Champion Homes, Inc. (SKY) FY 2023 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with Skyline Champion Corporation’s consolidated financial statements and the related notes that appear elsewhere in this Annual Report.

Certain statements set forth below under this caption constitute forward-looking statements. See Part I, “Cautionary Statement About Forward-Looking Statements,” of this Annual Report on Form 10-K for additional factors relating to such statements, and see Item 1A, “Risk Factors,” of this Annual Report for a discussion of certain risks applicable to our business, financial condition, results of operations and cash flows. See also Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended April 2, 2022, which provides additional information on comparisons of fiscal years 2022 and 2021.

Overview

The Company is a leading producer of factory-built housing in the U.S. and Canada. The Company serves as a complete solutions provider across complementary and vertically integrated businesses including manufactured construction, company-owned retail locations, construction services, and transportation logistics. The Company is the largest independent publicly traded factory-built solutions provider in North America based on revenue, and markets its homes under several nationally recognized brand names including Skyline Homes, Champion Home Builders, Genesis Homes, Athens Park Models, Dutch Housing, Atlantic Homes, Excel Homes, Homes of Merit, New Era, Redman Homes, ScotBilt Homes, Shore Park, Silvercrest, and Titan Homes in the U.S. and Moduline and SRI Homes in western Canada. The Company operates 38 manufacturing facilities throughout the U.S. and five manufacturing facilities in western Canada that primarily construct factory-built, timber-framed manufactured and modular houses that are sold primarily to independent retailers, builders/developers, and manufactured home community operators. The Company’s retail operations consist of 31 sales centers that sell manufactured homes to consumers across the U.S. The Company’s transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout the U.S. and Canada.

Acquisitions and Expansions

Over the last several years, demand for affordable housing in the U.S. has increased. As a result, the Company focused on operational improvements to increase capacity utilization and profitability at its existing manufacturing facilities as well as executed measured expansion of its manufacturing footprint through facility and equipment investments and acquisitions. During fiscal 2023, robust demand began to slow as inflation and higher interest rates made housing less affordable. Even though the housing markets have slowed, the Company continues to focus on growing in strong housing markets across the U.S. and Canada, as well as expanding products and services to provide more holistic solutions to homebuyers.

In July 2022, the Company acquired 12 Factory Expo retail sales centers from Alta Cima Corporation, which expanded the internal retail network across a broader portion of the U.S. In May 2022, the Company acquired Manis Custom Builders, Inc. ("Manis") in order to expand its manufacturing footprint and further streamline its product offering in the Southeast U.S. In February 2021, the Company acquired ScotBilt Homes, LLC and related companies (collectively, "ScotBilt"), which operated two manufacturing facilities in Georgia providing affordable housing throughout Alabama, Florida, Georgia and the Carolinas. The ScotBilt acquisition complemented the Company’s existing manufacturing footprint in the attractive mid-south region.

The Company is also focused on streamlining its U.S. manufacturing production capacity through various plant start-ups. In June 2021, the Company acquired two idle facilities in Navasota, Texas in order to increase its production capabilities in the Texas market. The Company began production at one of those facilities during the fourth quarter of fiscal 2022. In January 2021, the Company acquired two idle facilities in Pembroke, North Carolina, and began production at one of those facilities in the fourth quarter of fiscal 2023. The Company is also in the process of opening previously idled facilities in Bartow, Florida and Decatur, Indiana, both of which are expecting to begin production in fiscal 2024.

The Company's acquisitions and investments are part of a strategy to grow and diversify revenue with a focus on increasing the Company’s homebuilding presence in the U.S. as well as improving the results of operations through streamlining production of similar product categories. These acquisitions and investments are included in the Company's consolidated results for periods subsequent to their respective acquisition dates.

Industry and Company Outlook

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Since July 2020, U.S. and Canadian housing industry demand has been robust. The limited availability of existing homes for sale and the broader need for newly built affordable, single-family housing has continued to drive demand for new homes in these markets. In recent years, manufactured home construction experienced revenue growth due to a number of favorable demographic trends and demand drivers in the United States, including underlying growth trends in key homebuyer groups, such as the population over 55 years of age, the population of first-time home buyers, and the population of households earning less than $60,000 per year. More recently, we have seen a number of market trends pointing to increased sales of ADUs and urban-to-rural migration as customers accommodate working-from-home patterns, as well as people seeking rent-to-own single-family options.

