Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 28, 2019 (fiscal 2020 second quarter); comparisons are with the periods ended September 29, 2018. Amounts are in millions of dollars unless stated otherwise.
Business context
Cavco designs and builds manufactured and modular homes, park model RVs and related products, and operates consumer finance and insurance businesses. It reported factory-built housing and financial services as its two segments. In August 2019, it acquired certain assets and liabilities of Destiny Homes, adding a manufacturing facility in Georgia.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $268.7; up 11.2% | $532.7; up 9.2% |
| Gross profit / margin | $58.5 / 21.8%, versus $49.4 / 20.5% | $118.8 / 22.3%, versus $100.9 / 20.7% |
| Operating income | $22.4, versus $19.4 | $47.4, versus $41.6 |
| Net income | $20.9, versus $15.6 | $42.2, versus $35.3 |
| Diluted EPS | $2.25, versus $1.67 | $4.56, versus $3.80 |
| Operating cash flow | $43.6, versus $17.8 |
Quarterly factory-built housing revenue was $252.7 million, up 11.3%; financial services revenue was $16.0 million, up 10.7%. Six-month segment revenue was $501.5 million from factory-built housing and $31.3 million from financial services. Six-month home sales were 7,588, up 2.2%; factory-built housing revenue per home sold rose 6.7% to $66,086.
At September 28, cash and cash equivalents were $190.5 million, with another $15.3 million of restricted cash. Total assets were $773.8 million and stockholders’ equity was $573.0 million. Debt and finance lease obligations were $16.2 million, down from $34.1 million at March 30; the remaining secured credit facility balance was $11.0 million at a weighted-average 4.91% interest rate. The company repurchased its remaining 2007-1 securitized loan portfolio in August, eliminating that financing balance. Management said cash and operating cash flow should fund operations and growth for at least the next 12 months.
Material changes and drivers
- Higher home sales volume and selling prices, together with generally lower commodity costs, lifted factory-built housing revenue and gross margin. Destiny Homes contributed $6.4 million of revenue after acquisition.
- Financial services results improved with more home loan sales, higher commercial-loan interest income, more insurance policies in force and lower insurance claims, partly offset by declining interest income on amortizing securitized loan portfolios.
- Other income rose to $5.2 million for the quarter and $8.0 million for six months, including a $3.4 million gain on the sale of idle land and higher interest and investment-related income.
- SG&A increased 20.1% for the quarter and 20.4% for six months. Drivers included higher compensation, SEC inquiry-related expenses, and amortization of additional D&O insurance premiums.
- Six-month investing cash outflow was $18.3 million, mainly reflecting $15.9 million paid for Destiny Homes. Financing cash outflow was $19.3 million, primarily including repayment of securitized financing.
Outlook, risks and unusual items
Management described the $137 million order backlog as healthy and relatively consistent with $131 million at the prior quarter-end, but below $204 million a year earlier; orders may be cancelled before production begins. The company cited affordable-housing demand, employment and consumer confidence as supportive, while noting industry shipments were down 6.4% in the first eight months of calendar 2019. No formal earnings or revenue guidance was provided.
The filing identifies risks from housing demand and economic conditions, labor recruitment and retention, commodity costs, limited manufactured-home loan financing and secondary markets, and credit exposures to borrowers and distribution partners. Consumer-loan exposure is geographically concentrated, particularly in Texas (42%) and Florida (12%). Insurance results may be affected by severe weather; reinsurance reduces, but does not eliminate, exposure, including counterparty risk.
Cavco continued cooperating with an SEC enforcement investigation into trading in another public company’s securities by the company, its former CEO and others outside the company. The Audit Committee’s internal investigation was complete. SEC-related legal and other costs were $0.8 million for the quarter and $1.6 million for six months, and management expected further costs over coming quarters. Additional D&O coverage purchased in December 2018 generated $2.1 million of quarterly premium expense; the company expected approximately $2.1 million per quarter through fiscal 2021’s second quarter. These expenses may affect earnings.
Other disclosed commitments include up to $93.8 million of distributor inventory repurchase exposure before considering resale value, an $18.6 million commitment for future construction-loan advances, and an $11.0 million letter of credit securing reinsurance obligations. Destiny’s purchase-price allocation remained preliminary; purchase-accounting inventory adjustments reduced post-acquisition earnings and were expected to continue in subsequent periods. The company adopted lease accounting Topic 842, recognizing operating lease right-of-use assets and liabilities; management said adoption did not materially affect net income or cash flows.
Important facts for investors to verify
- Whether home orders and backlog convert into production and sales, given the year-over-year backlog decline and cancellation rights.
- How much earnings growth is recurring versus attributable to the $3.4 million land-sale gain, investment gains and lower insurance claims.
- The future amount and duration of SEC inquiry, indemnification and D&O insurance costs, and any developments in the investigation.
- Destiny Homes’ final purchase accounting, integration performance and continuing inventory step-up effects.
- Credit performance of consumer and commercial loan portfolios, including geographic and counterparty concentrations, and the effect of expected-loss accounting adoption in fiscal 2021.
- Whether cash generation remains adequate as the company pursues acquisitions, lending growth and other investments.