Edgar Filing: CAVCO INDUSTRIES INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-08822

Cavco Industries, Inc.

(Exact name of registrant as specified in its charter)



Delaware	56-2405642
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1001 North Central Avenue, Suite 800 Phoenix, Arizona 85004
(Address of principal executive offices, including zip code)

602-256-6263

(Registrant's telephone number, including area code)

(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 November 4, 2016, 8,992,468 shares of Registrant's Common Stock, $.01 par value, were outstanding.

CAVCO INDUSTRIES, INC.

FORM 10-Q

October 1, 2016

TABLE OF CONTENTS



	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 1, 2016 (unaudited) and April 2, 2016	1
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended October 1, 2016 and September 26, 2015	2
Consolidated Statements of Cash Flows (unaudited) for the six months ended October 1, 2016 and September 26, 2015	3
Notes to Consolidated Financial Statements	4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	45
Item 4. Controls and Procedures	46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	47
Item 1A. Risk Factors	47
Item 6. Exhibits	47
SIGNATURES	48
EXHIBIT INDEX	49

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

CAVCO INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)



	October 1, 2016		April 2, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	115,011	$	97,766
Restricted cash, current	12,615		10,218
Accounts receivable, net	32,622		29,113
Short-term investments	10,798		10,140
Current portion of consumer loans receivable, net	29,977		21,918
Current portion of commercial loans receivable, net	4,693		3,557
Inventories	92,584		94,813
Prepaid expenses and other current assets	23,737		22,196
Deferred income taxes, current	8,799		8,998
Total current assets	330,836		298,719
Restricted cash	723		1,082
Investments	29,250		28,948
Consumer loans receivable, net	62,699		67,640
Commercial loans receivable, net	16,322		21,985
Property, plant and equipment, net	56,478		55,072
Goodwill and other intangibles, net	80,205		80,389
Total assets	$	576,513	$	553,835
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	22,732	$	18,513
Accrued liabilities	104,321		100,314
Current portion of securitized financings and other	6,365		6,262
Total current liabilities	133,418		125,089
Securitized financings and other	51,641		54,909
Deferred income taxes	20,482		20,611

Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding	—		—
Common stock, $.01 par value; 40,000,000 shares authorized; Outstanding 8,990,813 and 8,927,989 shares, respectively	90		89
Additional paid-in capital	243,799		241,662
Retained earnings	124,970		110,186
Accumulated other comprehensive income	2,113		1,289
Total stockholders' equity	370,972		353,226
Total liabilities and stockholders' equity	$	576,513	$	553,835

See accompanying Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	October 1, 2016			September 26, 2015			October 1, 2016			September 26, 2015
Net revenue	$	188,348		$	191,964		$	373,489		$	353,632
Cost of sales	149,241			152,409			301,130			282,243
Gross profit	39,107			39,555			72,359			71,389
Selling, general and administrative expenses	25,429			26,571			50,116			49,230
Income from operations	13,678			12,984			22,243			22,159
Interest expense	(1,132		)	(965		)	(2,293		)	(1,980		)
Other income, net	552			471			1,578			943
Income before income taxes	13,098			12,490			21,528			21,122
Income tax expense	(3,757		)	(4,420		)	(6,744		)	(7,667		)
Net income	$	9,341		$	8,070		$	14,784		$	13,455

Comprehensive income:
Net income	$	9,341		$	8,070		$	14,784		$	13,455
Unrealized gain (loss) on available-for-sale securities, net of tax	879			(296		)	824			(705		)
Comprehensive income	$	10,220		$	7,774		$	15,608		$	12,750

Net income per share:
Basic	$	1.04		$	0.91		$	1.65		$	1.52
Diluted	$	1.03		$	0.89		$	1.63		$	1.49
Weighted average shares outstanding:
Basic	8,980,303			8,878,075			8,958,784			8,870,862
Diluted	9,100,833			9,032,652			9,092,653			9,026,224

