Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2011; filed November 8, 2011. Amounts are in U.S. dollars. Cavco designs and manufactures factory-built housing and, following its Palm Harbor acquisition, also operates mortgage finance and insurance businesses.
Financial performance
| Metric | Three months ended September 30, 2011 | Six months ended September 30, 2011 | Prior-year comparable |
|---|---|---|---|
| Net sales | $130.0 million | $229.0 million | $45.9 million and $93.4 million, respectively |
| Gross profit / margin | $28.2 million / 21.7% | $44.4 million / 19.4% | 15.6% and 14.6% margins |
| Operating income | $6.6 million | $5.8 million | $1.7 million and $2.9 million, respectively |
| Income before taxes | $5.0 million | $25.1 million | $2.0 million and $3.3 million, respectively |
| Net income attributable to Cavco shareholders | $1.7 million; $0.24 diluted EPS | $11.9 million; $1.72 diluted EPS | $0.7 million and $1.2 million; $0.10 and $0.18 diluted EPS |
| Cash from operations | $11.6 million for six months | Used $3.6 million in the prior-year six-month period |
Reported sales rose sharply year over year, largely because Palm Harbor was acquired on April 23, 2011 and its results are included from the acquisition date. For the quarter, Palm Harbor contributed $79.9 million of sales and $1.6 million of net income. For the six-month period, it contributed $132.9 million of sales and $22.4 million of net income, including the bargain-purchase gain. The six-month $22.0 million gain was non-taxable; excluding it, reported earnings are not representative of recurring operating performance. Financial services contributed $10.3 million of quarterly sales and $16.5 million for six months.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $35.2 million, down from $76.5 million at March 31. Total assets were $432.9 million; stockholders’ equity was $164.3 million.
- Current assets were $165.6 million and current liabilities were $88.4 million. These totals include acquired finance-company balances and restricted cash.
- Book value of securitized financings was $96.1 million, including $11.5 million current and $84.6 million long-term; the contractual balance was $125.9 million. The construction lending line was $4.5 million. The filing says the acquisition did not add debt at Cavco or Palm Harbor other than assumed CountryPlace facilities.
- Six-month cash flow: operating activities provided $11.6 million; investing activities used $29.4 million, principally for Palm Harbor; financing activities used $23.4 million, including $19.5 million to repay CountryPlace debt. Cash decreased by $41.3 million.
- Management said cash and expected operating cash flow should fund operations and growth for the next twelve months and beyond, but Cavco had no credit facility and might need other financing depending on results and opportunities.
Changes, outlook and risks
- The Palm Harbor acquisition added five operating factories, 49 retail locations, CountryPlace mortgage operations and Standard insurance operations, extending Cavco’s geographic reach. Purchase-price allocation remained provisional; management expected to complete it within one year of acquisition.
- Management cited potential synergies, cost reductions and operating efficiencies, while warning that transition and transaction costs would initially mask some savings. Acquisition-related costs were $864,000 for six months, with further costs anticipated in fiscal 2012.
- The industry remained in a prolonged downturn: approximately 32,000 HUD-code homes shipped January-August 2011 versus 36,000 a year earlier. September backlog was $20.4 million, about three weeks of production.
- Management highlighted weak consumer confidence, unemployment, constrained mortgage credit, limited retailer inventory financing, competition from discounted site-built homes, and raw-material and transportation costs. The filing provides no quantified earnings or sales guidance.
- CountryPlace said securitization markets were effectively closed and it had stopped originating chattel loans and non-conforming mortgages until other funding became available. A 10% increase in average interest rates was estimated to reduce the fair value of held-for-investment loans by about $5.5 million.
- Other exposures include $12.1 million of contingent home repurchase obligations, $7.2 million of letters of credit, $4.9 million of remaining construction-loan commitments, and mortgage-sale representation and warranty obligations. Management did not expect pending litigation to have a material effect, while noting outcomes are uncertain.
- Palm Harbor’s systems and internal controls were being maintained separately; integration into Cavco’s control environment was expected during fiscal 2013. Management concluded disclosure controls were effective at quarter-end.
Investor verification points
- Assess recurring earnings and margins apart from the $22.0 million bargain-purchase gain and acquisition-related costs.
- Review the final Palm Harbor purchase-price allocation and whether anticipated integration savings are achieved.
- Monitor liquidity, cash conversion, securitized-financing repayments, and the availability of funding for CountryPlace loan originations.
- Track credit quality, geographic concentration and loss assumptions in consumer and inventory-finance portfolios, along with insurance reserves and reinsurance exposure.
- Review the scale and performance of contingent repurchase, construction-funding and mortgage representation-and-warranty obligations.
- Evaluate whether Palm Harbor control-system integration proceeds as expected and whether the prolonged industry downturn further weakens orders or backlog.