 28, 2013, the Company’s investments in marketable equity securities consist of investments in common stock of industrial and other companies ($4.2 million of the total fair value and $54,000 of the total unrealized losses) and bank trust, insurance, and public utility companies ($1.4 million of the total fair value and $18,000 of the total unrealized losses).
As of March 30, 2013, the Company’s investments in marketable equity securities consisted of investments in common stock of industrial and other companies ($3.7 million of the total fair value and $51,000 of the total unrealized losses) and bank trust, insurance, and public utility companies ($1.6 million of the total fair value and $17,000 of the total unrealized losses).

7

Table of Contents

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 will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
December 28, 2013
 
March 30, 2013
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in less than one year
$
1,760

 
$
1,767

 
$
1,600

 
$
1,607

Due after one year through five years
3,432

 
3,474

 
4,786

 
4,880

Due after five years through ten years
1,009

 
940

 
924

 
893

Due after ten years
7,834

 
7,556

 
5,067

 
4,995

 
$
14,035

 
$
13,737

 
$
12,377

 
$
12,375

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 the three and nine months ended December 28, 2013 were approximately $231,000 and $695,000, respectively. Gross losses realized were approximately $56,000 and $140,000, respectively, for the three and nine months ended December 28, 2013.
4. Inventories
Inventories consist of the following (in thousands):
 
December 28,
2013
 
March 30,
2013
Raw materials
$
22,833

 
$
20,993

Work in process
6,428

 
8,079

Finished goods and other
38,264

 
39,733

 
$
67,525

 
$
68,805

5. Consumer Loans Receivable
The Company acquired consumer loans receivable during the first quarter of fiscal 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 a manner similar to Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“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):
 
December 28,
2013
 
March 30,
2013
Loans held for investment (acquired as part of the Palm Harbor transaction)
$
90,350

 
$
99,854

Loans held for investment (originated after the Palm Harbor transaction)
1,687

 
606

Loans held for sale
7,391

 
7,410

Construction advances, net
2,759

 
3,597

Consumer loans receivable
102,187

 
111,467

Deferred financing fees and other, net
(198
)
 
(477
)
Consumer loans receivable, net
$
101,989

 
$
110,990


8

Table of Contents

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 cannot be accreted into interest income (the non-accretable difference). The cash flows expected to be collected in excess of the carrying value of the acquired loans are accreted into interest income over the remaining life of the loans (referred to as accretable yield). The portion of the cash flows expected Interest income on consumer loans receivable is recognized as net revenue.
 
December 28,
2013
 
March 30,
2013
 
(In thousands)
Consumer loans receivable held for investment – contractual amount
$
231,912

 
$
263,038

Purchase discount
 
 
 
Accretable yield
(80,803
)
 
(91,291
)
Non-accretable difference
(60,206
)
 
(71,451
)
Less consumer loans receivable reclassified as other assets
(553
)
 
(442
)
Total acquired consumer loans receivable held for investment, net
$
90,350

 
$
99,854

Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected by CountryPlace. At the balance sheet date, the Company evaluates whether the present value of expected cash flows, determined using the effective interest rate, has decreased and, if so, recognizes an allowance for loan loss subsequent to the date of the Palm Harbor transaction. 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 changes in accretable yield on acquired consumer loans receivable held for investment were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Balance at the beginning of the period
$
83,817

 
$
102,314

 
$
91,291

 
$
106,949

Accretion
(2,980
)
 
(3,307
)
 
(9,143
)
 
(10,402
)
Net transfers between accretable yield and non-accretable difference
(34
)
 
374

 
(1,345
)
 
2,834

Balance at the end of the period
$
80,803

 
$
99,381

 
$
80,803

 
$
99,381

CountryPlace’s consumer loans receivable 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 property loans and retail installment sale contracts), 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. In rare instances, CountryPlace may provide other types of loans in second-lien or unsecured positions. Accordingly, CountryPlace classifies its loans receivable as follows: chattel loans, conforming mortgages, non-conforming mortgages, and other loans.

