Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 27, 2014. The fiscal year is scheduled to end March 28, 2015. Cavco designs and manufactures factory-built housing and also provides consumer financing and insurance.
Financial performance and position
| Metric | Three months ended Dec. 27, 2014 | Nine months ended Dec. 27, 2014 |
|---|---|---|
| Net revenue | $146.9 million | $425.4 million |
| Gross profit / margin | $31.8 million / 21.6% | $95.1 million / 22.4% |
| Operating income | $9.8 million | $28.6 million |
| Income before taxes | $10.6 million | $28.2 million |
| Net income attributable to Cavco common stockholders | $6.6 million; diluted EPS $0.74 | $17.9 million; diluted EPS $1.98 |
- Cash flow: Nine-month operating cash flow was $17.6 million, versus $26.7 million a year earlier. Investing activities provided $0.9 million, compared with $5.6 million used; financing activities provided $0.7 million, compared with $9.4 million used.
- Liquidity and debt: Cash and cash equivalents were $92.2 million at quarter-end, up from $72.9 million at March 29, 2014. Restricted cash was $8.1 million. Total assets were $489.6 million and stockholders’ equity was $313.8 million. Securitized financings and other debt totaled $67.6 million, including $7.7 million current. Management said cash and operating cash flow should fund operations and growth for at least the next 12 months; the company had no credit facility.
- Business segments: Nine-month factory-built housing revenue was $386.3 million and pretax income was $29.3 million. Financial services revenue was $39.1 million and pretax income was $8.3 million. General corporate charges were $9.4 million.
Material changes versus the prior comparable period
- Revenue increased 6.2% for the quarter and 5.8% for nine months. Factory-built housing sales volume rose 8.1% for the quarter and 3.2% for nine months; homes sold totaled 2,569 and 7,443, respectively.
- Quarterly gross margin declined to 21.6% from 22.8%, which management attributed to factory-built housing product mix. Nine-month gross margin eased to 22.4% from 22.6%.
- Nine-month operating income rose to $28.6 million from $24.3 million, while net income attributable to Cavco shareholders increased to $17.9 million from $12.0 million. The prior-year comparison included a $2.5 million deduction for redeemable noncontrolling interest, eliminated after Cavco acquired the remaining Fleetwood interest in July 2013.
- Other income increased to $3.0 million for nine months from $0.7 million, including a $1.3 million net gain on the quarter’s sale of two inactive manufacturing facilities.
- Interest expense declined to $3.4 million for nine months from $3.7 million, primarily as securitized debt principal was repaid. Cash from operations decreased, in part because of higher net loan originations.
- Factory order backlog was approximately $53.4 million at December 27, 2014, compared with $26.0 million a year earlier.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management cited potential support from demographic growth, product affordability, rental-housing demand, and improved employment and consumer confidence, but said the industry remained at historically low production and shipment levels.
- Management identified constrained consumer and retailer financing as a significant industry obstacle. New CFPB mortgage rules may limit lending or increase compliance costs, potentially reducing buyers’ access to financing and affecting sales.
- Risks include housing-market and economic weakness, interest rates, raw-material and transportation costs, limited wholesale financing, customer and lending-partner credit risk, warranty claims, geographic concentration, competition, and regulatory changes. Texas represented 41% of the consumer loan portfolio; Texas and Florida represented 31.1% and 26.2% of inventory finance receivables, respectively.
- Repurchase agreements with financial institutions created maximum contingent exposure of approximately $24.1 million, before resale value of homes; the recorded liability was $1.8 million. Remaining construction-mortgage funding commitments were $7.0 million. Management did not expect pending ordinary-course litigation to have a material adverse effect, while noting outcomes remain uncertain.
- CountryPlace’s securitized debt may require accelerated repayment if specified portfolio loss thresholds are exceeded; the filing reported that the loss ratios were within required levels at quarter-end. Management said the company had no current access to independent asset-backed or mortgage-backed securitization markets for new loan funding.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The company was evaluating the impact of the new revenue-recognition standard, effective beginning fiscal 2018.
Important facts for investors to verify
- Whether the larger backlog converts into shipments and revenue, and whether factory-built housing margins recover from the quarterly decline.
- How loan originations, loan sales, and collections affect operating cash flow and liquidity.
- Performance and credit quality of consumer loans and inventory finance receivables, particularly given geographic and counterparty concentrations.
- Actual exposure from repurchase commitments, construction funding, mortgage representations and warranties, and litigation compared with recorded reserves.
- Whether financing availability and regulatory requirements materially change homebuyer demand, loan profitability, or CountryPlace funding options.