Legacy Housing Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company manufactures and sells manufactured and tiny homes and provides dealer, consumer and manufactured-home-park financing. All amounts below are in millions of dollars unless noted. The filing was signed September 23, 2022.
Financial results and liquidity
- Second quarter: Revenue was $64.2, up 32.2% year over year. Operating income was $20.5, up 36.7%; net income was $17.3, up 36.5%. Basic and diluted EPS were $0.71 and $0.69, compared with $0.52 for both measures in the restated 2021 quarter.
- First half: Revenue was $124.1, up 40.2%; operating income was $38.7, up 40.1%; net income was $33.4, up 42.8%. Basic and diluted EPS were $1.37 and $1.35, versus $0.96 in the restated prior-year period.
- Revenue mix and margins: Q2 product sales were $55.1 (+34.0%); consumer and mobile-home-park loan interest was $7.5 (+11.3%). First-half product sales were $106.9 (+45.6%) and loan interest was $14.3 (+6.7%). Operating margin was approximately 31.9% in Q2 and 31.2% for the first half. Product gross margin was approximately 32.1% and 33.4%, respectively.
- Cash flow: First-half operating cash flow was negative $4.0, versus negative $4.8 in 2021, despite higher net income. Growth in loan balances, dealer financing, inventories and other assets used cash. Investing cash flow was positive $10.1, primarily reflecting note collections; financing cash flow was positive $7.1, including net revolver proceeds of $4.6. Cash increased to $14.3 from $1.0 at year-end.
- Balance sheet: Total assets were $413.0 and stockholders’ equity was $347.1. Current assets were $114.3 against current liabilities of $42.9. The Capital One revolving credit balance was $12.6; the stated available credit at June 30 was $57.4 under the then-$70.0 facility. Operating lease liabilities totaled $3.2.
- Credit quality: Consumer loans, net, were approximately $130.9. Consumer loans past due totaled $1.8 (1.3% of principal), compared with $2.1 (1.6%) at year-end 2021; nonaccrual principal was $1.2.
Material changes and management commentary
- Management attributed product-sales growth to higher prices and greater volume. First-half products sold increased 13.2% to 1,596, while revenue per product increased 28.7% to approximately $67,000. Rising material and labor costs were materially passed on to customers.
- For the quarter ending September 30, 2022, management expected product-sales revenue to decrease temporarily as the company and Georgia worked to improve quality and consistency at the Eatonton plant. The work reduced the pace of HUD certification labels and finished-home shipments. Texas plants were operating near peak capacity; management said Georgia had potential to add capacity with further investment.
- Management expected cash, operating cash flow and credit availability to support operations and growth for 12–18 months, as stated in the filing. That assessment should be considered alongside the subsequent credit-line developments below.
- Capital One notified the company in June that the revolver was in default following late filing of the 2021 Form 10-K and failure to deliver certain financial statements. A July 28 forbearance/amendment followed; on August 24, Capital One said the forbearance had been terminated and suspended $50.0 of the $70.0 commitment, limiting the line to $20.0. The filing does not clearly state the amount actually drawable after that suspension.
Risks, contingencies and unusual items
- Controls and reporting: Management concluded disclosure controls were ineffective at June 30 because of material weaknesses involving revenue recognition, accounts payable, prepaid expenses, inventory costing and management, timely financial reporting, accounting-system access and journal-entry review, segregation of duties, and IT safeguards. The company said it expected most remediation by year-end 2022, subject to effective operation and testing. It also received a Nasdaq notice over the late Q2 filing and submitted an updated compliance plan.
- Restatement: The 2021 interim comparisons were restated for errors and reclassifications involving inventory-related accounts payable, prepaid and other assets, lines of credit, accrued liabilities and tax expense. Restated 2021 net income was $12.6 for Q2 and $23.3 for the first half; the first-half restatement increased net income by $1.9 from the originally reported amount.
- Share-based compensation: First-half share-based payment expense was $4.3, including a fully vested 150,000-share award to the Executive Chairman with a grant-date fair value of $3.7. The company also granted substantial restricted stock and option awards to executives, creating potential dilution and future compensation expense.
- Legal and other contingencies: Accrued litigation reserves were $1.4; management did not expect pending claims to materially affect results, while noting litigation uncertainty. Maximum contingent repurchase exposure under retailer inventory-financing agreements was $11.4, up from $4.9 at year-end; no reserve was recorded because management considered current obligations insignificant.
- Other risks: The filing identifies potential effects from the pandemic, supply-chain disruption, loan losses, production constraints and community-development projects. The company also noted that the $44.9 principal collection from one MHP borrower in September 2021 was expected to reduce MHP interest income in 2022.
- Accounting: The company adopted lease accounting (ASC 842) in Q1 2022, recognizing $3.3 of assets and liabilities at transition, with no material income-statement or cash-flow impact. It was still evaluating the expected impact of the credit-loss standard effective for it in 2023.
Most important facts for investors to verify
- Current availability and terms of the Capital One facility, the status of the default and any subsequent waivers, and the company’s liquidity after the commitment suspension.
- Progress at the Eatonton plant, timing of restored HUD certifications and shipments, and the effect on Q3 sales and margins.
- Remediation and independent testing of the disclosed material weaknesses, and timeliness and reliability of future SEC filings.
- Whether growth in loan originations, inventory and other assets can be funded without sustained negative operating cash flow.
- Subsequent consumer- and MHP-loan performance, credit-loss reserves, litigation outcomes and potential repurchase-agreement losses.