Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended June 27, 2020; comparable period ended June 29, 2019. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context and results
Cavco designs and builds manufactured and modular homes, park model RVs and related products, and operates consumer-finance and insurance businesses. It reported two segments: factory-built housing and financial services. COVID-19 affected production, sales activity and staffing during the quarter.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net revenue | $254.8 million | $264.0 million | Down 3.5% |
| Gross profit / margin | $55.3 million / 21.7% | $60.3 million / 22.8% | Profit down 8.3%; margin down 1.1 percentage points |
| Operating income | $20.0 million | $25.0 million | Down 20.1% |
| Income before taxes | $21.7 million | $27.4 million | Down 20.8% |
| Net income | $16.7 million | $21.3 million | Down 21.7% |
| Diluted EPS | $1.80 | $2.31 | Down 22.1% |
| Operating cash flow | $35.7 million | $16.8 million | Up $18.9 million |
Revenue, margins and segment performance
- Factory-built housing revenue was $238.1 million, down 4.3%; segment pretax income was $18.5 million, down 24.1%. Homes sold fell 12.0% to 3,349, while revenue per home sold rose 8.8% to $71,093, reflecting higher prices and product mix.
- Financial services revenue increased 9.4% to $16.7 million; segment pretax income rose 5.9% to $3.2 million. The revenue increase reflected investment gains, more home-loan sales and a greater number of insurance policies in force.
- Factory-built housing gross margin declined to 19.7% from 21.0%, primarily due to lower volume and COVID-related production inefficiencies. Financial services gross margin fell to 49.9% from 53.4%, with higher weather-related insurance claims and lower interest income on acquired loan portfolios cited as factors.
- Other income was $1.9 million versus $2.8 million. Current-quarter net gains on marketable equity securities were $2.0 million; lower interest income on cash and commercial loans partly offset those gains.
Cash, debt and liquidity
- Cash and cash equivalents were $270.5 million at June 27, 2020, up from $241.8 million at March 28; cash, cash equivalents and restricted cash totaled $290.5 million.
- Operating cash flow was $35.7 million. Investing activities provided $0.1 million and financing activities used $0.9 million, resulting in a $34.9 million increase in cash and restricted cash during the quarter.
- Total reported debt and finance lease obligations were $14.5 million, including $10.2 million of secured credit facilities; the latter carried a 4.91% weighted-average interest rate. Interest expense was $0.2 million, down from $0.5 million.
- Current assets were $548.0 million and current liabilities $179.1 million. Management stated cash and operating cash flow should fund operations and growth for the next 12 months and beyond.
Material changes, outlook and risks
- COVID-19 initially reduced customer traffic, orders and production efficiency. Plant utilization fell to approximately 45% early in the quarter and reached approximately 70% by quarter-end, versus about 80% in the prior-year quarter. Labor absenteeism, hiring constraints and some material shortages remained operational challenges.
- Order activity improved through the quarter; at quarter-end, order rates were somewhat above the comparable prior-year level. Backlog rose 20% to $157 million from $131 million. Backlog excludes customer-paused or canceled orders. Management cautioned that future pandemic effects on demand and operations were difficult to predict; no quantified earnings or revenue guidance was provided.
- The company closed its Lexington, Mississippi production facility after completing production in June 2020, citing ongoing challenges worsened by COVID-19. It expected no significant adverse financial effect and put the facility up for sale.
- Cavco adopted the expected-credit-loss standard (ASU 2016-13), reducing opening retained earnings by $0.7 million net of tax. The adoption increased allowances for commercial and consumer loan losses; consumer loan allowance was $4.0 million at quarter-end versus $1.8 million at March 28.
- The SEC investigation concerning trading in personal and company accounts directed by former CEO Joseph Stegmayer continued. Cavco reported $0.1 million of related current-quarter expense, net of a $0.5 million insurance recovery of prior expenses, and expects further costs. It also recorded $2.1 million of quarterly D&O policy premium expense, expected to continue through Q2 FY2021.
- Contingencies include up to $78.8 million of distributor inventory repurchase commitments before resale value, with a $2.5 million reserve; $19.1 million of remaining construction-loan funding commitments; mortgage-sale representation and warranty obligations; and two California putative wage-and-hour class actions. Management said pending matters were not expected to have a material adverse effect, after reserves, based on information then available.
Important facts for investors to verify
- Whether improved order rates and the $157 million backlog convert to shipments and revenue, given capacity, labor and supply constraints.
- How COVID-19 affects home demand, production costs, customer loan performance, forbearance-related cash flows and insurance claims.
- Whether the higher loan-loss allowances prove adequate as actual delinquencies and defaults develop.
- The outcomes, costs and any potential financial consequences of the SEC investigation, wage-and-hour litigation and other contingencies.
- Whether Lexington’s closure and sale proceed as expected and whether there are further restructuring or impairment costs.