9

Table of Contents

In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (“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.
The following table disaggregates CountryPlace’s gross consumer loans receivable as of December 28, 2013, for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
 
Consumer Loans Held for Investment
 
 
 
Consumer
 
 
 
Securitized
2005
 
Securitized
2007
 
Unsecuritized
 
Construction
Advances
 
Loans Held
For Sale
 
Total
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Credit Quality Indicator
 
 
 
 
 
 
 
 
 
 
Chattel loans
 
 
 
 
 
 
 
 
 
 
 
0-619
$
1,142

 
$
668

 
$
821

 
$

 
$

 
$
2,631

620-719
17,449

 
11,617

 
987

 

 

 
30,053

720+
19,594

 
13,321

 
593

 

 

 
33,508

Subtotal
38,185

 
25,606

 
2,401

 

 

 
66,192

Conforming mortgages
 
 
 
 
 
 
 
 
 
 
 
0-619

 

 
274

 


 
128

 
402

620-719

 

 
2,308

 
1,552

 
4,604

 
8,464

720+

 

 
287

 
1,207

 
2,659

 
4,153

Subtotal

 

 
2,869

 
2,759

 
7,391

 
13,019

Non-conforming mortgages
 
 
 
 
 
 
 
 
 
 
 
0-619
94

 
817

 
2,051

 

 

 
2,962

620-719
1,646

 
6,399

 
4,082

 

 

 
12,127

720+
1,945

 
4,496

 
1,429

 

 

 
7,870

Subtotal
3,685

 
11,712

 
7,562

 

 

 
22,959

Other loans
 
 
 
 
 
 
 
 
 
 
 
Subtotal

 

 
17

 

 

 
17

 
$
41,870

 
$
37,318

 
$
12,849

 
$
2,759

 
$
7,391

 
$
102,187

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. Consumer loans receivable are located in the key states shown below with the corresponding percentage of loans aged 61 days or more:
 
 
December 28, 2013
 
March 30, 2013
 
 
 
 
Aging 61 days or more
 
 
 
Aging 61 days or more
 
 
Portfolio
 
Percent of state’s
 
Percent of total
 
Portfolio
 
Percent of state’s
 
Percent of total
State
 
concentration
 
loan balance
 
loan balance
 
concentration
 
loan balance
 
loan balance
Texas
 
41.4%
 
1.29%
 
0.53%
 
41.9%
 
1.77%
 
0.74%
Florida
 
7.9%
 
1.62%
 
0.13%
 
6.7%
 
2.26%
 
0.15%
New Mexico
 
6.9%
 
1.05%
 
0.07%
 
6.6%
 
2.44%
 
0.16%
Arizona
 
5.6%
 
6.31%
 
0.35%
 
6.2%
 
3.05%
 
0.19%
All others
 
38.2%
 
3.17%
 
1.21%
 
38.6%
 
3.08%
 
1.19%
 
 
100.0%
 
 
 
2.29%
 
100.0%
 
 
 
2.43%

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Table of Contents

The states of Florida and Arizona have experienced volatility in the housing market from economic circumstances. The risks created by these concentrations have been considered by management in the determination of the accretable yield and the adequacy of any allowance for loan losses. Other than Texas, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of December 28, 2013 or March 30, 2013.
6. Inventory Finance Notes Receivable and Allowance for Loan Loss
The Company’s inventory finance notes receivable balance consists of two classes: (i) amounts loaned by the Company under participation inventory financing programs; and (ii) direct inventory financing arrangements for the home product inventory needs of our independent distribution base.
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 of our products. The participation inventory finance receivables are unsecured general obligations of the independent floor plan lenders.
Under the terms of the direct inventory finance arrangements, the Company provides funds for the independent retailers’ financed inventory. The notes are secured by the inventory collateral and other security depending on the borrower’s (retailer’s) circumstances. The other terms of direct inventory finance arrangements vary depending on the needs of the borrower and the opportunity for the Company, but generally follow the same tenets as the participation programs.
Inventory finance notes receivables, net, consist of the following by class of financing notes receivable (in thousands):
 
December 28,
2013
 
March 30,
2013
Direct inventory finance notes receivable
$
20,869

 
$
18,955

Participation inventory finance notes receivable
1,570

 
4,345

Allowance for loan loss
(193
)
 
(350
)
 
$
22,246

 
$
22,950

The Company evaluates the potential for loss from its participation inventory finance 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 December 28, 2013 or March 30, 2013.

