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UNITED STATES
SECURITIES & EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2003

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)

1001 North Central Avenue, Suite 800, Phoenix, Arizona 85004

(602) 256-6263

(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 [X]  No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the latest practicable date.

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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
Form 10-Q Table of Contents
September 30, 2003

Table of Contents

See Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

See Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

See Notes to Consolidated Financial Statements

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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2003
(Dollars in thousands, except per share data)
(unaudited)

1.    Basis of Presentation

     The consolidated interim financial statements include the accounts of Cavco Industries, Inc. (“Cavco Inc.”) and its wholly-owned subsidiary (collectively, the “Company”) after elimination of all significant intercompany balances and transactions. The statements have been prepared, without audit, in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.

     In the opinion of the Company, all adjustments (consisting of normal, recurring accruals) necessary to present fairly the information in the consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of results for the full year. The Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes to consolidated financial statements included in the Company’s Form 10 Registration Statement filed with the Securities and Exchange Commission on June 23, 2003 (the “Form 10”).

     Effective June 30, 2003, Cavco Industries, LLC (“Cavco LLC”) was merged into Cavco Inc. and 100% of the outstanding shares of common stock of Cavco Inc. were distributed to the stockholders of Centex Corporation (“Centex”), Cavco Inc.’s parent company. Subsequent to this distribution, Cavco Inc. became a separate public company. The stockholders’ equity section of the balance sheet has been presented assuming the merger of Cavco LLC into Cavco Inc. had occurred as of March 31, 2003 and 3,091,399 shares of common stock of Cavco Inc. were issued and outstanding.

     Prior to June 30, 2003, Cavco LLC was incorporated into the consolidated Federal income tax returns of Centex. Therefore, income taxes are not provided for prior to June 30, 2003. Proforma income tax expense is calculated assuming a 40% effective tax rate. As a result of the distribution described above, proforma tax amounts have been presented on the face of the statement of operations as if the Company was a stand-alone taxable entity. As a stand-alone taxable entity, the deferred taxes associated with its assets and liabilities have been assumed by the Company from Centex and recorded in its financial statements.

2.    Discontinued Operations

     Prior to March 31, 2003, the Company distributed its New Mexico and Texas manufacturing facilities to Centex and these operations are classified as discontinued manufacturing operations. These facilities had no operations during the three and six month periods ended September 30, 2003.

     The Company has initiated plans to dispose of certain of its retail sales centers and these operations are classified as discontinued retail operations. Retail assets held for sale represent finished goods inventories to be liquidated in conjunction with the disposal of these retail sales centers. Net sales for the retail sales centers to be disposed of were $5,747 and $6,344 for the three month periods ended September 30, 2003 and 2002, respectively and $12,359 and $14,408 for the six month periods ended September 30, 2003 and 2002, respectively.

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3.    Inventories

     Raw materials inventories are valued at the lower of cost (first-in, first-out method which approximates actual cost) or market. Finished goods are valued at the lower of cost or market, using the specific identification method. Inventories at March 31, 2003 and September 30, 2003 were as follows:

4.    Revolving line of credit

     On September 17, 2003, the Company established a revolving line of credit facility (“RLC”) with Bank One, NA. The RLC provides for borrowings up to $15 million with availability limited to 80% of eligible accounts receivable and 50% of eligible inventory, as determined on a monthly basis. As of September 30, 2003, the amount available under the RLC was approximately $8.8 million. The Company has not made any draws under the RLC. The outstanding principal amount of borrowings under the RLC bears interest at the Company’s election at either the prime rate or the London Interbank Offered Rate plus 2.25%. The RLC expires on July 31, 2005.

     The RLC contains certain restrictive and financial covenants, which, among other things, limit the Company’s ability to pay dividends, purchase treasury stock, pledge assets, incur additional indebtedness and make capital expenditures, and requires the Company to maintain certain defined leverage and debt service coverage ratios.

