Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2011 (the first quarter of fiscal 2012). Dollar amounts are in millions unless otherwise stated. Cavco manufactures and sells factory-built housing and, following its Palm Harbor acquisition, also operates consumer finance and insurance businesses.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $98.981 | $47.505 |
| Gross profit / margin | $16.160 / 16.3% | $6.441 / 13.6% |
| Operating income (loss) / margin | ($0.830) / (0.8%) | $1.205 / 2.5% |
| Net income attributable to Cavco shareholders | $8.608 | $0.518 |
| Diluted earnings per share | $1.25 | $0.08 |
| Operating cash flow | $5.202 | $0.884 |
Reported net income included an $18.780 million gain on bargain purchase from Palm Harbor; without that unusual gain, the quarter’s reported earnings are not a clean measure of recurring performance. The acquisition also increased SG&A, which reached $16.990 million, including $0.744 million of acquisition costs. Interest expense was $1.461 million, principally related to CountryPlace securitized financings.
Cash and cash equivalents fell to $33.537 million from $76.513 million at March 31, 2011. Investing activities used $28.551 million, mainly for the Palm Harbor transaction, while financing activities used $19.627 million, including repayment of $19.456 million of acquired subsidiary debt. At June 30, current assets were $159.129 million and current liabilities were $88.396 million. Restricted cash was an additional $6.994 million and is not freely available for general use.
At quarter-end, securitized financings were $99.505 million and the construction lending line was $4.782 million. Cavco reported no access to an external credit facility. Total assets were $428.526 million; stockholders’ equity was $160.835 million, with redeemable noncontrolling interest of $80.843 million reported separately.
Material changes and acquisition
- Net sales increased 108.4% year over year, primarily because Palm Harbor’s results were included from its April 23, 2011 acquisition date. The acquired Standard Casualty insurance business closed June 10.
- Combined manufacturing operations sold 1,851 homes, compared with 1,316 a year earlier. Management attributed the higher gross margin mainly to the addition of higher-margin finance and insurance businesses.
- The $83.9 million Palm Harbor purchase added five operating production facilities, 49 retail locations, finance businesses CountryPlace, and Standard. The purchase price allocation remained provisional and could change.
- Unaudited pro forma results, assuming the acquisition occurred April 1, 2010, show revenue of $113.034 million and a $0.968 million loss attributable to Cavco shareholders for Q1 FY2012, versus revenue of $123.681 million and income of $9.270 million for Q1 FY2011. These figures are not actual reported results or a forecast.
- Factory-built housing reported an operating loss of $2.671 million; financial services reported operating income of $2.746 million. General corporate charges were $0.905 million.
Outlook, risks and contingencies
Management said cash and expected operating cash flow should fund operations and growth for the next twelve months and the foreseeable future, while noting that financing might be needed depending on operating results and strategic opportunities. No specific earnings or revenue guidance was provided. Management expects potential efficiencies and cost savings from the acquisitions, but said transaction and transition expenses may initially mask some benefits.
The industry remained at historically low shipment levels; Cavco reported a $20.0 million sales backlog at June 30, equivalent to about three weeks of production. Management cited weak housing demand, unemployment, limited consumer mortgage availability, restricted retailer inventory financing, competition from discounted site-built homes, and raw-material and transportation cost pressures. CountryPlace had stopped originating chattel loans and non-conforming mortgages because securitization markets were effectively closed and other long-term funding was unavailable. A 10% increase in average interest rates was estimated to reduce the fair value of its held-for-investment loan portfolio by approximately $4 million.
Contingencies included up to $11.6 million of retailer inventory repurchase commitments, before considering resale value of the homes, with a recorded liability of $0.690 million. A $0.250 million letter of credit supported a workers’ compensation program. Management did not expect pending ordinary-course litigation to have a material adverse effect, but noted outcomes remain uncertain. Acquisition integration, loan credit quality, liquidity, and the provisional purchase accounting are important areas of uncertainty.
Important facts for investors to verify
- How much of reported earnings reflects the nonrecurring $18.780 million bargain-purchase gain, and what are the acquired businesses’ ongoing margins?
- Whether the Palm Harbor purchase-price allocation, including consumer loans, securitized debt, intangible assets and deferred taxes, changes materially when finalized.
- CountryPlace loan performance, funding availability, securitization obligations and the implications of paused loan originations.
- Cash availability after acquisition spending, required debt service and restricted-cash needs; management’s liquidity assessment assumes ongoing cash generation.
- Whether expected acquisition synergies materialize amid weak demand, a short backlog, and risks from retailer financing and repurchase commitments.