See accompanying Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six Months Ended
	October 1, 2016			September 26, 2015
OPERATING ACTIVITIES
Net income	$	14,784		$	13,455
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,852			1,878
Provision for credit losses	259			348
Deferred income taxes	(415		)	(577		)
Stock-based compensation expense	1,357			1,117
Non-cash interest income, net	(589		)	(1,068		)
Incremental tax benefits from option exercises	(2,287		)	(352		)
(Loss) Gain on sale of property, plant and equipment including assets held for sale, net	(34		)	50
Gain on sale of loans and investments, net	(3,685		)	(3,175		)
Changes in operating assets and liabilities:
Restricted cash	(2,050		)	482
Accounts receivable	(3,510		)	1,850
Consumer loans receivable originated	(53,960		)	(53,912		)
Principal payments on consumer loans receivable	6,480			5,275
Proceeds from sales of consumer loans	47,405			56,269
Inventories	2,229			1,568
Prepaid expenses and other current assets	(702		)	(344		)
Commercial loans receivable	4,529			(5,731		)
Accounts payable and accrued liabilities	10,716			12,685
Net cash provided by operating activities	22,379			29,818
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(3,105		)	(1,112		)
Purchase of certain assets and liabilities of Fairmont Homes and Chariot Eagle	—			(28,121		)
Proceeds from sale of property, plant and equipment including assets held for sale	65			34
Purchases of investments	(4,753		)	(7,410		)
Proceeds from sale of investments	5,472			5,212
Net cash used in investing activities	(2,321		)	(31,397		)
FINANCING ACTIVITIES
(Payments) Proceeds from exercise of stock options	(1,506		)	741
Incremental tax benefits from exercise of stock options	2,287			352
Proceeds from secured financings and other	541			865
Payments on securitized financings	(4,135		)	(4,113		)
Net cash used in financing activities	(2,813		)	(2,155		)
Net increase (decrease) in cash and cash equivalents	17,245			(3,734		)
Cash and cash equivalents at beginning of the period	97,766			96,597
Cash and cash equivalents at end of the period	$	115,011		$	92,863
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes	$	7,750		$	5,459
Cash paid during the year for interest	$	1,783		$	1,926

See accompanying Notes to Consolidated Financial Statements

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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; 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 April 2, 2016, filed with the SEC on June 21, 2016.

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 April 1, 2017.

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 modular homes, manufactured homes and park model RVs in 19 factories located throughout the United States, which are sold to a network of independent retailers, through the Company's 45 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 chattel loans to purchasers of factory-built and site-built homes. Standard Casualty provides property and casualty insurance to owners of manufactured homes.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard is effective for us beginning with the first quarter of the Company's fiscal year 2019, with early application permitted in fiscal year 2018. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently evaluating the effect ASU 2014-09 will have on the Company's Consolidated Financial Statements and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 will be effective beginning with the first quarter of the Company's fiscal year 2018, with early adoption permitted. The amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the effect ASU 2016-09 will have on the Company's Consolidated Financial Statements and disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 will be effective beginning with the Company's fiscal year 2019 annual report and interim periods thereafter, with early adoption permitted. In this update, entities are required to present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The standard can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. As this standard impacts presentation only, the adoption of ASU 2015-17 is not expected to have an impact on the Company's financial condition, results of operations or cash flows.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. The amendments require certain equity investments to be measured at fair value, with changes in the fair value recognized through net income. The Company is currently evaluating the effect ASU 2016-01 will have on the Company's Consolidated Financial Statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require the recognition of lease assets and lease liabilities on the balance sheet for most leases, but recognize expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements are required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect ASU 2016-02 will have on the Company's Consolidated Financial Statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, which requires a new forward-looking impairment model based on expected losses rather than incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.

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 in the Form 10-K.

2. Restricted Cash

Restricted cash consists of the following (in thousands):



	October 1, 2016		April 2, 2016
Cash related to CountryPlace customer payments to be remitted to third parties	$	10,604	$	8,419
Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders	1,736		1,747
Cash related to workers' compensation insurance held in trust	353		728
Other restricted cash	645		406
	$	13,338	$	11,300

Corresponding amounts are recorded in accounts payable and accrued liabilities for customer payments, deposits and other restricted cash.

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3. Investments

Investments consist of the following (in thousands):



	October 1, 2016		April 2, 2016
Available-for-sale investment securities	$	25,201	$	24,247
Non-marketable equity investments	14,847		14,841
	$	40,048	$	39,088

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):



	October 1, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government debt securities	$	650	$	—	$	—		$	650
Residential mortgage-backed securities	6,431		15		(47		)	6,399
State and political subdivision debt securities	7,382		257		(75		)	7,564
Corporate debt securities	1,157		6		(3		)	1,160
Marketable equity securities	5,168		3,451		(191		)	8,428
Certificates of deposit	1,000		—		—			1,000
	$	21,788	$	3,729	$	(316	)	$	25,201



