Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Comparisons with 2010 are substantially affected by the Palm Harbor acquisition, completed in April 2011, and are not like-for-like.
Business context
Cavco manufactures and sells factory-built homes and, following the Palm Harbor acquisition, also operates retail locations, a consumer mortgage business (CountryPlace), and an insurance business (Standard). Cavco consolidates Fleetwood Homes, in which it holds a 50% interest; Third Avenue’s interest is presented as redeemable noncontrolling interest.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Nine months ended Dec. 31, 2011 | Prior-year period |
|---|---|---|---|---|
| Net sales | $114.6 | $39.6 | $343.6 | $133.0 |
| Gross profit / margin | $26.9 / 23.5% | $5.3 / 13.5% | $71.3 / 20.8% | $19.0 / 14.3% |
| Income from operations | $6.4 | $0.1 | $12.2 | $3.0 |
| Net income | $3.0 | $0.3 | $26.8 | $2.3 |
| Net income attributable to Cavco common stockholders | $1.7 | $0.02 | $13.6 | $1.2 |
| Diluted EPS attributable to Cavco common stockholders | $0.24 | $0.00 | $1.96 | $0.18 |
- Quarterly sales rose 189%; nine-month sales rose 158%, primarily reflecting Palm Harbor and the newly consolidated financial services businesses. Palm Harbor contributed $64.2 million of quarterly sales and $197.1 million from acquisition through December 31.
- Nine-month pre-tax income included a $22.0 million non-taxable bargain-purchase gain from Palm Harbor. Cavco’s attributable nine-month earnings include approximately half of that gain, consistent with its 50% ownership of Fleetwood Homes.
- Interest expense was $2.0 million for the quarter and $5.4 million year to date, mainly related to CountryPlace securitized loan financings. The nine-month effective tax rate was about 10%, affected by the non-taxable bargain-purchase gain.
- Operating cash flow was $8.7 million for the nine months, compared with cash used of $2.3 million in the prior-year period. Investing used $25.3 million, including acquisition-related outlays; financing used $24.5 million, including $19.5 million to retire a CountryPlace debt obligation.
Financial position and liquidity
- At December 31, 2011, cash and cash equivalents were $35.4 million, down from $76.5 million at March 31, 2011. Restricted cash was $6.7 million; investments were $14.7 million.
- Total assets were $428.0 million and stockholders’ equity was $166.4 million. Consumer loans receivable, net, were $123.2 million.
- Securitized financings were $94.2 million, with $5.6 million in construction lending lines. The filing also reports $85.2 million of redeemable noncontrolling interest, classified outside permanent equity.
- Management stated that cash and expected operating cash flow should fund operations and growth for at least the next 12 months. The company had not sought an external credit facility, but acknowledged future financing might be needed and might not be available on satisfactory terms.
Material changes, outlook, and risks
- The Palm Harbor acquisition added five operating factories, 49 retail locations, finance and insurance operations, and broader geographic reach. Management expects synergies and cost reductions over time, while noting transition costs may initially mask savings. Integration of Palm Harbor systems and controls was expected to continue through fiscal 2013.
- Industry conditions remained weak: shipments were near historic lows, consumer and retailer financing was constrained, and the company reported a $10.9 million sales backlog—about two weeks of current production. No numerical company earnings or revenue guidance was provided.
- Management cited weak consumer confidence, unemployment, restrictive mortgage underwriting, limited floorplan financing, competition from discounted site-built homes, and raw-material and transportation costs as pressures. CountryPlace had discontinued chattel and non-conforming mortgage originations because securitization markets were effectively closed.
- Key exposures include consumer-loan credit and valuation risk, Texas concentration in the loan portfolio, reinsurance counterparty exposure, interest-rate and loan-sale price risk, and manufactured-home repurchase commitments. Maximum repurchase exposure was approximately $11.5 million, versus a recorded liability of $0.75 million. Other commitments included $7.2 million of letters of credit and $3.8 million of remaining construction-loan advances.
- Management did not expect pending ordinary-course litigation to have a material adverse effect, while acknowledging outcomes remain uncertain. It reported disclosure controls were effective; Palm Harbor continued to operate with separate systems and controls during integration.
Important facts for investors to verify
- How much of reported growth and earnings is recurring and attributable to ongoing operations rather than acquisition accounting, particularly the $22.0 million bargain-purchase gain?
- Whether the provisional Palm Harbor purchase-price allocation, acquired loan valuations, and expected integration synergies change materially as assessments are finalized.
- CountryPlace’s ability to fund or sell new loans while securitization markets remain unavailable, and the credit performance and fair value of its acquired loan portfolio.
- Cash generation and liquidity after acquisition spending, debt service, and continuing investment in retailer inventory financing.
- The filing’s cover page appears to mark “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should verify this checkbox against the filed original.