Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 1, 2022; comparable periods ended December 26, 2020. Amounts are in U.S. dollars. Cavco designs and manufactures factory-built housing and operates consumer-finance and insurance businesses.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $431.7 million, up 49.5% | $1,121.7 million, up 39.9% |
| Gross profit / margin | $115.2 million / 26.7% (20.5% prior year) | $279.1 million / 24.9% (21.0% prior year) |
| Operating income | $54.9 million, versus $23.8 million | $132.6 million, versus $61.9 million |
| Net income attributable to Cavco common stockholders | $79.4 million; diluted EPS $8.57 | $144.1 million; diluted EPS $15.54 |
| Operating cash flow | Not reported separately for the quarter | $126.0 million, versus $91.6 million |
Quarterly factory-built housing revenue rose 52.7% to $413.6 million; financial-services revenue increased 1.0% to $18.1 million. For the nine months, factory-built housing revenue rose 42.4% to $1,068.0 million and financial-services revenue increased 4.0% to $53.7 million. Home sales volume and average factory-built housing revenue per home both increased; nine-month revenue per home rose 26.1% to $91,116.
Liquidity and capital: Cash and cash equivalents were $267.3 million at January 1, 2022, compared with $322.3 million at April 3, 2021; cash, cash equivalents and restricted cash totaled $283.1 million. Current assets were $703.5 million versus current liabilities of $272.8 million. Total debt, finance leases and mandatorily redeemable noncontrolling-interest obligations were $11.8 million, including $6.3 million of finance leases; secured term loans had been paid in full. Stockholders’ equity was $806.2 million. Nine-month investing cash outflow was $147.8 million, primarily reflecting acquisitions; financing cash outflow was $34.3 million, including $29.1 million of share repurchases.
Material changes and notable items
- Revenue and factory-built housing gross profit benefited from higher selling prices, increased unit volume and the September 2021 Commodore acquisition. Commodore contributed $77.5 million of revenue and $1.8 million of net income from acquisition through period-end; Craftsman contributed $9.0 million of revenue and $0.9 million of net income.
- Commodore was acquired for approximately $146.2 million in cash. The deal added six manufacturing facilities and two retail locations; purchase accounting remains preliminary. The company reported $2.7 million of acquisition-related deal costs and said it incurred no acquisition debt.
- Factory-built housing gross margin improved, but management cited higher material costs and Commodore purchase-accounting effects as offsets. Consolidated SG&A increased to 14.0% of quarterly revenue from 12.3%.
- Reported income taxes included estimated, non-recurring net tax credits of $34.4 million under Internal Revenue Code Section 45L, including $4.0 million related to fiscal 2022. The credits produced a quarterly tax benefit of $20.7 million and a nine-month tax benefit of $0.9 million. The credit expired in its then-current form on December 31, 2021; earnings comparisons are therefore affected by this unusual item.
- Other income included a $3.3 million non-cash gain from remeasuring Cavco’s previously held Craftsman interest when it obtained control.
Outlook, risks and contingencies
- Management said housing demand remained strong, although order rates had moderated from recent extreme highs and remained above pre-COVID levels. Backlog was $1.1 billion at January 1, 2022, consistent with the prior quarter and up $633 million, or 134.1%, year over year; $277 million of the increase was attributable to Commodore.
- Factory utilization was approximately 80%, back to pre-pandemic levels, compared with 75% during the prior four quarters. Management cited continuing hiring challenges, employee absenteeism, supply disruptions and volatile material prices; price increases may lag cost escalation.
- Management stated that cash and operating cash flow should fund operations and growth for the next 12 months and foreseeable future. It also noted that future acquisitions or strategic investments could affect liquidity.
- The SEC’s civil action against Cavco and two former executives alleges securities-law violations related to trading in another company’s shares. The court denied Cavco’s motion to dismiss on January 25, 2022, and the case proceeded to discovery. Cavco said it did not expect a material adverse effect, but cannot predict the outcome.
- Repurchase agreements for distributor inventory financing had a maximum contingent exposure of $117.3 million, before considering resale value, with a $3.2 million reserve. Construction-period mortgage commitments not yet advanced totaled $8.9 million. The filing also describes mortgage representations-and-warranties, interest-rate-lock and forward-sale commitments.
- Consumer-loan exposure is concentrated in Texas (41% of portfolio principal) and Florida (16%). Management cautioned that required payments to certain loan investors could create cash-flow pressure if borrower collections weaken, including under extended COVID-19 forbearance.
Important facts for investors to verify
- How much reported growth and backlog reflects acquired businesses versus organic activity, and how preliminary Commodore purchase accounting may change.
- The sustainability of higher home prices, unit volumes and margins amid labor constraints, supply availability and material-cost inflation.
- The timing and collection of the Section 45L tax-credit refunds and the effect of their nonrecurring nature on future earnings comparisons.
- Developments and potential financial consequences of the SEC litigation and other contingencies.
- Cash conversion, loan-portfolio credit quality and the company’s capital-allocation plans, including remaining authorization under the $100 million share-repurchase program.