Legacy Housing Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Amounts below are in U.S. dollars. Financial statement amounts are shown in millions unless otherwise noted.
Business context
Legacy manufactures and transports manufactured homes, sells through independent dealers and company-owned stores, and provides consumer, dealer and manufactured-home-park financing. It operates three manufacturing plants, primarily serves the southern United States, and reports one operating segment. For Q2 2021, management reported 945 home sections sold, compared with 1,056 a year earlier; for the first half, 1,665 versus 1,905.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $48.6 | $46.0 | $88.5 | $84.3 |
| Operating income | $14.7 | $13.1 | $25.4 | $23.7 |
| Net income | $12.4 | $10.0 | $21.5 | $19.1 |
| Diluted EPS | $0.51 | $0.41 | $0.89 | $0.79 |
| Operating cash flow | Not separately stated | Not separately stated | $(5.0) | $(5.2) |
| Investing cash flow | Not separately stated | Not separately stated | $(8.5) | $(0.4) |
| Financing cash flow | Not separately stated | Not separately stated | $13.5 | $5.0 |
Q2 revenue increased 5.6% and net income increased 23.8% year over year; first-half revenue rose 5.0% and net income rose 12.5%. Calculated operating margin was 30.3% in Q2 (28.4% prior year) and 28.6% for the first half (28.1% prior year). Net margin was 25.6% and 24.2%, respectively, compared with 21.8% and 22.6% in the corresponding 2020 periods.
At June 30, cash was $0.8; current assets were $69.7 and current liabilities $37.4. Lines of credit outstanding were $49.7, up from $36.2 at year-end 2020, under a $70.0 million facility; reported available credit was $20.3. Total assets were $373.8 and stockholders’ equity $280.8. The company reported $116.0 of net consumer loans, $133.6 of MHP notes receivable and $22.7 of other notes receivable. First-half cash fell only $0.04 million, to $0.81 million, as borrowings funded operating and investing cash uses.
Changes and management commentary
- Product sales rose 4.9% in Q2 and 4.3% for the first half, despite lower reported unit volumes. Management attributed the increase to higher average selling prices, including price increases in Q2 to address rising material and labor costs.
- Q2 consumer and MHP loan interest revenue increased 11.0%; first-half interest revenue increased 7.1%, reflecting larger loan portfolios. The MHP note portfolio was concentrated: one independent third party and affiliates represented 49.5% of principal outstanding at June 30, down from 52.9% at year-end.
- First-half net income included no repeat of the $1.1 million vendor-litigation settlement gain recorded in 2020. The lower effective tax rate in 2021—16.8% for the first half versus 22.7%—primarily reflected an energy-efficient construction tax credit, partly offset by state taxes.
- Management said it expects cash from operations, cash on hand and line availability to fund operations and growth for the next 12–18 months and beyond. It gave no specific earnings or revenue guidance. Plans include expanding company-owned retail locations and gradually adding capacity at the Georgia plant; the two Texas facilities were operating near peak capacity.
Risks, contingencies and unusual matters
- Management cited pandemic-related uncertainty, including potential effects on demand, loan collections, staffing, production, supply chains, development projects and liquidity. It also noted rising material and labor costs and limited near-term capacity at the Texas plants.
- Operating cash flow remained negative despite reported net income; inventory increased to $44.7 million from $35.9 million at year-end, and first-half investing included $13.6 million of notes issued, primarily for manufactured-home-park development.
- Potential repurchase obligations for dealer inventory financing were up to $3.4 million; no reserve was recorded because management considered current obligations insignificant. The company also described ordinary-course litigation, including warranty, product-liability and personal-injury claims, and said it did not expect pending matters to materially affect results, while noting outcomes remain uncertain.
- Disclosure controls were deemed ineffective at June 30, 2021 because of previously identified material weaknesses involving loan-loss allowances, inventory costing, revenue recognition, income taxes, payables and treasury processes, staffing, accounting-system access and approvals, segregation of duties, and IT safeguards. Management expected remediation by the end of fiscal 2021; weaknesses were not yet considered remediated.
Important facts for investors to verify
- Reconcile the volume disclosures: MD&A reports 945 Q2 and 1,665 first-half home sections, while the product-sales table lists 783 and 1,410 “products sold.” The filing does not clearly explain the difference in these measures.
- Track whether price increases continue to offset lower unit volumes and higher material and labor costs, and whether production capacity expands as planned.
- Monitor cash conversion, inventory growth, borrowing levels and availability under the asset-based credit facility, including compliance with its covenants.
- Assess credit quality and concentration in MHP notes, consumer loans and the largest MHP borrower; consumer loans past due totaled 1.2% of principal at June 30, versus 2.2% at year-end.
- Confirm remediation and testing of the disclosed material weaknesses, and review subsequent filings for changes to litigation, repurchase exposures and pandemic or supply-chain risks.