This report will blend three elements. One is a release to the Daily Business News on MHProNews from Cavco Industries. Two, are select graphics and commentary. But we will begin with the following exclusive.
An attorney spoke off-the-record to MHProNews one who has been tracking the drama at Cavco – said the following about Cavco’s official statements.
“The second half of this, beginning with “adverse industry conditions,” is boiler plate that they’ve used before, said that attorney who is tracking developments at Cavco. “The first part is more significant. They also note somewhere that they’ve increased their D&O (directors and officers) liability insurance coverage, which means that they’re expecting possible claims arising out of or related to the SEC matter.”
Put in non-legalize, there is incoming fire, as the related reports linked further below the byline and notices exclusively have reflected.
With that introduction, in a report dated 2.4, 2019, – Cavco Industries, Inc. (NASDAQ: CVCO) today announced financial results for the third fiscal quarter ended December 29, 2018.
Financial highlights include the following:
- “Net revenue for the third quarter of fiscal year 2019 was $233.7 million, up 5.6% from $221.4 million for the third quarter of fiscal year 2018. The increase was primarily from higher home selling prices as a result of input cost inflation and modestly larger home sizes. Net revenue for the first nine months of fiscal 2019 was $721.6 million, a 14.8% increase from $628.7 million in the same period last year. Net revenue for the three and nine months ended December 29, 2018 includes subcontracted pass-through services of $5.9 million and $18.7 million, respectively, which are now recognized on a gross basis rather than net of associated costs.”
- “Income before income taxes was $16.9 million for the third quarter of fiscal year 2019, a 28.7% decrease from $23.7 million in the comparable quarter last year. The current quarter’s results were impacted by the following events:”
The following bullets are direct quotes, from Cavco’s release. The graphics are from Cavco, as shown, but where not part of their press release.
- The Company recorded unrealized losses of $2.1 million on corporate equity investments in Other income, net. This is the result of implementation this fiscal year of new accounting standards that require unrealized gains and losses on equity instruments to be reported on the Consolidated Statement of Comprehensive Income. In previous fiscal years, these amounts were recorded on the Consolidated Balance Sheet in the Accumulated other comprehensive income line;
- Selling, general and administrative expenses included $1.3 million for legal and other expenses related to the Company’s internal investigation and response to the Securities and Exchange Commission (“SEC”) inquiry and $0.7 million of expense related to the purchase of additional Director and Officer (“D&O”) insurance, as described further below; and
- Financial services results were adversely impacted by a severe hailstorm in Arizona, which resulted in increased homeowners’ insurance claims for the period. The Company’s insurance subsidiary maintains reinsurance for loss events that exceed $1.5 million, which served to limit the losses realized this quarter. The prior year quarter experienced unusually low claims volume as policy coverage areas did not have any significant weather-related events.
- Further increasing the adverse quarterly comparison, income before income taxes for the prior year third fiscal quarter benefited from a $3.4 million favorable dispute settlement resolution and the production of a limited number of disaster-relief units for the Federal Emergency Management Agency.
Here’s what the legal beagles and shareholder’s plaintiffs attorneys are watching.
“As a result of the ongoing independent investigation, the Company recorded $1.3 million related to legal and other expenses during the third fiscal quarter and expects to continue to incur related costs pertaining to this matter over the next several quarters. During the quarter, the Company also reviewed the sufficiency of its insurance coverage and as a result of this review, Cavco’s Board of Directors made a decision to purchase additional D&O insurance coverage. These new 22 month policies were implemented December 21, 2018. Total premiums paid for these policies were $15.3 million, of which $5.4 million was paid in the third fiscal quarter. As a result, the Company recorded $0.7 million of additional D&O policy premium expense during the third fiscal quarter, and expects to incur approximately $2.1 million per quarter in Selling, general and administrative expense from the amortization of these policy premiums through the second quarter of fiscal year 2021. Any additional adjustments are expected to be in the normal course of maintaining adequate D&O insurance for the Company.”
Last night’s closing numbers, are linked here. Note that none of MHProNews’ management have taken any position in any tracked stock.
A key pull quote from a call transcript, per Seeking Alpha:
“Some factors that may affect the company’s results include, but are not limited to, the risk of litigation or regulatory action arising from the subpoenas we received from the SEC, the risk of potential litigation or regulatory action arising from the SEC related internal investigation and its findings, potential reputational damage that Cavco may suffer as a result of matters under investigation, adverse industry conditions, our involvement in vertically integrated lines of business, including manufactured housing, consumer finance, commercial finance and insurance, market forces and housing demand fluctuations, our business and operations begin concentrated in certain geographical regions, loss of any of our executive officers, federal government shutdowns and extensive regulation affecting manufactured housing.”
So between the attorney that spoke off-the-record to MHProNews, and Cavco’s own official statements, there are sound reasons to believe that legal tussles lie ahead.
Their full release is linked here.
MHProNews plans a more detailed dive into Cavco in the days ahead. Stay tuned.
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