CAVCO INDUSTRIES INC. - Quarter Report: 2005 September (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, 2005 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission File Number 000-08822
Cavco Industries, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 56-2405642 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
1001 North Central Avenue, Suite 800, Phoenix, Arizona 85004
(Address of principal executive offices)
(Zip Code)
(Address of principal executive offices)
(Zip Code)
(602) 256-6263
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of
the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the close of the latest practicable date.
| Class | Outstanding at November 3, 2005 | |
| Common Stock, $.01 Par Value | 6,335,730 Shares |
CAVCO INDUSTRIES, INC. AND SUBSIDIARY
Form 10-Q Table of Contents
September 30, 2005
Form 10-Q Table of Contents
September 30, 2005
Table of Contents
CAVCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| September 30, | March 31, | |||||||
| 2005 | 2005 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current assets
|
||||||||
Cash |
$ | 10,839 | $ | 46,457 | ||||
Short-term investments |
39,900 | — | ||||||
Restricted cash |
1,168 | 1,028 | ||||||
Accounts receivable |
9,329 | 7,545 | ||||||
Inventories |
11,897 | 9,703 | ||||||
Prepaid expenses and other current assets |
1,404 | 1,202 | ||||||
Deferred income taxes |
3,590 | 3,610 | ||||||
Retail assets held for sale |
334 | 1,114 | ||||||
Total current assets |
78,461 | 70,659 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land |
6,050 | 2,330 | ||||||
Buildings and improvements |
6,192 | 5,045 | ||||||
Machinery and equipment |
6,656 | 6,446 | ||||||
| 18,898 | 13,821 | |||||||
Accumulated depreciation |
(6,810 | ) | (6,349 | ) | ||||
| 12,088 | 7,472 | |||||||
Goodwill |
67,346 | 67,346 | ||||||
Total assets |
$ | 157,895 | $ | 145,477 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 5,450 | $ | 5,978 | ||||
Accrued liabilities |
25,815 | 22,099 | ||||||
Total current liabilities |
31,265 | 28,077 | ||||||
Deferred income taxes |
10,150 | 9,090 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity |
||||||||
Preferred Stock, $.01 par value, 1,000,000 shares authorized;
|
||||||||
No shares issued or outstanding |
— | — | ||||||
Common Stock, $.01 par value; 10,000,000 shares authorized;
|
||||||||
Outstanding 6,334,776 and 6,288,730 shares, respectively |
63 | 63 | ||||||
Additional paid-in capital |
120,984 | 119,998 | ||||||
Unamortized value of restricted stock |
(188 | ) | (313 | ) | ||||
Accumulated deficit |
(4,379 | ) | (11,438 | ) | ||||
Total stockholders’ equity |
116,480 | 108,310 | ||||||
Total liabilities and stockholders’ equity |
$ | 157,895 | $ | 145,477 | ||||
See Notes to Consolidated Financial Statements
1
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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
$ | 47,091 | $ | 38,635 | $ | 92,967 | $ | 74,572 | ||||||||
Cost of sales |
37,482 | 31,366 | 73,721 | 61,210 | ||||||||||||
Gross profit |
9,609 | 7,269 | 19,246 | 13,362 | ||||||||||||
Selling, general and administrative expenses |
4,207 | 4,068 | 8,319 | 7,418 | ||||||||||||
Income from operations |
5,402 | 3,201 | 10,927 | 5,944 | ||||||||||||
Interest income |
364 | 100 | 646 | 201 | ||||||||||||
Income from continuing operations before
income taxes |
5,766 | 3,301 | 11,573 | 6,145 | ||||||||||||
Income tax expense |
2,249 | 1,320 | 4,514 | 2,457 | ||||||||||||
Income from continuing operations |
3,517 | 1,981 | 7,059 | 3,688 | ||||||||||||
Income from discontinued retail operations
less income taxes of $100 in 2004 |
— | 150 | — | 150 | ||||||||||||
Net Income |
$ | 3,517 | $ | 2,131 | $ | 7,059 | $ | 3,838 | ||||||||
Net income per share (basic): |
||||||||||||||||
Continuing operations |
$ | 0.56 | $ | 0.32 | $ | 1.12 | $ | 0.59 | ||||||||
Discontinued retail operations |
— | 0.02 | — | 0.02 | ||||||||||||
