Legacy Housing Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited; amounts below are in millions except per-share data and where noted. The company manufactures, sells, and finances manufactured homes and tiny homes, with operations primarily in the southern United States.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $52.6 | $64.2 | $105.5 | $124.1 |
| Operating income | $17.5 | $20.5 | $35.9 | $38.7 |
| Net income | $15.0 | $17.3 | $31.3 | $33.4 |
| Diluted EPS | $0.60 | $0.69 | $1.25 | $1.35 |
- Q2 revenue fell 18.0% year over year; product sales declined 23.2% to $42.3 million. For the first half, revenue fell 15.0% and product sales fell 20.0%.
- Consumer and mobile-home-park (MHP) loan interest revenue increased 13.2% in Q2 and 13.5% for the first half, supported by portfolio growth. Other revenue also increased.
- Product gross profit was approximately $12.6 million in Q2 versus $17.7 million a year earlier; gross margin on product sales was approximately 29.8% versus 32.1%. Operating margin on total revenue was approximately 33.3% versus 31.9% in Q2 and 34.0% versus 31.2% for the first half. Net margin was approximately 28.5% versus 26.9% in Q2.
- At June 30, cash was $1.5 million, current assets $92.7 million, current liabilities $43.1 million, total assets $465.8 million, and stockholders’ equity $413.2 million.
- Six-month operating cash flow was negative $7.5 million, compared with negative $4.0 million in 2022. Investing cash flow was positive $3.9 million and financing cash flow positive $2.2 million. Cash declined $1.3 million during the period.
- June 30 borrowings under the Capital One revolver were $4.7 million, with $15.3 million available under the borrowing formula. The balance sheet reported $4.7 million of total lines of credit. Interest rates on the old revolver were 7.17% at June 30; the company reported covenant compliance at quarter-end.
Material changes and management commentary
- Management attributed lower product sales to an industry-wide decline in unit volumes and fewer conversions of certain dealer consignment arrangements to financing arrangements. First-half product units sold were 1,366 versus 1,596; revenue per product sold also declined, reflecting sales mix.
- Company and Georgia state efforts to assess and improve quality and consistency at the Eatonton facility temporarily reduced HUD-label issuance and shipments. Shipments increased in Q2; management said it planned to meet or exceed historical 2023 levels, subject to market conditions.
- Management cited inflation in materials and labor, higher interest rates that could affect buyer financing affordability, and the need to fulfill orders and manage production capacity. It is evaluating expansion opportunities, including increasing Georgia production over time.
- Operating cash use reflected growth in MHP, consumer, and dealer financing and inventory, among other working-capital changes. The company sold U.S. Treasury notes in June for $8.5 million and used proceeds to reduce its credit line; the sale generated a $12,000 gain.
- Effective January 1, 2023, adoption of the expected-credit-loss standard increased portfolio allowances by $0.9 million and reduced opening retained earnings by $0.7 million, net of tax.
- On July 28, 2023, after quarter-end, the company replaced the Capital One facility with a four-year Prosperity Bank revolving facility initially committed at $50 million, with a $25 million accordion feature. The new facility is secured by consumer-loan receivables and related escrow accounts; the old facility was repaid and terminated.
Risks, contingencies, and controls
- Management concluded disclosure controls were not effective at June 30 because previously identified material weaknesses remained unremediated. Weaknesses involved accounting systems and procedures, transaction and journal-entry review and access controls, segregation of duties, and IT safeguards. Remediation was ongoing; management expected to complete it by year-end 2023, but had not yet demonstrated effectiveness through sufficient operating time and testing.
- Consumer loans receivable were $146.0 million net; the portfolio had $3.2 million past due, or 2.2%, and $1.7 million on nonaccrual. MHP notes were concentrated among three borrowers/affiliates, representing 16.1%, 16.5%, and 28.4% of principal outstanding.
- Potential repurchase obligations on dealer inventory financing were up to $6.7 million before considering resale value; no reserve was recorded because management considered obligations on current contracts insignificant. Litigation reserves were $0.5 million; management did not expect pending or threatened litigation to materially affect the company, while noting outcomes remain uncertain.
- No formal earnings guidance was provided. The company said cash, operating cash flow, and credit availability were expected to fund operations and growth for the next 12–18 months and beyond.
Key investor verification points
- Track home shipments, product mix, selling prices, and recovery of Eatonton production and HUD-label activity; confirm whether management’s 2023 shipment expectation was achieved.
- Assess whether growth in loan portfolios and MHP development financing can be funded without continued operating cash outflows, and monitor credit quality, delinquencies, and borrower concentration.
- Review the terms, availability, borrowing costs, collateral, and covenant compliance of the Prosperity Bank facility after its replacement of the Capital One revolver.
- Follow remediation and independent testing of the disclosed material weaknesses, particularly given the prior lender default related to delayed reporting.
- Evaluate sensitivity to housing demand, inflation, interest rates, production capacity, and the company’s contingent dealer repurchase and legal exposures.