Cavco Industries, Inc. — Q2 FY2015 Form 10-Q
Business context and period. This quarterly report covers the three and six months ended September 27, 2014. Cavco designs and manufactures factory-built homes and operates retail, consumer finance, and insurance businesses. The prior-year comparison is affected by Cavco’s July 2013 purchase of the remaining Fleetwood Businesses interests; Cavco owned 100% thereafter, eliminating redeemable noncontrolling interest.
Financial results
| Metric | Three months ended Sep. 27, 2014 | Year-over-year change | Six months ended Sep. 27, 2014 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $139.3 million | +7.3% | $278.5 million | +5.6% |
| Gross profit | $31.6 million | $29.9 million prior year | $63.3 million | $59.3 million prior year |
| Gross margin | 22.7% | 23.0% prior year | 22.7% | 22.5% prior year |
| Operating income | $9.3 million | $7.8 million prior year | $18.8 million | $14.7 million prior year |
| Net income attributable to Cavco stockholders | $5.5 million | $4.3 million prior year | $11.2 million | $6.1 million prior year |
| Diluted EPS | $0.61 | $0.50 prior year | $1.25 | $0.79 prior year |
Margins and expenses. Quarterly SG&A was $22.3 million, or 16.0% of revenue, versus $22.1 million, or 17.0%, a year earlier. Six-month SG&A was $44.5 million, or 16.0%, versus $44.6 million, or 16.9%. Income before taxes was $8.7 million for the quarter and $17.6 million for six months. Effective tax rates were 37.2% and 36.4%, respectively; the prior-year rates were lower partly because of the Fleetwood buyout’s deferred-tax revaluation and tax credits.
Segments and operating indicators. Quarterly factory-built housing revenue was $126.4 million and financial-services revenue was $12.9 million. For six months, the respective amounts were $252.6 million and $25.8 million. Six-month home sales increased 0.7% to 4,874 units, while average selling price rose 4.5% to approximately $51,835. Backlog was approximately $41.8 million at period-end, compared with $36.0 million a year earlier.
Cash flow and liquidity. Cash and cash equivalents were $80.8 million at September 27, 2014, compared with $72.9 million at March 29, 2014. Current assets were $249.5 million and current liabilities $101.0 million. For the six months, operating cash flow was $8.7 million, down from $22.5 million; investing activities used $1.4 million, and financing activities provided $0.5 million. Cash increased $7.9 million to $80.8 million. Management said cash and operating cash flow should fund operations and growth for at least the next 12 months. The company had not sought a credit facility.
Debt and other balance-sheet items. Securitized financings and other totaled $68.1 million, including $2.7 million of other secured financings; $8.1 million was current. Total stockholders’ equity was $306.2 million. Inventories were $73.6 million, and net consumer loans receivable were $100.6 million.
Material changes and notable items
- Revenue and operating income increased in both the quarter and six-month period. Six-month net income attributable to Cavco rose substantially, though comparison is affected by the prior-year noncontrolling-interest deduction and the July 2013 buyout.
- Factory-built housing revenue grew as home sales rose modestly and average selling price increased; management attributed gross-margin movements to product mix.
- Six-month operating cash flow declined to $8.7 million from $22.5 million, principally reflecting working-capital and consumer-loan activity, including higher inventory and net loan originations.
- Cash flow from financing included $2.9 million of incremental tax benefits from stock-option exercises and proceeds from other secured financings; the company also repaid $4.9 million of securitized financings.
- After quarter-end, Cavco sold an inactive Woodland, California manufacturing facility for $4.7 million. The facility had been classified as held for sale at period-end.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management described the manufactured-housing industry as operating at historically low shipment levels, with employment, consumer confidence, and limited consumer financing constraining demand. It cited possible opportunities from demographic growth, demand for affordable housing and rental homes, and a backlog above the prior-year level.
- Consumer lending restrictions, CFPB and other regulatory requirements, and limited secondary-market financing may constrain home purchases and increase lender compliance costs. Availability of wholesale inventory financing is also limited.
- The 2007-1 securitized portfolio’s cumulative loss ratio exceeded its contractual threshold, triggering accelerated repayment from collections on the related loans. Management said the acceleration was not expected to materially affect cash flow; the threshold was scheduled to increase in October 2014.
- Consumer-loan exposure is geographically concentrated: 42% of outstanding principal was in Texas. Inventory-finance receivables also had geographic concentrations, and one independent third party and affiliates represented 47.9% of principal outstanding, all secured.
- Maximum contingent retailer repurchase commitments were $25.3 million, with a recorded liability of $1.9 million. Remaining construction-loan funding commitments were $6.3 million. CountryPlace also had mortgage repurchase representations and warranties, with a $0.9 million reserve.
- Standard Casualty depends on reinsurers and remains liable if they fail to meet obligations; substantially all assumed reinsurance was with one entity. Ordinary-course litigation includes contract, warranty, construction-defect, insurance, product-liability, and personal-injury claims. Management did not expect current matters to have a material adverse effect.
- Other cited risks include interest-rate sensitivity, raw-material and transportation costs, warranty claims, cyclicality and seasonality, competition, labor and zoning constraints, and potential liquidity or capital-access limitations. A 1% increase in average interest rates was estimated to reduce the fair value of CountryPlace’s held-for-investment loan portfolio by approximately $5.9 million.
Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue and margin gains persist, and whether home-unit growth can improve beyond the reported 0.7% six-month increase.
- Drivers of the decline in operating cash flow and the cash requirements of consumer-loan originations, inventory, and retailer financing.
- Developments in the 2007-1 securitization loss ratio and the effect of accelerated principal repayments on future cash flow.
- Credit quality, Texas loan concentration, and exposure to the concentrated inventory-finance counterparty.
- Effects of mortgage-lending regulation and financing availability on customer demand, retailer activity, and CountryPlace’s operations.
- Proceeds and any gain or loss from the post-quarter sale of the Woodland facility, which the filing does not clearly quantify beyond the $4.7 million sale price.