Cavco Industries, Inc. — FY2014 Form 10-K
Business context and reporting period. Cavco designs and manufactures factory-built housing, including manufactured and modular homes, park models, cabins, and commercial structures. It also provides consumer mortgage and manufactured-home insurance services. This filing covers the fiscal year ended March 29, 2014; the fourth quarter ended on that date. The company operated 15 manufacturing facilities and 47 company-owned retail centers.
Key financial results
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net revenue | $533.3 million | $452.3 million | +17.9% |
| Gross profit / margin | $119.5 million / 22.4% | $100.4 million / 22.2% | Margin +0.2 percentage points |
| Operating income / margin | $31.5 million / 5.9% | $21.0 million / 4.7% | Improved |
| Net income | $18.7 million | $10.3 million | +81.7% |
| Net income attributable to Cavco shareholders | $16.2 million | $5.0 million | More than tripled |
| Diluted earnings per share | $1.94 | $0.71 | +$1.23 |
| Operating cash flow | $46.8 million | $20.7 million | +$26.0 million |
Factory-built housing revenue rose 19.1% to $485.9 million; financial-services revenue increased to $47.4 million from $44.2 million. The company sold 9,537 homes, up 13.6% from 8,398. Fourth-quarter revenue was $131.2 million, gross profit $28.6 million, and net income attributable to Cavco shareholders $4.2 million; the comparable prior-year quarter reported $108.8 million, $24.0 million, and $1.4 million, respectively.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $72.9 million at year-end, versus $47.8 million a year earlier. Total current assets were $227.8 million and current liabilities $99.0 million.
- Securitized financings totaled $70.1 million, down from $82.3 million. These relate to CountryPlace loan portfolios; the filing reports no other general borrowing facility and says Cavco had not sought a credit facility.
- Stockholders’ equity increased to $290.4 million from $176.9 million, largely reflecting the acquisition of the remaining Fleetwood interest through issuance of Cavco shares.
- Investing activities used $9.7 million and financing activities used $12.0 million. Financing outflows primarily reflected $12.4 million of securitized debt repayments.
- Management said cash and expected operating cash flow should fund operations and growth for at least the next 12 months and into the foreseeable future.
Material changes and unusual items
- On July 22, 2013, Cavco acquired Third Avenue’s remaining 50% interest in Fleetwood and its subsidiaries, including Palm Harbor, CountryPlace, and Standard Casualty, for $91.4 million of newly issued shares (1,867,370 shares). Cavco thereafter owned 100%; the transaction eliminated redeemable noncontrolling interest accounting. Third Avenue held approximately 22.7% of Cavco at year-end.
- FY2014 shareholder earnings benefited from Cavco owning the acquired interest for part of the year; $2.5 million of consolidated net income was attributable to the former noncontrolling interest. Comparisons of shareholder earnings therefore reflect both operating performance and ownership changes.
- Factory-built housing operating income increased to $27.3 million from $14.3 million. Management cited improved production efficiency from higher volume, partly offset by product mix and competitive pricing pressure. SG&A rose in dollars but fell to 16.5% of revenue from 17.5%.
- FY2013 included a $22.0 million bargain-purchase gain from the Palm Harbor transaction, making comparisons with FY2012 atypical. FY2014 also included $0.6 million of long-lived-asset impairment charges, primarily related to idle properties.
- Home-order backlog rose to $33.6 million from $26.0 million, about four weeks of production. Fourth-quarter capacity utilization was approximately 47%, up from 41%.
Outlook, risks, and contingencies
Management described the industry as improving modestly but still operating well below historical shipment levels. It expects demand could improve as employment and consumer confidence recover, but gave no quantified earnings or revenue guidance. Management emphasized affordable-home demand, product customization, operational synergies, and financial flexibility.
- Consumer mortgage availability and retailer floor-plan financing remain constrained; higher rates, tighter underwriting, and new CFPB mortgage rules may limit purchases and lender participation.
- Housing demand is cyclical and seasonal and exposed to economic conditions, interest rates, competition, local zoning, and the availability and cost of materials and labor. Operations and financial-services exposures are concentrated in several states, including Texas.
- Maximum contingent retailer repurchase obligations were $25.5 million, compared with $17.7 million a year earlier; the recorded reserve was $1.8 million. No repurchase payments were made in FY2014 or FY2013.
- CountryPlace’s 2007-1 securitization exceeded a specified cumulative-loss threshold, triggering accelerated repayment from related loan collections. Management said this had not materially harmed cash flow; a threshold increase was scheduled for October 2014.
- CountryPlace had $0.9 million reserved for mortgage-sale representation-and-warranty obligations. Construction-loan commitments remaining to be funded were $3.2 million; letters of credit totaled $7.1 million.
- Warranty reserves were $9.3 million. Ordinary-course litigation includes warranty, product-liability, construction-defect, employment, and personal-injury matters; management did not expect pending claims to have a material adverse effect.
- The Goodyear, Arizona facility is on a Superfund site undergoing remediation. The landlord is contractually responsible for existing contamination and has agreed to indemnify Cavco; the company reported no regulator notice asserting its liability.
Important facts for investors to verify
- Assess whether home-sales growth and higher factory utilization can continue despite financing constraints and weak industry shipment levels.
- Separate recurring earnings from the effects of the midyear Fleetwood ownership change and compare shareholder earnings on a consistent ownership basis.
- Review CountryPlace loan performance, geographic concentration, securitization triggers, and the availability of long-term funding and loan-sale markets.
- Monitor the growth in retailer repurchase exposure and the adequacy of repurchase, warranty, and mortgage-sale representation-and-warranty reserves.
- Confirm the sustainability of operating cash flow and the assumptions behind management’s liquidity outlook, particularly if sales weaken or debt repayment accelerates.