CVCO

Business Context and Reporting Period

Company: Cavco Industries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 31, 2004
Industry: Manufactured Housing (Largest producer in Arizona; 12th largest in the U.S.)

Cavco operates as a vertically integrated manufacturer and retailer of manufactured homes. Effective June 30, 2003, the company became an independent public entity following a spin-off from Centex Corporation. The company operates three manufacturing plants in the Phoenix, Arizona area and sells through a network of 379 independent dealers and 18 company-owned retail outlets. The industry is currently experiencing a prolonged downturn characterized by tightened consumer financing and high repossession rates.

Key Financial Metrics (Fiscal Year 2004)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17.1% to $128.9 million from $110.0 million in fiscal 2003. This was driven by a 15.2% increase in manufacturing sales due to higher volume (3,646 homes sold vs. 3,375) and a 6.6% increase in average wholesale price per home.
• Profitability: Income from continuing operations before taxes rose to $9.3 million from $6.8 million. Net income turned positive at $6.2 million, compared to a net loss of $4.5 million in fiscal 2003, largely due to the elimination of significant impairment charges recorded in the prior year.
• Discontinued Operations: Losses from discontinued retail operations were minimal ($73,000) in 2004 compared to $7.95 million in 2003. The prior year included significant write-downs of retail assets and inventory. Manufacturing operations in Texas and New Mexico were distributed to Centex and are no longer reported.
• Liquidity: Cash on hand increased significantly to $30.8 million, up from zero at the end of fiscal 2003, bolstered by a $12.2 million capital contribution from Centex and strong operating cash flows.

Guidance, Outlook, and Risks

Management Outlook: Management expects the industry downturn to continue in the near term due to constrained consumer financing and high levels of repossessed homes. The company plans to dispose of or close more than half of its remaining 18 company-owned retail outlets over the next 12 months to reduce operating losses and liquidate inventory. The company believes its cash on hand and a $15 million revolving credit facility (undrawn) are sufficient to fund operations for the next 12 months.

Key Risks and Contingencies:

• Financing Constraints: Tightened credit standards and the exit of major lenders (e.g., Conseco, Deutsche Financial Services) from the wholesale and consumer lending markets continue to suppress demand.
• Repurchase Obligations: The company has contingent repurchase obligations of approximately $19.7 million related to wholesale floor plan financing. A reserve of $2.0 million has been established.
• Goodwill Impairment: Goodwill represents approximately 52% of total assets ($67.3 million). While not impaired as of March 31, 2004, future deterioration in cash flows could trigger a write-off.
• Raw Material Costs: Prices for wood, steel, and gypsum have increased, which may pressure margins if not passed on to customers.

Investor Verification Checklist

• Debt Status: Verify the company remains debt-free and has not drawn on its $15 million Bank One credit facility.
• Retail Divestiture: Monitor the progress of closing/disposing company-owned retail outlets and the associated cash recovery from inventory liquidation.
• Repurchase Reserves: Track the adequacy of the $2.0 million reserve against actual repurchase claims given the $19.7 million exposure.
• Goodwill Valuation: Assess the sensitivity of the $67.3 million goodwill balance to changes in stock price and future cash flow projections.
• Financing Environment: Evaluate the stability of the third-party lending market for manufactured homes, as sales volume is heavily dependent on consumer and dealer financing availability.