5.    Warranties

     Homes are 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 provided a liability for estimated future warranty costs relating to homes sold, based upon management’s assessment of historical experience factors and current industry trends. Activity in the liability for estimated warranties was as follows:

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6.    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 and is further reduced by the resale value of repurchased homes. The maximum amount for which the Company was contingently liable under such agreements approximated $20,405 at September 30, 2003. The Company has a reserve for repurchase commitments based on prior experience and market conditions of $2,000 at March 31, 2003 and September 30, 2003.

     The Company is engaged in various legal proceedings that are incidental to and arise in the course of its business. Certain of the cases filed against the Company and other companies engaged in businesses similar to the Company allege, among other things, breach of contract and warranty, product liability and personal injury. These kinds of suits are typical of suits that have been filed in recent years, and they sometimes seek certification as class actions, the imposition of large amounts of compensatory and punitive damages and trials by jury. Legal fees associated with these lawsuits are expensed as incurred. In the opinion of management, the ultimate liability, if any, with respect to the proceedings in which the Company is currently involved is not expected to have a material adverse effect on the Company’s financial position or results of operations. However, the potential exists for unanticipated material adverse judgments against the Company.

7.    Business Segment Information

     The Company operates in two business segments in the manufactured housing industry — Manufacturing and Retail. Through its Manufacturing segment, the Company designs and manufactures homes which are sold primarily in the southwestern United States to a network of dealers which includes Company-owned retail locations comprising the Retail segment. The Company’s Retail segment derives its revenues from home sales to individuals. The accounting policies of the segments are the same as those described in the Form 10. Retail segment results include retail profits from the sale of homes to consumers but do not include any manufacturing segment profits associated with the homes sold. Intercompany transactions between reportable operating segments are eliminated in consolidation. Each segment’s results include corporate office costs that are directly and exclusively incurred for the segment. The following table summarizes information with respect to the Company’s business segments for the periods indicated:

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Total Corporate assets are comprised primarily of the receivable from Centex at March 31, 2003 and cash and deferred taxes at September 30, 2003.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Effective June 30, 2003, Cavco Industries, LLC (“Cavco LLC”), our predecessor, was merged into Cavco Industries, Inc. (the “Company”) and 100% of the outstanding shares of common stock of the Company were distributed to the stockholders of Centex Corporation (“Centex”), Cavco LLC’s parent company. Subsequent to this distribution, the Company became a separate public company. The consolidated financial statements contained in this quarterly report reflect the financial condition and results of operations of the Company and unless the context otherwise requires, all financial information contained in this section gives effect to the reorganization as if it had occurred prior to the date of such financial information.

     The Company is the largest producer of manufactured homes in Arizona and 12th largest producer of manufactured homes in the United States in terms of wholesale shipments, based on 2002 data published by Manufactured Home Merchandiser. Headquartered in Phoenix, Arizona, the Company designs and produces manufactured homes which are sold to a network of retailers located primarily in the Southwestern United States. The retail segment of the Company operates retail sales locations which offer homes produced by the Company and other manufacturers to retail customers.

Results of Operations - (Dollars in thousands)

Three and six months ended September 30, 2003 compared to 2002

     Net Sales. Total net sales increased 8.8% to $30,820 for the three months ended September 30, 2003 compared to $28,322 last year. For the first half of fiscal 2004, net sales increased 10.6% to $60,335 versus $54,529 last year.

     Manufacturing net sales increased 8.5% to $28,756 for the three months ended September 30, 2003 from $26,497 for last year and 10.5% to $57,377 for the first half of fiscal 2004 from $51,921 last year. These increases were primarily attributable to the trend toward larger homes with more amenities. While the number of homes sold during the current quarter remained relatively constant at 850 wholesale shipments versus 839 last year, the average sales price per home increased 7.1% to $33,831 versus $31,582 last year. For the first half of fiscal 2004, the number of homes sold increased to 1,734 from 1,651 last year and the average sales price per home increased 5.2% to $33,089 versus $31,448 last year. In addition to the trend toward larger homes, manufacturing net sales were positively impacted by higher volume of homes sold resulting from our efforts to expand our market share in Arizona and California through recruiting of new independent dealers and expansion of specialty products to markets different from those for traditional manufactured homes.

