Legacy Housing Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018. Legacy manufactures and sells factory-built homes and provides financing to consumers, dealers and manufactured-home-park owners. It operates as one reportable segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $37.95 | $42.69 | Down 11.1% |
| Product sales | $31.55 | $37.41 | Down 15.7% |
| Consumer and MHP loan interest | $5.53 | $4.39 | Up 25.9% |
| Operating income | $9.37 | $9.91 | Down 5.4% |
| Net income | $7.21 | $5.36 | Up 34.5% |
| Basic and diluted EPS | $0.29 | $0.27 | Up $0.02 |
| Net cash from operating activities | $3.39 | $4.49 | Down $1.10 |
Cost of product sales was $21.89 million, down 20.8%. Gross profit on product sales was approximately $9.67 million, or 30.6% of product sales, versus $9.77 million, or 26.1%, in Q1 2018. Operating margin was 24.7% versus 23.2%; net margin was 19.0% versus 12.6%. Lower interest expense and a substantially lower effective tax rate contributed to higher net income despite lower revenue and operating income. Interest expense was $0.19 million versus $0.64 million; income tax expense was $2.01 million versus $3.99 million. Effective tax rates were 21.8% and 42.7%, respectively.
- Cash and cash equivalents were $3.10 million at March 31, 2019, versus $2.60 million at year-end 2018.
- Net cash used in investing was $1.99 million, including $1.4 million of notes issued for third-party manufactured-home-park development and approximately $0.6 million for land acquisition. Capital expenditures were $0.76 million in the cash flow statement.
- Net cash used in financing was $0.91 million. The quarter included $6.7 million of net proceeds from the IPO over-allotment and net repayments of lines of credit.
- Total assets were $243.68 million and stockholders’ equity was $203.42 million. Total liabilities were $40.25 million.
Material changes and operating developments
- Home volume fell 15.9%; the filing reports 767 products sold for its factory-built housing revenue analysis. The overview separately reports 918 home sections sold, a different measure.
- Product sales declined largely because Q1 2018 included $8.9 million of FEMA-related sales following Hurricane Harvey. Direct sales fell $8.1 million; commercial sales rose $5.5 million and company-owned retail-store sales rose $0.8 million, partly offsetting the decline.
- Average revenue per product sold increased 0.3% to $41,134, reflecting sales mix, company-owned stores and higher prices amid rising material and labor costs.
- SG&A rose 35.3% to $6.49 million, driven by retail operations, advertising, new offices, public-company costs, accounting fees and incentive compensation. Lower warranty costs partly offset the increase.
- Interest income from consumer and MHP loans increased with portfolio growth. At March 31, consumer loans receivable, net, were $98.90 million; MHP notes were $62.55 million in total current and noncurrent balances.
Liquidity, debt and risks
- Lines of credit totaled $7.16 million outstanding at quarter-end, down from $13.68 million at December 31, 2018. The company reported $39.84 million available under the Capital One revolver and $18.00 million under the Veritex revolver. Notes payable totaled $3.51 million; the Eagle One note was paid in January. Revolver rates were 4.88% and 4.99%, with maturities in May 2020 and April 2021, respectively.
- Management said cash, operating cash flow and available financing should be sufficient to fund operations and growth for the next 12–18 months. Revolver covenants were satisfied at March 31, 2019.
- Consumer-loan allowance for losses increased to $0.89 million from $0.71 million at year-end; Q1 provision was $0.41 million versus $0.12 million. Past-due consumer loans were 1.7% of the portfolio, down from 2.3% at year-end. MHP notes had no reported past-due balances or allowance.
- Potential repurchase obligations tied to independent retailers’ inventory financing were approximately $1.55 million, without reduction for resale value; no reserve was recorded. Ordinary-course litigation includes warranty, product-liability and personal-injury claims; management did not expect pending matters to materially affect results, while noting outcomes remain uncertain.
- Management identified material weaknesses in financial reporting controls involving loan-loss allowances, finished-goods inventory costing, revenue recognition, income taxes, accounts-payable and accrual cut-off, staffing, system access, journal-entry approvals and segregation of duties. Disclosure controls were deemed ineffective at March 31, 2019. Remediation was expected by year-end 2019, subject to successful implementation and testing.
Outlook, commentary and unusual items
- Management plans to expand company-owned retail locations and expects to open 8–12 additional centers by the end of 2020. Each center is expected to require $1–2 million for acquisition, setup, inventory and initial working capital.
- The company intends to increase production capacity at its Georgia facility over time. Its two Texas plants were operating near peak capacity, limiting near-term output growth.
- Management cited customer financing and development of manufactured-home-community sites as growth opportunities. It cautioned that results depend on forecasting demand, product mix, production schedules and inventory needs.
- On April 17, 2019, after quarter-end, the company repurchased 300,000 shares for $10.20 per share under a program authorizing up to $10 million of repurchases.
- The company adopted the new revenue standard on January 1, 2019 with no material financial-statement impact. It expects lease accounting adoption in 2020 to materially increase reported assets and liabilities, without a material income-statement effect; the impact of the expected-credit-loss standard, effective for the company in 2021, remained under evaluation.
Key investor verification points
- Assess the sustainability of earnings growth given lower product revenue and the prior-year FEMA comparison, and verify the reported volume measures and sales mix.
- Track consumer-loan growth, delinquencies, nonaccruals and loss provisions, along with returns and credit quality of MHP and other notes receivable.
- Confirm available borrowing capacity, compliance with revolver covenants, and the ability to fund planned retail and Georgia-facility expansion.
- Monitor remediation and independent testing of the disclosed material weaknesses in internal controls.
- Evaluate the possible financial exposure from retailer repurchase commitments, litigation, leases and the post-quarter share repurchase.