Cavco Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 30, 2019 (52 weeks). The filing is an annual report; it also provides unaudited fourth-quarter results. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Cavco designs and manufactures manufactured and modular homes, park model RVs, cabins, and commercial structures. Its financial services segment includes CountryPlace, which originates and services manufactured-home loans, and Standard Casualty, which provides insurance. The company operated 20 manufacturing facilities and 38 company-owned retail locations, alongside independent distributors.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $962.7 million | $871.2 million | +10.5% |
| Gross profit / margin | $205.7 million / 21.4% | $180.7 million / 20.7% | +13.9%; +0.7 percentage points |
| Income from operations | $84.1 million | $73.8 million | +14.0% |
| Net income | $68.6 million | $61.5 million | +11.6% |
| Diluted EPS | $7.40 | $6.68 | +10.8% |
| Net cash from operating activities | $32.8 million | $59.0 million | Down $26.1 million |
| Cash, cash equivalents and restricted cash | $199.9 million | $199.3 million | +$0.6 million |
| Securitized financings and other borrowings | $34.1 million | $59.8 million | Down $25.7 million |
| Total assets / stockholders’ equity | $725.2 million / $529.6 million | $674.8 million / $457.1 million | Assets +7.5%; equity +15.9% |
Factory-built housing revenue was $905.7 million, up 11.1%; financial services revenue was $57.0 million, up 2.3%. Factory-built housing pretax income rose 9.5% to $73.0 million, while financial services pretax income rose 15.4% to $13.7 million. Consolidated net margin was approximately 7.1%, broadly unchanged from FY2018.
Homes sold totaled 14,389, down 1.0%. Factory-built housing revenue per home sold increased 12.2% to $62,946, reflecting higher prices, larger and more upgraded homes, and a higher retail share. The filing says FY2019 revenue included $24.9 million of subcontracted services recognized gross under the new revenue standard; without ASC 606, reported FY2019 revenue would have been $930.3 million. This limits direct comparability of reported revenue growth.
Operating cash flow declined primarily because of higher commercial loan originations and D&O insurance premiums, partly offset by improved home-sale profitability and higher consumer-loan sale proceeds. Cash and cash equivalents alone were $187.4 million; an additional $12.5 million was restricted. Current assets were $462.0 million and current liabilities $174.0 million. Capital expenditures were $7.6 million.
At year-end, the remaining securitized bond balance was $18.4 million, with an estimated August 2019 call date; management anticipated repurchasing or refinancing it before then. CountryPlace also had $11.3 million outstanding on secured credit facilities and $5.0 million available to draw. The company said cash and operating cash flow should fund operations and growth for at least the next 12 months.
Material changes and fourth-quarter results
- Annual revenue, gross profit, operating income, and net income increased, while unit sales edged lower. Backlog fell to $128.8 million from $179.0 million, a decrease of about 28%.
- Management reported weaker fall and winter order rates for lower-priced homes, partly associated with increased distributor inventories, higher interest rates and home prices, and weather-related setup delays. Demand remained robust for larger, higher-priced homes in some markets.
- Fourth-quarter FY2019 revenue was $241.1 million versus $242.5 million a year earlier; gross profit was $55.8 million versus $54.3 million; net income was $20.0 million versus $22.1 million; diluted EPS was $2.17 versus $2.40.
- SG&A rose 13.7% to $121.6 million. It included $2.1 million of SEC-inquiry legal and other costs and $2.8 million of amortized D&O insurance premiums. The company expected about $2.1 million of quarterly premium amortization through FY2021’s second quarter.
- The company repurchased the 2005-1 securitized loan portfolio in January 2019 for $19.4 million, including interest and fees, reducing debt and interest expense.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical earnings, revenue, or shipment guidance was provided. Management cited continued need for affordable housing, but noted weaker orders for lower-price homes, constrained labor availability, and uncertain benefits from expanded GSE financing programs.
- SEC matter and leadership: The SEC issued subpoenas concerning trading in another public company’s stock. The company reported that former Chairman, President and CEO Joseph Stegmayer stepped down on November 8, 2018, following an internal investigation that identified company-policy violations related to securities trading. The internal investigation concluded, its results were shared with SEC staff, and the company continued to cooperate. The outcome, potential penalties, and total costs were uncertain. William C. Boor became CEO in April 2019.
- Cyber incident: A March 2019 cyberattack impaired some operations for up to two weeks. The company said it believed many related costs were insured, but uncovered costs could adversely affect results.
- Commitments: Maximum contingent repurchase obligations for distributor floor-plan financing were $77.1 million, before considering resale value; the recorded reserve was $2.4 million. Other commitments included an $11.0 million letter of credit and $15.3 million of remaining construction-mortgage funding commitments.
- Operating risks: Demand is cyclical and sensitive to interest rates, consumer financing availability, employment, and consumer confidence. The company also cited labor and material cost pressures, distributor financing constraints, zoning restrictions, regional concentration, weather-related insurance claims, and credit exposure from lending programs.
- Insurance experience: Standard Casualty’s results were adversely affected by increased weather-related claims in Arizona during FY2019. Reinsurance limits some catastrophe exposure, but the company remains exposed to reinsurer performance and concentrated insurance markets.
- Accounting and controls: The company adopted ASC 606 and new financial-instrument guidance in FY2019. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Progress and ultimate cost or consequences of the SEC investigation, including any further legal, regulatory, or reputational effects.
- Whether the $18.4 million 2007-1 bond was repurchased or refinanced before its anticipated August 2019 call date.
- Whether lower-priced home orders and the substantial backlog decline continued, and how distributor inventory levels affected shipments.
- Cash-flow conversion and the growth, credit quality, and concentration of commercial and consumer lending exposures.
- Costs and insurance recoveries associated with the cyber incident, and the continuing D&O premium expense.
- Comparability of reported revenue and margins after ASC 606’s gross presentation of subcontracted services.