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Table of Contents

With respect to the direct inventory finance notes receivable, the risk of loss is spread over numerous borrowers. Borrower inventory levels and activity are 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 loss. The Company recorded an allowance for loan loss of $193,000 and $350,000 at December 28, 2013 and March 30, 2013, respectively. 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 inventory finance notes receivable (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Balance at beginning of period
$
206

 
$
139

 
$
350

 
$
215

Provision for inventory finance credit losses
(24
)
 
(13
)
 
(122
)
 
(89
)
Loans charged off, net of recoveries
11

 

 
(35
)
 

Balance at end of period
$
193

 
$
126

 
$
193

 
$
126

The following table disaggregates inventory finance notes receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):
 
Direct Inventory Finance
 
Participation Inventory Finance
 
December 28,
2013
 
March 30,
2013
 
December 28,
2013
 
March 30,
2013
Inventory finance notes receivable:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
20,180

 
$
12,708

 
$

 
$

Individually evaluated for impairment
689

 
6,247

 
1,570

 
4,345

 
$
20,869

 
$
18,955

 
$
1,570

 
$
4,345

Allowance for loan loss:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
(133
)
 
$
(130
)
 
$

 
$

Individually evaluated for impairment
(60
)
 
(220
)
 

 

 
$
(193
)
 
$
(350
)
 
$

 
$


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Table of Contents

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. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At December 28, 2013, the Company was not aware of any potential problem loans that would have a material effect on the inventory finance receivables 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 Inventory Finance
 
Participation Inventory Finance
 
December 28,
2013
 
March 30,
2013
 
December 28,
2013
 
March 30,
2013
Risk profile based on payment activity:
 
 
 
 
 
 
 
Performing
$
20,180

 
$
18,446

 
$
1,570

 
$
4,345

Watch list
73

 

 

 

Nonperforming
616

 
509

 

 

 
$
20,869

 
$
18,955

 
$
1,570

 
$
4,345

The Company has concentrations of inventory finance notes receivable related to factory-built homes located in the following states, measured as a percentage of inventory finance receivables principal balance outstanding:
 
December 28,
2013
 
March 30,
2013
Florida
25.4
%
 
20.9
%
Colorado
21.6
%
 
5.1
%
Texas
13.0
%
 
12.6
%
Arizona
10.3
%
 
10.5
%
The states of Florida and Arizona have experienced volatility in the housing market from economic circumstances. 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 inventory finance receivables in any other states as of December 28, 2013 or March 30, 2013, respectively.

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Table of Contents

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: buildings and improvements, 10 to 39 years, and 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):
 
December 28,
2013
 
March 30,
2013
Property, plant and equipment, at cost:
 
 
 
Land
$
19,339

 
$
19,129

Buildings and improvements
25,652

 
25,474

Machinery and equipment
16,038

 
15,423

 
61,029

 
60,026

Accumulated depreciation
(15,348
)
 
(13,803
)
Property, plant and equipment, net
$
45,681

 
$
46,223

8. Goodwill and Other Intangibles
Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, technology, and insurance policies and renewal rights. 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 the nine months ended December 28, 2013, and December 29, 2012, no impairment expense was 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 11 years, technology over 7 to 10 years, and insurance policies and renewal rights over 15 years.
Goodwill and other intangibles consist of the following (in thousands):
 
December 28, 2013
 
March 30, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Indefinite lived:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
67,346

 
$

 
$
67,346

 
$
67,346

 
$

 
$
67,346

Trademarks and trade names
6,250

 

 
6,250

 
6,250

 

 
6,250

State insurance licenses
1,100

 

 
1,100

 
1,100

 

 
1,100

Total indefinite-lived intangible assets
74,696

 

 
74,696

 
74,696

 

 
74,696

Finite lived:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
6,200

 
(3,452
)
 
2,748

 
6,200

 
(2,506
)
 
3,694

Technology
900

 
(252
)
 
648

 
900

 
(181
)
 
719

Insurance policies and renewal rights
374

 
(66
)
 
308

 
374

 
(48
)
 
326

Total goodwill and other intangible assets
$
82,170

 
$
(3,770
)
 
$
78,400

 
$
82,170

 
$
(2,735
)
 
$
79,435

Amortization expense recognized on intangible assets during the three and nine months ended December 28, 2013 was $345,000 and $1,035,000, respectively. Amortization expense of $345,000 and $1,100,000 was recognized during the three and nine months ended December 29, 2012, respectively.

