Cavco Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 28, 2020 (52 weeks), compared with the fiscal year ended March 30, 2019. The filing also reports unaudited fourth-quarter results. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Cavco designs and manufactures manufactured and modular homes, park model RVs, cabins and commercial structures. It operates factory-built housing and financial services segments, the latter including CountryPlace consumer lending and loan servicing and Standard Casualty insurance. At year-end it operated 20 homebuilding production lines and 39 company-owned retail centers. Destiny Homes was acquired on August 2, 2019.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $1,061.8 | $962.7 | +10.3% |
| Gross profit | $230.5 | $205.7 | +12.1% |
| Gross margin | 21.7% | 21.4% | +0.3 percentage points |
| Income from operations | $84.9 | $84.1 | +0.9% |
| Net income | $75.1 | $68.6 | +9.4% |
| Diluted EPS | $8.10 | $7.40 | +9.5% |
| Operating cash flow | $101.7 | $32.8 | +$68.9 |
Factory-built housing revenue grew 10.3% to $999.3 million; financial services revenue grew 9.5% to $62.4 million. Homes sold increased 4.9% to 15,100, and reported factory-built housing revenue per home rose 5.1% to $66,181. Factory-built housing gross margin improved to 19.5% from 19.0%; financial services gross margin declined to 56.5% from 58.9%. SG&A rose 19.8% to $145.6 million, increasing to 13.7% of revenue from 12.6%, primarily reflecting higher compensation and legal and directors-and-officers insurance costs. Interest expense fell to $1.5 million from $3.4 million. The effective tax rate was 19.3%, versus 20.8%.
Fourth quarter: Revenue was $255.3 million, versus $241.1 million in FY2019 Q4; gross profit was $51.9 million, versus $55.8 million; net income was $12.0 million, versus $20.0 million; diluted EPS was $1.29, versus $2.17. The filing attributes increased loan-loss reserves amid changed economic conditions to a non-cash reduction in fourth-quarter financial services earnings.
Liquidity and debt: Cash and cash equivalents were $241.8 million and restricted cash was $13.8 million at year-end; total assets were $810.4 million and stockholders’ equity was $607.6 million. Current assets of $516.2 million exceeded current liabilities of $172.1 million. Securitized financings and other borrowings totaled $15.0 million, down from $34.1 million; operating lease liabilities were $14.9 million. CountryPlace’s secured credit facilities had $10.5 million outstanding at a weighted average rate of 4.9%. Management said available cash and operating cash flow should fund operations and growth for at least the next 12 months.
Investing cash use was $25.2 million, including $15.9 million for the Destiny acquisition and $14.3 million for capital expenditures, partly offset by asset-sale proceeds. Financing cash use was $20.8 million, mainly for securitized financing repayments. Year-end home-order backlog was approximately $124 million, compared with $129 million a year earlier; the company cautions that orders may be canceled before production begins and are not firm until then.
Material changes, outlook and risks
- COVID-19: Most factories and retail outlets continued operating with health protocols, but capacity utilization fell from pre-pandemic levels above 80% to approximately 45%–75%. Customer traffic and spring orders weakened; order volumes were about 40% below pre-pandemic levels in mid-April 2020 and about 20% below by mid-May. Material shortages, absenteeism and reduced operating efficiency also affected production. The duration and overall financial impact were uncertain.
- Plant closure: In April 2020, Cavco decided to close its Lexington, Mississippi plant. It expected to complete in-process orders by June and said it did not expect significant adverse financial effects, restructuring costs or impairment charges.
- Consumer credit exposure: CountryPlace reported approximately 4% of its serviced portfolio under forbearance by mid-May 2020, versus less than 1% before the pandemic. Loan-loss reserves increased; CountryPlace may also need to advance scheduled payments to certain investors when borrowers do not pay.
- Unusual expenses and gains: FY2020 included $2.9 million of legal and other expenses related to the ongoing SEC inquiry and $8.4 million of amortized additional D&O insurance premiums. Cavco expects approximately $2.1 million of quarterly premium amortization through FY2021 Q2. Other income included a $3.4 million net gain on sale of idle land.
- Acquisition: Destiny Homes contributed $30.1 million in FY2020 revenue and $0.8 million in net income after acquisition, based on preliminary purchase accounting. Purchase price was $16.5 million, including $5.9 million of identified intangible assets and $2.2 million of goodwill.
- Legal and regulatory matters: Cavco continued cooperating with an SEC investigation into trading in personal and company accounts directed by its former CEO. Two California putative class actions allege wage-and-hour violations. Management did not expect pending matters to materially harm financial position, liquidity or results after existing reserves, but outcomes remain uncertain.
- Other risks: Demand depends on consumer and distributor financing, employment and economic conditions, and interest rates. The filing also highlights raw-material and labor availability, geographic concentration, insurance/reinsurance exposure, warranty claims, cybersecurity, and regulatory and zoning constraints. A March 2019 cyber incident disrupted operations for up to two weeks.
- Outlook: No numerical earnings, revenue or shipment guidance was provided. Management emphasized balance-sheet strength, affordable-housing demand and ongoing uncertainty about pandemic effects. The 2020 spring selling season and near-term demand outlook were particularly uncertain.
Most important facts for investors to verify
- Whether orders, plant utilization, backlog and margins recovered or deteriorated after the mid-May 2020 update; backlog includes orders that may be canceled before production.
- Subsequent delinquencies, forbearance levels, loan-loss provisions and required servicing advances at CountryPlace.
- The final costs and any regulatory, litigation or reputational consequences of the SEC inquiry, and the California wage-and-hour cases.
- Destiny Homes’ finalized purchase-price allocation and subsequent contribution to earnings.
- The sustainability of operating cash flow and earnings given higher SG&A, market-sensitive housing demand and stated contingent commitments, including $79.3 million of distributor repurchase obligations before resale value.