Cavco Industries, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Fiscal quarter and nine months ended December 29, 2018; comparisons are with periods ended December 30, 2017. Amounts are in U.S. dollars. Cavco manufactures factory-built housing and operates consumer-finance and insurance businesses.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $233.7m | $221.4m | $721.6m | $628.7m |
| Gross profit | $49.0m | $49.9m | $149.9m | $126.4m |
| Operating income | $18.2m | $23.8m | $59.8m | $47.9m |
| Net income | $13.4m | $21.4m | $48.7m | $39.4m |
| Diluted EPS | $1.44 | $2.33 | $5.24 | $4.28 |
| Gross margin | 21.0% | 22.5% | 20.8% | 20.1% |
- Quarterly revenue increased 5.6%, while net income fell 37.5%. Factory-built housing revenue rose 6.4%; financial-services revenue declined 5.9%. Homes sold decreased 6.9% to 3,447, while factory-built housing revenue per home sold increased 14.2% to $63,923.
- For the nine-month period, revenue increased 14.8% and net income increased 23.6%. Factory-built housing revenue rose 15.8%; homes sold increased 3.8% to 10,870, and revenue per home sold rose 11.6% to $62,576.
- Quarterly operating income declined 23.6%; quarterly gross margin fell 1.5 percentage points. Nine-month gross margin improved 0.7 percentage points. Higher home prices and improved factory utilization supported factory-built housing results; input-cost inflation, product mix, and expense growth affected margins.
Cash, liquidity and debt
- At December 29, 2018, cash and cash equivalents were $192.9m; cash, cash equivalents and restricted cash totaled $204.6m. Total current assets were $449.7m and current liabilities $186.1m.
- Nine-month operating cash flow was $16.4m, versus $13.8m a year earlier. Investing activities used $5.2m and financing activities used $5.8m. Capital expenditures were $6.3m.
- Reported securitized financings and other debt totaled $54.6m, including $38.4m of acquired securitized financings. On January 15, 2019, Cavco repurchased the 2005-1 loan portfolio for $19.4m cash, reducing the related liability by $19.2m. The remaining 2007-1 portfolio was $19.2m, with a July 2019 call date; management anticipated repurchasing or refinancing it by then.
- Consumer loans receivable, net, were $91.3m, down from $95.0m at March 31, 2018. Commercial loans receivable, net, rose to $37.0m from $16.6m.
Changes, outlook and risks
- Management said the prior-year quarter benefited from a $3.4m favorable dispute settlement and FEMA disaster-relief home production. Current-quarter factory-built housing results included higher selling prices and improved factory utilization.
- Quarterly financial-services gross profit fell 28.9%, mainly due to Arizona hailstorm insurance claims. Reinsurance limited losses on events exceeding $1.5m, but the business remains exposed to weather-related claims and reinsurer performance.
- Management reported weaker-than-expected winter orders for lower-priced homes, citing higher retail inventories and possible effects from rising interest rates and home-price inflation. Demand for larger, higher-priced homes remained robust, but constrained labor limited production increases. Backlog was approximately $166m versus $207m a year earlier; the prior-year backlog included FEMA and Hurricane Harvey-related orders, and retailers may cancel orders before production. Management said the need for affordable housing remained strong. No specific financial guidance was provided.
- Management stated that cash and operating cash flow should fund operations and growth for at least the next 12 months. Potential acquisitions, strategic investments, lending growth, and refinancing could affect liquidity.
- The SEC issued subpoenas concerning trading in another public company’s stock. Cavco said its former CEO, Joseph Stegmayer, stepped down November 8, 2018, after an independent internal investigation identified company-policy violations related to securities trading; the SEC and Audit Committee investigations were ongoing. Cavco recorded $1.3m of related third-quarter legal and other expense and expected further costs over several quarters. The company purchased $15.3m of additional D&O insurance; it expects approximately $2.1m of quarterly premium amortization through Q2 FY2021.
- Other exposures include up to $72.5m of contingent retailer inventory-finance repurchase commitments, against a recorded reserve of $2.4m; mortgage representations-and-warranties obligations; and $15.5m of remaining construction-loan commitments. The filing says ordinary-course litigation was not expected by management to have a material adverse effect, but outcomes remain uncertain.
- Accounting changes affected comparability: ASC 606 was adopted using the modified retrospective method, and ASU 2016-01 moved unrealized equity investment gains and losses into earnings. The latter reduced pretax income by $2.9m in the quarter and $1.5m for nine months, according to the filing. ASC 606 also increased reported revenue and related costs by presenting certain subcontracted services gross.
Key facts for investors to verify
- Progress and potential financial, regulatory, management-time, and reputational consequences of the SEC and Audit Committee investigations, including D&O insurance coverage and related costs.
- Whether the slowdown in lower-priced home orders persists, how backlog and retail inventories change, and whether labor constraints limit production of higher-demand homes.
- Underlying earnings trends apart from investment-market losses, unusual prior-year benefits, investigation expenses, D&O premiums, and accounting-presentation changes.
- Insurance claims, reinsurance recoveries and counterparty exposure, plus credit quality and geographic concentration in consumer and commercial loan portfolios.
- Completion and funding of the 2007-1 securitized-debt repurchase or refinancing, and continued compliance with securitization overcollateralization requirements.