Net Income |
$ | 0.56 | $ | 0.34 | $ | 1.12 | $ | 0.61 | ||||||||
Net income per share (diluted): |
||||||||||||||||
Continuing operations |
$ | 0.52 | $ | 0.30 | $ | 1.06 | $ | 0.57 | ||||||||
Discontinued retail operations |
— | 0.03 | — | 0.02 | ||||||||||||
Net Income |
$ | 0.52 | $ | 0.33 | $ | 1.06 | $ | 0.59 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
6,302,386 | 6,288,730 | 6,295,558 | 6,288,730 | ||||||||||||
Diluted |
6,720,397 | 6,520,528 | 6,685,694 | 6,522,178 | ||||||||||||
On January 6, 2005, Cavco Industries, Inc. announced that its Board of Directors had
authorized a 2-for-1 split of its common stock in the form of a 100% stock dividend. The dividend
was paid on January 31, 2005 to stockholders of record as of January 18, 2005. The information for
the three and six months ended September 30, 2004 is presented as if this stock split had been
completed as of the beginning of these periods.
See Notes to Consolidated Financial Statements
2
Table of Contents
CAVCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Six Months Ended September 30, | ||||||||
| 2005 | 2004 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 7,059 | $ | 3,838 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Depreciation |
461 | 547 | ||||||
Amortization of restricted stock |
125 | 125 | ||||||
Deferred income taxes provision |
1,080 | 970 | ||||||
Tax benefit of option exercises |
441 | — | ||||||
Impairment charges |
— | 270 | ||||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
(140 | ) | (454 | ) | ||||
Accounts receivable |
(1,784 | ) | (722 | ) | ||||
Inventories |
(1,414 | ) | (153 | ) | ||||
Prepaid expenses and other current assets |
(202 | ) | 670 | |||||
Accounts payable and accrued liabilities |
3,188 | 133 | ||||||
Net cash provided by operating activities |
8,814 | 5,224 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchases of property, plant and equipment |
(5,077 | ) | (216 | ) | ||||
Purchases of short-term investments |
(53,900 | ) | — | |||||
Proceeds from sale of short-term investments |
14,000 | — | ||||||
Net cash used in investing activities |
(44,977 | ) | (216 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Common stock issued |
545 | — | ||||||
Net cash provided by financing activities |
545 | — | ||||||
Net (decrease) increase in cash |
(35,618 | ) | 5,008 | |||||
Cash at beginning of period |
46,457 | 30,775 | ||||||
Cash at end of period |
$ | 10,839 | $ | 35,783 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for income taxes |
$ | 3,682 | $ | 1,392 | ||||
See Notes to Consolidated Financial Statements
3
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CAVCO INDUSTRIES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2005
(Dollars in thousands, except per share data)
(unaudited)
1. Basis of Presentation
The consolidated interim financial statements include the accounts of Cavco Industries, Inc.
(“Cavco Inc.”) and its wholly-owned subsidiary (collectively, the “Company”) after elimination of
all significant intercompany balances and transactions. The statements have been prepared, without
audit, in accordance with United States generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in financial statements
prepared in accordance with United States generally accepted accounting principles have been
condensed or omitted.
In the opinion of the Company, all adjustments (consisting of normal, recurring accruals)
necessary to present fairly the information in the consolidated financial statements of the Company
have been included. The results of operations for such interim periods are not necessarily
indicative of results for the full year. The Company suggests that these consolidated financial
statements be read in conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the Company’s Form 10-K Annual Report filed with the
Securities and Exchange Commission on May 20, 2005 (the “Form 10-K”).