	April 2, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and government debt securities	$	1,002	$	—	$	(3	)	$	999
Residential mortgage-backed securities	5,866		13		(60		)	5,819
State and political subdivision debt securities	7,231		239		(49		)	7,421
Corporate debt securities	1,166		4		(6		)	1,164
Marketable equity securities	5,882		2,374		(412		)	7,844
Certificates of deposit	1,000		—		—			1,000
	$	22,147	$	2,630	$	(530	)	$	24,247

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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):



	October 1, 2016
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Residential mortgage-backed securities	$	2,999	$	(15	)	$	661	$	(32	)	$	3,660	$	(47	)
State and political subdivision debt securities	1,340		(21		)	1,966		(54		)	3,306		(75		)
Corporate debt securities	246		(3		)	—		—			246		(3		)
Marketable equity securities	1,030		(113		)	209		(78		)	1,239		(191		)
	$	5,615	$	(152	)	$	2,836	$	(164	)	$	8,451	$	(316	)



	April 2, 2016
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury and government debt securities	$	—	$	—		$	699	$	(3	)	$	699	$	(3	)
Residential mortgage-backed securities	3,436		(27		)	898		(33		)	4,334		(60		)
State and political subdivision debt securities	1,865		(29		)	1,257		(20		)	3,122		(49		)
Corporate debt securities	763		(6		)	—		—			763		(6		)
Marketable equity securities	1,780		(324		)	152		(88		)	1,932		(412		)
	$	7,844	$	(386	)	$	3,006	$	(144	)	$	10,850	$	(530	)

Based on the Company's ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at October 1, 2016.

As of October 1, 2016, the Company's investments in marketable equity securities consist of investments in common stock of industrial and other companies ($8.4 million of the total fair value and $191,000 of the total unrealized losses).

As of April 2, 2016, the Company's investments in marketable equity securities consisted of investments in common stock of industrial and other companies ($7.7 million of the total fair value and $409,000 of the total unrealized losses) and bank trust, insurance and public utility companies ($100,000 of the total fair value and $3,000 of the total unrealized losses).

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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.



	October 1, 2016
	Amortized Cost		Fair Value
Due in less than one year	$	1,364	$	1,370
Due after one year through five years	3,907		3,906
Due after five years through ten years	3,895		3,836
Due after ten years	6,454		6,661
	$	15,620	$	15,773

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 six months ended October 1, 2016 were approximately $208,000 and $661,000, respectively. Gross losses realized were approximately $108,000 and $257,000 for the three and six months ended October 1, 2016, respectively. Gross gains realized on the sales of investment securities for the three and six months ended September 26, 2015 were approximately $51,000 and $231,000, respectively. Gross losses realized were approximately $66,000 and $112,000 for the three and six months ended September 26, 2015.

4. Inventories

Inventories consist of the following (in thousands):



	October 1, 2016		April 2, 2016
Raw materials	$	30,919	$	28,764
Work in process	12,113		10,755
Finished goods and other	49,552		55,294
	$	92,584	$	94,813

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 accordance with 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):



	October 1, 2016			April 2, 2016
Loans held for investment (acquired on Palm Harbor Acquisition Date)	$	64,115		$	68,951
Loans held for investment (originated after Palm Harbor Acquisition Date)	7,087			6,120
Loans held for sale	15,468			8,765
Construction advances	7,055			6,566
Consumer loans receivable	93,725			90,402
Deferred financing fees and other, net	(1,049		)	(844		)
Consumer loans receivable, net	$	92,676		$	89,558

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As of the date of the Palm Harbor acquisition, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans' contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool's scheduled contractual principal and contractual interest payments over all cash flows expected as of the date of the Palm Harbor transaction as an amount that includes interest that cannot be accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans includes interest that is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as net revenue.



	October 1, 2016			April 2, 2016
	(in thousands)
Consumer loans receivable held for investment – contractual amount	$	154,434		$	166,793
Purchase discount
Accretable	(62,209		)	(69,053		)
Non-accretable	(27,773		)	(28,536		)
Less consumer loans receivable reclassified as other assets	(337		)	(253		)
Total acquired consumer loans receivable held for investment, net	$	64,115		$	68,951

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



	October 1, 2016		April 2, 2016
Prepayment rate	13.7	%	13.0	%
Default rate	1.0	%	1.0	%

Assuming there was a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows for the life of the portfolio, as of October 1, 2016, would decrease by approximately $2.1 million and $5.3 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
	October 1, 2016			September 26, 2015			October 1, 2016			September 26, 2015
Balance at the beginning of the period	$	66,284		$	70,261		$	69,053		$	73,202
Accretion	(2,449		)	(2,685		)	(4,964		)	(5,436		)
Reclassifications from non-accretable discount	(1,626		)	2,874			(1,880		)	2,684
Balance at the end of the period	$	62,209		$	70,450		$	62,209		$	70,450

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The consumer loans held for investment have the following characteristics:



	October 1, 2016		April 2, 2016
Weighted average contractual interest rate	8.97	%	9.05	%
Weighted average effective interest rate	9.43	%	9.39	%
Weighted average months to maturity	167		170

The Company's consumer loans receivable balance consists of fixed-rate, fixed-term and fully-amortizing single-family home loans. These loans are either secured by a manufactured home, excluding the land upon which the home is located (chattel 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.