The recent increases in interest rates in response to inflation have impacted the demand for the Company's products in both the U.S. and Canada. As a result, incoming orders from our manufacturing customers in fiscal 2023 decreased compared to the prior fiscal year. In addition, our independent retail customers have cancelled stock-model orders in response to the increase in floor plan carrying costs and the desire to optimize their model home inventory based on rising interest rates. The Company's backlog at the end of fiscal 2023 was $308.1 million compared to $1.6 billion at the end of fiscal 2022. The decrease in backlog was primarily driven by lower net orders. Cancellation of end-consumer orders, at the retail level, have been minimal.

For fiscal 2023, approximately 87% of the Company’s U.S. manufacturing sales were generated from the manufacture of homes that comply with the Federal HUD code construction standard in the U.S. According to data reported by MHI, HUD-code industry home shipments were 104,374, 108,964, and 95,588 units during fiscal 2023, 2022, and 2021, respectively. Based on industry data, the Company’s U.S. wholesale market share of HUD code homes sold was 20.4%, 19.3%, and 16.9% in fiscal 2023, 2022, and 2021, respectively. Annual industry shipments have generally increased each year since calendar year 2009 when only 50,000 HUD-coded manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD-coded manufactured homes have improved modestly in recent years, current manufactured housing shipments are still at lower levels than the long-term historical average of over 200,000 units per year. Manufactured home sales represent approximately 11% of all U.S. single family home starts.

RESULTS OF OPERATIONS FOR FISCAL 2023 VS. 2022

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FISCAL PERIODS

The Company’s fiscal year is a 52- or 53-week period that ends on the Saturday nearest March 31. Fiscal 2023 and 2022 were each 52-week periods.

NET SALES

The following table summarizes net sales for fiscal 2023 and 2022:

Net sales for fiscal 2023 were $2.6 billion an increase of $399.3 million, or 18.1%, over fiscal 2022. The following is a summary of the change by operating segment.

U.S. Factory-built Housing:

Fiscal 2023 net sales for the Company’s U.S. manufacturing and retail operations increased by $420.3 million, or 21.1%, over fiscal 2022. The increase was primarily due to an increase in the average home selling price of 20.8%. The average selling price increased in fiscal 2023 compared to the prior fiscal year due to pricing actions enacted in response to rising material, freight, and labor costs as well as the impact of sales to FEMA of $200.3 million. FEMA units generally have more specifications than our typical products and therefore drive a higher average selling price per home.

Canadian Factory-built Housing:

The Canadian Factory-built Housing segment net sales decreased by $14.8 million, or 9.3% for fiscal 2023 compared to the prior year, primarily due to a 20.6% decrease in homes sold, partially offset by a 14.2% increase in average selling price per new home. The increase in average selling price was due to pricing actions taken in response to rising material and labor costs and a change in product mix. The decrease in homes sold is due to slowing demand in certain regions of Canada and a shift in mix. Net sales for the Canadian segment were also unfavorably impacted by approximately $6.6 million as the Canadian dollar weakened relative to the U.S. dollar during fiscal 2023 as compared to the prior year.

Corporate/Other:

Net sales for Corporate/Other includes the Company’s transportation business and the elimination of intersegment sales. During fiscal 2023, net sales for the segment decreased by $6.1 million, or 10.7%, compared to fiscal 2022. The decrease was primarily attributable to a decrease in shipments of recreational vehicles due to a decrease in that industry's demand.

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GROSS PROFIT

The following table summarizes gross profit for fiscal 2023 and 2022:

Gross profit as a percent of sales during fiscal 2023 was 31.4% compared to 26.7% during fiscal 2022. The following is a summary of the change by operating segment.

U.S. Factory-built Housing:

Gross profit for the U.S. Factory-built Housing segment increased by $227.3 million, or 42.9%, during fiscal 2023 compared to the prior year. The increase in gross profit was primarily driven by the increase in revenue in fiscal 2023. As a percent of net sales, gross profit was 31.4% for fiscal 2023 compared to 26.6% in the prior fiscal year. Sales to FEMA during the first half of fiscal 2023 increased gross profit and gross profit as a percent of sales since FEMA units are generally at higher prices and have more specifications than our core products, which helps offset the disruption to our operations and our customers. In addition, input costs primarily related to forest products decreased while price increases for our products were still in effect. In the second half of fiscal 2023, we lowered certain material surcharges in response to lower input costs, we saw a decrease in volume allowing less leverage of fixed costs and we saw a shift to smaller, less optioned homes which lowered gross profit margins to more normal levels.