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Table of Contents

9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
 
December 28,
2013
 
March 30, 2013
Salaries, wages and benefits
$
15,625

 
$
12,490

Customer deposits
10,951

 
10,674

Unearned insurance premiums
10,021

 
8,781

Estimated warranties
8,875

 
8,202

Deferred margin
4,132

 
4,838

Accrued insurance
3,377

 
3,198

Accrued volume rebates
2,957

 
1,756

Reserve for repurchase commitments
1,820

 
1,352

Accrued taxes
1,649

 
2,006

Insurance loss reserves
1,514

 
1,801

Reserves related to consumer loans sold
1,141

 
1,172

Other
6,895

 
6,448

 
$
68,957

 
$
62,718

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):
 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Balance at beginning of period
$
8,670

 
$
8,782

 
$
8,202

 
$
9,456

Charged to costs and expenses
3,005

 
2,588

 
8,523

 
8,033

Payments and deductions
(2,800
)
 
(2,838
)
 
(7,850
)
 
(8,957
)
Balance at end of period
$
8,875

 
$
8,532

 
$
8,875

 
$
8,532

11. Debt Obligations
Debt obligations consist of the following (in thousands):
 
December 28,
2013
 
March 30,
2013
Securitized financing 2005-1
$
34,636

 
$
39,850

Securitized financing 2007-1
38,199

 
42,437

 
$
72,835

 
$
82,287

The Company acquired CountryPlace's securitized financings and construction lending lines during the first quarter of fiscal 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.

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Table of Contents

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 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 securitized financings (in thousands):
 
December 28,
2013
 
March 30,
2013
Securitized financings – contractual amount
$
90,145

 
$
102,203

Purchase discount
 
 
 
Accretable yield
(17,310
)
 
(19,916
)
Non-accretable difference (1)

 

Total securitized financings, net
$
72,835

 
$
82,287


(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
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Balance at the beginning of the period
$
18,443

 
$
23,679

 
$
19,916

 
$
26,032

Accretion
(1,115
)
 
(1,245
)
 
(3,353
)
 
(3,988
)
Adjustment to cash flows
(18
)
 
(190
)
 
747

 
200

Balance at the end of the period
$
17,310

 
$
22,244

 
$
17,310

 
$
22,244

On July 12, 2005, prior to Fleetwood'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 beginning in 2006 through 2015 and were issued with an expected weighted average maturity of 4.66 years. For accounting purposes, this transaction was structured as a securitized borrowing. As of December 28, 2013, the Class A-1 and Class A-2 bonds had been retired.
On March 22, 2007, prior to Fleetwood'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 beginning in 2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of December 28, 2013, the Class A-1 and Class A-2 bonds had been retired.

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Table of Contents

CountryPlace’s securitized debt is subject to provisions which may require acceleration of debt repayment. If cumulative loss ratios exceed levels specified in the respective pooling and servicing agreements for the 2005-1 and 2007-1 securitizations, repayment of the principal of the related Class A bonds is accelerated until cumulative loss ratios return to specified levels. During periods when cumulative loss ratios exceed the specified levels, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee, and surety are applied to reduce the debt. However, principal repayment of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of December 28, 2013, the cumulative loss ratio was within the specified level for the 2005-1 securitized portfolio; however, the cumulative loss ratio for the 2007-1 securitized portfolio exceeded the specified levels. The resulting acceleration of securitized debt repayment did not have a materially adverse impact on our cash flows. This specified level increased in October 2013, but did not ameliorate the situation. The next scheduled increase in the specified level is October 2014.
12. Reinsurance
Standard is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard’s premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard’s assumed reinsurance is with one entity.
The effects of reinsurance on premiums written and earned are as follows (in thousands):
 
Three Months Ended
 
December 28, 2013
 
December 29, 2012
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
3,319

 
$
3,317

 
$
1,815

 
$
1,231

Assumed premiums—nonaffiliate
3,754

 
3,925

 
3,034

 
3,131

Ceded premiums—nonaffiliate
(2,536
)
 
(2,536
)
 
(1,061
)
 
(1,061
)
Net premiums
$
4,537

 
$
4,706

 
$
3,788

 
$
3,301

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
December 28, 2013
 
December 29, 2012
 
Written
 
Earned
 
Written
 
Earned
Direct premiums
$
9,060

 
$
7,847

 
$
4,591

 
$
3,049

Assumed premiums—nonaffiliate
12,067

 
11,141

 
9,687

 
8,860

Ceded premiums—nonaffiliate
(5,995
)
 
