Legacy Housing Corporation — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021; comparisons are with Q3 and the first nine months of 2020. Legacy manufactures and sells manufactured homes and provides financing to consumers, dealers, and manufactured-home communities. It operates as one reportable segment, primarily in the southern United States.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages, and home counts.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $56.5 | $43.7 | $145.0 | $128.0 |
| Operating income | $17.6 | $10.8 | $43.0 | $34.5 |
| Net income | $14.7 | $8.4 | $36.2 | $27.5 |
| Diluted EPS | $0.61 | $0.35 | $1.49 | $1.13 |
| Operating margin | 31.2% | 24.7% | 29.6% | 27.0% |
Revenue rose 29.1% in Q3 and 13.3% year to date; net income increased 74.4% and 31.5%, respectively. Management attributed higher product revenue primarily to higher average selling prices, reflecting material and labor cost increases that were materially passed on to customers. Q3 product sales increased 32.1%, while products sold declined 1.7%; for the nine-month period, product sales increased 13.8% while products sold declined 12.3%. Consumer and mobile-home-park loan interest revenue increased 12.9% in Q3 and 9.0% year to date.
Operating cash flow was $50.2 million for the first nine months, versus cash used of $7.6 million in 2020. Investing used $22.3 million, including $27.1 million in notes issued, partly offset by collections. Financing used $27.8 million, primarily from net line-of-credit repayments. Cash increased by $0.1 million to $0.9 million.
At September 30, total assets were $349.0 million, total liabilities $53.3 million, and stockholders’ equity $295.6 million. Current assets were $83.4 million and current liabilities $38.9 million. Revolver borrowings were $8.3 million, down from $36.2 million at year-end; reported available capacity under the $70 million Capital One revolver was $61.7 million. The revolver matures March 30, 2024, bears interest at one-month LIBOR plus 2.00% (2.14% at quarter-end), is secured by receivables and loan portfolios, and includes financial and non-financial covenants.
Material changes versus prior comparable periods
- Q3 operating income rose 62.6%; nine-month operating income rose 24.5%. Cost of product sales grew more slowly than product sales, supporting improved operating margins.
- Nine-month net income benefited from lower income-tax expense, including an energy-efficient construction tax credit; the 2020 comparison included a $1.1 million gain from settlement of a vendor lawsuit.
- Consumer loans net of allowance and deferred fees were $121.6 million, versus $111.9 million at December 2020. Other notes receivable increased to $34.5 million from $15.1 million; MHP notes declined to $100.2 million from $136.3 million.
- Inventory was $40.5 million, up from $35.9 million at year-end. Property, plant and equipment increased to $26.4 million from $22.6 million.
Outlook, commentary, risks, and unusual items
- No formal numeric earnings or revenue guidance is provided. Management said cash from operations, cash on hand, and line availability should fund operations and growth for the next 12–18 months and into the foreseeable future.
- On September 30, the Company collected $44.9 million in principal from one borrower. Management expects MHP loan interest income to decrease in Q4 as a result. MHP notes were concentrated: one independent third party and affiliates represented 29.8% of principal outstanding at quarter-end, down from 52.9% at year-end 2020.
- Management identified rising material and labor costs, production capacity constraints at the two Texas plants, and the need for additional investment to expand Georgia production. It plans to expand company-owned retail locations and develop manufactured-home communities.
- The filing describes continuing uncertainty from COVID-19, including potential effects on demand, production, labor, supply chains, development projects, loan collections, and liquidity. Management stated the pandemic could have a minor-to-material negative effect.
- Disclosure controls were deemed ineffective at September 30, 2021 because of previously identified material weaknesses in accounting processes, staffing, system access and approvals, segregation of duties, and IT safeguards. Management expected most remediation by year-end 2021; weaknesses would not be considered remediated until controls operated effectively and were tested.
- Contingent repurchase obligations for retailer inventory financing had a maximum exposure of $5.3 million, versus $3.0 million at year-end; no reserve was recorded because management considered current obligations insignificant. Ordinary-course litigation includes contract, warranty, product liability, and personal injury claims; management did not expect a material adverse effect, while noting outcomes are uncertain.
- Upcoming accounting changes: lease standard adoption is expected to materially increase balance-sheet assets and liabilities, with no material income-statement impact; credit-loss standard adoption is planned for 2023, with effects still under evaluation.
Investor facts to verify
- How much of the strong operating cash flow reflects repeatable operations versus MHP loan originations and collections, including the $44.9 million borrower payment?
- Whether the borrower repayment, related concentration, and anticipated lower Q4 MHP interest income affect subsequent-period revenue and credit exposure.
- Whether pricing continues to offset materials and labor inflation, and whether unit volumes, capacity, and product mix support margins.
- Progress in remediating material weaknesses and whether the controls have been tested and found effective.
- Potential credit losses in consumer and other notes, including the adequacy of reserves and collateral values.
- The status and potential cost of litigation, retailer repurchase commitments, and planned investments in retail sites, Georgia capacity, and communities.