Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 28, 2013; comparatives are the periods ended December 29, 2012. Amounts are in U.S. dollars.
Business context and material change
Cavco manufactures factory-built homes and operates related retail, consumer-finance and insurance businesses. On July 22, 2013, Cavco acquired Third Avenue’s remaining 50% interest in Fleetwood and its subsidiaries, including Palm Harbor, CountryPlace and Standard, issuing 1,867,370 shares valued at $91.4 million. Cavco now owns 100% of those businesses and receives all their earnings from the acquisition date. The stock issuance increased shares outstanding and eliminated redeemable noncontrolling interest accounting.
Financial performance
| Metric | Three months ended Dec. 28, 2013 | Prior-year quarter | Nine months ended Dec. 28, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $138.3 million | $114.6 million | $402.1 million | $343.5 million |
| Gross profit | $31.6 million | $26.6 million | $90.9 million | $76.3 million |
| Gross margin | 22.8% | 23.2% | 22.6% | 22.2% |
| Operating income | $9.6 million | $6.3 million | $24.3 million | $15.9 million |
| Income before tax | $8.5 million | $5.3 million | $21.3 million | $12.5 million |
| Net income attributable to Cavco shareholders | $5.9 million | $1.5 million | $12.0 million | $3.6 million |
| Diluted EPS attributable to Cavco shareholders | $0.66 | $0.21 | $1.47 | $0.51 |
- Revenue rose 20.7% in the quarter and 17.1% year to date. Factory-built housing revenue increased 22.1% and 17.9%, respectively; financial-services revenue increased 8.0% in the quarter and 9.6% year to date.
- Factory-built home sales increased 15% to 2,376 in the quarter and 15.9% to 7,214 year to date. Management also cited higher average selling prices. Quarterly gross margin declined on product mix; year-to-date margin improved with production efficiencies, partly offset by mix, pricing pressure and fewer higher-margin mortgage-loan sales.
- SG&A was $22.0 million (15.9% of revenue) for the quarter and $66.6 million (16.6%) year to date. Interest expense declined to $1.2 million quarterly and $3.7 million year to date, primarily as securitized debt was repaid.
- Effective tax rates were approximately 31% for the quarter and 32% year to date, versus 43% and 41% in the respective prior-year periods. Manufacturing deductions and credits contributed to the lower current rates.
Cash flow, balance sheet and debt
- For the nine months, operating cash flow was $26.7 million, compared with $12.1 million in the prior year; investing cash outflow was $5.6 million, and financing cash outflow was $9.4 million. Cash and cash equivalents increased $11.7 million to $59.5 million.
- At December 28, 2013, total assets were $456.8 million, current assets $215.7 million, and current liabilities $90.1 million. Restricted cash totaled $7.1 million.
- Securitized financings totaled $72.8 million, down from $82.3 million at March 30, 2013. The filing reports no other outstanding debt balance; Cavco said it had not sought a credit facility given its cash position.
- Stockholders’ equity was $285.5 million, versus $176.9 million at March 30, 2013, principally reflecting the equity issuance to acquire the noncontrolling interest. Shares outstanding rose to 8,839,824 from 6,967,954.
- Management believes cash and operating cash flow will fund operations and growth for the next 12 months and the foreseeable future, while noting financing may be needed depending on results and opportunities and may not be available on satisfactory terms.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management reported an approximately $26 million home-order backlog at December 28, 2013, versus $16 million a year earlier, and third-quarter capacity utilization of approximately 44%, versus 36%. It cited potential demand improvement as employment and consumer confidence recover, but described industry shipments and production as historically low.
- Management identified constrained consumer and retailer financing, weak affordable-housing demand, competition, raw-material and transportation costs, and housing-market cyclicality as risks. CountryPlace had discontinued chattel-loan and non-conforming mortgage originations because securitization markets were effectively closed and alternative long-term funding was unavailable.
- The 2007-1 securitized portfolio’s cumulative loss ratio exceeded contractual thresholds, triggering accelerated repayment from collections on the underlying loans. Management said this had not materially adversely affected cash flows; the next threshold increase was scheduled for October 2014.
- New CFPB mortgage rules effective January 10, 2014 may constrain lending or increase compliance costs, particularly for some manufactured-home loans. The filing also notes possible effects from government funding interruptions, which could delay loan processing and home sales.
- Other notable items: a $0.56 million impairment charge on property, plant and equipment and assets held for sale during the nine months; the Work Opportunity and New Energy Efficient Home tax credits expired December 31, 2013 and may not be renewed; and the maximum contingent retailer-inventory repurchase exposure was $23.4 million, with a recorded liability of $1.8 million.
- Ordinary-course litigation includes contract, warranty, product-liability, construction-defect and personal-injury claims. Management did not expect currently known matters to have a material adverse effect, while acknowledging litigation uncertainty. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog growth, higher shipments and improved factory utilization continue, and whether they translate into sustainable margins.
- How full ownership of Fleetwood’s businesses affects earnings, share dilution and results compared with prior periods that included noncontrolling interests.
- Whether CountryPlace can obtain alternative funding and resume constrained loan originations, and how the 2007-1 acceleration affects collections and debt repayment.
- The impact of CFPB rules and other financing constraints on manufactured-home buyers, loan availability and Cavco’s sales.
- Whether tax credits are renewed and how their expiration affects the effective tax rate; also monitor repurchase commitments, credit quality and the stated liquidity outlook.