Canadian Factory-built Housing:

Gross profit for the Canadian Factory-built Housing segment increased by $1.1 million, or 2.6%, during fiscal 2023 compared to the prior year. Gross profit increased to 30.9% as a percent of segment net sales from 27.3% in the prior year. The increase in gross profit was due to the increase in average selling prices of new homes and lower material input costs. However, demand in Canada declined in the second half of fiscal 2023 which has put pressure on gross profit margins due to less leverage of fixed costs at lower production volumes.

Corporate/Other:

Gross profit for the Corporate/Other segment increased by $1.1 million, or 7.4%, during fiscal 2023 compared to the same period in the prior year. Corporate/Other gross profit improved as a percent of segment net sales to 32.4% from 27.0%. Gross margin for the Company’s transportation business improved due to a change in revenue mix.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative (“SG&A”) expenses include foreign currency transaction gains and losses, equity compensation, and intangible amortization expense. The following table summarizes SG&A expenses for fiscal 2023 and 2022:

SG&A expenses were $300.4 million during fiscal 2023, an increase of $44.2 million compared to the prior year. The following is a summary of the change by operating segment.

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U.S. Factory-built Housing:

SG&A expenses for the U.S. Factory-built Housing segment increased by $33.8 million, or 18.0%, during fiscal 2023 as compared to the prior year. SG&A expenses, as a percent of segment net sales, declined to 9.2% in fiscal 2023 compared to 9.4% during fiscal 2022. SG&A costs increased due to a combination of factors, primarily (i) additional expenses for acquisitions and new plant startups (ii) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (iii) and increased marketing and trade-show expense.

Canadian Factory-built Housing:

SG&A expenses for the Canadian Factory-built Housing segment remained consistent compared to the prior year. SG&A expenses, as a percent of segment net sales, were 9.0% during fiscal 2023 compared to 8.1% in fiscal 2022. The increase in SG&A as a percent of net sales is a the result of the decrease in net sales for the segment.

Corporate/Other:

SG&A expenses for Corporate/Other includes the Company’s transportation operations, corporate costs incurred for all segments, and intersegment eliminations. SG&A expenses for Corporate/Other increased by $10.4 million, or 18.6%, during fiscal 2023 as compared to the prior year. The increase is mainly due to increased equity compensation and investments made to enhance our online customer experience and support systems.

INTEREST (INCOME) EXPENSE, NET

The following table summarizes the components of interest (income) expense, net for fiscal 2023 and 2022:

Interest (income) expense, net was $15.0 million of income for fiscal 2023, compared to $2.5 million of expense in the prior year. The change was primarily due to higher interest income from higher average invested cash balances and higher interest rates in fiscal 2023 compared to fiscal 2022. Interest expense was flat for the year as a result of higher interest rates offsetting the benefit of paying off our outstanding floor plan payable balance in the third quarter of fiscal 2023.

OTHER INCOME, NET

The following table summarizes other income, net for fiscal 2023 and 2022:

Other income, net increased $0.6 million during fiscal 2023 compared to the prior year. During the first quarter of fiscal 2023, the Company received insurance proceeds for partial settlement of certain Champion Homes Builders' pre-bankruptcy workers' compensation claims, which was partially offset by transaction costs incurred for the acquisition of Manis.

INCOME TAX EXPENSE

The following table summarizes income tax expense for fiscal 2023 and 2022:

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Income tax expense during fiscal 2023 was $132.1 million, representing an effective tax rate of 24.7%, compared to income tax expense of $82.4 million, representing an effective tax rate of 24.9%, in fiscal 2022.

The Company’s effective tax rate for both fiscal 2023 and 2022 differs from the federal statutory income tax rate of 21.0%, due primarily to the effect of non-deductible expenses, state and local income taxes, and foreign rate differential, partially offset by tax credits.

ADJUSTED EBITDA

The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for fiscal 2023 and 2022:

* indicates that the calculated percentage is not meaningful

Adjusted EBITDA for fiscal 2023 was $545.0 million, an increase of $191.1 million over fiscal 2022. The increase is primarily a result of increased operating income due to increases in net sales and gross profits, partially offset by higher SG&A expenses. See the definition of Adjusted EBITDA under “Non-GAAP Financial Measures” below for additional information regarding the definition and use of this metric in evaluating the Company’s results.

