Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 26, 2020; comparisons are to the periods ended December 28, 2019. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Cavco designs and manufactures factory-built housing and operates consumer-finance and insurance businesses. It reported two segments: factory-built housing and financial services. The quarter fell within a 53-week fiscal year ending April 3, 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $288.8m | $273.7m | $801.5m | $806.4m |
| Gross profit / margin | $59.2m / 20.5% | $59.9m / 21.9% | $168.1m / 21.0% | $178.6m / 22.1% |
| Operating income | $23.8m | $23.0m | $61.9m | $70.4m |
| Net income | $19.7m | $20.9m | $51.4m | $63.1m |
| Diluted EPS | $2.12 | $2.25 | $5.54 | $6.81 |
| Operating / net margin | 8.2% / 6.8% | 8.4% / 7.6% | 7.7% / 6.4% | 8.7% / 7.8% |
Q3 factory-built housing revenue rose 5.3% to $270.8m, while financial services revenue increased 8.0% to $18.0m. Nine-month revenue was nearly flat, as factory-built housing declined 1.1% and financial services rose 7.9%. Nine-month segment income before tax was $54.7m in factory-built housing and $12.5m in financial services.
- Cash flow: Nine-month operating cash flow was $91.6m, versus $68.3m; investing used $5.1m, versus $18.9m; financing used $1.5m, versus $19.1m. Cash, cash equivalents and restricted cash increased to $340.6m from $255.6m at fiscal year-end.
- Liquidity and debt: At December 26, cash and cash equivalents were $327.5m; current assets were $625.7m and current liabilities $213.3m. Total secured financings and finance lease obligations were $13.0m, including $2.1m current. Stockholders’ equity was $661.7m.
- Other balance-sheet items: Consumer loans receivable, net, were $81.6m; commercial loans receivable, including affiliate balances, totaled approximately $44.1m. These are lending assets and carry credit risk.
Material changes versus prior comparable periods
- Q3 revenue increased 5.5%, but homes sold fell 6.8% to 3,603. Higher factory-built home revenue per unit—up 13.0% to $75,166—more than offset lower unit volume. Management attributed pricing increases to rising input costs.
- Q3 gross profit fell 1.0% and gross margin declined 1.4 percentage points, primarily reflecting higher material costs and production inefficiencies. Nine-month gross profit fell 5.9% and margin declined 1.1 points.
- Nine-month net income declined 18.5%. Other income fell to $5.8m from $10.2m, largely because the prior-year period included a $3.4m gain on the sale of idle land; lower interest income also weighed on the comparison.
- Nine-month operating cash flow improved, supported by higher customer deposits, commercial loan collections and timing of payments on payables and accrued liabilities. Consumer loan originations were $124.1m and loan-sale proceeds were $122.6m.
- Factory capacity utilization was approximately 75% in Q3, up from 65% in Q2 but below pre-pandemic levels above 80%. Home-order rates were nearly 65% above the prior-year quarter.
Outlook, management commentary, risks and contingencies
- Backlog reached $472m at December 26, up from $115m a year earlier and $321m at September 26. Management cautioned that orders may be canceled before production begins; Cavco does not consider backlog firm until production has commenced.
- Management said cash and expected operating cash flow should fund operations and growth for the next 12 months and foreseeable future. The filing provides no numerical earnings or revenue guidance.
- COVID-19 continued to constrain output through employee absenteeism, hiring difficulties and material shortages. Management identified increasing production, recruiting and retaining workers, and matching workforce and capacity to demand as priorities. Future pandemic effects remain difficult to predict.
- Consumer loan performance and servicing cash flows may be affected by forbearance and missed payments. The consumer loan portfolio was concentrated in Texas (37%) and Florida (20%). Commercial lending, customer creditworthiness and financing availability also present risks.
- Cavco had $70.8m of maximum exposure under distributor inventory repurchase agreements, before considering resale value, with a $2.3m reserve. CountryPlace had $27.8m of remaining commitments to fund construction-period mortgages. Mortgage-sale representations and warranties and loan repurchase obligations are additional contingencies.
- The company and its former CEO and CFO were subject to SEC-related enforcement developments. The SEC had issued Wells Notices to the company and former CFO; Cavco was exploring a possible settlement but said it could not estimate the probability or amount of any loss. The CFO had gone on leave. A putative California wage-and-hour class action continued after an amended complaint; January 2021 mediation did not resolve it.
- Unrealized gains on marketable equity securities contributed to financial-services revenue and earnings. The nine-month income comparison also reflected the prior-year land-sale gain. Management noted that estimates are more uncertain due to COVID-19.
Important facts for investors to verify
- Whether labor, supply constraints and factory utilization improve enough to convert the unusually large backlog into delivered homes and revenue, recognizing that pre-production orders may be canceled.
- How home pricing and material-cost inflation affect factory-built housing margins as production volume changes.
- Developments, potential financial exposure and any settlement relating to the SEC investigation and Wells Notices, as well as the wage-and-hour litigation.
- Loan delinquencies, credit-loss reserves, geographic and borrower concentrations, and the effect of COVID-related forbearance on servicing cash flows.
- Whether operating cash flow remains strong after considering customer-deposit movements, accrued-liability timing, and consumer loan originations and sales.
- The sustainability of investment gains and the company’s ability to meet repurchase, mortgage-funding and other contingent commitments.