Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019. The prior-year comparison is the three months ended July 1, 2017. Cavco manufactures and sells factory-built homes and operates consumer finance and insurance businesses.
Financial performance and position
| Metric | Quarter ended June 30, 2018 | Prior comparable quarter | Change |
|---|---|---|---|
| Net revenue | $246.4 million | $206.8 million | +19.1% |
| Gross profit / margin | $51.5 million / 20.9% | $42.0 million / 20.3% | Profit +22.7%; margin +0.6 percentage point |
| Operating income | $22.3 million | $15.7 million | +42.2% |
| Net income | $19.7 million | $11.8 million | +67.5% |
| Diluted EPS | $2.12 | $1.28 | +$0.84 |
| Cash from operating activities | $(2.1) million | $1.7 million | Decreased $3.8 million |
Factory-built housing revenue was $232.8 million, up 20.7%; financial-services revenue was $13.6 million, down 2.1%. Cavco sold 3,887 homes, up 11.9%, and reported factory-built housing revenue per home of $59,882, up 7.9%. Factory-built housing generated $21.6 million of pretax income versus $13.2 million; financial services generated $2.5 million versus $2.5 million.
At June 30, 2018, cash and cash equivalents were $177.5 million and restricted cash was $14.0 million. Current assets were $429.2 million versus current liabilities of $175.6 million. Total assets were $693.6 million and stockholders’ equity was $475.7 million. Securitized financings and other debt totaled $58.1 million, including $24.2 million current and $33.9 million long-term. Cash, cash equivalents and restricted cash declined $7.8 million during the quarter to $191.5 million.
Changes and notable items
- Factory-built housing growth reflected higher unit sales, higher selling prices associated with input-cost inflation and somewhat larger homes, plus improved factory utilization. Home sales were 3,188 wholesale and 699 retail, compared with 2,860 and 615, respectively.
- Reported revenue includes $6.5 million from adopting ASC 606, which changed subcontracted site-preparation and similar services to gross presentation. The filing’s pro forma comparison without ASC 606 shows quarterly revenue lower by $13.7 million and net income lower by $0.7 million; prior periods were not restated. The company said its underlying revenue recognition practices otherwise did not differ materially.
- Adoption of ASU 2016-01 moved unrealized changes in marketable equity securities into earnings. The quarter included approximately $1.6 million of unrealized investment gains and a reported $1.6 million increase in pretax income from the standard’s adoption.
- The effective tax rate was 18.4%, compared with 24.9%, reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act and excess tax benefits from stock-option exercises.
Cash flow, outlook and risks
Operating cash use reflected expanded commercial and home-only lending, consumer loan originations exceeding loan-sale proceeds, and higher receivables associated with sales growth. Investing cash use was $1.6 million, including $1.7 million of capital expenditures; financing cash use was $4.1 million.
Management said available cash and expected operating cash flow should fund operations and growth for at least the next 12 months and into the foreseeable future. No numerical earnings or revenue guidance was provided. The factory backlog was approximately $196 million, versus $137 million a year earlier, but retailers can cancel orders before production; management does not treat unstarted orders as firm. Cavco increased production and staffing, while identifying constrained labor availability as a challenge. Higher pricing was implemented to address rising labor and material costs, though backlog may delay the full benefit.
- Management cited risks from labor and input-cost pressure, consumer and retailer financing constraints, credit exposure from lending programs, and the availability of financing for manufactured homes. Consumer loans were geographically concentrated, with 45.6% of outstanding principal in Texas and 10.5% in Florida.
- Insurance results are exposed to severe weather and catastrophe claims, particularly in Texas; reinsurance mitigates but does not eliminate this exposure. Financial-services gross profit benefited from lower weather-related claims than in the prior-year quarter.
- Two securitized bond balances were $19.7 million and $21.8 million, with call dates in January and July 2019. Management expected to purchase or refinance them by their call dates. Both portfolios met required overcollateralization levels at quarter-end; a shortfall could redirect cash otherwise distributable to the subsidiary toward debt repayment.
- Repurchase agreements with retailers carried a maximum contingent exposure of approximately $71.2 million, with a recorded liability of $2.3 million. Remaining construction-loan funding commitments were $17.7 million. Ordinary-course litigation was not expected by management to have a material adverse effect, though outcomes remain uncertain.
Key facts for investors to verify
- How much of revenue and earnings growth persists after separating ASC 606 presentation effects and the approximately $1.6 million investment gain?
- Whether the $196 million backlog converts to completed sales, given cancellation rights, labor constraints and rising production costs.
- Whether lending growth produces acceptable credit performance and cash generation, particularly amid Texas loan concentration and the quarter’s negative operating cash flow.
- How the 2019 securitized financing call dates are addressed and whether overcollateralization requirements remain satisfied.
- Whether insurance claims, reinsurance recoveries, and the disclosed repurchase and construction-funding commitments change materially.