Cavco Industries, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three months ended July 1, 2017, Cavco’s first fiscal quarter of fiscal 2018; comparisons are with the three months ended July 2, 2016. Cavco manufactures factory-built homes and operates consumer-finance and insurance businesses. It acquired Lexington Homes on April 3, 2017; its results are included from that date.
Financial performance and position
| Metric | Quarter ended July 1, 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $206.8 million | $185.1 million |
| Gross profit / margin | $42.0 million / 20.3% | $33.3 million / 18.0% |
| Operating income / margin | $15.7 million / 7.6% | $8.6 million / 4.6% |
| Net income | $11.8 million | $5.4 million |
| Diluted earnings per share | $1.28 | $0.60 |
| Operating cash flow | $(0.05) million | $8.2 million |
- Revenue increased 11.7%. Factory-built housing revenue rose 11.8% to $192.9 million; financial-services revenue rose 10.1% to $13.9 million.
- Homes sold increased 2.4% to 3,475. Factory-built housing revenue per home rose 9.3% to $55,506, reflecting price and product mix as well as wholesale-versus-retail mix.
- Factory-built housing generated $13.2 million of pretax income, up from $10.7 million. Financial services generated $2.5 million, compared with a $2.3 million pretax loss a year earlier.
- Cash and cash equivalents were $129.5 million at quarter-end, down from $132.5 million at April 1, 2017. Restricted cash was $14.0 million. Total assets were $609.7 million and stockholders’ equity was $404.4 million.
- Securitized financings and other debt totaled $57.6 million, including $6.1 million current. Cash exceeded this debt by approximately $71.9 million, before considering restricted cash. The current ratio was approximately 2.5.
Material changes versus the prior-year quarter
- Gross profit grew 26.2%, and operating income increased 82.8%, outpacing revenue growth. Management attributed improved factory-built housing results to higher sales and construction leverage.
- Financial-services gross profit increased to $7.5 million from $2.6 million, principally because of fewer and less severe weather-related insurance claims and higher home-loan sales volume. The prior-year quarter experienced substantially greater storm losses.
- The effective tax rate fell to 24.9% from 35.4%. The current quarter included a $1.4 million tax benefit from adopting stock-compensation accounting guidance; this materially contributed to the increase in net income.
- Operating cash flow moved from $8.2 million provided to approximately break-even, as loan originations, higher receivables and inventories, and lower accrued liabilities absorbed cash. Consumer-loan originations rose to $34.4 million from $25.6 million.
- Lexington’s acquisition added production capacity and Southeastern distribution. The purchase-price allocation remained preliminary; the filing says acquisition effects were not material enough to present pro forma results.
Outlook, commentary and risks
- No specific financial guidance was provided. Management said cash and operating cash flow should be sufficient for operations and growth over the next 12 months and into the foreseeable future, while noting that acquisitions or operating needs could require alternative financing.
- Industry manufactured-home shipments increased 18.2% during the first five months of calendar 2017 versus the prior-year period, according to MHI. Cavco’s sales-order backlog was approximately $137 million, versus $55 million a year earlier; retailers may cancel orders before production begins, so backlog is not firm.
- Management cited improving employment and consumer confidence as potential demand supports, but noted that industry shipments remain low by historical standards and that limited consumer financing constrains growth. GSE chattel-loan plans had not yet produced a meaningful increase in orders.
- Key exposures include interest rates and financing availability, consumer and retailer credit risk, raw-material and transportation costs, seasonality, weather-related insurance claims, warranty claims, and regulatory requirements. Consumer loans are geographically concentrated: 47% of outstanding principal was in Texas and 11% in Florida.
- Contingencies include up to $48.2 million of retailer inventory-financing repurchase commitments, with a recorded liability of $1.8 million; $15.4 million of remaining construction-loan funding commitments; and mortgage-sale representations-and-warranties reserves of $0.9 million. Ordinary-course litigation was not expected by management to materially affect results, but outcomes remain uncertain.
- The 2005-1 and 2007-1 securitized portfolios met required overcollateralization levels at quarter-end. Falling below required levels could redirect cash collections to debt repayment and affect the timing of cash received by CountryPlace.
Important facts for investors to verify
- How much of earnings growth is sustainable after separating the $1.4 million stock-compensation tax benefit and the unusually favorable insurance-claims comparison?
- Whether stronger home shipments and the larger, partly cancelable backlog convert into deliveries, revenue and operating cash flow.
- Loan-origination, loan-sale and credit-loss trends, especially given geographic concentration and increased chattel lending.
- Integration and performance of Lexington, including final purchase accounting and realized operating benefits.
- Exposure to repurchase commitments, warranty claims, construction-loan funding, and securitization overcollateralization requirements.