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Acquisition of Palm Harbor Homes, Inc. | 12 Months Ended
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Mar. 31, 2012
Acquisition of Palm Harbor Homes, Inc. [Abstract] |
Acquisition of Palm Harbor Homes, Inc. | 21. Acquisition of Palm Harbor Homes, Inc. Description of the Acquisition. Fleetwood Homes, through its wholly-owned subsidiary, Palm Harbor Delaware, entered into the Purchase Agreement with Palm Harbor Florida to purchase substantially all of the assets, and assume specified liabilities, of Palm Harbor Florida, pursuant to an auction process under Section 363 of the U.S. Bankruptcy Code. On March 1, 2011, Palm Harbor Delaware was selected as the successful bidder in the court auction. The transaction was approved and a sale order entered by the U.S. Bankruptcy Court on March 4, 2011. During the first quarter of fiscal year 2012, Palm Harbor Delaware completed the purchase of the Palm Harbor Florida assets and the assumption of specified liabilities pursuant to the Amended and Restated Asset Purchase Agreement dated March 1, 2011. The effective date of the transaction was April 23, 2011 (the “Palm Harbor Acquisition Date”), except for Palm Harbor’s acquisition of the stock of Standard Casualty Co., which occurred on June 10, 2011. The aggregate gross purchase price was $83.9 million and is exclusive of transaction costs, specified liabilities assumed and post-closing adjustments. Of the purchase price, (i) approximately $45.3 million was used to retire the debtor-in-possession loan previously made by Fleetwood Homes to Palm Harbor Florida (see Note 20); and (ii) $13.4 million was deposited in escrow pending regulatory approval to transfer the stock of Standard Casualty Co. to Palm Harbor Delaware, at which time the escrowed funds were released to the Palm Harbor Florida estate. The purchase price was funded by Fleetwood Homes’ cash on hand, along with contributions of $36.0 million each from the Company and Third Avenue Value Fund (see Note 23). Palm Harbor Delaware acquired five operating manufactured housing production facilities, idled factories in nine locations, 49 operating retail locations, one office building, real estate, all related equipment, accounts receivable, customer deposits, inventory, certain trademarks and trade names, intellectual property, and specified contracts and leases. In addition, as of the Palm Harbor Acquisition Date, Palm Harbor Delaware purchased all of the outstanding shares of CountryPlace Acceptance Corp., CountryPlace Mortgage, Ltd. and their wholly-owned finance subsidiaries. Palm Harbor Delaware also acquired all of the outstanding shares of Standard Insurance Agency, Inc. and its subsidiary. On June 7, 2011, regulatory approval of the acquisition of Standard Casualty Co. was received from the Texas Department of Insurance and on June 10, 2011 (the “SCC Acquisition Date”), Palm Harbor Delaware completed the purchase of Standard Casualty Co. Further, Palm Harbor Delaware assumed certain liabilities of Palm Harbor Florida, including primarily debt facilities of the finance subsidiaries. The foregoing descriptions of the DIP Agreement, DIP Security Agreement, and Purchase Agreement do not purport to be complete and are qualified in their entirety by reference to the DIP Agreement, the DIP Security Agreement, and the Purchase Agreement which were filed as Exhibits 10.1, 10.2, and 10.3, respectively, to the Company’s Current Report on Form 8-K filed with the SEC on November 29, 2010. The purchase of the Palm Harbor Florida assets provides further operating capacity, increased home production capabilities and distribution, and entry into financial and insurance businesses specific to the Company’s industry. The transaction further expanded the Company’s geographic reach at a national level by adding factories and retail locations serving the Pacific, South Central and South Atlantic regions. The Company believes it will have continued opportunity to achieve certain synergies and cost reductions by eliminating redundant processes and overhead. Acquisition Date Fair Value of Consideration Transferred. The following table details the Palm Harbor Acquisition Date fair value of the consideration transferred to acquire Palm Harbor (in thousands):