BACKLOG

Although orders from customers can be cancelled at any time without penalty, and unfilled orders are not necessarily an indication of future business, the Company’s unfilled U.S. and Canadian manufacturing orders at April 1, 2023 totaled $308.1 million compared to $1.6 billion at April 2, 2022. The decrease in backlog was primarily driven by lower net orders. Increases in interest rates in response to inflation during this fiscal year has impacted the demand for the Company's products in both the U.S. and Canada. Incoming gross orders from our customers decreased compared to last year. In addition, our independent retail customers have cancelled stock-model orders in response to the increase in floor plan carrying costs and the desire to optimize their model home inventory. Cancellation of end-consumer orders, at the retail level, has been minimal.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents summary cash flow information for fiscal 2023 and 2022:

The Company’s primary sources of liquidity are cash flows from operations and existing cash balances. Cash balances and cash flows from operations for the next year are expected to be adequate to cover working capital requirements, capital expenditures, and strategic initiatives and investments. The Company does not have any scheduled long-term debt maturities in the next twelve months. The Company has an Amended and Restated Credit Agreement which provides for a $200.0 million revolving credit facility, including a $45.0 million letter of credit sub-facility ("Amended Credit Agreement"). At April 1, 2023, there were no borrowings

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under the Amended Credit Agreement and letters of credit issued under the Credit Agreement totaled $32.1 million. Total available borrowings under the Credit Agreement as of April 1, 2023 were $167.9 million. The Company’s revolving credit facility includes (i) a maximum consolidated total net leverage ratio of 3.25 to 1.00, subject to an upward adjustment upon the consummation of a material acquisition, and (ii) a minimum interest coverage ratio of 3.00 to 1.00. The Company anticipates compliance with its debt covenants and projects its level of cash availability to be in excess of cash needed to operate the business for the next year and beyond. In the event operating cash flow and existing cash balances were deemed inadequate to support the Company’s liquidity needs, and one or more capital resources were to become unavailable, the Company would revise its operating strategies.

Cash provided by operating activities was $416.2 million in fiscal 2023 compared to $224.5 million in fiscal 2022. The majority of the increase in cash provided by operating activities was a result of the $154.8 million increase in net income. However, the change in other working capital items also contributed to higher cash provided by operating activities. Cash required for working capital items increased in fiscal 2022 in response to consumer demand and supply chain issues. Those factors began to normalize in the fourth quarter of fiscal 2023, requiring less investment and improving cash flow.

Cash used in investing activities was $61.2 million in fiscal 2023 versus $32.0 million in fiscal 2022. The increase in the use of cash is related primarily to a $20.3 million increase in purchases of property, plant, and equipment to support the start up of new manufacturing facilities, the acquisition of Manis, and cash paid for an equity method investment.

In fiscal 2023, cash used in financing activities was $37.0 million, versus $19.9 million in the prior fiscal year. The increase in cash used for financing activities was related to floor plan financing repayments totaling $35.5 million during fiscal 2023 compared to $17.2 million of net repayments in fiscal 2022 on the revolving debt facility and floor plan financing arrangements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Credit Facility

The Amended Credit Agreement matures in July 2026 and has no scheduled amortization. The interest rate on borrowings under the Amended Credit Agreement is based on either the London Inter-Bank Offered Rate ("LIBOR"), or the Secured Overnight Financing Rate ("SOFR") plus a benchmark Replacement Rate Adjustment ("Replacement Rate"), plus an interest rate spread. The interest rate spread adjusts based on the consolidated total net leverage of the Company from a high of 1.875% when the consolidated total net leverage ratio is equal to or greater than 2.25:1.00, to a low of 1.125% when the consolidated total net leverage is below 0.50:1.00. Alternatively for same day borrowings, the interest rate is based on an Alternative Base Rate ("ABR") plus an interest rate spread that ranges from a high of 0.875% to a low of 0.125% based on the consolidated total net leverage ratio. In addition, the Company is obligated to pay an unused line fee ranging between 0.15% and 0.30% depending on the consolidated total net leverage ratio, in respect of unused commitments under the Amended Credit Agreement.

Letter of Credit Facility

The Company has a letter of credit sub-facility under the Amended Credit Agreement. At April 1, 2023, letters of credit issued under the sub-facility totaled $32.1 million.

Industrial Revenue Bonds

Obligations under industrial revenue bonds are supported by letters of credit and bear interest based on a municipal bond index rate. The industrial revenue bonds require lump-sum payments of principal upon maturity in 2029.