In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (such as FICO®). At the time of each loan's origination, CountryPlace obtains credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, CountryPlace uses the mid-point of the available credit scores or, if only two scores are available, the Company uses the lower of the two. CountryPlace does not update credit bureau scores after the time of origination.

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The following table disaggregates CountryPlace's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):



October 1, 2016
	Consumer Loans Held for Investment
	Securitized 2005		Securitized 2007		Unsecuritized		Construction Advances		Consumer Loans Held For Sale		Total
Asset Class
Credit Quality Indicator (FICO® score)
Chattel loans
0-619	$	736	$	473	$	315	$	—	$	39	$	1,563
620-719	12,468		8,453		3,860		—		156		24,937
720+	13,403		8,514		2,348		—		1,657		25,922
Other	52		—		438		—		—		490
Subtotal	26,659		17,440		6,961		—		1,852		52,912
Conforming mortgages
0-619	—		—		162		29		368		559
620-719	—		—		2,208		4,149		9,983		16,340
720+	—		—		233		2,877		2,975		6,085
Other	—		—		—		—		290		290
Subtotal	—		—		2,603		7,055		13,616		23,274
Non-conforming mortgages
0-619	86		568		1,350		—		—		2,004
620-719	1,326		5,074		3,594		—		—		9,994
720+	1,613		3,081		530		—		—		5,224
Other	—		—		304		—		—		304
Subtotal	3,025		8,723		5,778		—		—		17,526
Other loans
Subtotal	—		—		13		—		—		13
	$	29,684	$	26,163	$	15,355	$	7,055	$	15,468	$	93,725

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	April 2, 2016
	Consumer Loans Held for Investment
	Securitized 2005		Securitized 2007		Unsecuritized		Construction Advances		Consumer Loans Held For Sale		Total
Asset Class
Credit Quality Indicator (FICO® score)
Chattel loans
0-619	$	776	$	543	$	336	$	—	$	—	$	1,655
620-719	13,139		9,100		3,683		—		96		26,018
720+	14,751		9,409		2,324		—		215		26,699
Other	55		—		447		—		—		502
Subtotal	28,721		19,052		6,790		—		311		54,874
Conforming mortgages
0-619	—		—		164		95		171		430
620-719	—		—		1,428		3,355		5,847		10,630
720+	—		—		320		3,116		2,436		5,872
Subtotal	—		—		1,912		6,566		8,454		16,932
Non-conforming mortgages
0-619	88		585		1,392		—		—		2,065
620-719	1,365		5,290		3,664		—		—		10,319
720+	1,684		3,382		826		—		—		5,892
Other	—		—		307		—		—		307
Subtotal	3,137		9,257		6,189		—		—		18,583
Other loans
Subtotal	—		—		13		—		—		13
	$	31,858	$	28,309	$	14,904	$	6,566	$	8,765	$	90,402

Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. Forty-two percent of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas and 10% is 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 October 1, 2016.

Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is charged to the allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $543,000 and $707,000 as of October 1, 2016 and April 2, 2016, respectively, and are included in prepaid and other assets in the consolidated balance sheet. Foreclosure or similar proceedings in progress totaled approximately $1.2 million and $340,000 as of October 1, 2016 and April 2, 2016, respectively.

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6. Commercial Loans Receivable and Allowance for Loan Loss

The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent retailers, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.

Under the terms of the direct programs, the Company provides funds for the independent retailers, communities and developers' financed home purchases. The notes are secured by the home as collateral and, in some instances, other security depending on the circumstances. The other terms of direct arrangements vary depending on the needs of the borrower and the opportunity for the Company.

Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases. The participation commercial loan receivables are unsecured general obligations of the independent floor plan lenders.

