Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the three months ended June 29, 2019. Comparisons are with the three months ended June 30, 2018, unless noted. Amounts are in millions of dollars except per-share data.
Business context and results
Cavco designs and manufactures factory-built housing and operates consumer-finance and insurance businesses. Its two reportable segments are factory-built housing and financial services.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net revenue | $264.0 | $246.4 |
| Gross profit / gross margin | $60.3 / 22.8% | $51.5 / 20.9% |
| Income from operations | $25.0 | $22.3 |
| Net income | $21.3 | $19.7 |
| Basic / diluted EPS | $2.34 / $2.31 | $2.18 / $2.12 |
| Operating cash flow | $16.8 | $(2.1) |
| Capital expenditures | $2.1 | $1.7 |
Revenue, margins, and segment trends
- Revenue rose 7.2%. Factory-built housing revenue increased 6.9% to $248.8 million; financial-services revenue increased 12.0% to $15.3 million.
- Factory-built housing revenue per home sold rose 9.1% to $65,345, while homes sold declined 2.1% to 3,807. Management attributed the revenue increase primarily to higher selling prices and product mix. Factory-built housing gross margin improved to 21.0% from 18.9%.
- Financial-services gross profit increased 7.5% to $8.2 million, but its gross margin fell to 53.4% from 55.6%, principally due to higher insurance claims from storm activity. Segment pretax income was $3.0 million, versus $2.5 million.
- Consolidated gross margin increased 1.9 percentage points. SG&A rose 20.7% to $35.3 million, including costs associated with the SEC inquiry and additional directors-and-officers insurance.
- Income before taxes increased 13.4% to $27.4 million. The effective tax rate was 22.2%, compared with 18.4%; the prior-year period benefited more from tax deductions related to stock-option exercises.
Cash, debt, and liquidity
- Cash and cash equivalents were $199.8 million at June 29, 2019; restricted cash was $13.2 million. Combined cash, cash equivalents, and restricted cash totaled $213.0 million, up $13.2 million from fiscal year-end.
- Current assets were $479.0 million and current liabilities $175.3 million. Total assets were $756.1 million; stockholders’ equity was $550.3 million.
- Total securitized financings, other secured financings, and finance-lease liabilities were $34.3 million. The filing reports $34.3 million in total obligations; operating lease liabilities of $12.9 million are separately presented.
- Operating cash flow improved by $18.9 million year over year. Management cited increased profitability, greater sales of consumer loans, and decreased commercial lending. Consumer-loan sale proceeds were $37.6 million, compared with $28.2 million.
- Management believes available cash and operating cash flow will fund operations and growth for the next 12 months and the foreseeable future. The company said the planned Destiny Homes acquisition would not significantly affect liquidity.
Outlook, risks, contingencies, and notable items
- Demand and backlog: Management described the $131 million order backlog as healthy and relatively consistent with $129 million at March 30, 2019, but below $196 million a year earlier. Orders may be canceled before production and are not considered firm until production begins. Industry shipments fell 8.5% in the first five months of calendar 2019, partly because 2018 disaster-relief production did not recur.
- Operating constraints: Management identified a constrained labor market as a continuing challenge. It also cited restrictive lending standards, relatively high manufactured-home loan rates, and limited secondary-market financing as barriers to industry growth. It noted that expanded GSE programs had not yet produced a meaningful increase in home orders.
- SEC inquiry and costs: Cavco continues to cooperate with an SEC investigation concerning trading in another public company’s securities by Cavco, its former CEO, and others outside the company. The Audit Committee completed an internal investigation. Cavco recorded $0.8 million of related legal and other expenses in the quarter and expects further costs over the next several quarters, including advancement of expenses for its former CEO under indemnity arrangements.
- D&O insurance: Cavco paid $15.3 million for additional 22-month directors-and-officers policies and recorded $2.1 million of related expense in the quarter. It expects approximately $2.1 million of quarterly amortization expense through Q2 FY2021.
- Debt transactions: After quarter-end, Cavco exercised its right to repurchase the 2007-1 securitized loan portfolio and expected to pay $17.5 million in August 2019, including interest and fees. The portfolio was within required overcollateralization limits at quarter-end.
- Acquisition: On July 29, 2019, Cavco signed an agreement to acquire substantially all assets and liabilities of Destiny Industries for an undisclosed cash amount, subject to customary closing conditions. Closing was expected August 2, 2019.
- Other exposure: The company has $70.1 million of maximum contingent liability under distributor inventory repurchase agreements, without reduction for resale value; the recorded liability was $2.4 million. Consumer lending is geographically concentrated, with 42% of consumer-loan principal in Texas. Insurance claims may rise with severe weather, and the company remains exposed to reinsurer performance.
- Accounting change: Cavco adopted the new lease standard effective March 31, 2019, recognizing operating lease right-of-use assets and liabilities. Adoption did not materially affect net income or cash flows.
Important facts for investors to verify
- Whether housing demand, home shipments, backlog, and pricing trends persist, particularly as the prior-year backlog was unusually high.
- The scale and duration of SEC-related expenses and any developments in the investigation or related proceedings.
- How storm claims, reinsurance recoveries, and insurance profitability develop.
- The cash cost, closing, and subsequent financial contribution of the Destiny Homes acquisition, and the settlement of the 2007-1 securitization repurchase.
- Credit performance and geographic concentration in consumer and commercial loan portfolios, along with distributor repurchase commitments and construction-loan funding obligations.