(5,995
)
 
(2,753
)
 
(2,753
)
Net premiums
$
15,132

 
$
12,993

 
$
11,525

 
$
9,156

Typical insurance policies written or assumed by Standard have a maximum coverage of $300,000 per claim, of which Standard cedes $225,000 of the risk of loss per reinsurance. Therefore, Standard maintains risk of loss limited to $75,000 per claim on typical policies. Amounts are recoverable by Standard through reinsurance for catastrophic losses in excess of $1.0 million per occurrence up to a maximum of $20.0 million in the aggregate.

17

Table of Contents

13. Income Taxes
The Company’s deferred tax assets primarily result from financial statement accruals not currently deductible for tax purposes and differences in the acquired basis of certain assets, and its deferred tax liabilities primarily result from tax amortization of goodwill and other intangible assets. The Company complies with the provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The amount of unrecognized tax benefits recorded by the Company is insignificant and the impact on the effective tax rate if all unrecognized tax benefits were recognized would be insignificant. The Company classifies interest and penalties related to unrecognized tax benefits in tax expense.
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 2011. 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 maximum amount for which the Company was contingently liable under such agreements approximated $23.4 million at December 28, 2013, without reduction for the resale value of the homes. The Company applies ASC 460, Guarantees (“ASC 460”), and ASC 450-20, Loss Contingencies (“ASC 450-20”), to account for its liability for repurchase commitments. Under the provisions of ASC 460, the Company records the greater of the estimated value of the non-contingent obligation or a contingent liability for each repurchase arrangement under the provisions of ASC 450-20. The Company recorded an estimated liability of $1.8 million and $1.4 million at December 28, 2013 and March 30, 2013, respectively, related to the commitments pertaining to these agreements.
Letters of Credit. To secure certain reinsurance contracts, Standard maintains an irrevocable letter of credit of $5.0 million to provide assurance that Standard will fulfill its reinsurance obligations. This letter of credit is secured by certain of Standard’s investments. CountryPlace maintains an irrevocable letter of credit of $100,000 related to state licensing requirements. There have been no draws on any of the aforementioned letters of credit.
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 lower of cost or market, 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.

18

Table of Contents

Loan contracts with off-balance sheet commitments are summarized below (in thousands):
 
December 28,
2013
 
March 30,
2013
Construction loan contract amount
$
6,833

 
$
8,609

Cumulative advances
(2,969
)
 
(3,597
)
Remaining construction contingent commitment
$
3,864

 
$
5,012

Representations and Warranties of Mortgages Sold. CountryPlace sells loans to GSEs and whole-loan purchasers. In connection with these activities, CountryPlace provides to the GSEs and whole-loan purchasers, representations and warranties related to the loans sold. 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 $1.1 million and $1.2 million as of December 28, 2013 and March 30, 2013, 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 nine months ended December 28, 2013, no claim requests were received and no indemnification agreements were 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.
As of December 28, 2013 CountryPlace had outstanding IRLCs with a notional amount of $3.6 million, which are recorded at fair value in accordance with 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 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 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 the three and nine months ended December 28, 2013, CountryPlace recognized losses of $63,000 and $26,000, respectively, on the outstanding IRLCs.
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. Commitments to forward sales of whole loans are typically in an amount proportionate with the amount of IRLC expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.

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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 three and nine months ended December 28, 2013, CountryPlace recognized gains of $182,000 and $35,000, respectively, on forward sales and whole loan sale commitments.
Commitment to Equity-Method Investment. Cavco has an investment in an unconsolidated entity that was organized to purchase and install manufactured homes in certain manufactured home communities, sell those homes to consumers, and to purchase qualifying loans made by an approved lender to the buyers of those homes. Cavco and its partner have committed to make equal capital contributions to the unconsolidated entity up to $5.0 million each, of which $2.5 million has been contributed by Cavco as of December 28, 2013. Cavco accounts for its interest in this entity using the equity method of accounting.
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. Stockholders’ Equity
The following table represents changes in stockholders’ equity attributable to Cavco’s stockholders and redeemable non-controlling interest for the nine months ended December 28, 2013 (dollars in thousands):
 