     Retail net sales increased $757 to $4,421 for the three months ended September 30, 2003 versus $3,664 for the same period last year and $778 to $8,450 for the six months ended September 30, 2003 versus $7,672 last year. These increases in retail sales were primarily due to one new retail sales center added during the first quarter of fiscal 2004.

     Gross Profit. Gross profit as a percent of sales decreased to 17.2% and 17.6% for the three and six months ended September 30, 2003, respectively, from 17.8% for the comparable periods last year. The decrease in gross profit as a percent of sales was primarily due to increases in material costs. The negative impact of increased material costs was partially offset by economies achieved with increased production. Gross profit increased to $5,294 for the three months ended September 30, 2003 from $5,043 last year and $10,595 for the first half of fiscal 2004 from $9,723 last year. These increases in gross profit were due to the overall increase in net sales partially offset by the lower gross profit percentage.

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 16.6% or $493 to $3,454 or 11.2% of net sales for the three months ended September 30, 2003 versus $2,961 or 10.5% of net sales last year. Selling, general and administrative expenses increased 18.1% or $1,094 to $7,139 or 11.8% of sales for the first half of fiscal 2004 versus $6,045 or 11.1% of sales last year. These increases are attributable to the incremental costs related to being a stand alone public company and a $300 charge for accrued lease costs related to vacated office space recorded in the second quarter of fiscal 2004.

     Interest (Income) Expense. Interest income represents income earned on unrestricted cash during the three and six months ended September 30, 2003. In anticipation of the distribution noted above, all of the Company’s outstanding third party debt was repaid and the intercompany debt owed to Centex was contributed to capital prior to March 31, 2003. As a result, the Company has not incurred any interest expense in fiscal 2004.

     Income Taxes. The effective income tax rate for the quarter ended September 30, 2003 approximated the Company’s combined statutory rate of 40%. Prior to the distribution on June 30, 2003, Cavco LLC was incorporated in the consolidated federal income tax return of Centex. Therefore, income taxes were not provided for by Cavco LLC as Cavco LLC and Centex had agreed that all taxes or tax benefits from filing a consolidated income tax return would either be borne by or benefit Centex. Cavco LLC was a disregarded entity for federal income tax purposes and therefore on a stand-alone basis would not be subject to federal income taxes. As a result of the distribution described above, proforma tax amounts for all periods prior to the date of the distribution have been presented on the face of the statement of operations as if the Company was a stand-alone taxable entity. Pro forma income tax expense (benefit) is calculated based on a combined statutory rate of 40%.

Discontinued Operations

     Discontinued Manufacturing Operations. In anticipation of the distribution, the Company distributed to Centex its ownership interest in its idled manufacturing facilities in New Mexico and Texas during fiscal 2003 and these operations are classified as discontinued. Because the Company no longer owns or operates these facilities, there were no results of operations during the three and six month periods ended September 30, 2003 versus losses of $237 and $491 for the comparable periods last year.

     Discontinued Retail Operations There were no operating losses in the quarter for the stores we have identified for sale or disposal as the costs related to the liquidation of inventory were in line with our expectations of net realizable values. The loss from discontinued retail operations for the first half of fiscal 2004 primarily represents accrued lease costs related to one of the retail locations we closed during the quarter.

Liquidity and Capital Resources

     Prior to the distribution noted above, we participated in Centex’s central cash management program, wherein all of our cash receipts were remitted to Centex and all cash disbursements were funded by Centex. Subsequent to the distribution, we are now responsible for funding our own operating needs.

