Legacy Housing Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results; amounts below are in millions unless stated otherwise. Legacy manufactures and sells manufactured and tiny homes and provides dealer, consumer, and manufactured-home-park financing.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $57.3 | $56.5 | $181.5 | $145.0 |
| Operating income | $16.9 | $15.3 | $55.6 | $43.0 |
| Net income | $14.7 | $13.0 | $48.1 | $36.3 |
| Diluted EPS | $0.58 | $0.54 | $1.92 | $1.50 |
| Operating margin | 29.4% | 27.1% | 30.6% | 29.6% |
| Net margin | 25.7% | 23.0% | 26.5% | 25.1% |
Q3 product sales were $48.7 million, up 0.8%; higher average prices offset lower volume. Nine-month product sales rose 27.8%, reflecting both higher prices and more units sold. The company reported 944 home sections sold in Q3 and 2,947 for the first nine months; its separate factory-built housing table reports 753 and 2,349 products sold, respectively, using a different measure.
For the nine months, cost of product sales increased 21.7% to $104.6 million, while selling, general and administrative expense rose 35.2% to $20.3 million. Management attributed cost increases to greater volume and higher material and labor costs, substantially passed on to customers. SG&A growth included higher salaries and incentives, warranty costs, and legal expense.
- Cash flow: Nine-month operating cash flow was $0.8 million, down from $50.5 million. Loan originations net of collections, inventory growth, other assets, and lower payables and accrued liabilities absorbed cash. Investing provided $17.6 million, principally from note collections; financing used $8.2 million, mainly net revolver repayments. Cash ended at $11.3 million, versus $1.0 million at year-end 2021.
- Liquidity and debt: Current assets were $103.1 million and current liabilities $45.3 million at September 30. The Capital One revolver balance was zero, but following lender default notices and suspension of $50 million of the original $70 million commitment, the stated available commitment was limited to $20 million, subject to a borrowing-base formula. The rate was 4.56%. The company reported compliance with financial covenants at quarter-end, including minimum tangible net worth of $120 million and debt-to-EBITDA no greater than 4:1.
- Balance sheet: Total assets were $418.2 million, liabilities $55.9 million, and stockholders’ equity $362.2 million. Consumer loans, net, were $134.5 million and mobile-home-park notes were $131.7 million, including current portions. Inventory was $54.0 million.
Material changes and unusual items
- Comparative 2021 results are restated. Q3 2021 net income was reduced by $1.7 million, to $13.0 million, primarily from corrections involving inventory and product costs and income taxes. Nine-month 2021 net income increased by $0.2 million, to $36.3 million. Investors should use the restated figures shown here.
- Georgia plant shipments were temporarily constrained while Legacy and the State of Georgia evaluated and improved product quality and consistency at the Eatonton facility, slowing issuance of HUD certification labels. Management expected shipments to increase in Q4 2022 and reach or exceed historical levels by early 2023.
- On November 3, 2022, the board authorized repurchases of up to $10 million of common stock through October 31, 2025; timing and amount are at management’s discretion.
- Share-based compensation expense was $4.7 million for the first nine months, compared with $0.2 million in the restated prior-year period. This includes substantial 2022 equity awards to executives.
Outlook, risks, and contingencies
No numerical financial guidance is provided. Management stated that cash, operating cash flow, and credit availability should fund operations and growth for the next 12–18 months, while also describing the Georgia production recovery plan. Texas plants were operating near peak capacity; Georgia has potential capacity with additional investment. The company cited risks from demand and production changes, labor and material costs and availability, development delays, and the uncertain effects of the COVID-19 pandemic.
- Credit and liquidity risk: The Capital One revolver was subject to default notices; the lender terminated a forbearance agreement and suspended most of the commitment. Verify the current status, borrowing-base availability, and any continuing restrictions.
- Controls and reporting: Management concluded disclosure controls were not effective at September 30, 2022, due to previously identified material weaknesses involving revenue recognition, payables, prepaids, inventory, timely financial reporting, accounting-system access and journal-entry approvals, segregation of duties, and IT safeguards. Management expected most remediation by year-end 2022, but the weaknesses were not yet considered remediated.
- Legal and other exposures: The company recorded a $1.4 million litigation reserve and said pending matters were not expected to have a material adverse effect, while acknowledging litigation uncertainty. Repurchase commitments for dealer inventory financing had a maximum exposure of $9.9 million before considering home resale value; no reserve was recorded because current obligations were considered immaterial.
- Credit portfolio: Consumer loans had $1.35 million of nonaccrual principal and $2.20 million past due. One independent third party and affiliates represented 31.0% of MHP note principal outstanding, down from 52.1% at year-end 2021.
Most important facts for investors to verify
- Whether the Capital One default and commitment suspension were resolved after quarter-end, and how much borrowing capacity is actually available under the borrowing base.
- Progress on internal-control remediation, including whether subsequent filings or audits identify further errors or restatements.
- Whether Eatonton production and HUD-label shipments recovered as management expected, and the effect on sales, costs, and delivery timing.
- Cash conversion and credit-portfolio performance, particularly growth in consumer and MHP lending, delinquencies, and large borrower concentrations.
- Any material developments in litigation, dealer repurchase exposure, and the execution or financial impact of the authorized share repurchase program.