Cavco Industries, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 28, 2015. Although the request references 2014 Q4, this filing reports FY2015 and includes unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context and reporting period
Cavco designs and manufactures factory-built housing, including manufactured and modular homes, park model RVs, cabins and commercial structures. It also provides manufactured-home financing through CountryPlace and insurance through Standard Casualty. The company reported two segments: factory-built housing and financial services. It operated 19 homebuilding facilities and 45 company-owned retail centers; approximately 80% of products were built to HUD code.
Industry shipments improved but remained historically low: approximately 64,000 HUD-code homes in calendar 2014 versus 60,000 in 2013. Cavco sold 9,999 homes in FY2015, up from 9,537. Acquisitions of Chariot Eagle (March 30, 2015) and Fairmont Homes (May 1, 2015) occurred after the fiscal year-end, so their operating results are not included in FY2015.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $566.7 million | $533.3 million | +6.2% |
| Gross profit | $126.1 million | $119.5 million | +5.6% |
| Gross margin | 22.3% | 22.4% | Down 0.1 percentage point |
| Income from operations | $38.5 million | $31.5 million | +22.0% |
| Net income | $23.8 million | $18.7 million | +27.3% |
| Net income attributable to Cavco common stockholders | $23.8 million | $16.2 million | +46.7% |
| Diluted earnings per share attributable to Cavco stockholders | $2.64 | $1.94 | +36.1% |
| Cash provided by operating activities | $25.7 million | $46.8 million | Down $21.1 million |
Revenue comprised $513.7 million from factory-built housing (+5.7%) and $53.0 million from financial services (+11.6%). Factory-built housing pretax income rose to $36.6 million from $27.3 million; financial services pretax income was $12.2 million versus $11.6 million. Management cited higher home volume, modestly higher revenue per home and improved production efficiency. Other income included a net $1.4 million gain from sales of idle real estate and facilities.
Fourth quarter: Revenue was $141.2 million versus $131.2 million in FY2014 Q4; net income was $6.0 million versus $4.2 million; diluted EPS attributable to Cavco stockholders was $0.66 versus $0.47.
Liquidity, debt and financial position
At March 28, 2015, cash and cash equivalents were $96.6 million, up from $72.9 million; current assets were $265.5 million and current liabilities $101.5 million. Total stockholders’ equity was $320.2 million. Total securitized financings and other debt were $67.0 million, including $4.0 million of other secured financings; the filing reports no general credit facility. Management said cash on hand and operating cash flow should fund operations and growth for at least the next 12 months and into the foreseeable future, while noting that future financing availability is not assured.
Operating cash flow fell to $25.7 million from $46.8 million, with working-capital changes and increased funding of consumer lending among the factors affecting cash generation. Investing activities used $2.1 million; financing activities provided $0.05 million. The company repaid $7.7 million of securitized financings. The 2007-1 securitized portfolio required additional overcollateralization under a specified provision, with a scheduled increase in that requirement in October 2015; this could affect the timing of cash flows to CountryPlace.
Material changes, outlook and risks
- Home sales increased 4.8% and reported net revenue per home rose 0.8%. Backlog was $47.4 million, compared with $33.6 million a year earlier, or about six weeks of production. Backlog orders may be canceled before production begins and are therefore not firm.
- Company-owned retail centers declined to 45 from 47, while sales to independent retailers, builders, communities and developers rose 6.1%. Independent channels accounted for 79% of homes sold.
- FY2015 common-stockholder earnings comparisons reflect Cavco’s purchase of the remaining Fleetwood interest in July 2013. Cavco owned 100% thereafter; FY2014 included income attributable to a noncontrolling interest for part of the year.
- Management described the industry as still operating at low levels despite recent shipment improvement. It cited weak employment and consumer confidence and constrained consumer and retailer financing. It expects demand could improve if employment and confidence strengthen, but provided no quantified earnings or revenue guidance.
- Key risks include limited consumer and floor-plan financing, tighter CFPB lending rules, cyclical and seasonal housing demand, competition, raw-material and labor costs, geographic concentration, credit exposure from company-supported distributor financing, and the possibility of warranty, loan-repurchase or goodwill losses.
- Contingent repurchase obligations for retailer floor-plan financing were $28.3 million, against a recorded reserve of $2.2 million. CountryPlace also had $5.5 million of remaining construction-loan funding commitments and $0.9 million reserved for mortgage-sale representations and warranties.
- Ordinary-course litigation includes warranty, construction-defect, insurance-practice, product-liability and personal-injury claims. Management did not expect pending or threatened matters to materially affect financial position, liquidity or results, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether home orders, backlog conversion and production utilization continue to improve, given the industry’s depressed shipment levels and cancellation risk.
- Whether consumer and retailer financing remains available and how new lending requirements affect home sales and CountryPlace’s loan business.
- Cash-flow quality and the effects of loan originations, collections, working capital and any further company-funded distributor financing.
- The cash-flow impact of the 2007-1 securitization’s overcollateralization requirement, including the scheduled October 2015 change.
- Integration costs and operating performance of the post-year-end Chariot Eagle and Fairmont Homes acquisitions.
- Adequacy of reserves for warranty claims, retailer repurchases, loan-sale obligations and credit losses, plus exposure to Texas and other concentrated markets.