Legacy Housing Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited interim financial statements; amounts below are in millions of dollars unless noted. Legacy manufactures and sells manufactured homes and provides consumer, dealer and mobile-home-park financing.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $45.8 | $44.0 | $83.7 | $86.7 |
| Operating income | $11.5 | $9.5 | $20.9 | $19.4 |
| Net income | $8.6 | $6.9 | $15.8 | $12.2 |
| Diluted EPS | $0.35 | $0.34 | $0.65 | $0.61 |
- Operating margin was approximately 25.1% in Q2 and 24.9% for the first half, compared with 21.6% and 22.4%, respectively, in 2018.
- Q2 product sales rose 4.1% to $39.8 million, while six-month product sales fell 5.7% to $71.3 million. Consumer and mobile-home-park loan interest revenue increased 13.5% in Q2 and 19.6% for the half.
- Six-month operating cash flow was $3.3 million, versus $3.0 million a year earlier. Investing activities used $2.2 million; financing activities used $1.3 million. Cash declined to $2.4 million from $2.6 million at year-end.
- At June 30, total assets were $251.8 million, liabilities $42.6 million and stockholders’ equity $209.2 million. Current assets of $56.7 million exceeded current liabilities of $29.3 million.
- Lines of credit totaled $9.1 million and notes payable $3.5 million at June 30. The company reported compliance with debt covenants. Revolver rates were 4.83% and 4.94%; the Capital One facility matures in May 2020 and the Veritex facility in April 2021.
Material changes versus comparable periods
- Q2 net income increased 25.3%; first-half net income increased 29.4%, despite lower first-half revenue. Lower product costs and reduced interest expense helped offset higher SG&A and dealer incentives.
- Six-month home-section sales declined 10.1% to 1,658 from 1,845. Management attributed much of the year-over-year product-sales decline to $8.9 million of nonrecurring FEMA-related sales in Q1 2018. Higher commercial and company-store sales partly offset lower direct and consignment sales.
- Revenue per product sold increased 9.3% in Q2 and 5.0% for the half, reflecting a higher mix of community and company-store sales and prior price increases.
- SG&A rose 18.7% in Q2 and 26.7% for the half, including public-company, company-owned retail-location, and other operating costs. First-half interest expense fell to $0.35 million from $1.31 million, primarily due to lower average line-of-credit borrowings following the IPO.
- The company sold 600,000 additional IPO shares in January, netting $6.7 million, and repurchased 300,000 shares for $3.1 million in April.
Outlook, risks and unusual items
- Management said cash, operating cash flow and borrowing capacity should fund operations and growth for the next 12–18 months. It plans to open 6–10 additional retail centers by the end of 2020; each is expected to require $0.5–$1.5 million.
- Management said its two Texas plants were operating near peak capacity. Additional investment could expand production at the Georgia facility, where unused space is available.
- Consumer loans totaled $101.0 million net; the allowance for consumer loan losses was $0.8 million. Past-due consumer loans were 1.9% of the portfolio, versus 2.3% at year-end 2018. Repossessed homes increased to $1.5 million from $1.2 million.
- Repurchase-agreement exposure for dealer inventory was approximately $0.5 million, down from $2.2 million at year-end; no reserve was recorded. Ordinary-course litigation includes contract, warranty, product-liability and personal-injury claims. Management did not expect pending matters to have a material adverse effect, while noting outcomes are uncertain.
- Disclosure controls were deemed ineffective due to continuing material weaknesses involving loan-loss estimates, inventory costing, revenue recognition, taxes, period-end payables/accruals, experienced accounting personnel, system access, journal-entry approvals and segregation of duties. Management expected remediation by the end of fiscal 2020.
- The company expects lease accounting adoption in 2020 to materially increase balance-sheet assets and liabilities, with no material income-statement impact expected. The expected impact of the 2021 credit-loss standard remained under evaluation.
Investor verification priorities
- Reconcile the Veritex revolver availability figures: the notes report $12.568 million available at June 30, while MD&A reports $17.999 million.
- Assess the effect of continuing material weaknesses on the reliability and timeliness of financial reporting, and track evidence of remediation.
- Review consumer-loan credit quality, loss provisioning, repossessed assets and the expansion of consumer and mobile-home-park lending.
- Evaluate whether production capacity, retail-center investment and cash generation can support planned growth without increasing leverage or constraining liquidity.
- Separate ongoing sales trends from the prior-year FEMA comparison and monitor the mix shift among commercial, direct, consignment and company-store sales.