All shares authorized, outstanding and per share amounts for the three and six months ended
September 30, 2004 have been restated to give retroactive application to the January 31, 2005
two-for-one stock split effected in the form of a 100 percent stock dividend to Company
stockholders of record on January 18, 2005.
The Company’s deferred tax assets primarily result from financial accruals and its deferred
tax liabilities result from excess tax amortization of goodwill.
For a description of significant accounting policies used by the Company in the preparation of
its consolidated financial statements, please refer to Note 1 of the notes to consolidated
financial statements in the Form 10-K.
Accounting For Stock Based Compensation — The Company accounts for its stock-based
compensation programs under APB No. 25, Accounting for Stock Issued to Employees and related
interpretations (“APB 25”), under which no compensation expense has been recognized, as all options
have been granted with an exercise price equal to the fair value of the common stock on the date of
grant. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock Based
Compensation-Transition and Disclosure (“SFAS 123”). For the disclosure requirements of SFAS 123,
the fair value of each option grant as of the date of the grant was estimated using the
Black-Scholes option pricing method. The assumptions used for the six months ended September 30,
2005 were volatility of 6.67%, risk-free interest rate of 3.87%, dividend rate of 0.0% and an
expected life of the options of 5 years.
Options granted generally vest over a three-year period with 25% becoming vested on the grant
date and the remainder becoming vested in cumulative 25% increments on each of the first three
anniversaries of the grant date. Had compensation cost been determined as prescribed by SFAS 123,
utilizing the assumptions detailed above and amortizing the resulting fair value of the stock
options granted over the respective vesting period of the options, net income and earnings per
share would have been reduced to the pro forma amounts for the three and six months ended September
30, 2005 and 2004 as follows.
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| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income, as reported |
$ | 3,517 | $ | 2,131 | $ | 7,059 | $ | 3,838 | ||||||||
Less: Total stock-based employee
compensation determined under the fair
value based method for all awards, net of
related tax effects of $40, $64, $211 and
$171, respectively |
(71 | ) | (96 | ) | (374 | ) | (257 | ) | ||||||||
Pro forma net income |
$ | 3,446 | $ | 2,035 | $ | 6,685 | $ | 3,581 | ||||||||
Basic net income per share: |
||||||||||||||||
As reported |
$ | 0.56 | $ | 0.34 | $ | 1.12 | $ | 0.61 | ||||||||
Pro forma |
$ | 0.55 | $ | 0.32 | $ | 1.06 | $ | 0.57 | ||||||||
Diluted net income per share: |
||||||||||||||||
As reported |
$ | 0.52 | $ | 0.33 | $ | 1.06 | $ | 0.59 | ||||||||
Pro forma |
$ | 0.51 | $ | 0.31 | $ | 1.00 | $ | 0.55 | ||||||||
Recent Accounting Pronouncements — During December 2004, the Financial Accounting Standards Board
issued Statement No. 123R, Share-Based Payment (“SFAS 123R”), which requires companies to measure
and recognize compensation expense for all stock-based payments at fair value. Share-based
payments include stock options which the Company grants to some of its employees and directors
under its stock incentive plan at prices equal to the market value of the stock on the dates the
options were granted. SFAS 123R is effective for annual periods beginning after June 15, 2005.
The Company plans to adopt SFAS 123R effective April 1, 2006.
Because the Company currently accounts for share-based payments to employees using the
intrinsic value method under APB No. 25, it has recognized no compensation cost for stock options
granted. Accordingly, the adoption of SFAS 123R’s fair value method will impact our results of
operations, although it will have no impact on our overall financial position. The impact of
adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods,
the impact of that standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and net income per share above.
