Cavco Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 2, 2021; comparable periods ended September 26, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Cavco designs and manufactures factory-built homes and operates retail, consumer-finance and insurance businesses. It reported two segments: factory-built housing and financial services. The quarter included Craftsman from July 4 and Commodore from September 24, 2021.
| Metric | Three months ended Oct. 2, 2021 | Three months ended Sept. 26, 2020 | Six months ended Oct. 2, 2021 | Six months ended Sept. 26, 2020 |
|---|---|---|---|---|
| Revenue | $359.5 | $258.0 | $690.0 | $512.8 |
| Gross profit | $89.9 | $53.5 | $163.9 | $108.9 |
| Income from operations | $44.6 | $18.1 | $77.7 | $38.1 |
| Net income attributable to Cavco common stockholders | $37.6 | $15.0 | $64.7 | $31.7 |
| Diluted earnings per share | $4.06 | $1.62 | $6.97 | $3.42 |
Margins, cash flow and financial position
- Quarterly gross margin was 25.0%, up from 20.8%; operating margin was approximately 12.4%, versus 7.0%. Six-month gross margin was 23.8%, versus 21.2%; operating margin was approximately 11.3%, versus 7.4%.
- Quarterly factory-built housing revenue rose 42.0% to $342.1 million; financial-services revenue increased 2.6% to $17.4 million. Factory-built housing income before taxes was $46.9 million, while financial-services income before taxes was $2.1 million.
- Six-month operating cash flow was $80.1 million, compared with $74.6 million. Investing used $156.0 million, principally reflecting $151.3 million of net acquisition payments. Financing used $18.9 million, including $20.4 million of share repurchases.
- Cash, cash equivalents and restricted cash totaled $244.5 million at period-end, down from $339.3 million at fiscal year-end. Cash and cash equivalents alone were $224.3 million. Current assets were $633.0 million and current liabilities $282.3 million.
- Total secured financings and other obligations were $19.6 million, including finance leases and a mandatorily redeemable Craftsman interest; $2.3 million was current. Cavco reported $7.7 million outstanding on its converted secured loan facilities at a 4.91% weighted-average rate.
- Inventory increased to $190.4 million from $131.2 million at fiscal year-end. Management said available cash and operating cash flow should fund operations and growth for at least the next 12 months.
Material changes and unusual items
- Revenue increased 39.4% for the quarter and 34.6% for the six-month period. Management attributed factory-built housing growth to higher average selling prices, a shift toward multi-section homes and increased unit sales. Quarterly homes sold rose 5.0%; average factory-built housing revenue per home rose 35.3%.
- Factory-built housing gross profit improved with higher volume and pricing, although management cautioned that selling-price increases can lag building-material cost inflation. Total average plant capacity utilization was approximately 75% in the quarter.
- Other income included a $3.3 million noncash gain from remeasuring Cavco’s prior Craftsman investment when it obtained control. Commodore acquisition-related costs were $2.7 million for the six months, including $2.1 million in the quarter, and were recorded in SG&A.
- The Commodore acquisition consideration was approximately $156.1 million, paid in cash without incurring debt. It added six manufacturing facilities and two retail locations; its post-acquisition contribution was $4.4 million of revenue and a $0.6 million reduction to consolidated net income. Purchase-price allocations remained preliminary.
- Cavco’s reported backlog was $1.1 billion at October 2, up 39.8% from July 3 and 245.4% from September 2020; $279 million of the increase was attributable to Commodore. Backlog excludes orders paused or canceled at customer request.
Outlook, risks and contingencies
- No numerical company earnings or revenue guidance was provided. Management reported strong housing demand and orders above pre-COVID levels, but said order rates were gradually declining from recent highs. Industry shipments rose 14.3% in the first eight months of calendar 2021; the filing cautions that shipments reflect production capacity, not demand.
- Labor shortages, absenteeism, supply constraints and volatile material prices have reduced operating efficiency. Management said shortages had not halted production in the current period, but had caused inefficiencies in other periods; pricing actions may lag cost increases.
- COVID-related borrower forbearance and servicing obligations could pressure cash flows if collections weaken. Consumer lending also carries credit and geographic concentration risks: 36% of consumer-loan principal was in Texas and 18% in Florida. Commercial-loan principal had a 34% concentration in Pennsylvania; one third-party and its affiliates represented 12%.
- Maximum exposure under distributor inventory repurchase agreements was approximately $95.7 million, before considering resale value; the related reserve was $2.7 million. Construction-loan commitments for future advances were $15.0 million. Mortgage representations-and-warranties reserves were $1.2 million.
- The SEC filed a civil complaint naming Cavco and two former executives, alleging securities-law violations related to trading in another company’s shares. Cavco filed a summary-judgment motion on November 2, 2021 and said it did not expect a material adverse effect; the outcome remains uncertain.
Key facts for investors to verify
- Whether backlog converts to shipments and revenue, especially given that $279 million of backlog growth came from Commodore and production capacity remains constrained.
- Whether price increases continue to offset material-cost inflation and whether labor and supply conditions improve.
- Commodore and Craftsman integration, realized synergies, acquisition-related expenses and final purchase-price allocations.
- Cash generation and liquidity following the acquisitions, share repurchases and higher inventory investment.
- Changes in consumer and commercial loan credit quality, servicing cash requirements, and repurchase or legal exposures.
- The resolution and potential financial impact of the SEC litigation.