Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 1, 2016; comparisons are to the periods ended September 26, 2015. Cavco manufactures and sells factory-built housing and operates consumer-finance and insurance businesses.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net revenue | $188.3 million, down 1.9% | $373.5 million, up 5.6% |
| Gross profit / margin | $39.1 million / 20.8%, versus $39.6 million / 20.6% | $72.4 million / 19.4%, versus $71.4 million / 20.2% |
| Operating income | $13.7 million, versus $13.0 million | $22.2 million, versus $22.2 million |
| Net income | $9.3 million; diluted EPS $1.03 | $14.8 million; diluted EPS $1.63 |
- Quarterly factory-built housing revenue was $175.5 million, down 1.1%; financial-services revenue was $12.9 million, down 11.3%. Homes sold declined 0.7% to 3,242.
- Six-month factory-built housing revenue rose 7.1% to $348.0 million, with homes sold up 7.6% to 6,637. The period included one additional month of Fairmont Homes operations versus the prior-year comparison. Six-month financial-services revenue fell 10.9% to $25.5 million.
- Factory-built housing pretax income increased 24.1% for the six months to $21.1 million. Financial-services pretax income fell to $0.5 million from $4.2 million, principally reflecting higher insurance claims, including severe hail, wind and flood losses in the first quarter.
- Operating cash flow was $22.4 million for the six months, versus $29.8 million. Capital expenditures were $3.1 million. Cash and cash equivalents increased to $115.0 million from $97.8 million at April 2, 2016.
- At October 1, current assets were $330.8 million and current liabilities $133.4 million. Securitized financings and other debt totaled $58.0 million, down from $61.2 million at April 2. Stockholders’ equity was $371.0 million.
- Second-quarter effective tax rate was 28.7%, versus 35.4%; it benefited from $755,000 in research and development tax credits and other manufacturing-related tax benefits.
Changes, outlook and risks
- Management said cash and expected operating cash flow should fund operations and growth for at least the next 12 months. It provided no specific earnings or revenue guidance.
- Management described industry shipments and Cavco production as still relatively low, while citing improving employment and consumer confidence as potential demand supports. Industry shipments reached nearly 59,900 HUD-code homes in the first nine months of calendar 2016.
- Sales-order backlog was approximately $63.2 million, or about five weeks of production, versus $68.4 million a year earlier. Orders may be canceled before production begins and are not considered firm until then.
- Key risks include limited consumer and retailer financing, tighter lending standards and financial-services regulation, housing-market cyclicality and seasonality, raw-material and labor costs, and exposure to weather-related insurance claims. Consumer loans were geographically concentrated, with 42% in Texas and 10% in Florida.
- Repurchase agreements with retailer inventory financiers created maximum contingent exposure of $50.5 million; the recorded estimated liability was $1.8 million. Remaining construction-loan funding commitments were $12.3 million. Securitized portfolios met required overcollateralization levels at quarter end. Management did not expect pending ordinary-course litigation to materially affect results, while noting outcomes remain uncertain.
- Management is evaluating several accounting standards not yet effective, including revenue recognition, leases and expected credit losses. It stated that disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Check whether factory-built housing volume and backlog convert into sustained revenue growth, particularly given the cancellable nature of orders.
- Monitor financial-services profitability, insurance claim severity, reinsurance recoveries and the performance of consumer-loan portfolios.
- Assess the effect of financing availability and regulatory changes on homebuyers, retailers and loan originations and sales.
- Review operating cash conversion, loan-sale proceeds, debt repayments and contingent commitments; the filing says liquidity is adequate but depends partly on sales and operations.
- Confirm the timing and impact of the additional Fairmont comparison month when interpreting year-over-year six-month growth.