Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended July 2, 2016. Comparisons are with the three months ended June 27, 2015, unless otherwise noted. Cavco designs and builds factory-built homes and operates consumer-finance and insurance businesses.
Financial performance
| Metric | Q1 FY2017 | Prior period | Change |
|---|---|---|---|
| Net revenue | $185.1 million | $161.7 million | +14.5% |
| Gross profit | $33.3 million | $31.8 million | +4.5% |
| Gross margin | 18.0% | 19.7% | Down 1.7 percentage points |
| Income from operations | $8.6 million | $9.2 million | Down 6.7% |
| Net income | $5.4 million | $5.4 million | Up 1.1% |
| Diluted EPS | $0.60 | $0.60 | No change |
| Operating cash flow | $8.2 million | $3.9 million | Increased $4.3 million |
- Factory-built housing revenue rose 16.9% to $172.5 million; homes sold increased 17.0% to 3,395. Revenue per home was essentially flat at $50,806. The comparison included one additional month of Fairmont Homes operations in the current period.
- Factory-built housing pretax income increased to $10.7 million from $8.0 million. Financial services revenue fell 10.4% to $12.7 million, and the segment moved from $0.6 million pretax income to a $2.3 million pretax loss.
- SG&A increased 9.0% to $24.7 million, but declined to 13.3% of revenue from 14.0%. Interest expense rose 14.4% to $1.2 million. Other income increased to $1.0 million, primarily from realized investment gains.
- The effective tax rate was 35.4%, compared with 37.6%; management attributed the lower current-period rate partly to manufacturing deductions and credits.
Financial position and liquidity
- At July 2, 2016, cash and cash equivalents were $102.5 million, total current assets $305.8 million, and total current liabilities $127.4 million. Total assets were $560.4 million and stockholders’ equity was $358.6 million.
- Securitized financings and other totaled $59.5 million, including $5.7 million current and $53.7 million noncurrent. The balance declined from $61.2 million at April 2, 2016. Cash exceeded reported securitized financings and other by approximately $43.0 million; restricted cash is separate.
- Operating activities provided $8.2 million. Investing activities used $1.2 million and financing activities used $2.3 million. Cash increased $4.7 million from the fiscal-year opening balance.
- Management said existing cash and operating cash flow should fund operations and growth for the next 12 months and beyond. The company had no credit facility and said it might seek financing depending on results and strategic opportunities.
Material changes, outlook, and risks
- Industry manufactured-home shipments rose 19.7% in the first six months of calendar 2016, according to the Manufactured Housing Institute. Cavco said the industry and company remained at relatively low production and shipment levels, but expressed the view that improving employment and consumer confidence could support continued sales growth.
- Order backlog was $54.7 million, about five weeks of production, versus $72.1 million a year earlier. Retailers may cancel orders before production without penalty, so management does not consider the backlog firm.
- Financial-services results were pressured by unusually severe Texas hail, wind, and flood claims. Reinsurance mitigated some losses. Management described the insurer as an established business but noted that claims severity varies.
- Management cited constrained consumer financing, restrictive underwriting, regulatory costs and uncertainty, and limited secondary-market financing as barriers to manufactured-home demand. Risks also include loan and retailer credit exposure, warranty claims, weather events, interest rates, raw-material and transportation costs, seasonality, competition, and acquisition integration.
- CountryPlace’s 2005-1 and 2007-1 securitized portfolios met required overcollateralization levels at quarter-end. Falling below required levels could redirect cash collections to debt repayment and affect cash-flow timing.
- Contingencies included up to $49.1 million of retailer repurchase commitments, supported by an estimated $1.7 million liability; $10.0 million of remaining construction-mortgage funding commitments; and ordinary-course litigation that management did not expect to materially affect results or liquidity. No disclosable subsequent events were reported.
- No specific financial guidance was provided. Management’s outlook was qualitative and conditional on economic conditions, sales volumes, financing availability, and strategic opportunities.
Important facts for investors to verify
- Whether factory-built housing volume growth and backlog stabilize or continue to decline, and how much of growth reflects the Fairmont comparison.
- Whether severe insurance claims recur and how reinsurance affects losses, segment profitability, and cash flow.
- Whether financial-services revenue and earnings recover as loan portfolios amortize and financing availability changes.
- Credit performance and geographic concentration in consumer loans (39% of outstanding principal in Texas and 10% in Florida), commercial lending, and contingent repurchase obligations.
- Whether cash generation remains sufficient to support operations, growth, potential acquisitions, and debt service without external financing.