Commercial loans receivables, net, consist of the following by class of financing notes receivable (in thousands):



	October 1, 2016			April 2, 2016
Direct loans receivable	$	20,002		$	24,392
Participation loans receivable	1,139			1,278
Allowance for loan loss	(126		)	(128		)
	$	21,015		$	25,542

The commercial loans receivable balance has the following characteristics:



	October 1, 2016		April 2, 2016
Weighted average contractual interest rate	6.7	%	6.9	%
Weighted average months to maturity	7		9

The Company evaluates the potential for loss from its participation loan programs based on the independent lender's overall financial stability, as well as historical experience, and has determined that an applicable allowance for loan loss was not needed at either October 1, 2016 or April 2, 2016.

With respect to direct programs with communities and developers, borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. For direct programs with independent retailers, the risk of loss is spread over numerous borrowers. Borrower activity is monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related 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 $126,000 and $110,000 at October 1, 2016 and September 26, 2015, respectively.

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The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan loss applicable to the direct programs (in thousands):



	Three Months Ended					Six Months Ended
	October 1, 2016			September 26, 2015		October 1, 2016			September 26, 2015
Balance at beginning of period	$	135		$	82	$	128		$	73
Provision for inventory finance credit losses	(9		)	28		(2		)	37
Loans charged off, net of recoveries	—			—		—			—
Balance at end of period	$	126		$	110	$	126		$	110

The following table disaggregates commercial loans receivable and the estimated allowance for loan loss for each class of financing receivable by evaluation methodology (in thousands):



	Direct Commercial Loans						Participation Commercial Loans
	October 1, 2016			April 2, 2016			October 1, 2016		April 2, 2016
Inventory finance notes receivable:
Collectively evaluated for impairment	$	12,566		$	12,761		$	—	$	—
Individually evaluated for impairment	7,436			11,631			1,139		1,278
	$	20,002		$	24,392		$	1,139	$	1,278
Allowance for loan loss:
Collectively evaluated for impairment	$	(126	)	$	(128	)	$	—	$	—
Individually evaluated for impairment	—			—			—		—
	$	(126	)	$	(128	)	$	—	$	—

Loans are subject to regular review and are given management's attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments past due 90 days or more. The Company's policy is to place loans on nonaccrual status when interest is past due and remains unpaid 90 days or more or when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At October 1, 2016, 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 October 1, 2016, the Company was not aware of any potential problem loans that would have a material effect on the commercial receivables balance. Charge-offs occur when it becomes probable that outstanding amounts will not be recovered.

The following table disaggregates the Company's inventory finance receivables by class and credit quality indicator (in thousands):



	Direct Commercial Loans				Participation Commercial Loans
	October 1, 2016		April 2, 2016		October 1, 2016		April 2, 2016
Risk profile based on payment activity:
Performing	$	20,002	$	24,392	$	1,139	$	1,278
Watch list	—		—		—		—
Nonperforming	—		—		—		—
	$	20,002	$	24,392	$	1,139	$	1,278

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The Company has concentrations of commercial loans receivable related to factory-built homes located in the following states, measured as a percentage of commercial loans receivables principal balance outstanding:



	October 1, 2016		April 2, 2016
Indiana	18.1	%	7.1	%
Arizona	15.4	%	13.3	%
Texas	12.8	%	33.2	%
Oregon	12.1	%	5.4	%

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 October 1, 2016 or April 2, 2016, respectively.

As of October 1, 2016, the Company did not have concentrations in excess of 10.0% of the principal balance of commercial loans receivable with any one borrower. As of April 2, 2016, the company had concentrations with one independent third-party that equaled 32.0% of the principal balance outstanding, all of which was secured.

7. Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: (i) buildings and improvements, 10 to 39 years, and (ii) machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. Property, plant and equipment consist of the following (in thousands):



	October 1, 2016			April 2, 2016
Property, plant and equipment, at cost:
Land	$	22,716		$	22,719
Buildings and improvements	33,676			32,230
Machinery and equipment	20,645			19,533
	77,037			74,482
Accumulated depreciation	(20,559		)	(19,410		)
Property, plant and equipment, net	$	56,478		$	55,072

As of April 2, 2016, the Company had land and buildings and improvements under capital lease of $240,000 and $3.0 million, respectively, which are included in the amounts above. On September 20, 2016, the Company purchased the assets under the capital lease, terminating the lease arrangement.

8. Goodwill and Other Intangibles

Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, and other, which includes technology, insurance policies and renewal rights and other. Goodwill, trademarks and trade names and state insurance licenses are indefinite-lived intangible assets and are evaluated for impairment annually and whenever events or circumstances indicate that more likely than not impairment has occurred. During the six months ended October 1, 2016 and September 26, 2015, 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 15 years and other intangibles over 7 to 15 years.

