Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended September 26, 2020. Comparisons are with the periods ended September 28, 2019, unless noted. Cavco manufactures factory-built housing and operates consumer finance and insurance businesses.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $258.0 million, down 4.0% | $512.8 million, down 3.7% |
| Gross profit / margin | $53.5 million / 20.8%, versus $58.5 million / 21.8% | $108.9 million / 21.2%, versus $118.8 million / 22.3% |
| Operating income | $18.1 million, versus $22.4 million | $38.1 million, versus $47.4 million |
| Net income | $15.0 million, versus $20.9 million | $31.7 million, versus $42.2 million |
| Diluted EPS | $1.62, versus $2.25 | $3.42, versus $4.56 |
| Operating cash flow | Six-month cash provided: $74.6 million, versus $43.6 million |
Factory-built housing generated quarterly revenue of $241.0 million, down 4.6%; financial services revenue was $17.0 million, up 6.4%. Homes sold fell 9.4% in the quarter and 10.7% for six months, while factory-built housing revenue per home sold increased 5.2% and 7.0%, respectively. Factory-built housing pretax income for six months was $35.9 million, versus $46.8 million; financial services pretax income was $5.4 million, versus $7.8 million.
Quarterly gross margin was flat year over year in factory-built housing, but declined 18.1 percentage points in financial services to 43.4%, primarily reflecting higher weather-related insurance claims and lower interest income on acquired consumer loans. Six-month consolidated gross margin declined 1.1 percentage points. Other income fell to $1.7 million for the quarter and $3.6 million for six months, partly because the prior-year periods included a $3.4 million gain on idle land. Marketable-equity investment gains partly offset that decline.
Balance sheet and liquidity
- Cash and cash equivalents were $312.2 million at September 26, 2020, up from $241.8 million at March 28; cash, cash equivalents and restricted cash totaled $329.3 million.
- Total assets were $882.5 million and stockholders’ equity was $640.7 million. Current assets were $597.4 million and current liabilities were $208.2 million.
- Debt and finance lease obligations totaled $14.1 million, including $9.8 million of secured credit facilities; the converted loans carried a 4.91% weighted-average rate. Six-month interest expense was $0.4 million.
- Six-month investing cash use was $0.1 million and financing cash use was $0.9 million. Operating cash flow benefited from customer deposits, collections and payment timing. Consumer loan originations were $82.4 million and loan-sale proceeds were $80.6 million.
Management stated that available cash and operating cash flow should fund operations and growth for at least the next 12 months and into the foreseeable future. The company reported no material change in contractual obligations.
Operating trends, outlook and risks
- COVID-19-related workforce absenteeism, hiring constraints, material shortages and health protocols reduced production efficiency. Average plant capacity utilization was about 65% in the quarter, ending at about 70%, compared with pre-pandemic levels above 80%.
- Home sales order rates were nearly 65% above the prior-year quarter. Backlog reached $321 million, up from $137 million a year earlier and $157 million at June 27, 2020. Management cautioned that orders can be canceled before production begins and are not firm until then.
- Management’s stated focus is to improve production capacity, workforce recruitment and retention, and product offerings to address demand. Industry shipments declined 1.4% in the first eight months of calendar 2020. The filing provides no quantitative earnings or revenue guidance.
- COVID-19 creates uncertainty around demand, labor, supply chains and financial-services collections. CountryPlace’s servicing cash flows could be affected by borrower forbearance and late payments. Loan-loss reserves reflect management’s assessment of pandemic-related risks.
- Consumer loans were concentrated in Texas (35%) and Florida (19%). A single independent commercial-finance third party and affiliates represented 17.9% of commercial-loan principal, all secured.
- The company remains subject to an SEC investigation concerning securities trading directed by former CEO Joseph Stegmayer. The SEC issued a Wells Notice to CFO Dan Urness, who took leave; Paul Bigbee was appointed Principal Financial Officer and Principal Accounting Officer. Cavco could not estimate any potential loss and expects further investigation-related costs.
- Two California putative wage-and-hour class actions were scheduled for mediation in January 2021. Management did not believe pending matters were likely to have a material adverse effect, but noted outcomes could change.
- On October 27, 2020, after quarter-end, the board approved a $100 million stock repurchase authorization, replacing the prior $10 million authorization. Repurchases are discretionary and not assured.
Most important facts for investors to verify
- Whether Cavco can increase production and convert the elevated, partly cancelable backlog into completed sales without further margin pressure.
- Whether lower home volumes, weather-related insurance claims and weaker loan interest income persist, and how they affect segment profitability.
- Changes in consumer and commercial loan delinquencies, loss reserves, forbearance-related servicing cash flows and geographic or counterparty concentrations.
- Developments in the SEC investigation, potential settlement or enforcement costs, and the company’s financial leadership arrangements.
- Whether the authorized buyback is implemented and how it compares with acquisition, investment and other capital needs.