Cavco Industries, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended July 1, 2023; comparative period ended July 2, 2022. Amounts below are in U.S. dollars. Cavco manufactures factory-built housing and operates consumer finance and insurance businesses. The quarter includes results of Solitaire Homes, acquired in January 2023.
Financial performance
| Metric | Q1 FY2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $475.9 million | $588.3 million | Down 19.1% |
| Gross profit / gross margin | $117.9 million / 24.8% | $144.7 million / 24.6% | Profit down 18.5%; margin up 0.2 percentage points |
| Operating income | $56.2 million | $78.6 million | Down 28.5% |
| Net income attributable to Cavco common stockholders | $46.4 million | $59.6 million | Down 22.2% |
| Diluted EPS | $5.29 | $6.63 | Down 20.2% |
| Operating cash flow | $82.3 million | $58.2 million | Up $24.1 million |
- Factory-built housing: Revenue was $457.1 million, down 20.2%; segment pretax income was $61.8 million, versus $79.8 million. Homes sold fell 14.3% to 4,582. Revenue per home sold declined 6.9% to $99,762. Factory-built housing gross margin improved to 24.8% from 24.4%.
- Financial services: Revenue rose 19.2% to $18.8 million, while pretax loss widened to $1.1 million from $0.5 million. Higher weather-related insurance claims partly offset gains on marketable securities.
- Liquidity and balance sheet: Cash and cash equivalents were $352.2 million at July 1, 2023, versus $271.4 million at April 1; cash, cash equivalents and restricted cash totaled $366.4 million. Total assets were $1.35 billion and stockholders’ equity was $1.02 billion. No borrowings were outstanding on the $50 million revolving credit facility, and the company reported compliance with its covenants. Current liabilities were $293.4 million.
- Investing and financing cash flows: Investing provided $2.1 million, compared with $24.4 million used in the prior-year quarter. Financing used $1.5 million, versus $40.2 million, primarily reflecting prior-year stock repurchases. There were no repurchases in the reported quarter.
Material changes and management commentary
- Consolidated revenue and earnings declined mainly because of lower factory-built home volume and selling prices; Solitaire Homes partly offset the decline. Management cited favorable material costs as a factor in the factory-built housing margin improvement.
- Industry shipments through May 2023 were 35,714, down 29.0% year over year, according to the Manufactured Housing Institute. Management cited higher interest rates and inflation as demand headwinds, while noting the relative affordability of manufactured housing.
- Backlog was $177 million at July 1, down from $244 million at April 1 and $1.0 billion at July 2, 2022. Management noted uncertainty around housing demand, labor availability and supply chains; material or labor shortages could cause delays, inefficiencies and margin pressure.
- Management said cash and operating cash flow should be sufficient to fund operations, obligations and growth for the next 12 months and into the foreseeable future. It may consider acquisitions, strategic investments or other expansion, and may seek additional financing depending on results and opportunities. The filing provides no numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- Potential repurchase obligations under distributor inventory-financing agreements were approximately $157 million gross at July 1; the reserve was $3.9 million. These maximum obligations are not reduced by the resale value of homes.
- Consumer loans receivable were $39.4 million net; 39% of outstanding principal was concentrated in Texas and 15% in Florida. Commercial loans totaled $105.5 million net, with 17% of principal concentrated in New York. Management reported no commercial loans on watch list or nonperforming.
- Insurance claim reserves increased to $13.0 million from $10.9 million during the quarter, with weather-related claims cited in Arizona and Texas. Reinsurance provides risk protection, but the company remains exposed if reinsurers do not meet their obligations.
- Ordinary-course lawsuits were not believed by management to be likely to have a material adverse effect, after existing reserves, though outcomes remain uncertain. Solitaire purchase-accounting adjustments increased goodwill by $1.0 million during the quarter.
- On August 1, 2023, after quarter-end, the board approved a new $100 million stock repurchase program, bringing total available authorization to $135.7 million. Repurchases are discretionary and depend on market conditions and other investment opportunities.
Important facts for investors to verify
- Whether home volumes, selling prices and backlog stabilize amid elevated interest rates and weaker industry shipments.
- Whether factory-built housing margins remain resilient and whether insurance claims and financial-services losses moderate.
- The composition and collectability of consumer and commercial loan portfolios, including geographic and borrower concentrations, and the adequacy of credit-loss reserves.
- Potential cash demands from repurchase commitments, warranties, litigation, acquisitions and the newly authorized share repurchases.
- Whether management’s liquidity outlook remains supported by operating cash flow and access to the revolving facility.