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Goodwill and other intangibles consist of the following (in thousands):



	October 1, 2016							April 2, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite lived:
Goodwill	$	69,753	$	—		$	69,753	$	69,753	$	—		$	69,753
Trademarks and trade names	7,000		—			7,000		7,000		—			7,000
State insurance licenses	1,100		—			1,100		1,100		—			1,100
Total indefinite-lived intangible assets	77,853		—			77,853		77,853		—			77,853
Finite lived:
Customer relationships	7,100		(5,436		)	1,664		7,100		(5,329		)	1,771
Other	1,384		(696		)	688		1,384		(619		)	765
Total goodwill and other intangible assets	$	86,337	$	(6,132	)	$	80,205	$	86,337	$	(5,948	)	$	80,389

Amortization expense recognized on intangible assets was $92,000 and $184,000 during the three and six months ended October 1, 2016, respectively. Amortization expense of $116,000 and $305,000 was recognized during the three and six months ended September 26, 2015, respectively.

9. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	October 1, 2016		April 2, 2016
Salaries, wages and benefits	$	18,326	$	20,675
Customer deposits	17,400		14,039
Unearned insurance premiums	16,947		15,528
Estimated warranties	14,046		13,371
Accrued volume rebates	5,916		4,647
Company repurchase option on certain loans sold	4,529		3,497
Accrued insurance	4,473		3,969
Insurance loss reserves	3,553		5,990
Deferred margin	3,430		2,823
Accrued taxes	2,058		1,282
Reserve for repurchase commitments	1,790		1,660
Capital lease obligation	—		2,387
Other	11,853		10,446
	$	104,321	$	100,314

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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 recorded 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						Six Months Ended
	October 1, 2016			September 26, 2015			October 1, 2016			September 26, 2015
Balance at beginning of period	$	13,718		$	11,057		$	13,371		$	9,953
Purchase accounting additions	—			—			—			1,111
Charged to costs and expenses	6,144			5,970			12,280			10,235
Payments and deductions	(5,816		)	(4,222		)	(11,605		)	(8,494		)
Balance at end of period	$	14,046		$	12,805		$	14,046		$	12,805

11. Debt Obligations

Debt obligations consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt obligations (in thousands):



	October 1, 2016		April 2, 2016
Acquired securitized financings (acquired as part of the Palm Harbor transaction)
Securitized financing 2005-1	$	25,641	$	27,481
Securitized financing 2007-1	27,273		28,859
Other secured financings	5,092		4,831
Total securitized financings and other, net	$	58,006	$	61,171

The Company acquired CountryPlace's securitized financings during the first quarter of fiscal year 2012 as a part of the Palm Harbor acquisition. Acquired securitized financings were recorded at fair value at the time of acquisition, which resulted in a discount, and subsequently are accounted for in a manner similar to ASC 310-30 to accrete the discount.

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The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for securitized consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the date of the Palm Harbor acquisition include interest that cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield). The following table summarizes acquired securitized financings (in thousands):



	October 1, 2016			April 2, 2016
Securitized financings – contractual amount	$	62,704		$	68,673
Purchase discount
Accretable	(9,790		)	(12,333		)
Non-accretable (1)	—			—
Total acquired securitized financings, net	$	52,914		$	56,340

(1) There is no non-accretable difference, as the contractual payments on acquired securitized financing are determined by the cash collections from the underlying loans.

Over the life of the loans, the Company continues to estimate cash flows expected to be paid on securitized financings. The Company evaluates at the balance sheet date whether the present value of its securitized financings, determined using the effective interest rate, has increased or decreased. The present value of any subsequent change in cash flows expected to be paid adjusts the amount of accretable yield recognized on a prospective basis over the securitized financing's remaining life.

The changes in accretable yield on securitized financings were as follows (in thousands):



	Three Months Ended						Six Months Ended
	October 1, 2016			September 26, 2015			October 1, 2016			September 26, 2015
Balance at the beginning of the period	$	11,459		$	10,741		$	12,333		$	12,128
Accretion	(938		)	(741		)	(1,906		)	(1,553		)
Adjustment to cash flows	(731		)	3,993			(637		)	3,418
Balance at the end of the period	$	9,790		$	13,993		$	9,790		$	13,993

On July 12, 2005, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.66 years. For accounting purposes, this transaction was structured as a securitized borrowing. As of October 1, 2016, the Class A-1 and Class A-2 bonds have been retired.