|  | Acquisition Date |
|  | Fair Value |
Cash advanced to Palm Harbor under DIP financing, credited to purchase |  | $ | 44,117 |
Paid-in-kind interest on DIP financing, credited to purchase price |  |  | 1,184 |
Additional cash consideration |  |  | 38,599 |
Total consideration transferred |  | $ | 83,900 |
Recording of Assets Acquired and Liabilities Assumed. The acquisition has been accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition dates (in thousands):
|  | Initial |  |  |  |  |  | Revised |
|  | Estimate |  |  | Adjustments (3) |  |  | Estimate |
Cash and cash equivalents |  | $ | 15,077 |  |  | $ | — |  |  | $ | 15,077 |
Restricted cash |  |  | 5,924 |  |  |  | — |  |  |  | 5,924 |
Investments |  |  | 16,636 |  |  |  | — |  |  |  | 16,636 |
Accounts receivable (1) |  |  | 3,219 |  |  |  | — |  |  |  | 3,219 |
Inventories |  |  | 42,034 |  |  |  | 5,195 |  |  |  | 47,229 |
Prepaid expenses and other assets |  |  | 2,781 |  |  |  | — |  |  |  | 2,781 |
Property, plant and equipment |  |  | 13,782 |  |  |  | — |  |  |  | 13,782 |
Assets held for sale |  |  | 9,278 |  |  |  | — |  |  |  | 9,278 |
Consumer loans receivable |  |  | 126,030 |  |  |  | — |  |  |  | 126,030 |
Deferred income tax assets |  |  | 14,532 |  |  |  | — |  |  |  | 14,532 |
Intangible assets (2) |  |  | 15,294 |  |  |  | — |  |  |  | 15,294 |
Total identifiable assets acquired |  | $ | 264,587 |  |  | $ | 5,195 |  |  | $ | 269,782 |
Accounts payable of the finance subsidiaries |  | $ | (1,917 | ) |  | $ | — |  |  | $ | (1,917 | )
Accrued liabilities |  |  | (27,503 | ) |  |  | — |  |  |  | (27,503 | )
Construction lending line |  |  | (3,974 | ) |  |  | — |  |  |  | (3,974 | )
Securitized financings |  |  | (101,786 | ) |  |  | — |  |  |  | (101,786 | )
Debt of the finance subsidiaries |  |  | (19,456 | ) |  |  | — |  |  |  | (19,456 | )
Deferred income tax liabilities |  |  | (7,271 | ) |  |  | (1,966 | ) |  |  | (9,237 | )
Total liabilities assumed |  |  | (161,907 | ) |  |  | (1,966 | ) |  |  | (163,873 | )
Net identifiable assets acquired |  |  | 102,680 |  |  |  | 3,229 |  |  |  | 105,909 |
Bargain purchase recognized |  |  | (18,780 | ) |  |  | (3,229 | ) |  |  | (22,009 | )
Net assets acquired |  | $ | 83,900 |  |  | $ | — |  |  | $ | 83,900 |
(1) | The fair value of accounts receivables acquired is $3,219, with the gross contractual amount being $3,601. The Company determined that $382 would be uncollectible.
(2) | Of the $15,294 of acquired intangible assets, $5,450 was assigned to trademarks and trade names and $1,100 was assigned to state insurance licenses, which are considered indefinite-lived intangible assets and are not subject to amortization and $8,744 was assigned to customer-related intangibles, technology and insurance business in force, policies and renewal rights, subject to a weighted-average useful life of approximately 5 years.
(3) | Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase gain, the acquirer must reassess the reasonableness of the values assigned to all of the net assets acquired, liabilities assumed and consideration transferred. The Company has performed such a reassessment and has concluded that the values assigned for the Palm Harbor acquisition are reasonable. In the first quarter ended June 30, 2011, the Company originally reported a gain of $18.8 million, which has been retrospectively adjusted to $22.0 million, as reflected in the table above. The increase in the gain was the result of a $5.2 million revision to the value of retail finished goods, which led to a $0.23 increase in first quarter and year-to-date basic and diluted earnings per share.
