Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter ended September 30, 2017; comparisons are with the quarter ended October 1, 2016. Six-month figures cover the fiscal year-to-date period. Amounts are in millions of dollars unless stated otherwise.
Business context
Cavco designs and manufactures factory-built homes and operates retail, consumer-finance and insurance businesses. It reported two segments: factory-built housing and financial services. On April 3, 2017, Cavco acquired Lexington Homes, adding a manufacturing facility and distribution in the Southeast.
Financial results and material changes
| Metric | Three months ended Sep. 30, 2017 | Year-over-year change | Six months ended Sep. 30, 2017 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $200.5 | +6.5% | $407.3 | +9.1% |
| Gross profit / margin | $34.6 / 17.2% | −11.6%; 20.8% prior margin | $76.5 / 18.8% | +5.8%; 19.4% prior margin |
| Income from operations / margin | $8.4 / 4.2% | −38.6%; 7.3% prior margin | $24.1 / 5.9% | +8.2%; 6.0% prior margin |
| Net income | $6.2 | −33.8% | $17.9 | +21.3% |
| Diluted earnings per share | $0.67 | vs. $1.03 | $1.96 | vs. $1.63 |
Quarterly factory-built housing revenue rose 6.8% to $187.4 million; financial-services revenue rose 2.0% to $13.1 million. Homes sold increased 1.7% to 3,298, while factory-built revenue per home increased 5.0% to $56,816. For the six-month period, homes sold rose 2.0% to 6,773 and revenue per home rose 7.1% to $56,144. Management attributed revenue growth to higher sales volume and a greater proportion of higher-priced homes.
Quarterly profit weakened despite higher revenue. Factory-built gross profit fell amid hurricane-related inventory damage and lower margins at Lexington; financial-services gross profit declined due to Texas insurance claims, reinsurance reinstatement costs and lower interest income from amortizing securitized loan portfolios. Six-month operating income increased modestly, while reported income taxes benefited from a $1.7 million stock-compensation accounting benefit. The effective tax rate was 27.3% for the quarter and 25.7% year to date, versus 28.7% and 31.3%, respectively, in the prior-year periods.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $7.4 million, down from $22.4 million. Management cited loan origination and chattel-lending growth, higher receivables and inventory, and reinsurance amounts due as cash uses; higher payables and hurricane-related insurance reserves partly offset them.
- Cash and cash equivalents were $136.8 million at September 30, versus $132.5 million at April 1. Restricted cash was $13.6 million. Short-term and other investments totaled $46.3 million.
- Total assets were $649.1 million and stockholders’ equity was $413.0 million. Current liabilities were $172.1 million, including $140.8 million in accrued liabilities.
- Securitized financings and other debt totaled $59.0 million, including an $8.0 million secured term loan. The company reported that its securitized portfolios met required overcollateralization levels.
- Consumer loans receivable, net, were $97.5 million; commercial loans receivable, net, were $31.2 million. The consumer loan-loss allowance increased to $0.5 million from $0.3 million at fiscal year-end.
Outlook, risks and contingencies
Management reported that industry manufactured-home shipments increased 15.8% in the first eight months of calendar 2017, while noting that shipment levels remained low by historical standards. It expects demand to continue improving with employment and consumer confidence and anticipates several quarters of replacement-home demand after the Texas and Florida storms. FEMA had ordered disaster-relief homes, which Cavco planned to produce primarily in unaffected regions during winter. The filing provides no quantified earnings or revenue guidance.
Hurricane Harvey caused inland insurance claims, inventory damage at certain Texas retail centers, production interruptions and delayed sales; Cavco incurred $1.4 million in additional premiums to reinstate reinsurance coverage. Hurricane Irma also disrupted some production, but Cavco’s insurance subsidiary did not operate in Florida. The sales-order backlog was approximately $199 million, compared with $63 million a year earlier, but orders may be canceled before production begins and management did not consider the backlog firm.
Management cited restricted consumer financing, tighter lending standards, regulation, interest-rate sensitivity, raw-material and labor costs, seasonality, acquisition integration, credit exposure from lending programs, and weather-related insurance claims as risks. Potential repurchase obligations on retailer inventory financing were $46.6 million before estimated resale recoveries; the recorded liability was $1.7 million. The company also disclosed ordinary-course litigation and an IRS examination of its fiscal 2016 federal return; management did not expect either to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether hurricane-related claims, reinsurance costs, inventory losses and delayed sales continue to affect margins and cash flow.
- Whether the higher backlog converts to completed sales, given cancellation rights and seasonal production patterns.
- Progress in Lexington integration and whether its margins improve.
- Credit performance and allowance adequacy for consumer and commercial loans, including geographic concentration in Texas and Florida.
- Whether consumer financing availability and proposed GSE chattel-loan initiatives improve demand; the filing says meaningful effects had not yet materialized.
- Developments in the IRS examination, repurchase commitments and regulatory requirements affecting manufactured-home lending.