Equity Attributable to Cavco Stockholders
 
 
 
 
 
 
 
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
 
Total
 
 
Redeemable noncontrolling interest
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance, March 30, 2013
6,967,954

 
$
70

 
$
135,053

 
$
41,590

 
$
177

 
$
176,890

 
 
$
91,994

Stock option exercises
4,500

 

 
162

 

 

 
162

 
 

Share-based compensation

 

 
2,163

 

 

 
2,163

 
 

Net income

 

 

 
12,028

 

 
12,028

 
 
2,468

Other comprehensive loss (1)

 

 

 

 
(114
)
 
(114
)
 
 
(76
)
Acquisition of noncontrolling interest
1,867,370

 
18

 
94,267

 

 
101

 
94,386

 
 
(94,386
)
Balance, December 28, 2013
8,839,824

 
$
88

 
$
231,645

 
$
53,618

 
$
164

 
$
285,515

 
 
$

(1)
Other comprehensive income is comprised of unrealized gains and losses on available-for-sale investments. Unrealized losses before tax on available-for-sale investments was $292,000 for the nine months ended December 28, 2013.
16. 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 1,350,000 shares of the Company’s common stock, of which 214,126 shares were still available for grant at December 28, 2013. 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 period of up to five years in accordance with plan provisions, or as determined by the plan administrator (the Board’s Compensation Committee, 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).

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Stock-based compensation cost charged against income for the three and nine months ended December 28, 2013 was $226,000 and $2.2 million, respectively. The Company recorded stock-based compensation expense of $330,000 and $966,000 for the three and nine months ended December 29, 2012, respectively.
As of December 28, 2013, total unrecognized compensation cost related to stock options was approximately $1.2 million and the related weighted-average period over which it is expected to be recognized is approximately 2.2 years .
The following table summarizes the option activity within the Company’s stock-based compensation plans for the nine months ended December 28, 2013:
 
Number
of Shares
Outstanding at March 30, 2013
399,700

Granted
64,450

Exercised
(4,500
)
Canceled or expired
(7,500
)
Outstanding at December 28, 2013
452,150

Exercisable at December 28, 2013
262,625


17. 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 (dollars in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
December 28,
2013
 
December 29,
2012
 
December 28,
2013
 
December 29,
2012
Net income attributable to Cavco common stockholders
$
5,892

 
$
1,457

 
$
12,028

 
$
3,571

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
8,838,832

 
6,967,954

 
8,070,619

 
6,953,037

Common stock equivalents—treasury stock method
152,840

 
69,379

 
112,507

 
65,243

Diluted
8,991,672

 
7,037,333

 
8,183,126

 
7,018,280

Net income per share attributable to Cavco common stockholders:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.21

 
$
1.49

 
$
0.51

Diluted
$
0.66

 
$
0.21

 
$
1.47

 
$
0.51

Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended December 28, 2013, and December 29, 2012 were 4,932 and 14,389, respectively. There were 5,021 and 7,103 anti- dilutive common stock equivalents excluded from the computation of diluted earnings per share for the nine months ended December 28, 2013 and December 29, 2012, respectively.

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18. Fair Value Measurements
The book value and estimated fair value of the Company’s financial instruments are as follows (in thousands):
 
December 28, 2013
 
March 30, 2013
 
Book
Value
 
Estimated
Fair Value
 
Book
Value
 
Estimated
Fair Value
Cash and cash equivalents (1)
$
59,520

 
$
59,520

 
$
47,823

 
$
47,823

Restricted cash (1)
7,131

 
7,131

 
7,952

 
7,952

Available for sale securities (2)
19,337

 
19,337

 
17,698

 
17,698

Consumer loans receivable (3)
101,989

 
103,114

 
110,990

 
115,044

Interest rate lock commitment derivatives (4)
1

 
1

 
28

 
28

Forward loan sale commitment derivatives (4)
32

 
32

 
(3
)
 
(3
)
Inventory finance receivable (5)
22,246

 
22,246

 
22,950

 
22,950

Securitized financings (6)
72,835

 
80,969

 
82,287

 
90,895

Mortgage servicing rights (7)
390

 
390

 
335

 
335


(1)
The fair value approximates book value due to the instruments’ short-term maturity.
 
(2)
The fair value is based on quoted market prices.
 
(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 approximates book value based on current market rates and the revolving nature of the instruments.
 
