Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 28, 2019; comparable periods ended December 29, 2018. The fiscal year ends March 28, 2020. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Cavco manufactures and sells factory-built homes, modular homes and park model RVs, and provides consumer financing and insurance. It reported two segments: factory-built housing and financial services. In August 2019, Cavco acquired selected assets and liabilities of Destiny Homes, adding a manufacturing facility in Georgia.
Key financial results
| Metric | Three months ended Dec. 28, 2019 | Year-over-year change | Nine months ended Dec. 28, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $273.7 | +17.1% | $806.4 | +11.8% |
| Gross profit / margin | $59.9 / 21.9% | $49.0 / 21.0% | $178.6 / 22.1% | $149.9 / 20.8% |
| Operating income / margin | $23.0 / 8.4% | $18.2 / 7.8% | $70.4 / 8.7% | $59.8 / 8.3% |
| Net income | $20.9 | +56.1% | $63.1 | +29.6% |
| Diluted EPS | $2.25 | vs. $1.44 | $6.81 | vs. $5.24 |
Factory-built housing revenue grew 16.7% in the quarter and 11.5% year to date, reflecting higher sales volume, product mix and average selling prices; Destiny Homes contributed $11.2 million and $17.6 million, respectively. Financial services revenue rose 24.4% and 15.5%. Nine-month home sales increased 5.4% to 11,453; factory-built housing revenue per home rose 5.8% to $66,233.
Quarterly gross margin gains were modest in factory-built housing and substantially greater in financial services, where reduced weather-related claims helped. Selling, general and administrative expenses increased 19.5% for the quarter and 20.1% year to date, faster than revenue. The quarter included $0.9 million of SEC-inquiry legal costs and $2.1 million of amortized premiums for additional directors and officers insurance.
Cash flow, balance sheet and debt
- Operating cash flow: $68.3 million for nine months, versus $16.4 million a year earlier. Management attributed the improvement mainly to higher profitability and lower inventory. Cash flow includes substantial consumer-loan originations ($121.6 million) and loan-sale proceeds ($117.1 million).
- Investing and financing: Investing used $18.9 million, including $15.9 million paid for Destiny Homes. Financing used $19.1 million, including repayments of securitized financings. Cash, cash equivalents and restricted cash rose $30.4 million to $230.3 million.
- Liquidity: At December 28, cash and cash equivalents were $216.9 million, restricted cash $13.4 million, and current assets $502.0 million versus current liabilities of $161.8 million. Management said available cash and operating cash flow should fund operations and growth for the next 12 months and foreseeable future.
- Debt: Debt and finance lease obligations totaled $16.0 million, down from $34.1 million at March 30, 2019. The 2007-1 securitized financing was repurchased in August 2019; no securitized financing remained. Secured credit facilities totaled $10.8 million at a 4.91% weighted-average rate and converted to amortizing loans with balloon payments at maturity.
- Other balance-sheet changes: Total assets were $787.4 million, up from $725.2 million at March 30; stockholders’ equity was $595.3 million, up from $529.6 million. Operating lease right-of-use assets and liabilities reflect adoption of the new lease standard; comparative periods were not restated.
Outlook, commentary and risks
No specific earnings or revenue guidance was provided. Management described the $115 million order backlog as healthy, but below $166 million a year earlier; the prior-year backlog had been elevated by distributor orders and is not firm because orders may be canceled before production. Management highlighted affordable-housing demand, expansion opportunities and potential strategic acquisitions, while noting that industry shipments declined 2.9% in the first 11 months of calendar 2019.
Management cited production labor recruitment and retention, limited financing and secondary-market options for manufactured-home buyers, borrower and distributor credit exposure, and weather-related insurance claims as business risks. Texas and Florida represented 41% and 14% of consumer-loan principal, respectively. Other exposures include a $77.2 million maximum contingent liability under distributor repurchase agreements (with a $2.5 million recorded reserve), $19.2 million of remaining construction-loan funding commitments, and mortgage-sale representations and warranties.
Cavco continued cooperating with an SEC enforcement investigation into trading in another public company’s securities by the company, its former CEO and others outside the company. The company reported $2.5 million of related legal and other costs for the nine months and expects further costs, including advancement of expenses under the former CEO’s indemnity agreement. Management did not believe other pending ordinary-course litigation would materially affect results, but noted that outcomes are uncertain. Other income included a $3.4 million gain on sale of idle land for the nine-month period; marketable-investment gains also affected reported results. The quarter’s 15.5% effective tax rate included a $1.7 million tax-credit benefit recognized following legislation enacted in December 2019.
Management reported effective disclosure controls as of quarter-end and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and margin growth persist after considering product mix, lower commodity costs, weather-related claims, and investment and land-sale gains.
- How the $115 million backlog translates into production and sales, given its year-over-year decline and cancellation terms.
- Whether loan portfolio performance, geographic concentrations, construction commitments and distributor repurchase exposures change materially.
- The eventual scope, cost and outcome of the SEC investigation, including future legal expense and indemnification advances.
- The acquired Destiny Homes’ final purchase-price allocation and contribution to earnings; reported acquisition values remained preliminary, and purchase-accounting inventory adjustments affected post-acquisition results.