2. Inventories
Raw materials inventories are valued at the lower of cost (first-in, first-out method which
approximates actual cost) or market. Finished goods are valued at the lower of cost or market,
using the specific identification method. Inventories at September 30, 2005 and March 31, 2005
were as follows:
| September 30, | March 31, | |||||||
| 2005 | 2005 | |||||||
Raw materials |
$ | 4,610 | $ | 3,811 | ||||
Work in process |
3,693 | 2,546 | ||||||
Finished goods |
3,594 | 3,346 | ||||||
Total inventories |
$ | 11,897 | $ | 9,703 | ||||
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3. Revolving line of credit
The Company has established a $15 million revolving line of credit facility (“RLC”) with
JPMorgan Chase Bank N.A. which expires on July 31, 2007. As of September 30, 2005, $945 of the
line amount is reserved for an outstanding letter of credit issued for the Company’s workers’
compensation program. The Company has not made any draws under the RLC. The outstanding principal
amount of borrowings under the RLC bears interest at the Company’s election at either the prime
rate or the London Interbank Offered Rate plus 1.75%. The RLC contains certain restrictive and
financial covenants, which, among other things, limit the Company’s ability to pledge assets and
incur additional indebtedness, and requires the Company to maintain a certain defined fixed charge
coverage ratio.
4. Warranties
Homes are warranted against manufacturing defects for a period of one year commencing at the
time of sale to the retail customer. Estimated costs relating to home warranties are provided at
the date of sale. The Company has provided a liability for estimated future warranty costs
relating to homes sold, based upon management’s assessment of historical experience factors and
current industry trends. Activity in the liability for estimated warranties was as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Balance at beginning of period |
$ | 5,563 | $ | 4,601 | $ | 5,576 | $ | 4,596 | ||||||||
Charged to costs and expenses |
2,065 | 1,361 | 3,748 | 2,866 | ||||||||||||
Deductions |
(1,770 | ) | (1,387 | ) | (3,466 | ) | (2,887 | ) | ||||||||
Balance at end of period |
$ | 5,858 | $ | 4,575 | $ | 5,858 | $ | 4,575 | ||||||||
5. Contingencies
The Company is contingently liable under terms of repurchase agreements with financial
institutions providing inventory financing for independent retailers of its products. These
arrangements, which are customary in the industry, provide for the repurchase of products sold to
retailers in the event of default by the retailer. The risk of loss under these agreements is
spread over numerous retailers. The price the Company is obligated to pay generally declines over
the period of the agreement and is further reduced by the resale value of repurchased homes. The
maximum amount for which the Company was contingently liable under such agreements approximated
$28,540 at September 30, 2005. The Company has a reserve for repurchase commitments based on prior
experience and market conditions of $1,600 at September 30, 2005. In connection with the
repurchase agreement with one financial institution, the Company has provided a guaranty in the
amount of $300 to guaranty payment should one of the Company’s larger independent dealers default
on certain of its obligations in the event of a repurchase by the lender. The potential liability
related to this guaranty is included in the Company’s reserve for repurchase commitments.
The Company is engaged in various legal proceedings that are incidental to and arise in the
course of its business. Certain of the cases filed against the Company and other companies engaged
in businesses similar to the Company allege, among other things, breach of contract and warranty,
product liability and personal injury. Legal fees associated with these lawsuits are expensed as
incurred. In the opinion of management, the ultimate
liability, if any, with respect to the proceedings in which the Company is currently involved is
not expected to have a material adverse effect on the Company’s financial position or results of
operations. However, the potential exists for unanticipated material adverse judgments against the
Company.
6
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6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share.
Earnings per share calculations for the three and six months ended September 30, 2004 have been restated to give
retroactive application to the January 31, 2005 two-for-one stock split effected in the form of a
100 percent stock dividend to Company stockholders of record on January 18, 2005.
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income |
$ | 3,517 | $ | 2,131 | $ | 7,059 | $ | 3,838 | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
6,302,386 | 6,288,730 | 6,295,558 | 6,288,730 | ||||||||||||
Add: Effect of dilutive stock options |
418,011 | 231,798 | 390,136 | 233,448 | ||||||||||||
Diluted |
6,720,397 | 6,520,528 | 6,685,694 | 6,522,178 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.56 | $ | 0.34 | $ | 1.12 | $ | 0.61 | ||||||||
Diluted |
$ | 0.52 | $ | 0.33 | $ | 1.06 | $ | 0.59 | ||||||||
7. Discontinued Operations
The Company has plans to dispose of certain of its retail sales centers and these operations
are classified as discontinued retail operations. Retail assets held for sale represent finished
goods inventories to be liquidated in conjunction with the disposal of these retail sales centers.
