Cavco Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended December 26, 2015, the third quarter of Cavco’s fiscal 2016; comparisons are with the quarter ended December 27, 2014. The nine-month figures cover the same respective fiscal-year periods. Cavco manufactures and sells factory-built homes and operates consumer finance and insurance businesses.
During the current fiscal year, Cavco acquired certain assets and liabilities of Chariot Eagle and Fairmont Homes. Their results are included from the acquisition dates. The company reported 19 homebuilding facilities and 45 company-owned retail locations.
Financial performance and position
| Metric | Three months ended Dec. 26, 2015 | Three months ended Dec. 27, 2014 | Nine months ended Dec. 26, 2015 | Nine months ended Dec. 27, 2014 |
|---|---|---|---|---|
| Net revenue | $181.4 million | $146.9 million | $535.1 million | $425.4 million |
| Gross profit | $36.4 million | $31.8 million | $107.8 million | $95.1 million |
| Gross margin | 20.1% | 21.6% | 20.1% | 22.4% |
| Operating income | $12.7 million | $9.8 million | $34.8 million | $28.6 million |
| Net income | $8.1 million | $6.6 million | $21.6 million | $17.9 million |
| Diluted earnings per share | $0.89 | $0.74 | $2.38 | $1.98 |
- Quarterly revenue rose 23.5% and net income rose 22.0%; nine-month revenue rose 25.8% and net income rose 20.6%.
- Factory-built housing drove growth: quarterly segment revenue increased 25.2% and nine-month revenue increased 27.4%. Homes sold rose 25.1% in the quarter and 26.0% year to date. Acquisitions contributed substantially, alongside growth in existing operations.
- Financial services revenue increased 6.5% for the quarter and 9.4% year to date, but segment pretax income declined 41.5% and 22.0%, respectively. Higher insurance claims were a principal factor.
- Quarterly gross margin fell 1.5 percentage points and nine-month gross margin fell 2.3 points, reflecting higher insurance claims and product-mix variation. Texas hail and wind storms in the first fiscal quarter generated unusually high claims; reinsurance partly mitigated losses.
- Other income was $0.6 million for the quarter and $1.5 million year to date, below prior-year periods that included gains from property sales. The prior-year quarter included a $1.3 million aggregate gain on facility sales.
- Operating cash flow was $35.1 million for the nine months, versus $17.6 million a year earlier. Investing used $32.7 million, including $28.1 million for the acquisitions; financing used $2.8 million. Cash and cash equivalents ended at $96.2 million, compared with $96.6 million at fiscal year-end.
- At December 26, 2015, total assets were $542.5 million, current assets $291.5 million, and current liabilities $121.1 million. Securitized financings and other totaled $62.5 million, down from $67.0 million at March 28, 2015. Management said cash and expected operating cash flow should fund operations and growth for at least the next 12 months.
Changes, outlook, risks and unusual items
- Quarter-end order backlog was approximately $54.9 million, or about five weeks of current production, versus $53.4 million a year earlier. Retailers can cancel orders before production begins, so backlog is not necessarily firm.
- Management cited improving industry shipments: manufactured-home shipments increased 8.8% in the first 11 months of calendar 2015 versus the comparable 2014 period. It also emphasized that industry production and shipments remain low and that constrained consumer and retailer financing, weak employment and consumer confidence, and regulatory burdens continue to limit demand. No specific company earnings or revenue guidance was provided.
- Management expects liquidity to be adequate and continues to consider complementary acquisitions and investments. It cautioned that acquisition integration, operating results and strategic opportunities could affect future financing needs. Cavco had no credit facility and said external financing might not be available on satisfactory terms.
- Risks include housing-market cyclicality and seasonality; limited consumer and wholesale financing; exposure from lending to retailers, developers and communities; raw-material and labor costs; warranty and construction-defect claims; regulatory requirements; and geographic concentration. Consumer loans were concentrated in Texas (39% of outstanding principal); one third party represented 35.4% of commercial-loan principal, all secured.
- Contingencies included up to $46.7 million of retailer inventory repurchase commitments, before considering resale value, with a recorded liability of $1.7 million; $11.5 million of remaining construction-loan funding commitments; and an $0.8 million reserve for mortgage-loan representations and warranties. Standard Casualty maintained a $7.0 million letter of credit secured by investments.
- Management did not expect ordinary-course litigation to materially affect financial position, liquidity or results, while acknowledging inherent uncertainty. CountryPlace’s securitized portfolios met required overcollateralization levels at quarter-end.
- In July 2015, the CEO repaid $1.1 million to Cavco for performance bonuses determined to exceed plan limits. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of recent factory-built housing growth reflects acquired businesses versus organic sales, and whether acquisition integration delivers expected benefits.
- Whether margins recover as storm-related insurance claims normalize; review subsequent claims, reinsurance recoveries and insurance-segment profitability.
- Trends in home orders, cancellations, backlog and industry financing availability, particularly given backlog is not firm before production.
- Credit quality and concentration in consumer and commercial lending, including Texas exposure and the large commercial-loan counterparty.
- Potential cash demands from repurchase commitments, construction funding, loan-sale representations and warranties, and securitization requirements.
- Whether cash generation remains sufficient to support operations, acquisitions and lending initiatives without external financing.