Legacy Housing Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 14, 2020. The company manufactures and sells manufactured homes and provides financing to consumers, dealers, and mobile-home-park owners. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $46.0 | $45.8 | $84.3 | $83.7 |
| Operating income | $11.2 | $11.5 | $21.8 | $20.9 |
| Net income | $8.6 | $8.6 | $17.6 | $15.8 |
| Diluted EPS | $0.36 | $0.35 | $0.73 | $0.65 |
- Q2 revenue rose 0.5%, while net income declined 0.4%. Six-month revenue increased 0.7% and net income increased 11.2% year over year.
- Product sales were $39.2 million in Q2 and $70.4 million year to date, down 1.5% and 1.3%, respectively. Consumer and mobile-home-park loan interest income increased 18.7% in Q2 and 17.4% year to date, reflecting portfolio growth.
- Cost of product sales increased 9.6% in Q2 and 5.3% year to date, outpacing product sales. Selling, general and administrative expenses decreased 33.9% and 23.4%, respectively; management cited, among other items, lower warranty costs and differences in retail-store expense classification. Operating margin was approximately 24.3% in Q2 versus 25.1% a year earlier, and 25.9% for the first half versus 24.9%.
- Six-month operating cash flow was negative $5.3 million, compared with positive $3.3 million in 2019. Investing cash flow was negative $0.4 million; financing cash flow was positive $5.0 million. Cash declined to $1.0 million from $1.7 million at year-end 2019.
- At June 30, total assets were $312.2 million and stockholders’ equity was $238.7 million. Current assets were $49.5 million and current liabilities $28.6 million. Consumer loans, net, were $107.2 million; mobile-home-park notes receivable were $120.1 million, including current portions.
- Outstanding lines of credit totaled $37.5 million, up from $30.9 million at year-end; the company reported $32.5 million of availability under its primary facility. Management said cash, operating cash flow, and credit availability were expected to fund operations and growth for the next 12–18 months.
Material changes and unusual items
- Commercial home sales increased, but declines in direct, consignment, and company-owned retail sales offset much of the growth. Product-sales mix reduced revenue per product sold year over year.
- First-half other income included a $1.075 million gain from settlement of a lawsuit with a former vendor, contributing to reported net-income growth.
- On March 30, the company replaced its $45 million Capital One revolver with a $70 million facility maturing in March 2024, at one-month LIBOR plus 2.00%. It paid approximately $0.3 million in related fees. The former $20 million Veritex line was repaid and terminated in April.
- The company borrowed approximately $6.5 million through the Paycheck Protection Program on April 10 and repaid the loan in full on May 1.
- The company repurchased 145,065 shares during the first half for approximately $1.4 million. A single independent third party and its affiliates accounted for 36.6% of Q2 product sales and 37.4% of first-half product sales. The same party and affiliates represented 47.4% of mobile-home-park note principal outstanding at June 30; those notes were secured.
Outlook, risks and contingencies
- Management had initially anticipated opening two to four additional retail centers by year-end 2020, but said it would reassess the plan in light of COVID-19. Each center was estimated to require $0.5–$1.5 million.
- Management warned that the pandemic could negatively affect results, from minor to material, through lower demand, loan-payment deferrals or losses, production interruptions, supply-chain disruption, delayed community-development projects, and reduced operating cash flow. The company cited demand incentives, reduced production labor, suspended overtime, and lower pay rates for non-production workers as actions taken.
- Management said the two Texas plants were operating near peak capacity; additional Georgia production capacity would require investment. Development plans include properties acquired for manufactured-home communities in Texas.
- Consumer loans past due totaled $1.9 million, or 1.7% of principal, compared with $1.6 million, or 1.4%, at year-end. Nonaccrual consumer-loan principal was $1.6 million. The company’s largest mobile-home-park borrower concentration merits attention.
- Maximum contingent obligations under retailer inventory repurchase agreements were approximately $0.4 million; no reserve was recorded because management considered current obligations immaterial. Management said pending and threatened litigation was not expected to have a material adverse effect, while acknowledging uncertainty.
- Disclosure controls were deemed ineffective at June 30 due to previously reported material weaknesses involving accounting processes and staffing, access and approval controls, segregation of duties, and IT safeguards. Management expected remediation to be completed by the end of fiscal 2021.
- No formal earnings guidance was provided. The filing notes that results for the interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether operating cash flow improves as mobile-home-park lending expands, and how loan growth is funded.
- Credit quality, delinquencies, reserves, and exposure to the largest mobile-home-park borrower and significant product-sales customer.
- Primary revolver availability, borrowing-base conditions, covenant compliance, and the effect of variable interest rates.
- Whether product margins recover amid higher materials and labor costs and changing sales mix.
- Progress and testing of internal-control remediation, given the disclosed material weaknesses and ineffective disclosure controls.
- COVID-19 effects on demand, production, collections, supply chains, and planned retail and community-development investments.