Business Context and Reporting Period
Company: Cavco Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010 (Unaudited)
Business Overview: Cavco designs and produces factory-built homes (manufactured homes, park models, and vacation cabins) sold through a network of retailers. The company operates under the Cavco Homes and Fleetwood Homes brands. Fleetwood Homes, acquired in August 2009 in a joint venture with Third Avenue Value Fund, is fully consolidated despite Cavco holding a 50% financial interest.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 31, 2010 | Nine Months Ended Dec 31, 2010 | Nine Months Ended Dec 31, 2009 |
|---|---|---|---|
| Net Sales | $39,612 | $133,005 | $79,341 |
| Gross Profit | $5,343 | $18,963 | $7,505 |
| Gross Margin % | 13.5% | 14.3% | 9.5% |
| Operating Income | $68 | $2,963 | $(4,459) |
| Net Income (Total) | $290 | $2,339 | $(2,839) |
| Net Income Attributable to Cavco | $24 | $1,222 | $(2,642) |
| Diluted EPS (Cavco) | $0.00 | $0.18 | $(0.41) |
Liquidity and Balance Sheet Highlights (in thousands)
- Cash and Cash Equivalents: $49,162 (Dec 31, 2010) vs. $74,988 (Mar 31, 2010).
- Total Assets: $245,295.
- Total Liabilities: $60,702 (Current: $42,290; Non-current: $18,412 deferred taxes).
- Debt: No traditional long-term debt. Includes a $14,000 noncontrolling interest note payable and a $38,516 debtor-in-possession (DIP) note receivable.
- Inventory Finance Notes Receivable: $18,413 (net of $213 allowance).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 67.6% for the nine months ended Dec 31, 2010, compared to the prior year, driven by the inclusion of Fleetwood Homes operations and increased unit volume (5,713 floors vs. 3,280 floors).
- Profitability Turnaround: The company returned to profitability, reporting net income of $1,222 for the nine-month period compared to a net loss of $2,642 in the prior year. Operating income improved from a loss of $4,459 to income of $2,963.
- Margin Expansion: Gross margin improved to 14.3% from 9.5% year-over-year, though management notes pricing competition and a mix favoring smaller homes continue to pressure margins.
- Interest Income Surge: Interest income increased 786.1% to $957 for the nine-month period, primarily due to the growth in inventory finance notes and interest earned on the new DIP note receivable.
- Cash Flow: Net cash used in operating activities decreased significantly to $2,037 from $6,647 in the prior year. However, investing activities consumed $39,180, largely due to the $38,516 investment in the Palm Harbor DIP facility.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management remains optimistic about long-term prospects despite a prolonged industry downturn. Key factors include:
- Industry Headwinds: Low production levels, high unemployment, and a lack of consumer mortgage financing continue to impede growth. Competition from excess site-built home inventory is also a concern.
- Strategic Initiatives: The company is expanding its inventory financing programs to support retailers and is leveraging the combined Cavco and Fleetwood operations for efficiency.
- Backlog: Sales backlog as of Dec 31, 2010, was $1.7 million, representing less than one week of production.
Material Contingencies and Unusual Items
- Palm Harbor Acquisition: Fleetwood Homes provided a $50 million DIP credit facility to Palm Harbor Homes, Inc. (currently $38.5 million outstanding). Fleetwood is the "stalking horse" bidder to acquire Palm Harbor's assets for approximately $57.5 million. If the acquisition closes, the DIP loan will be credit-bid against the purchase price. If the acquisition fails, Palm Harbor must repay the loan in full.
- Repurchase Obligations: The company has contingent repurchase obligations of approximately $12.4 million related to inventory financing for retailers, with a recorded liability of $696.
- Legal Proceedings: Routine litigation regarding warranty and product liability is ongoing; management does not expect a material adverse effect.
Investor Verification Checklist
- Palm Harbor Transaction Status: Verify the outcome of the bankruptcy auction and whether the acquisition of Palm Harbor assets closes, as this impacts the recovery of the $38.5 million DIP loan.
- Inventory Financing Exposure: Monitor the $18.4 million inventory finance portfolio, particularly concentrations in Arizona (26.5%), Texas (18.4%), and California (8.9%), for credit quality deterioration.
- Consumer Financing Environment: Assess the impact of continued tight credit markets and restrictive underwriting on future home orders and shipment volumes.
- Integration Synergies: Evaluate whether the integration of Fleetwood Homes is delivering the anticipated cost savings and operational efficiencies to offset integration expenses.
- Idle Asset Disposition: Track the sale of the idle Waco factory and the lease status of the Woodland, California facility.