Cavco Industries, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal second quarter and first six months of fiscal 2019, ended September 29, 2018; comparisons are to the periods ended September 30, 2017. Cavco manufactures and sells factory-built housing and operates consumer-finance and insurance businesses. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Sep. 29, 2018 | Year-over-year change | Six months ended Sep. 29, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $241.5 | +20.5% | $487.9 | +19.8% |
| Gross profit | $49.4 | +43.0% | $100.9 | +31.9% |
| Gross margin | 20.5% | 17.2% prior year | 20.7% | 18.8% prior year |
| Operating income | $19.4 | Up from $8.4 | $41.6 | Up from $24.1 |
| Net income | $15.6 | Up from $6.2 | $35.3 | Up from $17.9 |
| Diluted EPS | $1.67 | Up from $0.67 | $3.80 | Up from $1.96 |
- Revenue and volume: Factory-built housing revenue was $227.1 million for the quarter (+21.2%) and $459.9 million for six months (+20.9%). Financial-services revenue was $14.4 million (+10.0%) and $28.1 million (+3.8%), respectively. Homes sold rose 7.2% to 3,536 for the quarter and 9.6% to 7,423 for six months.
- Margins and earnings drivers: Management attributed factory-built housing improvement to increased sales volume, higher average selling prices reflecting input-cost inflation, modestly larger homes, and improved factory utilization. SG&A increased, but declined as a share of revenue to 12.4% from 13.0% for the quarter and to 12.1% from 12.9% for six months. The effective tax rate fell to 20.2% for the quarter and 19.2% for six months, primarily reflecting the Tax Act’s lower federal corporate tax rate and excess tax benefits from stock-option exercises.
- Cash flow: Six-month operating cash flow was $17.8 million, versus $8.7 million a year earlier; investing cash outflow was $3.2 million and financing cash outflow was $4.2 million. Cash, cash equivalents and restricted cash ended at $209.7 million, up from $199.3 million at fiscal year-end. Operating cash flow benefited from earnings, but was partly absorbed by consumer and commercial lending, loan originations, and higher receivables.
- Liquidity and debt: Cash and cash equivalents were $195.5 million, with an additional $14.2 million in restricted cash. Total assets were $715.2 million and stockholders’ equity $494.7 million. Securitized financings and other debt totaled $56.1 million, down from $59.8 million at March 31, 2018. Management said available cash and operating cash flow should fund operations and growth for at least the next 12 months. Two securitized bond balances of $19.1 million and $20.7 million have call dates in January and July 2019; Cavco expects to purchase or refinance them by those dates. The home-only lending facilities had $5.0 million available to draw.
Material changes and management commentary
- Factory-built housing revenue growth reflected higher selling prices and home volume. Revenue per home sold rose 13.0% for the quarter and 10.3% for six months; management cautioned that this measure varies with channel, product mix, and customer-selected options.
- Industry shipments increased 9.7% for the first eight months of calendar 2018, according to the Manufactured Housing Institute. Cavco’s order backlog was approximately $204 million at quarter-end, versus $199 million a year earlier. Orders may be canceled before production begins, so backlog is not considered firm until production starts.
- Management reported labor-market constraints as a challenge to increasing production and said it had raised production levels and product pricing to address demand and rising labor and material costs. Higher costs and backlog could delay realization of pricing benefits.
- ASC 606 was adopted April 1, 2018, without restating prior periods. For the six months, adoption increased reported net income by approximately $1.0 million versus results without adoption; reported revenue was $22.8 million higher, with related cost of sales and SG&A also higher. Gross-basis recognition of certain subcontracted site services contributed $12.8 million to six-month revenue. A separate accounting change moved unrealized marketable-equity gains and losses into earnings; six-month income before taxes included a $1.1 million unrealized investment gain.
- There is no quantified earnings or revenue guidance in the provided filing text. Management described demand and growth opportunities, including affordable housing, community-owner orders, and potential expanded GSE financing, while noting that meaningful demand benefits from new GSE programs had not yet materialized.
Risks, contingencies, and unusual items
- SEC investigation and leadership transition: Cavco received an SEC subpoena on August 20, 2018; its former CEO received a related subpoena on October 1. The company said it believed the former CEO traded in a public company’s stock in personal and company accounts while Cavco had agreed to refrain from such trading. An independent investigation was underway. On November 8, after the quarter-end, the former CEO stepped down following findings of company-policy violations related to securities trading; Daniel L. Urness became President and Acting CEO, and Joshua J. Barsetti assumed principal financial-officer duties. Cavco warned that investigation-related costs, including advancement of the former CEO’s expenses under indemnity arrangements, could materially affect earnings over several quarters, and that penalties, litigation, management distraction, and reputational harm were possible.
- Weather and insurance: An Arizona windstorm increased insurance claims in the quarter. Hurricanes Florence and Michael did not affect Cavco operations, though replacement-home demand could follow. Reinsurance limits exposure, but Cavco remains responsible if reinsurers fail to meet obligations.
- Credit and financing exposure: Consumer loan balances were concentrated in Texas (44.7%) and Florida (10.6%). Commercial lending expanded; receivables had state and counterparty concentrations. Consumer and commercial loan performance, financing availability, and collateral values may affect results and liquidity.
- Commitments: Maximum contingent liability under retailer inventory-financing repurchase agreements was approximately $71.4 million, before considering home resale value; the recorded liability was $2.3 million. Remaining construction-loan funding commitments were $18.3 million. Mortgage representation-and-warranty reserve was $1.1 million.
- Management did not expect ordinary-course litigation to materially affect financial position, liquidity, or results, but acknowledged outcomes remain uncertain. Securitized debt overcollateralization requirements were met at quarter-end; a shortfall could redirect cash collections to debt repayment and affect cash-flow timing.
Most important facts for investors to verify
- Progress, findings, costs, and any regulatory or legal consequences of the SEC and Audit Committee investigations, including effects of the November 8 leadership changes.
- Whether revenue, pricing, and margins remain strong after separating volume and price/mix effects from accounting changes and pass-through site-service revenue.
- Whether labor availability, rising input costs, and cancellable backlog limit Cavco’s ability to increase production or realize price increases.
- Performance and funding needs of consumer and commercial loan portfolios, including geographic concentrations, credit losses, and available lending facilities.
- Plans and terms for refinancing or purchasing the securitized bonds due for call in 2019, and maintenance of required overcollateralization.