Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended June 27, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Business context
Cavco designs and manufactures factory-built homes, modular homes, park model RVs and related products, and also provides consumer financing and manufactured-home insurance. It reported two segments: factory-built housing and financial services. During the quarter, Cavco acquired certain assets and liabilities of Chariot Eagle (March 30) and Fairmont Homes (May 1); their results are included from their respective acquisition dates. Purchase-price allocations remained preliminary.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $161.7 million | $139.2 million | +16.2% |
| Gross profit | $31.8 million | $31.7 million | +0.4% |
| Gross margin | 19.7% | 22.8% | Down 3.1 percentage points |
| Income from operations | $9.2 million | $9.5 million | Down $0.3 million |
| Income before taxes | $8.6 million | $8.9 million | Down 3.5% |
| Net income | $5.4 million | $5.8 million | Down 6.5% |
| Diluted earnings per share | $0.60 | $0.64 | Down $0.04 |
| Operating cash flow | $3.9 million | $2.2 million | +$1.8 million |
Factory-built housing revenue rose 16.9% to $147.5 million, while financial services revenue rose 9.5% to $14.1 million. Total homes sold increased 19.0% to 2,902; sales to independent retailers, builders, communities and developers rose 22.9%. Revenue per home sold declined 1.8% to $50,843, attributed primarily to a greater share of lower-priced homes. Factory-built housing pretax income increased to $8.0 million; financial services pretax income fell to $0.6 million from $1.3 million.
Quarter-end cash and cash equivalents were $70.2 million, down from $96.6 million at March 28, 2015. Current assets were $270.2 million and current liabilities $116.4 million. Total assets were $522.9 million and stockholders’ equity $325.7 million. Securitized financings and other debt totaled $65.5 million, including $5.1 million current. Operating cash flow was offset by $29.2 million used in investing, including $27.1 million for the acquisitions and other investment activity; financing used $1.1 million. The filing reports no conventional credit facility and says cash and operating cash flow should fund operations and growth for at least the next 12 months.
Material changes and notable items
- Revenue growth primarily reflected higher home volume, including the recent acquisitions and improving market conditions. Acquired-inventory fair-value adjustments partly offset factory-built housing gross profit growth.
- Financial services gross profit declined 13.2%, principally because of higher insurance claims following unusually severe Texas hail and wind storms. Reinsurance partly limited the losses.
- SG&A increased 2.0% to $22.7 million, but declined as a share of revenue to 14.0% from 16.0%. Interest expense fell 13.7% to $1.0 million as securitized debt principal continued to decline.
- In July 2015, the CEO repaid $1.1 million of performance bonuses related to fiscal 2012, 2014 and 2015 that had exceeded stock-plan limits. The amount was recorded as a receivable at quarter-end and reduced current-quarter SG&A.
- Sales-order backlog was approximately $72.1 million, about six weeks of production, versus $37.7 million a year earlier. Retailers may cancel orders before production, so backlog is not necessarily firm.
Outlook, risks and contingencies
Management cited industry shipments up 8.8% in the first five months of calendar 2015 and described modest improvement, but noted industry production and shipments remained low. No specific earnings or revenue guidance was provided. Management expects available cash and operating cash flow to be sufficient for the next 12 months and foreseeable future, while retaining the possibility of acquisitions or strategic investments.
Key risks include constrained consumer and retailer financing, economic and housing-market weakness, interest-rate sensitivity, raw-material and transportation costs, seasonality, acquisition integration, warranty exposure, and regulatory changes affecting manufactured-home lending. Consumer loans were geographically concentrated, with 37% of outstanding principal in Texas. Commercial loan principal was concentrated in Texas (38.1%) and Arizona (12.8%).
CountryPlace’s 2007-1 securitized portfolio had a provision exceeding a specified overcollateralization level, requiring additional overcollateralization; a further increase in that specified level was scheduled for October 2015. This could redirect cash collections to debt repayment and affect the timing of cash received by CountryPlace. Maximum contingent repurchase exposure on retailer inventory-financing agreements was approximately $40.5 million, with a recorded liability of $1.5 million. The filing describes ordinary-course litigation and says management did not expect pending or threatened matters to have a material adverse effect, while acknowledging outcomes remain uncertain.
Disclosure controls were judged effective, and the company reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether acquisition-driven volume growth translates into sustained earnings and margins, given lower revenue per home and acquisition-related costs.
- Whether Texas storm claims normalize and how insurance results perform after reinsurance recoveries.
- The status and cash-flow effects of the 2007-1 securitization’s overcollateralization requirement, particularly after the planned October 2015 change.
- Whether backlog converts to production and sales, and whether consumer and retailer financing availability improves.
- The final purchase-price allocations for Fairmont Homes and Chariot Eagle and the treatment and completion of the CEO bonus repayment.