Cavco Industries, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2012. The quarter is Cavco’s second fiscal quarter of fiscal 2013. Unless stated otherwise, dollar amounts below are in millions.
Business context
Cavco manufactures factory-built homes and operates retail, consumer-finance, and insurance businesses. Its two reportable segments are factory-built housing and financial services. Results include Fleetwood, which Cavco consolidates despite holding a 50% ownership interest; Third Avenue’s interest is reported as redeemable noncontrolling interest.
Financial results
| Metric | Three months ended Sep. 30, 2012 | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2012 | Six months ended Sep. 30, 2011 |
|---|---|---|---|---|
| Net sales | $110.1 | $130.0 | $228.9 | $229.0 |
| Gross profit | $25.7 | $28.2 | $49.8 | $44.4 |
| Gross margin | 23.4% | 21.7% | 21.7% | 19.4% |
| Income from operations | $5.6 | $6.6 | $9.7 | $5.8 |
| Income before taxes | $4.4 | $5.0 | $7.2 | $25.1 |
| Net income attributable to Cavco stockholders | $1.3 | $1.7 | $2.1 | $11.9 |
| Diluted EPS | $0.18 | $0.24 | $0.30 | $1.72 |
- Quarterly sales fell 15.3%; management attributed the factory-built housing decline mainly to fewer homes sold and lower average selling prices. Factory-built housing sales were $98.9 million, down 17.4%; financial-services sales were $11.2 million, up from $10.3 million.
- Quarterly factory-built home sales were 1,918 units at an average price of $51,566, compared with 2,147 units at $55,745 a year earlier. Management cited lower-priced product mix, competitive pricing, and revenue recognition delays on internally financed wholesale and company-store sales.
- Six-month revenue was essentially flat. Factory-built housing sales declined 2.4% to $207.4 million, while financial-services sales rose to $21.5 million from $16.5 million, reflecting the acquired businesses’ inclusion in the prior-year comparison for only part of the period.
- Gross margin improved in both comparisons. Management cited improved production planning and operating efficiency. Quarterly operating income nevertheless declined to $5.6 million from $6.6 million.
- Six-month 2011 pretax income and Cavco-attributable earnings included a $22.0 million bargain-purchase gain from the Palm Harbor acquisition. Excluding that unusual gain, the reported six-month earnings comparison is substantially less dramatic; the filing does not provide an adjusted earnings measure.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $13.9 million, versus $11.6 million in 2011. Investing used $1.9 million, compared with $29.4 million used in the prior period, which included Palm Harbor acquisition spending. Financing used $6.3 million, including $5.0 million of securitized-financing repayments and $3.5 million of net construction-line repayments.
- Cash and cash equivalents were $46.8 million at September 30, up from $41.1 million at March 31, 2012. Restricted cash was an additional $7.8 million. Current assets were $173.1 million and current liabilities $85.5 million.
- Total assets were $440.2 million. Debt obligations were $87.8 million: $86.7 million of securitized financings and $1.0 million on construction lending lines. Securitized financings declined from $91.5 million at March 31.
- Consumer loans receivable, net, were $116.3 million; inventory-finance notes receivable, net, were $27.3 million. These lending activities expose Cavco to borrower, retailer, and financing-partner credit risk.
- Management stated that available cash and operating cash flow should fund operations and growth for the next twelve months and the foreseeable future. Cavco had not sought an external credit facility but could consider financing depending on results and opportunities.
Outlook, risks, and unusual items
- Management described manufactured housing demand and shipments as remaining at depressed levels. Backlog was $22.1 million, about three weeks of production, versus $20.4 million a year earlier; factory capacity utilization was approximately 37%.
- Management identified consumer confidence, employment, limited consumer and retailer financing, restrictive underwriting, excess site-built home inventory, and competitive pricing as key constraints. It noted some benefit from demand for rental housing, but said a meaningful industry recovery depends on improving conditions and financing availability.
- The 2007-1 securitized portfolio’s cumulative loss ratio exceeded its contractual trigger at September 30, requiring accelerated repayment from related loan collections. Cavco said this had not materially harmed cash flows; the trigger threshold increased in October 2012, but management expected it could be exceeded again during the fiscal year. The 2005-1 portfolio remained within its trigger level.
- Third Avenue’s put right, and Cavco’s corresponding call right, are expected to become exercisable after August 17, 2014, irrespective of whether the earlier earnings condition is met. The redeemable noncontrolling interest was $88.8 million at quarter-end; the eventual purchase price and settlement form could affect cash, shares, or both.
- Additional exposures include $14.0 million of maximum contingent retailer-inventory repurchase obligations (with a $1.0 million recorded liability), $4.9 million of remaining construction-loan commitments, and $30.8 million of mortgage interest-rate lock commitments. The reserve for mortgage-loan repurchase and indemnification claims was $1.1 million; six claims totaling an estimated $36,000 were open for review.
- Risks cited include continuing industry weakness, credit and funding constraints, raw-material and transportation inflation, interest-rate sensitivity, regulatory changes (including Dodd-Frank), integration and acquisition risks, and regional loan/inventory-finance concentrations. Texas accounted for 42.2% of consumer-loan balances; management also noted economic weakness in certain states. Standard’s assumed reinsurance was substantially concentrated with one entity.
- Management did not expect ordinary-course litigation to have a material adverse effect based on information then available. No disclosable subsequent events were reported. No impairment expense was recorded for goodwill, other intangibles, or long-lived assets in the six-month period.
Important facts for investors to verify
- Whether the improved gross margins and six-month operating performance are sustainable despite lower quarterly shipments, selling prices, low capacity utilization, and short backlog.
- How consumer and retailer financing availability, loan originations and sales, and credit quality affect financial-services revenue, cash generation, and inventory-finance exposure.
- Whether the 2007-1 securitization trigger is breached again, and the resulting pace and effect of accelerated debt repayments on cash flows.
- The potential amount, timing, and funding method for any Third Avenue redemption after August 2014.
- Changes in warranty, loan-loss, mortgage-repurchase, retailer-repurchase, and other contingency reserves, and developments in regulatory or legal matters.