Cavco Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 30, 2013 (FY2013), with comparisons to the year ended March 31, 2012 (FY2012). Although the request metadata refers to “2012 Q4,” this filing is an annual report for FY2013; it also provides unaudited quarterly data. Cavco designs and manufactures factory-built homes and operates consumer-finance and manufactured-home insurance businesses. Results consolidate Fleetwood, which Cavco owns 50% of but controls; Third Avenue’s share is reported as redeemable noncontrolling interest.
Financial and operating highlights
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $452.3 million | $443.1 million |
| Gross profit / gross margin | $100.4 million / 22.2% | $95.9 million / 21.7% |
| Operating income / operating margin | $21.0 million / 4.7% | $16.1 million / 3.6% |
| Income before taxes | $16.6 million | $32.2 million |
| Consolidated net income | $10.3 million | $29.7 million |
| Net income attributable to Cavco shareholders / diluted EPS | $5.0 million / $0.71 | $15.2 million / $2.19 |
| Operating cash flow | $20.7 million | $16.4 million |
| Cash and cash equivalents at year-end | $47.8 million | $41.1 million |
| Securitized financings at year-end | $82.3 million | $91.5 million |
Revenue increased 2.1%. Factory-built housing revenue was $408.1 million, up 0.3%; financial-services revenue rose to $44.2 million from $36.2 million. Homes sold increased 6.8% to 8,398. Gross margin improved, partly because financial services has higher margins than manufacturing. Manufacturing profitability remained pressured by price competition, a mix weighted toward smaller, less-upgraded homes, and low factory utilization.
FY2012 earnings included a $22.0 million bargain-purchase gain from the Palm Harbor acquisition, which was not taxable. Cavco states that FY2012 net income attributable to its shareholders would have been about $3.6 million after excluding its share of that gain and the related tax benefit. Thus, the reported year-over-year decline in net income is not a like-for-like measure of underlying performance. FY2013 effective tax rate was approximately 38%, versus approximately 8% in FY2012; the latter reflected the bargain-purchase gain and an acquisition-related tax benefit.
Cash, cash equivalents and current investments totaled about $61.5 million; $7.0 million of cash was restricted and not available for general use. Current assets were $194.4 million and current liabilities $87.0 million. The company reported no construction lending line balance at year-end. Cash flow from investing used $2.1 million, while financing activities used $11.9 million, including $9.5 million of securitized-debt repayments. Capital expenditures were $0.8 million.
Material changes versus the prior comparable year
- Revenue rose modestly, while home volume increased faster; factory-built housing revenue was nearly flat.
- Operating income increased to $21.0 million from $16.1 million, while Cavco-attributable net income fell from $15.2 million to $5.0 million, primarily reflecting the absence of FY2012’s bargain-purchase gain.
- Financial-services revenue expanded, with insurance revenue increasing to $21.0 million from $14.0 million and consumer-finance revenue to $23.2 million from $22.2 million.
- Orders in backlog increased to $26.0 million from $14.4 million, equivalent to about four weeks of production; fourth-quarter capacity utilization was approximately 38%.
- Cash increased by $6.7 million during FY2013. Securitized financings declined, and the construction lending lines were repaid.
Outlook, risks and contingencies
Management expects cash and operating cash flow to support operations and growth over the next 12 months and into the foreseeable future, but provides no numerical earnings or revenue guidance. It describes the manufactured-housing market as still depressed and says a sustained near-term recovery is unlikely. Management sees potential demand support from improving employment and consumer confidence, rental-housing economics, and growing younger and 55-plus demographics; it says financing availability remains a prerequisite for a marked industry recovery.
- Financing exposure: Consumer and retailer floor-plan credit remain constrained. CountryPlace says asset-backed and mortgage-backed securitization markets are effectively closed to it, and it discontinued originating chattel loans and non-conforming mortgages until other funding is available. CFPB mortgage rules scheduled to take effect in January 2014 could restrict financing options or increase compliance costs.
- Credit and commitments: Maximum contingent retailer repurchase obligations were $17.7 million, against a $1.4 million reserve. CountryPlace also had $5.0 million of remaining construction-loan funding commitments, $5.1 million of letters of credit, and a $1.2 million reserve for mortgage-sale representations and warranties.
- Debt repayment terms: The 2007-1 securitized portfolio’s cumulative loss ratio exceeded its trigger, accelerating repayment from collections on the related loans. Management did not expect a material adverse cash-flow effect; the 2005-1 portfolio was within its trigger level.
- Potential Fleetwood buyout: Third Avenue’s put right and Cavco’s call right are expected to become exercisable after August 17, 2014, absent earlier satisfaction of the earnings condition. The purchase price is intended to approximate fair value, and its amount is not stated here.
- Other risks: Cyclical and seasonal demand, low plant utilization, competition, raw-material and labor costs, retailer creditworthiness, geographic concentration in Texas, loan defaults and collateral values, insurance claims, and goodwill impairment could affect results. Goodwill was $67.3 million; the FY2013 qualitative impairment review found no need for further testing.
- Legal and environmental matters: Management said ordinary-course litigation was not expected to materially affect results or financial position, while noting outcomes are uncertain. A Goodyear, Arizona factory is on a Superfund site; the landlord has agreed to assume and indemnify the company for existing contamination liabilities, and Cavco reported no regulator inquiry or notice of potential liability.
Key facts for investors to verify
- Review how much of FY2013 operating improvement is sustainable, separating manufacturing performance from financial-services contribution and comparing FY2012 earnings excluding the acquisition gain and tax benefit.
- Track factory utilization, home orders, backlog conversion and sales volumes, as backlog orders may be canceled before production begins.
- Assess consumer and retailer financing availability, CountryPlace loan-sale funding, loan performance and the impact of the 2014 mortgage rules.
- Monitor the $17.7 million repurchase exposure, loan-sale indemnification reserve, securitization triggers and the potential 2014 Fleetwood redemption payment.
- Confirm available liquidity after restricted cash, debt service, loan-originations and any future Fleetwood buyout; the filing does not state a quantified buyout price.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of March 30, 2013.