Cavco Industries, Inc. — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2024, ended September 30, 2023; comparisons are with the periods ended October 1, 2022. Amounts are in millions unless otherwise stated.
Business context and outlook
Cavco designs and manufactures factory-built housing and operates a financial services segment focused on manufactured-home lending and insurance. It has 31 production lines and 68 company-owned U.S. retail stores. Management reported that higher interest rates and inflation were tempering demand; industry shipments through August 2023 fell 27% year over year. Backlog was $170 million at quarter-end, versus $177 million at July 1, 2023 and $651 million a year earlier. The company gave no specific financial guidance.
Financial performance
| Metric | Quarter ended Sep. 30, 2023 | Prior-year quarter | Six months ended Sep. 30, 2023 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $452.0 | $577.4 | $927.9 | $1,165.7 |
| Gross profit / margin | $107.0 / 23.7% | $157.6 / 27.3% | $224.8 / 24.2% | $302.3 / 25.9% |
| Operating income | $45.5 | $90.7 | $101.7 | $169.3 |
| Net income attributable to Cavco stockholders | $41.5 | $74.1 | $87.9 | $133.7 |
| Diluted earnings per share | $4.76 | $8.25 | $10.05 | $14.88 |
| Operating cash flow | Not provided by quarter | $160.2 | $162.9 |
Quarterly revenue declined 21.7% and six-month revenue declined 20.4%. Factory-built housing revenue fell 22.4% for the quarter and 21.3% for six months, reflecting lower sales volume and selling prices, partly offset by Solitaire Homes. Homes sold declined 16.9% for the quarter and 15.6% for six months; revenue per home sold fell 6.7% and 6.8%, respectively. Financial services revenue increased 1.0% for the quarter and 9.5% for six months, primarily on more insurance policies in force.
Consolidated gross margin contracted year over year. Management attributed factory-built housing margin pressure mainly to lower average selling prices; financial services gross profit was affected by higher weather-related insurance claims in Arizona and Texas. SG&A declined, but its share of revenue rose to 13.6% for the quarter from 11.6% and to 13.3% for six months from 11.4%, as revenue fell faster than expenses. Higher interest income partly offset lower operating income.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $377.3 million at September 30, 2023, versus $271.4 million at April 1; cash, cash equivalents and restricted cash totaled $395.0 million.
- Operating cash flow was $160.2 million for the first six months. Investing used $6.4 million and financing used $42.2 million; cash and restricted cash increased $111.5 million from the fiscal-year opening balance.
- Total assets were $1.369 billion and stockholders’ equity was $1.019 billion. Current liabilities were $305.5 million.
- No borrowings were outstanding under the $50 million revolving credit facility, which expires in 2027; the company reported compliance with its covenants. Other secured financing was $2.1 million. Lease liabilities totaled $41.8 million, including operating and finance leases.
- The company paid $40.9 million for common-stock repurchases during the six-month period. In the quarter, it repurchased 172,941 shares at an average $270.51 per share. A new $100 million repurchase authorization was approved in August 2023.
Material changes, risks and unusual items
- Management cited demand sensitivity to interest rates, inflation and consumer confidence, as well as possible cost or availability pressures for materials and labor. Material shortages could cause production inefficiencies, delays or lower margins; no significant production halts occurred in the current period.
- Maximum exposure under distributor inventory repurchase agreements was approximately $157 million, before considering resale value; the recorded reserve was $3.7 million. One second-quarter demand was settled by obtaining the inventory shortly after period-end, with no reserve deemed necessary.
- On September 28, 2023, Cavco amended its Craftsman purchase agreement to acquire the remaining 30% interest for cash on December 31, 2023. The filing does not provide a clear purchase price. The former redeemable noncontrolling interest was reclassified as a current liability at fair value.
- The Solitaire Homes acquisition, completed in January 2023 for approximately $110.8 million, remained subject to purchase-accounting adjustments; six-month adjustments increased goodwill by $1.0 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain. Reinsurance exposures include dependence on reinsurers meeting their obligations.
- Management believes available cash and operating cash flows will fund operations and obligations for at least the next 12 months. Future acquisitions or strategic investments may use cash; additional financing, if needed, may not be available on satisfactory terms.
Important facts for investors to verify
- Whether home sales volume, average selling prices and backlog stabilize, and how lower industry shipments affect future results.
- Whether gross margins recover and whether weather-related insurance claims remain elevated.
- The cash consideration and funding for the planned Craftsman buyout, which are not clearly stated in this filing.
- Potential losses under inventory repurchase commitments, loan portfolios and insurance reinsurance arrangements.
- Progress and final purchase accounting for Solitaire Homes, and the pace of share repurchases relative to cash generation.