On March 22, 2007, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of October 1, 2016, the Class A-1 and Class A-2 bonds have been retired.

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CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time the overcollateralization level reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of October 1, 2016, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.

12. Reinsurance

Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remains obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all of Standard Casualty's assumed reinsurance is with one entity.

The effects of reinsurance on premiums written and earned are as follows (in thousands):



	Three Months Ended
	October 1, 2016						September 26, 2015
	Written			Earned			Written			Earned
Direct premiums	$	3,749		$	3,992		$	3,549		$	3,664
Assumed premiums—nonaffiliate	6,152			5,941			5,476			5,295
Ceded premiums—nonaffiliate	(3,077		)	(3,077		)	(2,722		)	(2,722		)
Net premiums	$	6,824		$	6,856		$	6,303		$	6,237



	Six Months Ended
	October 1, 2016						September 26, 2015
	Written			Earned			Written			Earned
Direct premiums	$	8,135		$	7,918		$	7,660		$	7,257
Assumed premiums—nonaffiliate	13,099			11,573			11,265			10,378
Ceded premiums—nonaffiliate	(6,297		)	(6,297		)	(5,436		)	(5,436		)
Net premiums	$	14,937		$	13,194		$	13,489		$	12,199

Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000 per claim, of which Standard cedes $200,000 of the risk of loss per reinsurance. Therefore, Standard Casualty maintains risk of loss limited to $100,000 per claim on typical policies. Amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.0 million per occurrence up to a maximum of $44.0 million in the aggregate.

Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severity of losses incurred on insurance policies issued, such as in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time.

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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 2013. In general, the Company is no longer subject to state and local income tax examinations by tax authorities for years before fiscal year 2012. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to the Company's financial position. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.

14. Commitments and Contingencies

Repurchase Contingencies. The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months, calculated from the date of sale to the retailer) and the risk of loss is further reduced by the resale value of the repurchased homes. The maximum amount for which the Company was contingently liable under such agreements approximated $50.5 million at October 1, 2016, 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 $1.7 million at October 1, 2016 and April 2, 2016, respectively, related to the commitments pertaining to these agreements.

Letters of Credit. To secure certain reinsurance contracts, Standard Casualty maintains an irrevocable letter of credit of $7.0 million to provide assurance that Standard Casualty will fulfill its reinsurance obligations. This letter of credit is secured by certain of the Company's investments.

Construction-Period Mortgages. CountryPlace funds construction-period mortgages through periodic advances during the period of home construction. At the time of initial funding, CountryPlace commits to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried in the consolidated balance sheet at the amount advanced less a valuation allowance, which are included in consumer loans receivable. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.

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Loan contracts with off-balance sheet commitments are summarized below (in thousands):



	October 1, 2016			April 2, 2016
Construction loan contract amount	$	19,371		$	15,109
Cumulative advances	(7,055		)	(6,566		)
Remaining construction contingent commitment	$	12,316		$	8,543

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 $899,000 and $785,000 as of October 1, 2016 and April 2, 2016, respectively, included in accrued liabilities, reflects management's estimate of probable loss. CountryPlace considers a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan defect rates to estimate the liability for loan repurchases and indemnifications.

Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issues interest rate lock commitments ("IRLCs") to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.

As of October 1, 2016, CountryPlace had outstanding IRLCs with a notional amount of $6.0 million and 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 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 six months ended October 1, 2016, CountryPlace recognized losses of $18,000 and gains of $10,000 on the outstanding IRLCs, respectively. During the three and six months ended September 26, 2015, CountryPlace recognized gains of $13,000 and losses of $5,000 on the outstanding IRLCs, respectively.

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Forward Sales Commitments. CountryPlace manages the risk profiles of a portion of its outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage backed securities ("MBS") and whole loan sale commitments. As of October 1, 2016, CountryPlace had $28.4 million in outstanding notional forward sales of MBSs and forward sales commitments. Commitments to forward sales of whole loans are typically in an amount proportionate with the amount of IRLCs expected to close in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.

The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded within other current assets in the consolidated balance sheets. During the three and six months ended October 1, 2016, CountryPlace recognized gains of $33,000 and losses of $11,000, respectively, on forward sales and whole loan sale commitments. CountryPlace recognized losses of $81,000 and $15,000 on forward sales and whole loan sale commitments during the three and six months ended September 26, 2015, respectively.

