Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended June 30, 2012; filed August 9, 2012. Comparisons below are with the three months ended June 30, 2011 unless stated otherwise. Amounts are in U.S. dollars.
Business context
Cavco designs and manufactures factory-built homes, including manufactured and modular homes, and operates retail, consumer-finance and insurance businesses. Its two reportable segments are factory-built housing and financial services. Results include Fleetwood and Palm Harbor, which Cavco consolidates despite owning 50% of Fleetwood; Third Avenue’s interest is reported as redeemable noncontrolling interest.
Financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $118.8 million | $99.0 million |
| Gross profit / gross margin | $24.1 million / 20.3% | $16.2 million / 16.3% |
| Operating income (loss) | $4.1 million | $(0.8) million |
| Income before taxes | $2.8 million | $20.1 million |
| Net income | $1.6 million | $20.7 million |
| Net income attributable to Cavco common stockholders | $0.9 million; $0.12 diluted EPS | $10.2 million; $1.48 diluted EPS |
| Cash provided by operating activities | $9.3 million | $5.2 million |
- Sales grew 20.0%. Factory-built housing sales were $108.4 million, up 16.8%; financial-services sales were $10.3 million, versus $6.1 million.
- Factory-built housing income before taxes was $3.5 million, compared with a $2.1 million loss; financial services contributed $1.0 million, versus $1.1 million. General corporate charges were $1.7 million.
- Higher gross margin reflected the greater contribution of retail and finance businesses acquired with Palm Harbor, some manufacturing overhead leverage, and the timing of the prior-year acquisition. A higher share of lower-priced homes partly offset these factors. The prior-year quarter included only 68 days of Palm Harbor activity.
- Prior-year pretax income included a $22.0 million bargain-purchase gain from the Palm Harbor acquisition. Its absence explains much of the year-over-year decline in reported net income and EPS; the prior-period gain was excluded from taxable earnings.
Balance sheet, cash flow and liquidity
- At June 30, 2012, cash and cash equivalents were $47.1 million; restricted cash was $7.6 million. Investments totaled $15.1 million, including $5.5 million classified as short-term.
- Total assets were $437.7 million. Current assets were $171.2 million and current liabilities $84.2 million.
- Debt obligations totaled $92.0 million: $89.4 million of securitized financings and $2.5 million drawn on construction lending lines. Securitized financing balances are shown net of acquisition discounts.
- Operating cash flow was $9.3 million; investing activities used $1.2 million and financing activities used $2.0 million. Cash increased $6.1 million during the quarter.
- Management said cash and expected operating cash flow should fund operations and growth for at least the next 12 months. Cavco had no general credit facility and said it might seek financing depending on results and opportunities; availability on satisfactory terms was not assured.
Outlook, risks and unusual items
- No specific financial forecast or earnings guidance was provided. Management described manufactured-home production and shipments as depressed and cited weak consumer confidence, unemployment, tight buyer-credit conditions, limited retailer inventory financing, competition from low-priced site-built homes and industry overcapacity.
- Backlog at June 30 was $20.5 million, about three weeks of current production, versus $20.0 million a year earlier. Cavco sold 2,239 homes, compared with 1,851; manufacturing capacity utilization was approximately 37%.
- Management expects continued benefits from integration, operating efficiencies and purchasing scale following the Fleetwood and Palm Harbor acquisitions, but noted that market recovery and higher shipment levels depend on broader economic and financing conditions.
- CountryPlace had stopped originating chattel loans and non-conforming mortgages because asset-backed and mortgage-backed securitization markets were effectively closed to it. A 1% increase in average interest rates was estimated to reduce the fair value of its held-for-investment loan portfolio by about $4.5 million.
- The 2007-1 securitized portfolio’s cumulative loss ratio exceeded its contractual threshold, triggering accelerated repayment from portfolio collections. Cavco expected the threshold issue could continue during the remainder of fiscal 2013 but did not expect a material adverse cash-flow impact; the threshold was scheduled to increase in October 2012. The 2005-1 portfolio remained within its threshold.
- Third Avenue’s put right over its Fleetwood interest becomes available after August 17, 2014, at the latest, subject to the agreement’s terms; the corresponding call right is also disclosed. The carrying amount of the redeemable noncontrolling interest was $87.3 million at quarter-end.
- Contingencies include up to $12.9 million of retailer inventory-financing repurchase exposure before resale value, with an $0.9 million recorded liability; $4.8 million of remaining construction-loan commitments; and $28.8 million of outstanding mortgage rate-lock commitments. Management did not expect pending ordinary-course litigation to materially affect the company, while acknowledging outcomes remain uncertain.
- Risks also include geographic concentrations in consumer and inventory-finance loans, possible credit losses, warranty and mortgage repurchase claims, reinsurance counterparty exposure, raw-material and healthcare cost pressures, and regulatory changes, including Dodd-Frank and CFPB rulemaking.
Important facts for investors to verify
- How much of sales and margin improvement reflects ongoing operations versus the acquisition-related comparison and segment mix, and whether factory utilization and order backlog are improving.
- CountryPlace loan performance, delinquency and loss trends, the effects of restricted securitization funding, and whether the 2007-1 repayment acceleration changes cash available to Cavco.
- The adequacy of warranty, credit-loss and mortgage-repurchase reserves, and the potential cash or share settlement required for Third Avenue’s Fleetwood interest.
- Whether cash generation remains sufficient amid weak industry demand, limited external financing, and contingent commitments.