Cavco Industries, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012. The filing also presents unaudited fourth-quarter results. Cavco designs and manufactures factory-built housing and, following its Palm Harbor acquisition, also operates retail, consumer finance and property-and-casualty insurance businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $443.1 | $171.8 |
| Gross profit / gross margin | $95.9 / 21.7% | $24.3 / 14.1% |
| Operating income | $16.1 | $2.9 |
| Net income attributable to Cavco common stockholders | $15.2 | $2.8 |
| Diluted EPS | $2.19 | $0.41 |
| Cash from operations | $16.4 | $3.1 |
- FY2012 sales rose 157.9%, principally reflecting Palm Harbor, acquired April 23, 2011. Factory-built housing sales were $406.8 million; financial-services sales, a new segment, were $36.2 million. Homes sold increased to 7,860 from 4,786.
- Reported earnings include a $22.0 million non-taxable bargain-purchase gain from Palm Harbor. Management stated Cavco-attributable net income would have been about $3.6 million excluding its share of that gain and the $1.2 million insurance-group tax benefit.
- Fourth-quarter sales were $99.5 million, gross profit $24.6 million, net income attributable to Cavco stockholders $1.7 million and diluted EPS $0.24. The comparable FY2011 quarter recorded sales of $38.8 million, gross profit of $5.3 million, attributable net income of $1.6 million and diluted EPS of $0.23.
- Cash and equivalents were $41.1 million at year-end, down from $76.5 million. Operating activities provided $16.4 million; investing activities used $23.1 million and financing activities used $28.8 million.
- Year-end debt included $91.5 million of securitized financings and $4.6 million on construction lending lines. Interest expense was $7.3 million. Current assets were $169.0 million versus current liabilities of $85.5 million; the filing says management expects available cash and operating cash flow to fund operations and growth for at least the next twelve months.
- Consumer loans receivable, net, were $119.3 million, and inventory-finance notes receivable, net, were $24.7 million. Restricted cash totaled $6.8 million and is not freely available for general operations.
Changes, outlook and key risks
- Palm Harbor added five operating factories, 49 retail locations, CountryPlace finance operations and Standard insurance operations. The acquisition’s results are included only from their respective acquisition dates. Third Avenue owns the other 50% of Fleetwood Homes; its interest is consolidated as redeemable noncontrolling interest. FY2012 attributable earnings therefore include a substantial noncontrolling-interest allocation.
- Management described industry shipments as historically depressed and recovery as uncertain. Financing constraints, unemployment, weak consumer confidence, competing site-built foreclosure inventory and price competition continued to weigh on demand. Year-end order backlog was $14.4 million, up from $5.9 million, but represented about two weeks of production and could be cancelled before production began.
- Management expects integration synergies and cost reductions over time, while noting transition costs may temporarily obscure savings. No specific revenue or earnings guidance was provided. The company said its cash position should support the business and potential growth, but additional financing might be needed depending on results and opportunities.
- Material risks include limited consumer and retailer financing, Cavco’s expanding exposure to retailer inventory lending and loan credit risk, mortgage repurchase representations and warranties, interest-rate and loan-funding risk, and the prolonged housing downturn. Maximum retailer home repurchase commitments were approximately $12.0 million; the recorded reserve was $0.8 million.
- CountryPlace’s securitized debt may amortize faster if portfolio loss thresholds are breached. Thresholds were met at year-end, but management expected the 2007-1 portfolio could exceed its trigger during FY2013; it did not expect a material cash-flow effect, and the trigger was scheduled to increase in October 2012.
- Third Avenue’s put right over its Fleetwood Homes interest becomes exercisable after August 17, 2014 at the latest, subject to agreement terms. The purchase price may be settled in cash or Cavco shares under specified conditions; no maximum share issuance is stated.
- Management reported effective disclosure controls and internal control over financial reporting. However, the assessment and auditor’s internal-control audit excluded Palm Harbor, which represented 57% of revenue and 90% of net income for FY2012 and 55% of total assets at year-end. Integration into Cavco’s control environment was expected during FY2013.
- Ordinary-course litigation includes contract, warranty, product-liability, construction-defect and personal-injury claims; management did not expect pending matters to have a material adverse effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- How much recurring earnings and cash generation came from the acquired businesses, excluding the bargain-purchase gain and tax benefit, and how the 50% noncontrolling interest affects Cavco shareholders.
- CountryPlace loan performance, portfolio concentrations, credit-loss assumptions, securitization triggers and the availability of ongoing loan-sale and funding channels.
- Progress and costs of Palm Harbor integration, expected synergies, and remediation of the acquired business’s systems and control environment.
- Cash availability after restricted balances, acquisition-related commitments, securitized debt service and any future settlement of Third Avenue’s put right.
- Whether the backlog, retailer financing access and industry demand improved after year-end; the filing provides no quantified forward earnings guidance.