Legacy Housing Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; dollar amounts below are in millions unless noted. The filing was signed September 12, 2022, and the 2021 comparative figures were restated.
Business context
Legacy manufactures and sells manufactured and tiny homes, provides dealer and consumer financing, and finances mobile-home parks. It reported one operating segment. It sold 802 homes in Q1 2022, up 27.9% year over year; management separately reported 1,004 home sections sold. The Texas plants were operating near peak capacity, while the Georgia facility had potential to expand production with investment.
Financial performance
| Metric | Q1 2022 | Q1 2021, restated | Change |
|---|---|---|---|
| Total revenue | $59.9 | $39.9 | +50.0% |
| Product sales | $51.8 | $32.3 | +60.5% |
| Operating income | $18.3 | $12.7 | +44.0% |
| Net income | $16.1 | $10.7 | +50.4% |
| Diluted EPS | $0.65 | $0.44 | +$0.21 |
| Operating cash flow | $(1.1) | $(1.5) | Less cash used |
| Capital expenditures | $0.9 | $1.7 | Lower |
Product sales growth reflected higher unit volume and average selling prices. Revenue per product sold rose 25.4% to $64,600; higher material and labor costs were passed through in selling prices. Product cost rose 53.3%. Gross margin on product sales was approximately 34.9%, versus 31.8% in the prior year. SG&A rose 59.8%, primarily due to higher salaries and incentive costs, including a $4.0 million share-based compensation expense. Operating margin was approximately 30.5%, compared with 31.8%; net margin was approximately 26.9%, compared with 26.8%.
Interest income from consumer and mobile-home-park loans increased 1.9%. Management noted that a $44.9 million principal payment from a borrower in September 2021 was expected to reduce MHP loan interest income in 2022. The reported effective tax rate was 18.1%, compared with 17.1%, primarily reflecting an energy-efficient construction tax credit, partly offset by state taxes.
Balance sheet, liquidity and debt
At March 31, 2022, cash was $2.5 million, current assets $109.1 million, current liabilities $45.8 million, total assets $390.7 million, and stockholders’ equity $329.5 million. Cash increased $1.5 million during the quarter. Operating cash use reflected growth in loans, inventory, receivables and other assets. Investing cash flow was positive $2.8 million, mainly from note collections; financing cash flow was negative $0.2 million after net revolver repayments.
The balance sheet reported $5.1 million of lines of credit; the debt note reported an outstanding revolver balance of $5.2 million. The Capital One revolver had a $70 million commitment and a 2.23% rate at quarter-end; stated available credit was $64.9 million. The filing says the company met financial covenants but had obtained a waiver for certain non-financial covenant violations. The difference between the balance-sheet and note debt amounts should be checked against the filing’s detailed debt accounting.
Outlook, risks and unusual matters
- Liquidity outlook: Management stated that cash, operating cash flow and credit availability were expected to fund operations and growth for the next 12–18 months. That assessment preceded later developments with the revolver.
- Subsequent credit developments: Capital One declared a default related to late financial reporting and required financial statements. After a forbearance agreement was terminated, the lender suspended $50 million of the $70 million commitment on August 24, 2022, leaving $20 million available. The company reported it was not then using the available credit.
- Reporting and controls: The company disclosed material weaknesses in revenue recognition, accounts payable, prepaid expenses, inventory, timely financial reporting, accounting-system access and approvals, segregation of duties, and IT safeguards. Management said remediation was underway and expected most work to be completed by year-end 2022. Nasdaq had granted an extension for overdue filings; a later notice required an updated compliance plan.
- Restatement: Q1 2021 net income was restated upward from $9.0 million to $10.7 million, mainly due to correction of inventory-related costs and related adjustments. The filing says the restatement also affected balance-sheet and cash-flow classifications.
- Contingencies: Potential home repurchase obligations under dealer inventory-financing arrangements were $14.7 million, up from $4.9 million at year-end; no reserve was recorded because management considered current obligations insignificant. Accrued legal reserves were $2.7 million; management did not expect pending claims to have a material adverse effect, while noting litigation uncertainty.
- Business risks: Risks include constrained Texas production capacity, supply-chain and labor costs, loan losses, COVID-related disruption, and reliance on dealer channels. Two MHP borrowers represented 29.1% and 12.9% of MHP note principal, respectively. Management also planned to expand company-owned retail locations and increase Georgia production over time.
- Other unusual item: The company adopted lease accounting in Q1, adding $3.3 million of right-of-use assets and lease liabilities at transition, with no material income-statement or cash-flow impact.
Key facts for investors to verify
- Current status and terms of the Capital One default, commitment suspension, covenant compliance and remaining borrowing availability.
- Progress in remediating material weaknesses and the reliability of subsequent financial reporting.
- Restatement details and the reasons for late filings, including any effect on previously reported periods.
- Cash conversion and liquidity needs as loan originations, inventories and receivables grow.
- Credit quality and concentration of consumer and MHP loans, plus exposure under dealer repurchase commitments and litigation.