In connection with the acquisition of Palm Harbor, approximately $30.4 million was transferred from Fleetwood Homes to the Palm Harbor Florida estate at closing of the Palm Harbor transaction on April 23, 2011 and $19.5 million was used to retire a certain debt obligation of the Company’s new subsidiary, CountryPlace, on May 10, 2011 (including payoff of the loan, prepayment penalty and related legal fees). During the fiscal years ended March 31, 2012 and 2011, the Company recorded acquisition-related costs of $879,000 and $272,000, respectively. These costs were expensed as incurred and recognized in selling, general and administrative expenses on the Consolidated Statement of Operations. The Company anticipates no significant additional acquisition-related costs related to the purchase of the Palm Harbor assets. Because the Company purchased Palm Harbor out of bankruptcy, the fair value of identifiable assets acquired and specified liabilities assumed exceeded the fair value of the consideration transferred. In accordance with ASC 805, Business Combinations, the Company consequently reassessed the recognition and measurement of identifiable assets acquired and specified liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain on bargain purchase of $22.0 million in its consolidated statements of operations for the year ended March 31, 2012. The gain on bargain purchase was not taxable, causing a variation in the customary relationship between income before income taxes and income tax expense for the year ended March 31, 2012. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. Judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact results of operations. For the year ended March 31, 2012, Palm Harbor contributed net sales of $252.3 million and net income of $26.7 million to the consolidated results of operations, which included $22.0 million related to gain on bargain purchase. Pro Forma Impact of Acquisition (unaudited). The following table presents supplemental pro forma information as if the acquisition of Palm Harbor had occurred on April 1, 2010 (in thousands):
|  | Unaudited Pro Forma |
|  | Consolidated Results |
|  | Year Ended |
|  | March 31, |
|  | 2012 |  |  | 2011 |
Net sales |  | $ | 457,568 |  |  | $ | 431,433 |
Net income (loss) attributable to Cavco common stockholders |  |  | 5,470 |  |  |  | 8,326 |
Diluted net income (loss) per share attributable to Cavco common stockholders |  |  | 0.79 |  |  |  | 1.21 |
The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of Cavco and Palm Harbor, reflecting both Cavco and Palm Harbor results of operations for years ended March 31, 2012 and 2011, respectively. The historical financial information has been adjusted to give effect to the pro forma events that are: (i) directly attributable to the acquisition; (ii) factually supportable; and (iii) expected to have a continuing impact on the combined results. The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisition on April 1, 2010. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition, including the elimination of overhead costs. The results reflect primarily the following pro forma pre-tax adjustments:
| • | Reduction of fifty-percent of the $22.0 million bargain purchase gain for the year ended March 31, 2012, representing a decrease of $11.0 million in net income attributable to Cavco, and an increase of fifty-percent of the bargain purchase gain for the year ended March 31, 2011, representing an increase of $11.0 million in net income attributable to Cavco common stockholders. The fifty-percent portion is consistent with Cavco’s ownership of Fleetwood Homes.
| • | Reclassification of amounts to conform to Cavco’s accounting policies resulted in no impact to net income/(loss). For the year ended March 31, 2012, net sales were grossed up by $1.2 million, cost of sales were grossed up by $1.1 million, SG&A decreased by $428,000, interest expense increased by $44,000, and other income decreased by $445,000. For the year ended March 31, 2011, net sales were grossed up by $18.7 million, cost of sales were grossed up by $18.2 million, SG&A decreased by $3.2 million, interest expense increased by $593,000, and other income decreased by $3.1 million.
| • | Reclassification of amounts to conform to Cavco’s accounting policies for revenue recognition in the retail sales process, resulting in the reclassification of net sales and cost of sales among periods. These revenue recognition adjustments resulted in decreases of net sales and cost of sales of $203,000 and $166,000 for the year ended March 31, 2012 and increases of $10.7 million and $7.6 million of net sales and cost of sales for the year ended March 31, 2011, net of adjustments for amounts deferred under Cavco’s revenue recognition policy.
| • | Elimination of Palm Harbor’s historical interest expense related to Senior Convertible Notes discharged in bankruptcy, a note payable settled prior to the bankruptcy and a credit agreement that has been terminated and will not be a part of the Company’s capitalization going forward. ($239,000 and $7.1 million in the year ended March 31, 2012 and 2011, respectively).
| • | Elimination of $1.9 million of costs incurred and $187,000 of interest income in the year ended March 31, 2012. These are directly attributable to the bankruptcy and subsequent acquisition, and which do not have a continuing impact on the combined company’s operating results. Included in these costs are advisory, legal and regulatory costs incurred by both legacy Cavco and legacy Palm Harbor and income and costs related to the debtor-in-possession financing that has been terminated.
| • | Additional amortization expense (approximately $111,000 and $3.2 million for the year ended March 31, 2012 and 2011, respectively) related to the fair value of identifiable intangible assets acquired.
| • | Reduction in depreciation expense (approximately $128,000 and $2.4 million for the year ended March 31, 2012 and 2011, respectively) related to the fair value adjustment to property, plant and equipment acquired.
| • | Elimination of operating activities related to closed manufacturing facilities and retail locations that (i) were not purchased in the transaction or (ii) are held for sale as of the Date of Acquisition. The amounts eliminated included sales of $645,000 and $26.6 million, cost of sales of $1.3 million and $26.0 million, and SG&A of $558,000 and $10.2 million for the year ended March 31, 2012 and 2011, respectively.
| • | In addition, all of the above adjustments were adjusted for the applicable tax impact.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51, 52 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1500-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e7000-128479 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6927-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e7008-128479 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1490-128463 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6996-128479 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4922-128472 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4934-128472 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Appendix F -Paragraph F4 -Subparagraph e Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1383-128463 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1392-128463 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1497-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph 67-73 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1524-128463 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 88-16 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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