     On September 17, 2003, the Company established a revolving line of credit facility (“RLC”) with Bank One, NA. The RLC provides for borrowings up to $15 million with availability limited to 80% of eligible accounts receivable and 50% of eligible inventory, as determined on a monthly basis. As of September 30, 2003, the amount available under the RLC was approximately $8.8 million. The Company has not made any draws under the RLC. The outstanding principal amount of borrowings under the RLC bears interest at the Company’s election at either the prime rate or the London Interbank Offered Rate plus 2.25%. The RLC expires on July 31, 2005.

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     The RLC contains certain restrictive and financial covenants, which, among other things, limit the Company’s ability to pay dividends, purchase treasury stock, pledge assets, incur additional indebtedness and make capital expenditures, and requires the Company to maintain certain defined leverage and debt service coverage ratios.

     We believe that cash on hand at September 30, 2003, together with cash flow from operations and cash to be provided by retail assets held for sale, will be sufficient to fund our operations for at least the next twelve months. In addition, as described above, we have entered into a $15 million credit facility with Bank One that can be used to supplement these sources of liquidity.

     Operating activities provided $9,212 of cash during the six months ended September 30, 2003 compared to using $576 of cash during the first six months of last year. Cash generated by operating activities was primarily derived from operating income before non-cash charges, the liquidation of retail inventories held for sale and an increase in accounts payable and accrued expenses resulting from the timing of payments due to vendors and various service providers.

     Investing activities required the use of $146 of cash during the six months ended September 30, 2003 compared to the use of $243 last year. The cash used for investing activities during the first half of fiscal 2004 was for normal recurring capital expenditures.

     Financing activities provided $12,224 of cash in during the six months ended September 30, 2003 resulting from the payment by Centex of the capital contribution committed during fiscal 2003 in anticipation of the distribution.

Critical Accounting Policies

     In our Form 10 filed with the Securities and Exchange Commission on June 23, 2003, under the heading “Critical Accounting Policies”, we have provided a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

FORWARD-LOOKING STATEMENTS

     Various sections of this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the context of the statement and generally arise when we are discussing our beliefs, estimates or expectations.

     All forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results or performance may differ materially from anticipated results or performance. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences to occur include, but are not limited to, those discussed in our Form 10 filed with the Securities and Exchange Commission under the heading “Risk Factors”. We expressly disclaim any obligation to update any forward-looking statements contained in this report or elsewhere, whether as a result of new information, future events or otherwise. For all of these reasons, you are cautioned not to place undue reliance on any forward-looking statements included in this report or elsewhere.

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

Market Risk

     Market risk is the risk of loss arising from adverse changes in market prices and interest rates. We may from time to time be exposed to interest rate risk inherent in our financial instruments, but are not currently subject to foreign currency or commodity price risk. We manage our exposure to these market risks through our regular operating and financing activities. We are not currently party to any market risk sensitive instruments that could be reasonably expected to have a material effect on our financial condition or results of operations.

Item 4: Controls and Procedures

     An evaluation has been performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2003. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2003, for the purpose of ensuring that information required to be disclosed in this Report has been processed, summarized and reported in a timely manner. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2003.

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

            (a)    Exhibits

                     10.1 Credit Agreement dated September 17, 2003 between Bank One, NA and Cavco Industries, Inc.

                     31.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

                     31.2 Certification of the Chief Financial Officer of Cavco Industries, Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

                     32.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                     32.2 Certification of the Chief Financial Officer of Cavco Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

            (b)    Reports on Form 8-K

                     The Company filed a Current Report on Form 8-K on October 22, 2003, with respect to a press release announcing its fiscal second quarter net earnings for the quarter ended September 30, 2003.

            All other items required under Part II are omitted because they are not applicable.

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Exhibit Index

               10.1 Credit Agreement dated September 17, 2003 between Bank One, NA and Cavco Industries, Inc.

               31.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

               31.2 Certification of the Chief Financial Officer of Cavco Industries, Inc. pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.

               32.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

               32.2 Certification of the Chief Financial Officer of Cavco Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.