Floor Plan Payable

At April 1, 2023, the Company had no outstanding borrowings on floor plan financing arrangements. The Company repaid the outstanding balance of $38.5 million in the third quarter of fiscal 2023. The Company’s retail operations historically utilized floor plan financing to fund the acquisition of manufactured homes for display or resale. The arrangements provide for borrowings up to $43.0 million. Floor plan payables are secured by the homes acquired and are required to be repaid when the Company sells the financed home to a customer.

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Contingent Obligations

The Company has contingent liabilities and obligations at April 1, 2023, including surety bonds and letters of credit totaling $31.0 million and $32.1 million, respectively. Additionally, the Company is contingently obligated under repurchase agreements with certain lending institutions that provide floor plan financing to independent retailers. The contingent repurchase obligation as of April 1, 2023 is approximately $386.6 million, without reduction for the resale value of the homes collateralizing the potential repurchases. The Company has the ability to resell the repurchased collateral to other retailers, and losses incurred on repurchased homes have been insignificant in recent periods. The reserve for estimated losses under repurchase agreements was $2.5 million at April 1, 2023. See “Critical Accounting Polices and Estimates – Reserve for Repurchase Commitments” below.

The Company has provided various representations, warranties, and other standard indemnifications in the ordinary course of its business in agreements to acquire and sell business assets and in financing arrangements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business.

The Company has received claims for damage related to water intrusion in homes built in one of its manufacturing facilities. The Company is investigating the cause of the damage and assessing its responsibility to remediate. While it is reasonably possible that the Company will receive future claims that could result in additional costs to repair that could be significant in the aggregate, the Company is unable to estimate the number of such claims or the amount or range of any potential losses associated with such claims at this time.

In the normal course of business, the Company’s subsidiaries historically provided certain parent company guarantees to two U.K. customers. These guarantees provided contractual liability for proven construction defects up to 12 years from the date of delivery of the units. The guarantees remain a contingent liability subsequent to the fiscal 2017 disposition of the U.K. operations, which declines over time through October 2027. As of the date of this report, no claims have been reported under the terms of the guarantees.

Management believes the ultimate liability with respect to these contingent obligations will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

NON-GAAP FINANCIAL MEASURES - ADJUSTED EBITDA

The Company defines Adjusted Earnings Before Interest Taxes and Depreciation and Amortization (“Adjusted EBITDA”) as net income or loss plus expenses or minus income: (a) the provision for income taxes; (b) interest (income) expense, net; (c) depreciation and amortization; (d) gain or loss from discontinued operations; (e) non-cash restructuring charges and impairment of assets; and (f) other non-operating income or expense including but not limited to those costs for the acquisition and integration or disposition of businesses and idle facilities. Adjusted EBITDA is not a measure of earnings calculated in accordance with U.S. GAAP and should not be considered an alternative to, or more meaningful than, net income or loss prepared on a U.S. GAAP basis. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by U.S. GAAP, which is presented in the Statement of Cash Flows. In addition, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.

Adjusted EBITDA is presented as a supplemental measure of the Company’s financial performance that management believes is useful to investors, because the excluded items may vary significantly in timing or amounts and/or may obscure trends useful in evaluating and comparing the Company’s operating activities across reporting periods. Management believes Adjusted EBITDA is useful to an investor in evaluating operating performance for the following reasons: (i) Adjusted EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest income and expense, taxes, depreciation and amortization and equity-based compensation, which can vary substantially from company to company depending upon accounting methods and the book value of assets, capital structure and the method by which assets were acquired; and (ii) analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in the industry.

Management uses Adjusted EBITDA for planning purposes, including the preparation of internal annual operating budget and periodic forecasts: (i) in communications with the Board of Directors and investors concerning financial performance; (ii) as a factor in determining bonuses under certain incentive compensation programs; and (iii) as a measure of operating performance used to determine the ability to provide cash flows to support investments in capital assets, acquisitions and working capital requirements for operating expansion.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are more fully described in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements included in this Report. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assumptions and estimates of future earnings and cash flow are used in the periodic analyses of the recoverability of goodwill, intangible assets, deferred tax assets and property, plant, and equipment. Historical experience and trends

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are used to estimate reserves, including reserves for self-insured risks, warranty costs, and wholesale repurchase losses. The Company considers an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations. The Company believes that the following discussion addresses the Company’s critical accounting estimates.

Acquisitions

We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.