There were no operating losses for the three and six months ended September 30, 2005 for the stores
we have identified for sale or disposal as the costs related to the liquidation of inventory were
in line with our expectations of net realizable values. Income from discontinued retail operations
for the three and six months ended September 30, 2004 resulted from better than anticipated results
from liquidating retail inventories at our closed locations partially offset by an accrual for the
estimated remaining lease costs for one retail location closed during these periods. Net sales for
the retail sales centers to be disposed of were $1,752 and $3,693 for the three month periods ended
September 30, 2005 and 2004, respectively and $3,572 and $8,193 for the six month periods ended
September 30, 2005 and 2004, respectively. The decline in sales versus the prior year was
primarily due to the closure or disposal of retail sales centers in accordance with the Company’s
plans.
8. Business Segment Information
The Company operates in two business segments in the manufactured housing industry —
Manufacturing and Retail. Through its Manufacturing segment, the Company designs and manufactures
homes which are sold primarily in the Southwestern and Western United States to a network of
dealers which includes Company-owned retail locations comprising the Retail segment. The Company’s
Retail segment derives its revenues from home sales to individuals. The accounting policies of the
segments are the same as those described in the Form 10-K. Retail segment results include retail
profits from the sale of homes to consumers but do not include any manufacturing segment profits
associated with the homes sold. Intercompany transactions between reportable operating segments
are eliminated in consolidation. Each segment’s results include corporate office costs that are
directly and exclusively incurred for the segment. The following table summarizes information with
respect to the Company’s business segments for the periods indicated:
7
Table of Contents
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
||||||||||||||||
Manufacturing |
$ | 45,122 | $ | 38,338 | $ | 89,910 | $ | 73,283 | ||||||||
Retail |
3,309 | 2,204 | 6,347 | 4,935 | ||||||||||||
Less: Intercompany |
(1,340 | ) | (1,907 | ) | (3,290 | ) | (3,646 | ) | ||||||||
Total consolidated net sales |
$ | 47,091 | $ | 38,635 | $ | 92,967 | $ | 74,572 | ||||||||
Income (loss) from operations |
||||||||||||||||
Manufacturing |
$ | 6,914 | $ | 5,117 | $ | 13,834 | $ | 8,888 | ||||||||
Retail |
16 | (446 | ) | 4 | (548 | ) | ||||||||||
Intercompany profit in inventory |
85 | 85 | — | 285 | ||||||||||||
General corporate charges |
(1,613 | ) | (1,555 | ) | (2,911 | ) | (2,681 | ) | ||||||||
Total consolidated income
from operations |
$ | 5,402 | $ | 3,201 | $ | 10,927 | $ | 5,944 | ||||||||
Depreciation |
||||||||||||||||
Manufacturing |
$ | 191 | $ | 189 | $ | 386 | $ | 385 | ||||||||
Retail |
16 | 41 | 31 | 79 | ||||||||||||
Corporate |
21 | 42 | 44 | 83 | ||||||||||||
Total consolidated depreciation |
$ | 228 | $ | 272 | $ | 461 | $ | 547 | ||||||||
Capital expenditures |
||||||||||||||||
Manufacturing |
$ | 4,878 | $ | 37 | $ | 5,042 | $ | 201 | ||||||||
Corporate |
— | — | 35 | 15 | ||||||||||||
Total consolidated capital
expenditures |
$ | 4,878 | $ | 37 | $ | 5,077 | $ | 216 | ||||||||
| As of | ||||||||
| September 30, | March 31, | |||||||
| 2005 | 2005 | |||||||
Total assets |
||||||||
Manufacturing |
$ | 97,808 | $ | 89,358 | ||||
Retail |
5,353 | 4,824 | ||||||
Retail assets held for sale |
334 | 1,114 | ||||||
Corporate, primarily cash, short-term investments and deferred taxes |
54,400 | 50,181 | ||||||
Total consolidated assets |
$ | 157,895 | $ | 145,477 | ||||
8
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The consolidated financial statements contained in this quarterly report reflect the financial
condition and results of operations of Cavco Industries, Inc. (the “Company”). The Company is the
largest producer of manufactured homes in Arizona and 7th largest manufactured home builder in the
United States in terms of total dollar volume, based on 2004 data published by Manufactured Home
Merchandiser. Headquartered in Phoenix, Arizona, the Company designs and produces manufactured
homes which are sold to a network of retailers located primarily in the Southwestern and Western
United States. The retail segment of the Company operates retail sales locations which primarily
offer homes produced by the Company to retail customers.
