Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2016, ended September 26, 2015; comparisons are to the periods ended September 27, 2014. Unless noted, amounts are in millions of dollars.
Business context
Cavco designs and manufactures factory-built homes, including manufactured and modular homes, park model RVs and cabins. Its financial services segment provides consumer and commercial financing and manufactured-home insurance. During the period, Cavco acquired Chariot Eagle and Fairmont Homes; their results are included from their respective acquisition dates. The acquisitions expanded production capacity and geographic reach.
Financial performance
| Metric | Quarter ended Sep. 26, 2015 | Prior-year quarter | Six months ended Sep. 26, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $192.0 | $139.3 | $353.6 | $278.5 |
| Gross profit | $39.6 | $31.6 | $71.4 | $63.3 |
| Gross margin | 20.6% | 22.7% | 20.2% | 22.7% |
| Operating income | $13.0 | $9.3 | $22.2 | $18.8 |
| Net income | $8.1 | $5.5 | $13.5 | $11.2 |
| Diluted EPS | $0.89 | $0.61 | $1.49 | $1.25 |
- Quarterly revenue rose 37.8% and six-month revenue rose 27.0%. Factory-built housing revenue increased 40.4% for the quarter and 28.6% year to date; slightly more than half of the increase reflected the acquired businesses, with the remainder primarily from growth in existing operations.
- Homes sold increased 34.0% in the quarter to 3,264 and 26.5% over six months to 6,166. Revenue per home sold increased 4.8% for the quarter and 1.7% year to date.
- Gross margin fell year over year. Management attributed the six-month financial-services gross-profit decline to unusually severe Texas hail and wind claims in the first fiscal quarter; reinsurance partly offset losses. Higher housing volume supported factory-built housing gross profit.
- Quarterly operating income increased 39.3%; six-month operating income increased 17.6%. SG&A rose in dollars, including acquisition-related costs, but declined as a share of revenue to 13.8% for the quarter and 13.9% for six months, from 16.0% in both prior-year periods.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $29.8, versus $8.7 a year earlier. Investing used $31.4, including $28.1 for the acquisitions; financing used $2.2. Cash and cash equivalents declined $3.7 from fiscal year-end to $92.9.
- At September 26, 2015, total assets were $536.4, current assets $284.9 and current liabilities $124.0. Working capital was approximately $160.9. Inventories rose to $89.0 from $75.3 at March 28, 2015.
- Securitized financings and other debt totaled $63.5, down from $67.0 at fiscal year-end; interest expense declined 15.3% year to date as securitized principal was repaid. The filing reports no external credit facility, citing the company’s cash position.
- Management said available cash and operating cash flow should fund operations and growth for at least the next 12 months. The sales-order backlog was approximately $75.5, or about six weeks of production, versus $41.8 a year earlier; orders may be canceled before production and are not considered firm until production begins.
Outlook, commentary and risks
- No quantified earnings or revenue guidance was provided. Management cited improving industry shipments—up 8.1% in the first eight months of calendar 2015—but said industry and company production remained relatively low. It identified employment, consumer confidence and access to home financing as important demand constraints.
- Management expects acquisitions to offer longer-term strategic benefits and said it will pursue operating synergies and consider complementary acquisitions or investments. The acquisition purchase-price allocations remained preliminary.
- Manufactured-home consumer and retailer financing remains constrained by limited lenders, restrictive underwriting and regulatory requirements. The company’s lending programs increase financing availability but expose it to borrower and partner credit risk.
- CountryPlace’s 2007-1 securitized portfolio required additional overcollateralization under a provision; the specified level increased in October 2015. This could affect the timing of cash distributions. The 2005-1 portfolio was within its required level.
- Other risks include weather-related insurance claims, warranty and product-liability claims, raw-material and transportation costs, seasonality, geographic concentration, acquisition integration and changes in regulation. The company reported ordinary-course litigation and did not expect pending matters to have a material adverse effect, while noting outcomes remain uncertain.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No disclosable subsequent events were identified through filing.
Important facts for investors to verify
- How much of future growth and margin performance is attributable to the acquired Fairmont and Chariot Eagle operations versus organic growth.
- Whether housing volume and backlog convert to completed sales, given cancellation rights and the industry’s financing constraints.
- The size and persistence of insurance claims, reinsurance recoveries and resulting financial-services margins after the severe Texas storms.
- The status and cash-flow effects of the 2007-1 securitization’s overcollateralization requirement, including the October 2015 change.
- Credit quality and concentration in consumer and commercial lending, including the consumer loan portfolio’s 38% Texas concentration and a commercial-loan exposure representing 33.3% of principal to one independent third party.
- Potential changes from preliminary acquisition accounting, and the eventual effect of the new revenue-recognition standard, which the company was evaluating.