Cavco Industries, Inc. — FY2016 Form 10-K Summary
Business context and reporting period. Cavco designs and manufactures manufactured and modular homes, park model RVs, cabins and commercial structures, and also provides home financing and insurance. The fiscal year ended April 2, 2016 and comprised 53 weeks; comparisons are with the fiscal year ended March 28, 2015. The filing is an annual report, not a quarterly filing.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $712.4 million | $566.7 million | +25.7% |
| Gross profit / margin | $144.4 million / 20.3% | $126.1 million / 22.3% | Profit +14.5%; margin down 2.0 points |
| Operating income | $46.3 million | $38.5 million | +20.4% |
| Net income attributable to Cavco shareholders | $28.5 million | $23.8 million | +19.8% |
| Diluted EPS | $3.15 | $2.64 | +19.3% |
| Operating cash flow | $43.5 million | $25.7 million | +$17.8 million |
| Cash and cash equivalents at year-end | $97.8 million | $96.6 million | +$1.2 million |
| Securitized financings and other debt | $61.2 million | $67.0 million | Down $5.8 million |
Factory-built housing revenue rose 27.5% to $655.1 million; financial-services revenue rose 8.0% to $57.2 million. Home sales increased 23.4% to 12,339, and factory-built housing revenue per home rose 3.3% to $53,096. Financial-services pretax income fell 29.6% to $8.6 million, while factory-built housing pretax income increased 41.0% to $35.4 million.
Current assets were $298.7 million and current liabilities were $125.1 million. Total stockholders’ equity was $353.2 million. Investing activities used $38.2 million, including $28.1 million for the Chariot Eagle and Fairmont acquisitions; financing activities used $4.1 million. Restricted cash totaled $11.3 million and was unavailable for general operating purposes.
Material changes versus the prior year
- FY2016 results include Chariot Eagle, acquired March 30, 2015, and Fairmont Homes, acquired May 1, 2015. Together they contributed $88.3 million of revenue and $1.9 million of net income.
- Management attributed most factory-built housing revenue growth to the acquisitions, with the remainder from growth in existing operations. Capacity utilization in the fourth quarter increased to approximately 60% from 55%.
- Consolidated gross margin declined from 22.3% to 20.3%. Financial-services gross profit decreased 12.4%, primarily because of higher insurance claims and lower interest income from amortizing securitized loan portfolios.
- Operating cash flow improved, while year-end inventory increased to $94.8 million from $75.3 million. Commercial loans receivable, net, increased to $25.5 million from $18.1 million.
Outlook, risks and unusual items
- Outlook: Management said industry shipments had improved modestly but remained low by historical standards. It cited constrained consumer financing, low employment and consumer confidence as obstacles, while identifying demographic demand and rental-housing activity as potential sources of growth. The filing provides no specific earnings or revenue guidance. Management stated that cash and operating cash flow should fund operations and growth for at least the next 12 months.
- Industry and financing risks: Manufactured housing is cyclical and seasonal, and demand depends on consumer credit availability, interest rates, employment and confidence. New CFPB mortgage rules and other regulatory requirements may further constrain chattel and non-conforming lending. CountryPlace’s access to long-term securitization funding was limited.
- Insurance and weather: Severe Texas storms during FY2016 caused unusually high claims, partly mitigated by reinsurance. After year-end, further severe spring weather increased claims; the ultimate cost and reinsurance recoveries were not yet known when the filing was prepared.
- Contingencies: Maximum retailer floor-plan repurchase obligations were $46.6 million, compared with $28.3 million a year earlier; the recorded reserve was $1.7 million. Other disclosed commitments included $7.0 million of letters of credit and $8.5 million of remaining construction-loan advances. CountryPlace also had $785,000 reserved for mortgage-sale representations and warranties.
- Other items: The warranty reserve increased to $13.4 million from $10.0 million. The CEO repaid $1.1 million in July 2015 for performance bonuses determined to exceed plan limits. Management and the auditor reported effective internal controls, but the assessment excluded Chariot Eagle and Fairmont Homes, which represented approximately 12% of revenue and 5% of assets.
- Management said pending ordinary-course litigation was not expected to materially affect financial position, liquidity or results, while noting that future outcomes remain uncertain. Goodwill was $69.8 million; no impairment was recorded for FY2016.
Important facts for investors to verify
- How much of revenue and earnings growth came from acquired businesses versus organic operations, and whether acquisition-related growth and expected synergies continue.
- Whether margins recover after the FY2016 decline, particularly in financial services, and how elevated Texas storm claims and reinsurance recoveries affect subsequent results.
- Credit quality, delinquencies and loss assumptions for consumer and commercial loans, including geographic and counterparty concentrations.
- Potential cash and earnings exposure from the increased $46.6 million retailer repurchase commitments, mortgage-sale representations and warranties, and other contingent commitments.
- Whether consumer and retailer financing availability improves, and the effects of mortgage regulation and limited secondary-market funding on home demand.
- Whether backlog converts into shipments: the $47.9 million year-end backlog was approximately four weeks of production, and retailers could cancel orders before production began.