Results of Operations — (Dollars in thousands)
Three and six months ended September 30, 2005 compared to 2004
Three and six months ended September 30, 2005 compared to 2004
Net Sales. Total net sales increased 22% to $47,091 for the three months ended September 30,
2005 compared to $38,635 last year. For the first six months of the fiscal year ending March 31,
2006, net sales increased 25% to $92,967 versus $74,572 last year.
Manufacturing net sales increased 18% to $45,122 for the three months ended September 30, 2005
from $38,338 for last year and 23% to $89,910 for the first six months of fiscal 2006 from $73,283
last year. These increases in sales were attributable to increases in the number of homes sold and
wholesale sales prices. Total homes sold during the current quarter increased 4% to 1,051
wholesale shipments versus 1,008 last year and the average sales price per home increased 13% to
$42,932 versus $38,034 last year. The higher volume of homes sold resulted from stronger demand
for our products particularly in Arizona and California and expansion of specialty products to
markets different from those for traditional manufactured homes. Wholesale sales prices were
increased to offset significant material cost increases experienced since early 2004. In addition,
customers are trending toward larger homes with more amenities because lower interest rates have
made higher priced homes more affordable and traditional mortgage financing can require more square
footage to meet appraisal requirements.
Retail net sales increased $1,105 to $3,309 for the three months ended September 30, 2005 from
$2,204 for the same period last year and $1,412 to $6,347 for the first six months of fiscal 2005
from $4,935 last year. This increase in retail sales was due to additional units sold during the
quarter and a higher average sales price per unit.
Gross Profit. Gross profit as a percent of sales increased to 20.4% for the three months
ended September 30, 2005 from 18.8% last year and to 20.7% for the first six months of fiscal 2006
from 17.9% last year. The increases in gross profit percentage were primarily due to increases in
sales prices, which were enacted to offset material cost increases, and the efficiencies realized
through higher production rates. Since early 2004, the Company has experienced significant cost
increases in substantially all of the major components in the Company’s products, including lumber
and lumber-related products, gypsum products, raw steel and products built with steel and
petroleum-based products and services, including delivery costs. The Company anticipates continued
upward pressure in material prices and is concerned about the availability of materials,
particularly in view of the recent hurricane activity in the gulf coast region of the United
States, which has further escalated demand for building products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased 3.4% or $139 to $4,207 or 8.9% of net sales for the three months ended September 30, 2005
versus $4,068 or 10.5% of net sales last year. For the first six months of fiscal 2006, selling,
general and administrative expenses increased 12.1% or $901 to $8,319 from $7,418 last year. The
increase was primarily the result of incentive compensation programs tied to profitability and an
increase in costs influenced by higher sales volume.
Interest Income. Interest income represents income earned on short-term investments and
unrestricted cash. The increases in interest income for the current quarter versus the comparative
period for last year resulted from the increase in the Company’s investable funds and higher
short-term interest rates.
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Income Taxes. The effective income tax rate for the three and six months ended September 30,
2005 approximated the Company’s estimated combined statutory rate of 39% versus 40% for the same
periods last year.
