Legacy Housing Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. Unaudited results. Dollar amounts below are in millions unless indicated. Legacy manufactures, sells, transports and finances manufactured homes, and finances and develops manufactured-home communities. It reports one operating segment.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $39.94 | $38.27, up 4.4% |
| Product sales | $32.27 | $31.20, up 3.5% |
| Operating income | $10.66 | $10.61, up 0.5% |
| Net income | $9.02 | $9.03, essentially unchanged |
| Basic and diluted EPS | $0.37 | $0.37 |
| Operating margin | 26.7% | 27.7% |
| Net margin | 22.6% | 23.6% |
| Cash from operations | $(1.69) | $(4.55) |
| Cash from investing | $(6.13) | $(0.38) |
| Cash from financing | $9.46 | $6.92 |
Cost of product sales rose 9.9% to $24.02 million, faster than product revenue; product gross margin was approximately 25.5%, versus 29.9% a year earlier. SG&A fell 14.6% to $4.79 million, while dealer incentive expense rose to $0.46 million from $0.19 million. Q1 2020 included a $1.08 million gain from settling a lawsuit with a former vendor; excluding that unusual gain, the year-over-year comparison of pretax income is less unfavorable than reported.
At March 31, cash was $2.41 million, current assets $60.85 million, and current liabilities $36.26 million, implying working capital of $24.58 million and a current ratio of about 1.68. Total assets were $356.92 million, total liabilities $88.66 million, and stockholders’ equity $268.26 million. The company held $45.35 million of line-of-credit debt, up from $36.17 million at year-end 2020. Its $70 million Capital One revolver had $24.65 million of availability; the reported interest rate was 2.11%, and maturity is March 2024. The company reported compliance with its financial covenants.
Cash increased by $1.64 million during the quarter, primarily with $9.17 million of net line-of-credit proceeds offsetting operating and investing outflows. Investing outflows included $1.72 million of property and equipment purchases and $5.71 million of notes issued to third parties. Management said cash, operating cash flow and available credit should fund operations and growth for the next 12–18 months.
Changes, outlook and management commentary
- Homes sold declined: MD&A reports 627 products sold versus 755 in Q1 2020, while the overview separately reports 720 home sections versus 849. The filing does not clearly reconcile these measures. Product revenue nevertheless increased, with revenue per product sold rising 24.6% to about $51,500, reflecting price increases amid higher material and labor costs.
- Management attributed some production and transportation disruption to a week-long closure of Texas factories during February weather, which contributed to higher finished-goods inventory. Texas plants were operating near peak capacity; management expects to increase output over time at the Georgia facility with additional investment.
- Management expects to open one to two additional retail centers by the end of 2021, after delaying earlier expansion plans during the pandemic. Each center requires an estimated $0.5–$1.5 million.
- Revenue from MHP loan interest increased as the portfolio grew; the filing states the MHP portfolio increased $35 million year over year. A single independent third party and affiliates accounted for 52.1% of MHP note principal at quarter-end.
- Consumer-loan provision expense increased to $0.54 million from $0.22 million. Consumer loans more than 90 days past due were $1.69 million, approximately 1.4% of principal outstanding; total past-due loans were 1.6%, down from 2.2% at year-end 2020.
- COVID-19 risks include weaker demand or collections, workforce and factory disruptions, supply-chain constraints, delayed development projects and reduced operating cash flow. Management said the pandemic could have a negative financial effect ranging from minor to material.
Risks, contingencies and controls
- Material weaknesses: Management concluded disclosure controls were not effective at March 31, 2021 because of previously disclosed material weaknesses involving loan-loss allowances, inventory costing, revenue recognition, taxes, payables and treasury processes; staffing; access, journal-entry approval and segregation of duties; and IT safeguards. Remediation was expected by fiscal year-end 2021, but is not complete until controls operate effectively and are tested.
- Contingencies: Maximum obligations under retailer inventory repurchase agreements were approximately $3.07 million, without reduction for resale value; no reserve was recorded because management considered current obligations immaterial. The company is involved in ordinary-course legal proceedings, including warranty, product-liability and personal-injury claims; management did not expect pending matters to have a material adverse effect, while noting litigation uncertainty.
- Accounting and credit risks: The loan and notes receivable portfolios, inventory valuation, estimates of credit losses and concentration with the MHP borrower group warrant attention. The company expects lease accounting adoption in 2022 to materially increase balance-sheet assets and liabilities; it was still evaluating the impact of the credit-loss standard due in 2023.
- The company had not drawn on its separate $10 million Georgia PILOT credit facility, which had a stated maturity of December 2021. The report also describes that facility as available for qualifying plant improvements.
Investor verification priorities
- Reconcile the reported 627 products sold with the 720 home sections cited elsewhere, and assess unit volumes alongside the higher selling price.
- Track product cost inflation, gross margin, dealer incentives and whether price increases continue to offset materials and labor costs.
- Monitor revolver borrowings, borrowing-base availability, covenant headroom, and liquidity needs from loan originations, development lending and capital spending.
- Review consumer-loan delinquency, charge-offs and allowance adequacy, and concentration and credit performance of MHP notes, particularly the borrower group representing 52.1% of principal.
- Confirm progress and testing of internal-control remediation, and follow up on litigation, repurchase obligations and the PILOT facility’s maturity.