Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 29, 2012; comparisons are with the periods ended December 31, 2011. Amounts below are in millions of dollars unless stated otherwise. Cavco manufactures factory-built housing and also operates consumer finance and insurance businesses.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $114.6, essentially flat year over year | $343.5, essentially flat |
| Gross profit / margin | $26.6 / 23.2%, versus $26.9 / 23.5% | $76.3 / 22.2%, versus $71.3 / 20.8% |
| Operating income | $6.3, versus $6.4 | $15.9, versus $12.2 |
| Net income attributable to Cavco shareholders | $1.5, or $0.21 per diluted share, versus $1.7, or $0.24 | $3.6, or $0.51 per diluted share, versus $13.6, or $1.96 |
| Operating cash flow | $12.1 for nine months, versus $8.7 |
Nine-month 2011 results included a $22.0 million bargain-purchase gain from the Palm Harbor acquisition; its absence is the principal reason reported year-to-date earnings fell. Nine-month income before taxes was $12.5 million, versus $29.8 million. Interest expense declined to $4.7 million from $5.4 million for the nine-month period.
Segments and operating trends
- Factory-built housing sales were $103.5 million for the quarter, down 1.4%, and $310.8 million for nine months, down 2.1%. Unit sales increased to 2,065 from 1,972 in the quarter and to 6,222 from 5,970 year to date, while average selling price declined to about $50,100 from $53,200 in both comparisons, reflecting a greater mix of smaller, lower-priced homes.
- Financial-services sales increased to $11.1 million from $9.6 million for the quarter and to $32.6 million from $26.1 million for nine months. Segment income before taxes was $3.7 million and $7.6 million, respectively, versus $2.0 million and $5.6 million.
- Gross margin improved year to date, which management attributed to better production planning and operating efficiency. Quarterly gross margin was slightly lower year over year.
Cash, debt, and liquidity
- At December 29, 2012, cash and cash equivalents were $42.5 million; restricted cash was $7.2 million. Investments totaled $16.5 million.
- Current assets were $175.8 million and current liabilities $80.5 million. Total assets were $436.4 million.
- Total debt obligations were $84.5 million, all securitized financings; this compares with $96.0 million at March 31, 2012. Construction lending lines were zero, down from $4.6 million. Nine-month cash repayments included $7.2 million of securitized financing.
- Cash from operations was $12.1 million; investing activities used $1.2 million and financing activities used $9.6 million. Cash increased by $1.4 million over the nine months.
- Management said cash and expected operating cash flow should fund operations and growth for the next 12 months and the foreseeable future. The filing provides no formal earnings or revenue guidance.
Outlook, risks, and unusual items
- Management described industry production and shipments as persistently depressed. The company reported a $15.9 million factory order backlog, approximately two weeks of production, and factory capacity utilization of about 36% for the quarter. Industry shipments were approximately 55,000 homes in 2012, versus 52,000 in 2011.
- Management identified unemployment, weak consumer confidence, restricted homebuyer financing, and limited retailer inventory financing as constraints on demand. Cavco noted that it supports some retailer inventory financing, exposing it to borrower and partner credit risk.
- CountryPlace had stopped originating chattel loans and non-conforming mortgages because asset-backed and mortgage-backed securitization markets were effectively closed to it. The company warned that consumer-finance regulation, including CFPB mortgage rules scheduled to take effect in January 2014, could make some manufactured-home loans harder to originate or fund.
- Cumulative loss ratios on the 2007-1 securitized portfolio were within required limits at quarter-end, but Cavco expected them to exceed a trigger during the remainder of fiscal 2013, potentially accelerating repayment. Management did not expect this to materially adversely affect cash flows; a threshold increase was scheduled for October 2013.
- Potential exposures include up to $16.0 million of retailer inventory-financing repurchase commitments, against a recorded liability of $1.3 million; $4.6 million of remaining construction-loan funding commitments; and mortgage-sale representations and warranties, for which a $1.1 million reserve was recorded.
- Third Avenue’s redeemable interest in Fleetwood was presented outside permanent equity at $90.3 million. Put/call rights are expected to become exercisable after August 17, 2014 at the latest, subject to the agreement’s terms; the purchase price may be payable in cash or Cavco shares.
- Cavco disclosed an unresolved Palm Harbor historical-financial-statement filing issue that prevents it from having a new SEC registration statement declared effective unless relief is obtained. Ordinary-course litigation was not expected by management to have a material adverse effect. No material subsequent events were reported.
Most important facts for investors to verify
- Whether factory-built home demand, backlog, average selling prices, and capacity utilization improve from the reported low levels.
- Whether improved gross margin and operating efficiency persist, and how much financial-services growth depends on acquired operations and loan-sale activity.
- Performance and credit quality of CountryPlace consumer loans and inventory-finance receivables, including the 2007-1 securitization loss-ratio trigger and potential repayment acceleration.
- Cash availability after restricted balances, debt repayments, contingent commitments, and any future funding needs; management’s liquidity outlook is not a guarantee.
- Timing and potential cost of Third Avenue’s Fleetwood redemption rights, and resolution of the Palm Harbor SEC registration-statement issue.