Legacy Housing Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise. Legacy manufactures and sells manufactured homes and provides consumer, dealer, and manufactured-home-park financing.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $38.3 | $38.0; up 0.8% |
| Product sales | $31.2 | $31.6; down 1.1% |
| Consumer and MHP loan interest revenue | $6.4 | $5.5; up 16.2% |
| Operating income | $10.6 | $9.4; up 13.2% |
| Operating margin | 27.7% | 24.7% |
| Net income | $9.0 | $7.2; up 25.1% |
| Diluted earnings per share | $0.37 | $0.29 |
| Operating cash flow | $(4.5) | $3.4 |
| Cash and cash equivalents | $3.7 at March 31 | $1.7 at December 31, 2019 |
| Total assets / stockholders’ equity | $301.6 / $230.8 | $283.6 / $222.4 at December 31, 2019 |
| Lines of credit outstanding | $39.0 | $30.9 at December 31, 2019 |
Product gross margin was approximately 29.9%, versus 30.6% in Q1 2019. SG&A fell 13.5% to $5.6 million. Net income included a $1.075 million gain from settlement of a lawsuit with a former vendor; excluding this unusual gain, reported net income would have been lower, though the filing does not provide an adjusted figure.
Operating cash use reflected, among other items, increased MHP loan originations net of collections, higher inventory, increased accounts receivable, and lower accounts payable. Financing activities provided $6.9 million, including net line-of-credit borrowings; cash rose by $2.0 million during the quarter. Current assets were $58.0 million and current liabilities $24.5 million at quarter-end.
Changes versus the prior comparable period
- Loan interest revenue grew as the loan portfolios expanded. Management reported year-over-year portfolio increases of $40.7 million for MHP notes and $6.7 million for consumer loans.
- Product sales were nearly flat, but mix shifted: commercial sales increased to $15.8 million from $12.5 million, while direct and consignment sales declined.
- Operating income improved on lower SG&A and broadly unchanged product costs. Net income also benefited from the lawsuit settlement gain.
- Operating cash flow swung to a use of cash from a source of cash a year earlier, principally reflecting lending and working-capital needs.
- Consumer loans past due increased to 1.8% of the portfolio from 1.4% at year-end 2019; nonaccrual consumer loans were $1.9 million versus $1.7 million.
Liquidity, debt, outlook, and risks
- On March 30, 2020, the company replaced its Capital One revolver with a $70 million facility maturing March 30, 2024. It had $37.0 million drawn and $33.0 million available at March 31; the rate then in effect was 3.02%. Borrowing availability is subject to a borrowing base and the facility is secured by receivables and loan portfolios.
- The separate Veritex facility had $2.0 million outstanding at March 31 and $12.0 million available; it was repaid and terminated in April 2020. The company reported covenant compliance at quarter-end.
- Management said cash, operating cash flow, and available credit were expected to fund operations and growth for the next 12–18 months. It gave no earnings or revenue guidance.
- COVID-19 effects were uncertain. Management warned of potential lower sales, production interruptions, supply-chain constraints, delayed development projects, higher loan losses or deferred payments, and weaker operating cash flow. It said the pandemic could have a minor-to-material negative financial impact. Actions included discounts and modified purchase terms, reduced production labor, suspended overtime, reduced non-production pay, and expanded bank credit.
- Plans to open two to four additional retail centers in 2020 were to be reassessed as the pandemic’s impact became clearer. Texas plants were near peak capacity; additional Georgia capacity would require investment.
- Customer and credit concentrations merit attention: one independent third party and affiliates accounted for 37.2% of product sales, and held 45.7% of MHP note principal outstanding at March 31. MHP notes were secured, with minimal past dues reported.
- Management concluded disclosure controls were not effective because of previously identified material weaknesses involving loan-loss allowances, inventory costing, revenue recognition, taxes, transaction processing, financial-statement staffing, access and approval controls, segregation of duties, and IT safeguards. Remediation was expected by the end of fiscal 2021.
- Other items: litigation is ongoing, but management did not expect pending or threatened claims to materially affect financial position, liquidity, or results. Repurchase-agreement exposure was approximately $0.5 million, with no reserve recorded. April 2020 share repurchases totaled 82,035 shares at an average $8.95 per share.
Key facts for investors to verify
- How much future earnings growth depends on loan portfolio expansion, and how credit quality and collections evolve amid pandemic-related stress.
- Whether operating cash flow improves as lending originations, inventory, and receivables are managed; also monitor reliance on revolving credit and borrowing-base availability.
- The recurrence and materiality of the $1.075 million settlement gain and the sustainability of lower SG&A.
- The status of material-weakness remediation and whether controls become effective by the stated target.
- The significance of customer and MHP borrower concentrations and any effects on sales, collections, or collateral recovery.
- The filing reports 849 home sections sold in its business overview, while its results discussion lists 755 “products sold” versus 767 in Q1 2019; confirm the definitions and comparability of these volume measures.