Reserves for Self-Insured Risks

The Company is self-insured for a significant portion of its general insurance, product liability, workers’ compensation, auto, health, and property insurance. Insurance coverage is maintained for catastrophic exposures and those risks required to be insured by law. The Company is liable for the first $150,000 of incurred losses for each workers’ compensation and auto liability claim and is responsible for losses up to the first $500,000 per occurrence for general, product liability, and property insurance. Generally catastrophic losses are insured up to $80 million. The Company establishes reserves for reported and unreported losses and insurance company reimbursements under these programs using an actuarial determined value which takes into consideration prior claim experience, estimates of losses for known occurrences and the respective volume of business activity for a given period. The health plan is currently subject to a stop-loss limit of $600,000 per occurrence. Estimated self-insurance costs are accrued for all expected future expenditures for reported and unreported claims based on historical experience.

Warranty Reserves

The Company’s factory-built housing operations generally provide each retail homebuyer with a 12-month assurance warranty from the date of retail purchase. Estimated warranty costs are accrued as cost of sales at the time of sale. Warranty provisions and reserves are based on various factors, including estimates of the amounts necessary to settle existing and future claims on homes sold as of the balance sheet date. Factors used in the estimation of the warranty liability include the estimated amount of warranty and customer service costs incurred for homes that remain in retailers’ inventories before delivery to the consumer, homes purchased by consumers still within the warranty period, the timing in which work orders were completed, and the historical average costs incurred to service a home.

Impairment of Long-Lived Assets

It is the Company’s policy to evaluate the recoverability of property, plant, and equipment whenever events and changes in circumstances indicate that the carrying amount of assets may not be recoverable, primarily based on estimated selling price, appraised value, or projected undiscounted future cash flows.

Impairment of Goodwill

Goodwill is not amortized but is tested for impairment at least annually. Impairment testing is required more often if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. As the analysis depends upon judgments, estimates and assumptions, such testing is subject to inherent uncertainties, which could cause the fair value to fluctuate from period to period.

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In fiscal 2023, the Company performed qualitative assessments of its reporting units. The annual assessment was completed on of the first day of fiscal March. The assessments indicated that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying value. The Company does not believe that any reporting units are at risk for impairment.

Income Taxes and Deferred Tax Assets

Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that some or all of the deferred tax assets will not be realized.

Reserve for Repurchase Commitments

As is customary in the factory-built housing industry, a significant portion of the home sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Certain homes sold pursuant to repurchase agreements are subject to repurchase, generally up to 24 months after the sale of the home to the retailer. Certain other homes sold pursuant to repurchase agreements are subject to repurchase until the home is sold by the retailer. For those homes with an unlimited repurchase period, the Company’s risk of loss upon repurchase declines due to required monthly principal payments by the retailer. After 18 to 36 months from the date of the Company’s sale of the home, the risk of loss on these homes is low, and by the 46th month, most programs require that the home be paid in full, at which time the Company no longer has risk of loss. Pursuant to these agreements, during the repurchase period, generally upon default by the retailer and repossession by the financial institution, the Company is obligated to repurchase the homes from the floor plan lenders. The contingent repurchase obligation as of April 1, 2023 was estimated to be approximately $386.6 million, without reduction for the resale value of the homes. Losses under repurchase obligations represent the difference between the repurchase price and net proceeds from the resale of the homes, less accrued rebates, which will not be paid. Losses incurred on homes repurchased have been insignificant in recent periods. The reserve for estimated losses under repurchase agreements was $2.5 million at April 1, 2023.

OTHER MATTERS

Inflation

Inflation of raw materials, especially forest products, was significant in fiscal 2022 and 2021, and generally stabilized in fiscal 2023. The raw material price increases have generally been passed on to customers or mitigated through working with supply chain partners, sourcing alternative materials or other operational improvements to minimize the effect on our profitability. However, continued, frequent and sudden increases in specific costs, as well as price competition, can affect the ability to pass on costs and adversely impact results of operations. Therefore, there is no assurance that inflation or the impact of rising material costs will not have a significant impact on revenue or results of operations in the future.

Seasonality

The housing industry, which includes factory-built homes, is affected by seasonality. Sales during the period from March to November are traditionally higher than other months. As a result, quarterly results of a particular period are not necessarily representative of the results expected for the year.

Recently Issued Accounting Standards

Refer to Note 1, “Summary of Significant Accounting Policies,” in our accompanying Consolidated Financial Statements for information regarding new accounting pronouncements.

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