Legacy Housing Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Unless otherwise noted, amounts below are in millions of dollars. Legacy manufactures and sells manufactured and tiny homes and provides financing to dealers, consumers, and manufactured-home communities.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total revenue | $52.9 | $59.9; down 11.8% year over year |
| Product sales | $43.3 | $51.8; down 16.4% |
| Consumer and MHP loan interest revenue | $7.7 | $6.8; up 13.9% |
| Operating income | $18.4 | $18.3; up 0.5% |
| Net income | $16.3 | $16.1; up 1.1% |
| Basic / diluted EPS | $0.67 / $0.65 | $0.66 / $0.65 |
| Operating / net margin | 34.7% / 30.8% | 30.5% / 26.9% |
| Cash and cash equivalents | $3.2 | $2.8 at December 31, 2022 |
| Total assets / stockholders’ equity | $455.0 / $397.9 | $436.8 / $382.1 at December 31, 2022 |
| Lines of credit outstanding | $7.8 | $2.5 at December 31, 2022 |
Product gross margin, calculated as product sales less product costs divided by product sales, was approximately 33.1%, versus 34.9% a year earlier. Current assets were $107.8 million and current liabilities $46.7 million, implying a current ratio of about 2.3. Cash plus held-to-maturity Treasury securities totaled $11.7 million. The company reported $12.2 million of available credit under its revolving facility at quarter-end.
Operating cash flow was negative $2.7 million, compared with negative $1.1 million in Q1 2022. Investing cash flow was negative $2.2 million, including $3.1 million of notes issued for manufactured-home-park development and $0.8 million of capital expenditures, partly offset by $1.1 million from leased-home sales. Financing cash flow was positive $5.3 million, primarily net revolver borrowings. Cash increased $0.4 million during the quarter.
Changes and management commentary
- Product sales declined as units sold fell and fewer independent-dealer consignment arrangements converted to financing arrangements. The company reported 688 products sold in its operating comparison, down 14.2%; revenue per product sold was $63,000, down 2.5%. Its overview separately reports 810 home sections sold versus 1,004 a year earlier.
- Lower product costs, reduced selling, general and administrative expense, and lower dealer incentives largely offset lower sales. SG&A fell 29.3%, primarily reflecting lower salary and incentive costs. Loan-interest revenue increased with growth in consumer and mobile-home-park loan portfolios.
- Management said Texas plants were operating at or near peak capacity, while the Georgia plant had available space that could support added production with investment. The company reported increased Georgia shipments in Q1 and said it planned to meet or exceed historical levels in 2023. It is reviewing opportunities to add capacity.
- Management stated that operating cash flow, cash, and available credit should be sufficient to fund operations and growth for the next 12 to 18 months and beyond. The filing provides no quantified revenue or earnings guidance.
Debt, accounting, risks and contingencies
- The Capital One revolver’s effective commitment was reduced from $70 million to $20 million after the lender suspended $50 million of commitments in August 2022 following default-related notices. The facility bears interest at one-month SOFR plus 2%; the rate was 6.66% at March 31, 2023. The company reported compliance with financial and non-financial covenants at quarter-end. The facility matures March 30, 2024.
- Adoption of the expected-credit-loss standard (ASC 326) increased portfolio allowances by $0.9 million and reduced opening retained earnings by $0.7 million, net of tax. The company reported a $0.8 million allowance for consumer loan losses and newly recorded allowances on MHP and other notes.
- Consumer loans had a 13.3% average contractual rate. MHP notes had an average rate of 8.0%; three borrower groups and affiliates accounted for 15.3%, 16.6%, and 31.0% of their principal balance, respectively.
- Potential repurchase obligations under dealer inventory-financing agreements were capped at $8.4 million at quarter-end, before considering resale value; no reserve was recorded. The company recorded $0.4 million of legal reserves and said it did not expect pending or threatened litigation to materially adversely affect results, while noting outcomes remain uncertain.
- Disclosure controls were deemed ineffective at March 31, 2023 because of material weaknesses involving accounting processes (including revenue recognition, payables, prepaid expenses and inventory), system-access and journal-entry review, segregation of duties, and IT safeguards. Remediation was ongoing; management expected to complete most remediation by year-end 2023, subject to testing.
Key facts for investors to verify
- Reconcile the cash-flow figures: the cash-flow statement reports investing outflow of $2.2 million and financing inflow of $5.3 million, while the MD&A cash-flow table lists different amounts. The MD&A narrative agrees with the statement figures.
- Clarify the different volume measures: the overview cites 810 home sections sold, while the results comparison cites 688 products sold. Confirm the definitions and comparability.
- Monitor revolver availability, covenant compliance, and the March 2024 maturity, particularly given the prior default notices and suspended commitment.
- Track progress on internal-control remediation, Georgia production and capacity plans, credit-loss allowances, and concentrations in MHP lending.
- Assess whether the negative operating cash flow reflects continued loan and park-development growth or changing collections, deposits, inventory, and working-capital needs.