Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 30, 2017; comparative periods ended December 31, 2016. Amounts below are in U.S. dollars.
Business context
Cavco designs and manufactures factory-built homes, including manufactured and modular homes, park model RVs and cabins. It also provides consumer and commercial financing and manufactured-home insurance. The company acquired Lexington Homes on April 3, 2017; its results are included from that date. At quarter-end, Cavco operated 20 homebuilding facilities and 41 company-owned retail locations.
Financial performance
| Metric | Three months ended Dec. 30, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 30, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $221.4 million | $202.3 million | $628.7 million | $575.8 million |
| Gross profit | $49.9 million | $43.5 million | $126.4 million | $115.9 million |
| Operating income | $23.8 million | $17.5 million | $47.9 million | $39.8 million |
| Net income | $21.4 million | $12.3 million | $39.4 million | $27.1 million |
| Diluted EPS | $2.33 | $1.35 | $4.28 | $2.98 |
| Gross margin | 22.5% | 21.5% | 20.1% | 20.1% |
Quarterly revenue rose 9.4% and net income rose 74.5%; nine-month revenue increased 9.2% and net income 45.3%. Approximate operating margin was 10.8% for the quarter versus 8.7%, and 7.6% for the nine months versus 6.9%. Quarterly homes sold increased 6.2% to 3,701; nine-month unit sales rose 3.5% to 10,474. Factory-built housing revenue per home sold increased 3.5% for the quarter and 5.8% for the nine months.
At December 30, cash and cash equivalents were $139.0 million, restricted cash was $10.7 million, and short-term investments were $14.5 million. Current assets were $384.0 million and current liabilities $149.3 million, a current ratio of approximately 2.6. Securitized financings and other totaled $57.3 million. Nine-month operating cash flow was $15.4 million, compared with $28.8 million a year earlier; investing activities used $6.6 million and financing activities used $2.4 million. Cash increased $6.4 million during the nine-month period.
Changes, outlook and material items
- Factory-built housing drove most revenue growth, reflecting higher home sales and a greater proportion of higher-priced homes. Financial-services revenue increased 3.2% for the quarter and 5.0% for the nine months, supported by more insurance policies and an 18% year-over-year increase in home-loan sales.
- Quarterly factory-built housing gross profit included a $3.4 million benefit from a favorable dispute settlement, offset against cost of sales. The Tax Cuts and Jobs Act produced a $5.6 million net tax benefit in the quarter, contributing to the lower quarterly effective tax rate of 9.5% versus 28.9%. The nine-month effective rate was 17.7% versus 30.3%; current-year tax expense also included a $1.7 million benefit from excess stock-option exercise tax benefits.
- Management cited industry manufactured-home shipments up 15.5% for the first 11 months of calendar 2017. Backlog was approximately $207 million, versus $91 million a year earlier; retailers may cancel orders before production, so backlog is not firm. Management said it increased production and workforce capacity but faces labor constraints and rising labor and material costs. Pricing increases were implemented to help offset those costs.
- Management expected replacement-home demand after Hurricanes Harvey and Irma to continue for several quarters and reported limited FEMA disaster-relief home production. Harvey led to higher insurance claims and $1.4 million in additional reinsurance reinstatement premiums during the nine months; factory operations and sales were also disrupted in affected markets. Cavco reported no adverse insurance impact from Irma.
- Management stated cash and operating cash flow should fund operations and growth for at least the next 12 months. It provided no quantified earnings or revenue guidance. Longer-term growth depends partly on improved consumer financing availability; GSE plans include chattel-loan pilots beginning in 2019, but Cavco said meaningful sales impact had not yet materialized.
Risks, contingencies and other disclosures
- Key risks include constrained manufactured-home financing, industry cyclicality and seasonality, labor and input-cost pressures, competition, regulatory changes, acquisition integration, credit exposure from lending programs, warranty claims and geographic concentration.
- Consumer loan exposure is geographically concentrated, with 43% of outstanding principal in Texas and 10% in Florida. The company also has commercial-loan concentrations in Arizona, Oregon, Texas and Washington, and 19% of commercial-loan principal was with one independent third party, all secured.
- Maximum contingent retailer inventory-financing repurchase exposure was approximately $45.0 million, before considering resale value; the recorded liability was $1.6 million. CountryPlace had $14.2 million of remaining construction-loan commitments and a $1.0 million reserve for mortgage repurchase and indemnification obligations.
- Ordinary-course litigation includes contract, warranty, construction-defect, insurance, product-liability and personal-injury claims. Management did not expect pending or threatened matters to have a material adverse effect, while noting outcomes remain uncertain. The IRS notified Cavco of an examination of its fiscal 2016 federal return.
- The 2005-1 and 2007-1 securitized portfolios were within required overcollateralization levels at quarter-end. Failure to meet those requirements could redirect cash collections to debt repayment and affect timing of cash flows.
Important facts for investors to verify
- How much of quarterly earnings growth is sustainable after excluding the $3.4 million settlement benefit and $5.6 million tax benefit.
- Whether the $207 million backlog converts to production and sales, given cancellation rights and labor constraints.
- Trends in consumer financing, loan originations and sales, credit losses, and cash conversion as operating cash flow declined year over year.
- Effects of hurricane-related claims and reinsurance costs, and any continuing disruption or replacement-home demand.
- Progress on Lexington integration, input-cost recovery through pricing, and future tax rates following the Tax Act.