Cavco Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018. The filing reports FY2018 Q4 as the quarter ended March 31, 2018; quarterly figures are unaudited. FY2018 had 52 weeks versus 53 weeks in FY2017.
Business context
Cavco designs and manufactures factory-built homes, park model RVs, cabins and modular/commercial structures. It also provides manufactured-home financing through CountryPlace and insurance through Standard Casualty. The April 2017 Lexington Homes acquisition expanded production capacity and Southern-market distribution.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $871.2 million | $773.8 million | +12.6% |
| Gross profit / gross margin | $180.7 million / 20.7% | $158.0 million / 20.4% | +14.3% gross profit |
| Operating income | $73.8 million | $56.8 million | +29.9% |
| Net income | $61.5 million | $38.0 million | +62.0% |
| Diluted EPS | $6.68 | $4.17 | +60.2% |
| Operating cash flow | $58.8 million | $44.8 million | +$14.0 million |
Factory-built housing revenue rose 13.1% to $815.5 million; financial-services revenue grew 5.5% to $55.7 million. Homes sold increased 5.2% to 14,537, while factory-built housing revenue per home rose 7.5% to $56,100. SG&A was $106.9 million, or 12.3% of revenue, down from 13.1%. Interest expense was essentially unchanged at $4.4 million. Net income margin was approximately 7.1%, versus 4.9%.
Cash and cash equivalents were $186.8 million, up from $132.5 million. Current assets were $418.6 million and current liabilities $176.3 million. Total assets were $674.8 million and stockholders’ equity $457.1 million. Securitized financings and other borrowings totaled $59.8 million, including $43.1 million of acquired securitized financings; the filing identifies $42.7 million of two securitized bond classes with call dates in January and July 2019. Investing activities used $4.7 million and financing activities provided $0.1 million. The company reported no dividends and no repurchases under its $10 million authorization.
At March 31, 2018, home-order backlog was $179.0 million versus $88.8 million a year earlier; orders may be cancelled without penalty before production begins. Wholesale shipments represented approximately 83% of factory-built housing wholesale sales channel volume described in the filing.
Material changes and unusual items
- FY2018 factory-built housing revenue growth reflected higher sales volume, pricing increases, Lexington Homes operations, and approximately $14.8 million of home-sale revenue recognized from early commercial-loan payoffs.
- Gross profit benefited from a $3.4 million favorable dispute settlement. Other income increased to $9.1 million, including $3.9 million of investment gains over the prior year and higher commercial-loan interest and partnership income.
- The Tax Act lowered the federal corporate rate; the company recorded a $4.8 million tax benefit from revaluation of deferred taxes and a $2.1 million benefit from stock-option tax accounting. The reported effective tax rate was 21.7%; management noted the tax analysis remained provisional.
- Hurricane Harvey drove elevated insurance claims. Reinsurance limited exposure to a stated $1.5 million retention, but reinstatement premiums added costs. Cavco also produced a limited number of FEMA disaster-relief homes.
- Cash flow benefited from operating earnings and commercial-loan principal collections, partly offset by higher inventory. Consumer loan originations were $126.4 million; proceeds from consumer-loan sales were $119.3 million.
Outlook, risks and contingencies
Management said cash and operating cash flow should fund operations and growth for at least the next 12 months and into the foreseeable future. It expected to continue expanding commercial and home-only lending programs and pursue complementary acquisitions or investments. No numerical earnings or revenue guidance was provided. Management cited rising labor and material costs, constrained labor availability, and the possibility that pricing increases may lag cost inflation.
- Consumer and retailer financing remains constrained; reduced lender availability or tighter underwriting could limit home demand and shipments.
- Maximum contingent retailer inventory repurchase obligations were $55.6 million, before resale-value reductions; the recorded reserve was $2.2 million.
- CountryPlace’s consumer loan portfolio was geographically concentrated, with 44% of outstanding principal in Texas and 11% in Florida. Loan performance, collateral values, funding access and mortgage-sale representations and warranties are risks.
- Standard Casualty remains exposed to catastrophe losses and reinsurer credit risk; substantially all assumed reinsurance was with one entity.
- Other key exposures include housing-market cyclicality, competition, local zoning, warranty/construction claims, regulatory changes, and potential goodwill impairment. Management said pending litigation was not expected to materially affect financial position, liquidity or results, while noting outcomes remain uncertain.
Most important facts for investors to verify
- Whether backlog converts to shipments and revenue, given pre-production cancellation rights and production constraints.
- How sustainable FY2018 earnings growth is after the investment gains, dispute settlement, commercial-loan payoff income and tax benefits.
- Cash generation, inventory growth, and the credit quality and concentration of commercial and consumer loans.
- Plans and funding for the 2019 securitized-financing call dates, plus compliance with overcollateralization requirements.
- Actual effects of input-cost inflation, labor availability, Hurricane Harvey claims and reinsurance costs.