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 for the six months ended October 1, 2016 (dollars in thousands):



				Additional paid-in capital		Retained earnings		Accumulated other comprehensive income		Total
	Common Stock
	Shares	Amount
Balance, April 2, 2016	8,927,989	$	89	$	241,662	$	110,186	$	1,289	$	353,226
Stock option exercises, including incremental tax benefits	62,824	1		780		—		—		781
Share-based compensation	—	—		1,357		—		—		1,357
Net income	—	—		—		14,784		—		14,784
Unrealized loss on Available-for-sale securities	—	—		—		—		824		824
Balance, October 1, 2016	8,990,813	$	90	$	243,799	$	124,970	$	2,113	$	370,972


(1)	Other comprehensive income is comprised of unrealized gains and losses on available-for-sale investments. Unrealized gains before tax effect on available-for-sale securities were $1.3 million for the six months ended October 1, 2016.

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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. As of October 1, 2016, the plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company's common stock, of which 374,732 shares were still available for grant. When options are exercised, new shares of the Company's common stock are issued. Stock options may not be granted below 100% of the fair market value of the Company's common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock typically vest over a one to five year period as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors). The stock incentive plans provide for accelerated vesting of stock options upon a change in control (as defined in the plans).

Stock-based compensation cost charged against income for the three and six months ended October 1, 2016 was $987,000 and $1.4 million, respectively. The Company recorded stock-based compensation expense of $786,000 and $1.1 million for the three and six months ended September 26, 2015, respectively.

As of October 1, 2016, total unrecognized compensation cost related to stock options was approximately $3.4 million and the related weighted-average period over which it is expected to be recognized is approximately 3.42 years.

The following table summarizes the option activity within the Company's stock-based compensation plans for the six months ended October 1, 2016:



	Number of Shares
Outstanding at April 2, 2016	491,980
Granted	73,350
Exercised	(116,275	)
Canceled or expired	(8,500	)
Outstanding at October 1, 2016	440,555
Exercisable at October 1, 2016	247,025

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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				Six Months Ended
	October 1, 2016		September 26, 2015		October 1, 2016		September 26, 2015
Net income	$	9,341	$	8,070	$	14,784	$	13,455
Weighted average shares outstanding:
Basic	8,980,303		8,878,075		8,958,784		8,870,862
Common stock equivalents—treasury stock method	120,530		154,577		133,869		155,362
Diluted	9,100,833		9,032,652		9,092,653		9,026,224
Net income per share:
Basic	$	1.04	$	0.91	$	1.65	$	1.52
Diluted	$	1.03	$	0.89	$	1.63	$	1.49

Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three and six months ended October 1, 2016 were 4,155 and 7,941, respectively. There were 18,962 and 23,052 anti-dilutive common stock equivalents excluded for the three and six months ended September 26, 2015, respectively.

18. Fair Value Measurements

The book value and estimated fair value of the Company's financial instruments are as follows (in thousands):



	October 1, 2016						April 2, 2016
	Book Value			Estimated Fair Value			Book Value			Estimated Fair Value
Available-for-sale securities (1)	$	25,201		$	25,201		$	24,247		$	24,247
Non-marketable equity investments (2)	14,847			14,847			14,841			14,841
Consumer loans receivable (3)	92,676			123,947			89,558			126,077
Interest rate lock commitment derivatives (4)	18			18			8			8
Forward loan sale commitment derivatives (4)	(42		)	(42		)	(31		)	(31		)
Commercial loans receivable (5)	21,015			21,123			25,542			25,688
Securitized financings (6)	(58,006		)	(56,583		)	(61,171		)	(60,220		)
Mortgage servicing rights (7)	899			899			803			803


(1)	The fair value is based on quoted market prices.


(2)	The fair value approximates book value based on the non-marketable nature of the investments.

(3)

Includes consumer loans receivable held for investment, held for sale and construction advances. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale are estimated based on recent GSE mortgage backed bond prices. The fair value of the construction advances approximates book value and the sales price of these loans is estimated based on construction completed.

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(4)	The fair values are based on changes in GSE mortgage backed bond prices and, additionally for IRLCs, pull through rates.


(5)	The fair value is estimated using market interest rates of comparable loans.


(6)	The fair value is estimated using recent public transactions of similar asset-backed securities.


(7)	The fair value of the mortgage servicing rights is based on the present value of expected net cash flows related to servicing these loans.

In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:



Level 1 –	Quoted prices in active markets for identical assets or liabilities.
Level 2 –	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 –	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

When the Company uses observable market prices for identical securities that are traded in less active markets, it classifies such securities as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs.

Financial instruments measured at fair value on a recurring basis are summarized below (in thousands):

October 1, 2016

Total

Level 1

Level 2