Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 28, 2013 (the second quarter of Cavco’s fiscal 2014); comparisons are to the periods ended September 30, 2012. Amounts below are in millions of dollars unless stated otherwise.
Business context
Cavco manufactures and sells factory-built homes through independent and company-owned retailers, and provides related consumer financing and insurance. It reported factory-built housing and financial services as its two principal segments.
On July 22, 2013, Cavco acquired Third Avenue’s remaining 50% interest in Fleetwood and its businesses, including Palm Harbor, CountryPlace and Standard Casualty. Cavco issued 1,867,370 shares, valued at approximately $91.4 million, and now owns 100%. The transaction eliminated redeemable noncontrolling interest; Cavco’s earnings attribution and share count are therefore not directly comparable with prior periods.
Financial performance
| Metric | Three months ended Sep. 28, 2013 | Prior-year quarter | Six months ended Sep. 28, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $129.8 | $110.1 | $263.8 | $228.9 |
| Gross profit / margin | $29.9 / 23.0% | $25.7 / 23.4% | $59.3 / 22.5% | $49.8 / 21.7% |
| Operating income | $7.8 | $5.6 | $14.7 | $9.7 |
| Income before taxes | $6.7 | $4.4 | $12.8 | $7.2 |
| Consolidated net income | $4.7 | $2.7 | $8.6 | $4.3 |
| Net income attributable to Cavco common stockholders | $4.3 | $1.3 | $6.1 | $2.1 |
| Diluted EPS attributable to Cavco stockholders | $0.50 | $0.18 | $0.79 | $0.30 |
Quarterly revenue rose 17.9%; factory-built housing revenue increased 19.1% to $117.8 million, with homes sold up 29% to 2,480, despite a lower average selling price. Financial services revenue was $12.0 million, versus $11.2 million. For the six months, factory-built housing revenue increased 15.8% and financial services revenue increased 10.4%.
Quarterly gross margin eased to 23.0% from 23.4%, reflecting product mix and competitive pricing partly offset by production efficiencies. Six-month gross margin improved to 22.5% from 21.7%. SG&A was $22.1 million for the quarter and $44.6 million for six months, but declined as a share of revenue to 17.0% and 16.9%, respectively. Lower interest expense reflected continuing repayments of securitized debt. Quarterly other income included a $291,000 impairment charge on assets held for sale.
Quarterly segment pretax income was $7.1 million for factory-built housing and $3.0 million for financial services, offset by $3.4 million of corporate charges. Six-month amounts were $14.1 million, $5.0 million and $6.3 million, respectively.
Cash flow, liquidity and debt
- Operating cash flow was $22.5 million for the six months, compared with $13.9 million a year earlier. Investing activities used $1.9 million; financing activities used $6.7 million, primarily for securitized-financing repayments. Cash and cash equivalents increased $13.8 million to $61.7 million.
- At September 28, current assets were $215.9 million and current liabilities were $95.7 million, implying working capital of approximately $120.2 million. Restricted cash was $9.3 million. Cavco also held $5.7 million in short-term investments and $13.1 million in noncurrent investments.
- Securitized financings totaled $75.5 million, down from $82.3 million at March 30, 2013; $10.0 million was current. The filing reports no other general borrowing balance. Management said cash and operating cash flow should fund operations and growth for at least the next 12 months; Cavco had no credit facility and had not sought external liquidity.
- Stockholders’ equity increased to $279.3 million from $176.9 million, principally reflecting the acquisition share issuance and removal of the redeemable noncontrolling interest. Shares outstanding increased to 8.84 million from 6.97 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management cited an improving order backlog of approximately $36 million at quarter-end, compared with $22 million a year earlier, and factory capacity utilization of about 44%, versus 37%.
- Management described manufactured-home demand and shipments as historically weak. Unemployment, low consumer confidence, restrictive buyer financing, limited wholesale inventory financing and competition remain constraints. The company expects demand to benefit if employment, confidence and financing availability improve, but timing is uncertain.
- CountryPlace’s access to asset-backed and mortgage-backed securitization markets remained effectively closed; it had suspended chattel and non-conforming mortgage originations pending other funding sources. New CFPB mortgage rules were expected to take effect in January 2014 and could restrict financing availability or raise compliance costs, particularly for some manufactured-home loans.
- Loss-ratio triggers on the 2007-1 securitized portfolio required accelerated repayment. The company said this had not materially harmed cash flow; a trigger threshold increase in October 2013 did not resolve the issue. Repayment is limited to collections from the securitized loans.
- Other exposures include $22.3 million of maximum retailer inventory-financing repurchase commitments, against a recorded $1.8 million liability; $5.3 million of remaining construction-loan funding commitments; and mortgage-sale representation and warranty obligations with a $1.2 million reserve. Ordinary-course litigation was not expected by management to materially affect the company, though outcomes remain uncertain.
- Additional risks include consumer-loan and retailer credit losses, geographic loan concentrations, interest-rate sensitivity, raw-material and transportation costs, regulatory disruption, and information-technology failures or data breaches. The filing estimated that a 1% rise in interest rates would reduce the fair value of CountryPlace’s held-for-investment loan portfolio by approximately $3.7 million.
Important facts for investors to verify
- How much of the earnings increase reflects improved operations versus Cavco’s acquisition of the remaining Fleetwood interest and the resulting change in earnings attribution?
- Whether backlog, home shipments and factory utilization continue to improve, and whether price/mix pressure affects gross margins.
- Whether the 2007-1 securitization loss-ratio trigger continues to accelerate repayments and how that affects CountryPlace’s liquidity and loan portfolio.
- Whether alternative funding becomes available for CountryPlace originations and how the 2014 CFPB rules affect manufactured-home financing and sales.
- Whether recorded reserves remain adequate for retailer repurchases, mortgage representations and warranties, consumer loans, and other contingencies.