Legacy Housing Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; financial statements are unaudited. The company manufactures and sells manufactured homes and provides financing to consumers, dealers, and manufactured-home-park owners.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $41.9m | $40.5m | $125.7m | $127.2m |
| Operating income | $8.1m | $9.3m | $28.9m | $28.7m |
| Net income | $6.1m | $6.5m | $22.0m | $18.7m |
| Diluted EPS | $0.25 | $0.32 | $0.90 | $0.94 |
Q3 product sales rose 1.3%, but operating income fell 13.3% and net income fell 5.4%. For the nine months, revenue decreased 1.2%, while operating income rose 0.8% and net income rose 17.3%. Lower interest expense and a lower effective tax rate supported nine-month earnings. Q3 operating margin was approximately 19.2% versus 22.9%; nine-month operating margin was approximately 23.0% versus 22.5%.
Q3 home-section volume was 968 versus 914; reported product units sold were 864 versus 763. Nine-month home-section volume was 2,914 versus 3,045, and product units sold were 2,522 versus 2,608. Interest income from consumer and MHP loans increased 19.6% in both comparison periods as loan portfolios expanded.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $3.1m, compared with cash used of $0.2m in 2018. Investing used $6.9m, including land purchases and loans for mobile-home-park development; financing provided $3.1m. Cash declined to $1.9m from $2.6m at year-end 2018.
- At September 30, 2019, total assets were $262.3m, total liabilities $46.9m, and stockholders’ equity $215.4m. Current assets were $53.3m and current liabilities $33.9m. Inventory was $40.3m, down from $49.4m at year-end.
- Lines of credit totaled $12.9m and notes payable $3.4m, for approximately $16.3m of stated borrowings. Revolver rates were 4.47% and 4.57%; the company reported compliance with covenants. The Capital One facility matures May 2020 and Veritex facility April 2021.
- Consumer loans, net, were $103.1m; MHP notes were $82.0m including current and long-term portions. Consumer loans past due totaled 1.9% of the portfolio, versus 2.3% at December 2018; the allowance was $0.8m.
Material changes, outlook and risks
- Nine-month product sales declined 3.5%, partly reflecting the absence of $8.9m of FEMA-related sales included in Q1 2018 and lower consignment sales. Commercial sales increased substantially. Q3 mix shifted toward commercial sales, while direct, consignment, and company-store sales declined.
- SG&A increased 28.2% for the nine months, including higher public-company costs, staffing, retail-store costs, loan-loss provision, and advertising. Management also cited higher material and labor costs in Q3.
- Management expected cash, operating cash flow, and credit availability to fund operations and growth for the next 12–18 months. It planned to open 2–4 additional retail centers by the end of 2020, each requiring approximately $0.5m–$1.5m, and described plans to develop communities and expand Georgia production. The two Texas facilities were operating near peak capacity; Georgia expansion would require investment.
- Sales to one independent third party and affiliates represented 36.9% of Q3 product sales and 24.7% for the nine months, up from 4.7% and 3.0%, respectively. This customer concentration and the growing concentration in MHP notes warrant attention.
- Management said pending ordinary-course litigation was not expected to materially affect the company, while noting outcomes remain uncertain. Repurchase commitments for dealer inventory were capped at approximately $0.6m at quarter-end; no reserve was recorded.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses in loan-loss allowances, inventory costing, revenue recognition, taxes, period-end liabilities, experienced accounting staffing, system access, journal-entry approvals, and segregation of duties. Management expected remediation by the end of fiscal 2020.
- Adoption of the revenue standard in 2019 had no material impact. The company expected lease-standard adoption in 2021 to materially increase reported assets and liabilities, with no material income-statement impact anticipated; the effect of the expected-credit-loss standard was still being assessed.
Important facts for investors to verify
- Revolver 2 availability is inconsistent in the filing: the debt note reports $11.75m available, while MD&A reports $17.999m. Confirm borrowing-base availability and terms.
- Assess the quality, concentration, and collectability of consumer and MHP loan growth, including the 34.8% MHP-note exposure to one third party and affiliates; the filing says this balance was secured.
- Track whether planned retail expansion and Georgia capacity investments generate returns without worsening liquidity or operating costs.
- Monitor remediation and testing of the disclosed material weaknesses, particularly given the company’s loan, inventory, and revenue-recognition estimates.
- Evaluate the continuing effect of product-sales mix, FEMA comparison effects, and customer concentration on revenue and margins.