(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 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.

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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.
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.
Assets measured at fair value on a recurring basis are summarized below (in thousands):
 
December 28, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Securities issued by the U.S Treasury and Government (1)
$
2,232

 
$

 
$
2,232

 
$

Mortgage-backed securities (1)
3,730

 

 
3,730

 

Securities issued by states and political subdivisions (1)
5,933

 

 
5,933

 

Corporate debt securities (1)
1,842

 

 
1,842

 

Marketable equity securities (1)
5,600

 
5,600

 

 

Interest rate lock commitment derivatives (2)
1

 

 

 
1

Forward loan sale commitment derivatives (2)
32

 

 

 
32

Mortgage servicing rights (3)
390

 

 

 
390


(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 nine months ended December 28, 2013. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

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Assets and liabilities 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):
 
December 28, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash and cash equivalents
$
59,520

 
$
59,520

 
$

 
$

Restricted cash
7,131

 
7,131

 

 

Loans held for investment
92,416

 

 

 
92,416

Loans held for sale
7,729

 

 
7,729

 

Loans held—construction advances
2,969

 

 

 
2,969

Inventory finance receivable
22,246

 

 

 
22,246

Securitized financings
80,969

 

 
80,969

 

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 impairment charges of $560,000 on property, plant and equipment including assets held for sale during the nine months ended December 28, 2013. No other asset impairment charges were recorded during the period. No impairment charges were recorded during the nine months ended December 29, 2012.
Assets measured on a nonrecurring basis also include impaired loans (nonaccrual loans) disclosed in Note 5 and loans held for sale. No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics, or performance. Impaired loans are measured using Level 3 inputs that are calculated using estimated discounted future cash flows with discount rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using Level 2 inputs that consist of 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. The cost of loans held for sale is lower than the fair value as of December 28, 2013.
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.

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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 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.
The Company applies fair value accounting to MSRs, with all changes in fair value recorded to net revenue in accordance with ASC 860-50, Servicing Assets and Liabilities. The fair value of MSRs is based on the overall market demand for MSRs and 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.
 
December 28,
2013
 
March 30,
2013
Number of loans serviced with MSRs
2,634

 
2,106

Weighted average servicing fee (basis points)
34.50

 
34.59

Capitalized servicing multiple
36.64
%
 
38.82
%
Capitalized servicing rate (basis points)
12.64

 
13.43

Serviced portfolio with MSRs (in thousands)
$
308,515

 
$
249,378

Mortgage servicing rights (in thousands)
$
390

 
$
335

19. Redeemable Noncontrolling Interest
Redeemable Noncontrolling Interest. During fiscal year 2010, the Company and an investment partner, Third Avenue Value Fund, formed Fleetwood Homes, Inc., with an initial contribution of $35.0 million each for equal 50 percent ownership interests. On July 21, 2009, Fleetwood entered into an asset purchase agreement with Fleetwood Enterprises, Inc. and certain of its subsidiaries to purchase certain assets and liabilities of its manufactured housing business.
The Company and Third Avenue Value Fund subsequently contributed an additional $36.0 million each in anticipation of the purchase of Palm Harbor, which was completed during the first quarter of fiscal year 2012. Subsequent to the transaction, a portion of Third Avenue Value Fund’s interests were transferred to an affiliate along with the applicable rights and obligations. This transfer had no impact on Cavco’s ownership interest. Third Avenue Value Fund and its affiliate are hereinafter collectively referred to as “Third Avenue.”
Financial information for Fleetwood is included in the Company’s Consolidated Financial Statements and the related Notes in accordance with the provisions of ASC 810, Consolidation. Management determined that, under GAAP, although Fleetwood was only 50 percent owned by the Company, Cavco had a controlling interest and was required to fully consolidate the results of Fleetwood. The primary factors that contributed to this determination were Cavco’s board and management control of Fleetwood. Members of Cavco’s management held all of the seats on the board of directors of Fleetwood. In addition, as part of a management services agreement among Cavco, Fleetwood and Third Avenue, Cavco provided all executive-level management services to Fleetwood including, among other things, general management oversight, marketing and customer relations, accounting and cash management. Third Avenue’s financial interest in Fleetwood was considered a “redeemable noncontrolling interest,” as determined by GAAP, and was designated as such in the Consolidated Financial Statements.

25