Cavco Industries, Inc. — Form 10-Q Summary
Business context and reporting period
Reports the first quarter of fiscal 2015, the three months ended June 28, 2014, compared with the three months ended June 29, 2013. Cavco manufactures and sells factory-built housing through independent and company-owned retailers, and provides manufactured-housing finance and insurance through CountryPlace and Standard Casualty.
Financial results and position
| Metric | Quarter ended June 28, 2014 | Prior-year quarter |
|---|---|---|
| Net revenue | $139.2 million | $134.0 million |
| Gross profit / margin | $31.7 million / 22.8% | $29.4 million / 21.9% |
| Operating income | $9.5 million | $6.9 million |
| Income before taxes | $8.9 million | $6.0 million |
| Net income attributable to Cavco common stockholders | $5.8 million; diluted EPS $0.64 | $1.8 million; diluted EPS $0.26 |
| Cash provided by operating activities | $2.2 million | $15.6 million |
Factory-built housing revenue was $126.3 million, up 3.3%; homes sold increased 3.4% to 2,439. Financial services revenue was $12.9 million, up from $11.7 million. Factory-built housing pretax income rose to $10.7 million from $7.0 million; financial services pretax income declined to $1.3 million from $2.0 million. General corporate charges were $3.1 million.
At June 28, 2014, cash and cash equivalents were $73.6 million; restricted cash was $8.3 million; investments totaled $25.6 million. Total assets were $474.5 million and stockholders’ equity was $296.9 million. Securitized financings and other debt totaled $68.9 million, including $10.2 million current. Current assets were $234.8 million and current liabilities $98.8 million.
Material changes versus the prior comparable period
- Revenue rose 3.9%; gross margin increased 0.9 percentage point. Management attributed the margin improvement to construction leverage from higher volume and factory-built housing product mix.
- SG&A decreased 1.2% to $22.2 million and declined to 16.0% of revenue from 16.8%. Interest expense also declined, primarily as securitized debt principal was repaid.
- Net income attributable to Cavco stockholders increased substantially, but the comparison is affected by ownership: Cavco acquired the remaining Fleetwood noncontrolling interest in July 2013. The prior-year quarter included $2.0 million of net income attributable to redeemable noncontrolling interest.
- Operating cash flow fell to $2.2 million from $15.6 million, primarily reflecting increases in accounts receivable and inventories; prior-year cash flow benefited from reduced inventory after completion of larger multi-unit projects and increases in payables and accrued liabilities.
- Factory capacity utilization was approximately 51%, versus 49%. Order backlog was approximately $37.7 million, down from $43.2 million a year earlier; the prior-year backlog included larger-than-normal multi-unit orders.
Outlook, risks, contingencies, and unusual items
- No quantitative earnings or revenue guidance was provided. Management said cash, together with operating cash flow, should fund operations and growth for the next 12 months and the foreseeable future; the company had no credit facility and noted financing might be needed depending on results and opportunities.
- Management described industry shipments and production as low, citing constrained consumer financing, restrictive underwriting, regulatory burdens, unemployment and weak consumer confidence. It expects demand to improve as employment and confidence improve, but noted limited progress in expanding financing availability.
- The 2007-1 securitized portfolio’s cumulative loss ratio exceeded its trigger level, requiring accelerated principal repayment from collections on the related loans. Management said this had not materially harmed cash flow; a scheduled trigger-level increase in October 2014 might ease the issue. The 2005-1 portfolio remained within its trigger level.
- Key exposures include interest rates and housing demand, limited wholesale and consumer financing, retailer and lending-partner credit risk, raw-material and transportation costs, warranty and construction-defect claims, and geographic concentration. Forty-two percent of consumer loan principal was concentrated in Texas; inventory-finance exposure was concentrated in Florida, Colorado, Texas and Arizona, and one independent party and affiliates accounted for 48.6% of that principal balance.
- Contingencies included up to $25.0 million of retailer repurchase commitments, with a recorded liability of $1.8 million; a $5.6 million remaining commitment for construction-period mortgage advances; and a $963,000 reserve for mortgage-sale representations and warranties. Management did not expect ordinary-course litigation to have a material adverse effect, while noting litigation outcomes remain uncertain.
- The company recorded no impairment expense in the quarter. It was evaluating ASU 2014-09, the new revenue recognition standard, which becomes effective in fiscal 2018. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improvement in factory-built housing margin and earnings persists, given low industry shipment levels and the backlog decline.
- Whether working-capital needs continue to suppress operating cash flow as sales activity and inventory change.
- Developments in the 2007-1 securitization loss trigger and the effect of accelerated repayments on CountryPlace liquidity.
- Credit quality, loss reserves and concentration levels in consumer lending and inventory finance, including exposure to the large inventory-finance counterparty.
- Potential effects of mortgage regulations and limited consumer and retailer financing on home orders, loan originations and financial services results.