Discontinued Retail Operations. The Company has plans to dispose of certain of its retail
sales centers and these operations are classified as discontinued retail operations. Retail assets
held for sale represent finished goods inventories to be liquidated in conjunction with the
disposal of these retail sales centers. There were no operating losses for the three months ended
September 30, 2005 and 2004 for the stores we have identified for sale or disposal as the costs
related to the liquidation of inventory were in line with our expectations of net realizable
values. Income from discontinued retail operations for the three and six months ended September
30, 2004 resulted from better than anticipated results from liquidating retail inventories at our
closed locations partially offset by an accrual for the estimated remaining lease costs for one
retail location closed during these periods. Net sales for the retail sales centers to be disposed
of were $1,752 and $3,693 for the three month periods ended September 30, 2005 and 2004,
respectively and $3,572 and $8,193 for the six month periods ended September 30, 2005 and 2004,
respectively. The decline in sales versus the prior year was primarily due to the closure or
disposal of retail sales centers in accordance with the Company’s plans.
Liquidity and Capital Resources
The Company has established a $15 million revolving line of credit facility (“RLC”) with
JPMorgan Chase Bank N.A. As of September 30, 2005, $945 of the line amount is reserved for an
outstanding letter of credit issued for the Company’s workers’ compensation program. The Company
has not made any draws under the RLC. The outstanding principal amount of borrowings under the RLC
bears interest at the Company’s election at either the prime rate or the London Interbank Offered
Rate plus 1.75%. The RLC expires on July 31, 2007.
The RLC contains certain restrictive and financial covenants, which, among other things, limit
the Company’s ability to pledge assets and incur additional indebtedness, and requires the Company
to maintain a certain defined fixed charge coverage ratio.
We believe that cash on hand at September 30, 2005, together with cash flow from operations,
will be sufficient to fund our operations for at least the next twelve months. In addition, our
$15 million line of credit facility described above can be used to supplement these sources of
liquidity.
Operating activities provided $8,814 of cash during the six months ended September 30, 2005
compared to providing $5,224 of cash during the first six months of last year. Cash generated by
operating activities was primarily derived from operating income before non-cash charges and an
increase in accrued liabilities due to operating growth partially offset by higher accounts
receivable due to increased sales and higher inventories necessary to supply increased production.
Cash generated by operating activities in the prior year was primarily derived from operating
income before non-cash charges partially offset by increased accounts receivable due to the timing
of payments.
Investing activities required the use of $44,977 of cash during the six months ended September
30, 2005 compared to the use of $216 last year. The cash was primarily used to make net purchases
of $39,900 of short-term investments in order to enhance yields. In addition, the Company also
purchased $5,077 of property, plant and equipment, including $1,550 for a production facility in
Texas and $3,000 for land in Arizona on which the Company may build an additional production
facility.
Financing activities provided $545 of cash during the six months ended September 30, 2005 from
common stock issued for stock options exercised.
Critical Accounting Policies
In our Form 10-K filed with the Securities and Exchange Commission on May 20, 2005, under the
heading “Critical Accounting Policies”, we have provided a discussion of the critical accounting
policies that management believes affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
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During December 2004, the Financial Accounting Standards Board issued Statement No. 123R,
Share-Based Payment (“SFAS 123R”), which requires companies to measure and recognize compensation expense for
all stock-based payments at fair value. Share-based payments include stock options which the
Company grants to some of its employees and directors under its stock incentive plan at prices
equal to the market value of the stock on the dates the options were granted. SFAS 123R is
effective for annual periods beginning after June 15, 2005. The Company plans to adopt SFAS 123R
effective April 1, 2006.
Because the Company currently accounts for share-based payments to employees using the
intrinsic value method under APB No. 25, Accounting for Stock Issued to Employees and related
interpretations, it has recognized no compensation cost for stock options granted. Accordingly,
the adoption of SFAS 123R’s fair value method will impact our results of operations, although it
will have no impact on our overall financial position. The impact of adoption of SFAS 123R cannot
be predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and net
income per share in Note 1 to our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Various sections of this Report, including Management’s Discussion and Analysis of Financial
Condition and Results of Operations, contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934 and the
Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by
the context of the statement and generally arise when we are discussing our beliefs, estimates or
expectations.
