CAVCO INDUSTRIES, INC. quarterly report, Q3 FY2017

Cavco Industries, Inc. — Form 10-Q summary

Business context and reporting period

For the fiscal third quarter and nine months ended December 31, 2016 (fiscal year ending April 1, 2017), Cavco reported results for factory-built housing and financial services. It manufactures and sells homes through independent and company-owned retailers, and provides consumer financing and manufactured-home insurance.

Financial performance and position

Metric	Three months ended Dec. 31, 2016	Prior comparable quarter	Nine months ended Dec. 31, 2016	Prior comparable nine months
Revenue	$202.3 million	$181.4 million	$575.8 million	$535.1 million
Gross profit	$43.5 million	$36.4 million	$115.9 million	$107.8 million
Operating income	$17.5 million	$12.7 million	$39.8 million	$34.8 million
Net income	$12.3 million	$8.1 million	$27.1 million	$21.6 million
Diluted EPS	$1.35	$0.89	$2.98	$2.38

• Quarterly gross margin was 21.5%, up from 20.1%; nine-month gross margin was 20.1%, essentially unchanged. Quarterly operating margin was approximately 8.7% versus 7.0%; nine-month operating margin was approximately 6.9% versus 6.5%.
• Factory-built housing revenue increased 12.7% for the quarter and 9.0% for the nine months. Homes sold rose 8.5% and 7.9%, respectively. Financial services revenue fell 2.7% and 8.2%.
• Nine-month operating cash flow was $28.8 million, versus $35.1 million. Investing activities used $3.7 million, compared with $32.7 million, largely reflecting the prior-year acquisitions of Fairmont Homes and Chariot Eagle. Financing activities used $3.2 million, versus $2.8 million.
• Cash and cash equivalents were $119.7 million at December 31, 2016, versus $97.8 million at April 2, 2016. Current assets were $334.6 million and current liabilities $125.8 million. Securitized financings and other totaled $57.8 million, down from $61.2 million. Stockholders’ equity was $384.0 million.
• Management said cash and expected operating cash flow were sufficient for operations and growth over the next 12 months and foreseeable future; the company had no credit facility and had not sought external liquidity.

Material changes and management commentary

• Quarterly factory-built housing growth primarily reflected higher sales volume and higher revenue per home. For the nine-month comparison, the current period also included one additional month of Fairmont Homes operations.
• Quarterly financial-services gross profit increased, helped by fewer weather-related insurance claims and higher home-loan sales; nine-month financial-services gross profit declined, mainly due to heavier insurance claim losses and lower loan-sale volume. Management cited unusually severe hail, wind and flood damage in the first fiscal quarter, partly offset by reinsurance.
• The backlog at December 31 was approximately $90.5 million, or about six weeks of production, compared with $48.5 million a year earlier. Orders may be canceled before production and are not considered firm until production begins.
• Management reported U.S. manufactured-home shipments of approximately 81,000 in calendar 2016, up 14.1% from 2015, but said industry and company production remained low relative to historical levels. It cited improving employment and consumer confidence as potential demand supports, while emphasizing financing constraints and industry seasonality.

Outlook, risks, contingencies, and unusual items

• No specific earnings or revenue guidance was provided. Management expects affordable-housing demand may improve with employment and consumer confidence, but notes restricted consumer credit, lending regulation, appraisal requirements, higher financing costs, limited secondary-market access, and zoning constraints as barriers.
• Key exposures include cyclical and seasonal demand, interest-rate sensitivity, raw-material and transportation costs, labor availability, competition, acquisition integration, geographic concentration, warranty and construction-defect claims, and credit risk from consumer and commercial lending.
• Retailer inventory-financing repurchase commitments had a maximum exposure of approximately $46.6 million; the recorded estimated liability was $1.6 million. Remaining commitments to fund construction-period mortgages were $11.8 million. Mortgage representations-and-warranties reserves were $821,000.
• CountryPlace had $12.4 million of outstanding interest-rate lock commitments and $34.3 million of forward-sale commitments. Securitized portfolios met required overcollateralization levels at quarter-end; a shortfall could redirect cash collections to debt repayment and delay cash receipts.
• Ordinary-course litigation includes contract, warranty, construction-defect, insurance, product-liability and personal-injury claims. Management did not expect pending or threatened matters to have a material adverse effect, while noting outcomes remain uncertain.
• Quarterly effective tax rate was 28.9%, versus 32.5% a year earlier; management attributed the lower rate partly to manufacturing deductions and research-and-development tax credits. Other income included realized investment gains and gains on sales of certain retail-location assets. No impairment expense was recorded for the nine-month period.

Important facts for investors to verify

• Whether home shipment growth and the higher backlog convert into delivered sales and sustainable margins; backlog orders remain cancelable before production.
• Whether consumer financing availability, interest rates, and regulatory developments improve or further constrain home purchases and CountryPlace loan activity.
• Insurance claim severity and reinsurance recoveries, particularly given weather-related losses in Texas and the increased warranty accrual.
• Credit performance and concentration in consumer loans, including the portfolio’s geographic concentration in Texas, and potential changes in expected defaults or prepayments.
• Liquidity implications of loan originations, loan sales, repurchase commitments, construction-loan funding, and securitization overcollateralization requirements.