Forward-looking statements are not guarantees of future performance and are subject to risks
and uncertainties, many of which are beyond our control. As a result, our actual results or
performance may differ materially from anticipated results or performance. Also, forward-looking
statements are based upon management’s estimates of fair values and of future costs, using
currently available information. Therefore, actual results may differ materially from those
expressed or implied in those statements. Factors that could cause such differences to occur
include, but are not limited to, those discussed in our Form 10-K filed with the Securities and
Exchange Commission under the heading “Risk Factors”. We expressly disclaim any obligation to
update any forward-looking statements contained in this report or elsewhere, whether as a result of
new information, future events or otherwise. For all of these reasons, you are cautioned not to
place undue reliance on any forward-looking statements included in this report or elsewhere.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market prices and interest
rates. We may from time to time be exposed to interest rate risk inherent in our financial
instruments, but are not currently subject to foreign currency or commodity price risk. We manage
our exposure to these market risks through our regular operating and financing activities. We are
not currently a party to any market risk sensitive instruments that could be reasonably expected to
have a material effect on our financial condition or results of operations.
The Company maintains short-term investments. Short-term investments are comprised of auction
rate certificates which are adjustable-rate securities with dividend rates that are reset by
bidders through periodic “Dutch auctions” generally conducted every 7 to 35 days by a broker/dealer
on behalf of the issuer. The Company believes these securities are highly liquid investments
through the related auctions; however, the collateralizing securities have stated terms of up to
thirty (30) years. The investment instruments are rated AAA by Standard & Poor’s Ratings Group, or
equivalent. The Company’s investments are intended to establish a high-quality portfolio that
preserves principal, meets liquidity needs, and delivers an appropriate yield in relationship to
the Company’s investment guidelines and market conditions. Given the short-term nature of these
investments, and that we have no borrowings outstanding, we are not subject to significant interest
rate risk.
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Item 4: Controls and Procedures
An evaluation has been performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Interim Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of September
30, 2005. Based on that evaluation, our management, including our Chief Executive Officer and
Interim Chief Financial Officer, concluded that our disclosure controls and procedures were
effective as of September 30, 2005, for the purpose of ensuring that information required to be
disclosed in this Report has been processed, summarized and reported in a timely manner. There
were no changes in the Company’s internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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Part II. Other Information
Item 6: Exhibits
10.1 Amendment to Credit Agreement dated as of October 25, 2005.
10.2 Agreement between Cavco Industries, Inc. and Sean K. Nolen dated as of August 11, 2005.
31.1 Certification of the Chief Executive Officer of Cavco Industries, Inc.
pursuant to
Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Interim Chief Financial Officer of Cavco Industries, Inc. pursuant
to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Interim Chief Financial Officer of Cavco Industries, Inc. pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other items required under Part II are omitted because they are not applicable.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Cavco Industries, Inc. | ||
| Registrant | ||
November 8, 2005
|
/s/ Joseph H. Stegmayer | |
| Joseph H. Stegmayer — Chairman, | ||
| President and | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
November 8, 2005
|
/s/ Daniel L. Urness | |
| Interim Chief Financial Officer | ||
| (Principal Financial and | ||
| Accounting Officer) |
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EXHIBIT
INDEX
10.1 Amendment to Credit Agreement dated as of October 25, 2005.
10.2 Agreement between Cavco Industries, Inc. and Sean K. Nolen dated as of August 11, 2005.
31.1 Certification of the Chief Executive Officer of Cavco Industries, Inc.
pursuant to
Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Interim Chief Financial Officer of Cavco Industries, Inc. pursuant
to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of the Chief Executive Officer of Cavco Industries, Inc. pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Interim Chief Financial Officer of Cavco Industries, Inc. pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other items required under Part II are omitted because they are not applicable.