Legacy Housing Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 16, 2020. Amounts below are in millions of dollars unless stated otherwise. The company manufactures and sells manufactured homes and provides consumer, dealer, and manufactured-home-park financing.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $43.743 | $41.936 | $128.022 | $125.651 |
| Operating income | $10.829 | $8.054 | $34.504 | $28.924 |
| Net income | $8.446 | $6.138 | $27.507 | $21.984 |
| Diluted EPS | $0.35 | $0.25 | $1.13 | $0.90 |
| Operating margin | 24.8% | 19.2% | 27.0% | 23.0% |
| Net margin | 19.3% | 14.6% | 21.5% | 17.5% |
Q3 revenue increased 4.3% year over year and net income rose 37.6%. For the nine-month period, revenue increased 1.9% and net income rose 25.1%. Interest income from consumer and MHP loans grew 13.0% in Q3 and 15.9% year to date, reflecting portfolio growth. Product sales were $36.566 million in Q3 and $106.940 million year to date; the filing’s financial statements show increases of 3.4% and 0.3%, respectively.
Cost of product sales was $27.839 million in Q3 and $78.387 million year to date. SG&A declined 28.1% in Q3 and 25.0% year to date, while dealer incentives increased to $0.550 million and $0.929 million, respectively. Nine-month results included a $1.075 million gain from settlement of a lawsuit with a former vendor. The effective tax rate was 22.7% for the nine-month period, primarily reflecting state income taxes.
Cash flow, debt, and liquidity
- Cash was $1.643 million at September 30, 2020, compared with $1.724 million at December 31, 2019.
- Nine-month operating cash flow was negative $8.348 million, versus positive $3.076 million in 2019. The company attributed the decline mainly to increased MHP and consumer loan originations, net of collections, and changes in receivables and payables.
- Investing cash outflow was $3.754 million; financing cash inflow was $12.021 million. Cash decreased $0.081 million over the period.
- Total assets were $328.380 million and stockholders’ equity was $248.657 million. Current assets were $55.670 million and current liabilities $28.139 million.
- Outstanding Capital One revolver borrowings were $43.820 million, up from $28.860 million at year-end 2019. The $70 million facility matures March 2024, carried a 2.16% rate at quarter-end, and had $26.180 million of availability. The company reported compliance with its financial covenants.
- The former Veritex revolver was repaid and terminated in April 2020. A $6.546 million Paycheck Protection Program loan received in April was repaid May 1, 2020. No amount had been drawn under the Georgia PILOT credit facility.
Material developments, outlook, and risks
- Management said cash, operating cash flow, and available credit were expected to fund operations and growth for the next 12 to 18 months and beyond. This is management’s assessment, not earnings guidance.
- The company initially anticipated opening two to four retail centers by year-end 2020, but said it would reassess plans as the effects of COVID-19 became clearer. Texas factories were operating near peak capacity; additional Georgia production capacity would require investment.
- Management described COVID-19 risks including weaker sales or production, supply disruptions, customer payment deferrals or defaults, delayed community-development projects, and reduced operating cash flow. It said the pandemic’s effect could range from minor to material. Actions included discounts and modified purchase terms, reduced production labor, suspended overtime, and reduced pay for non-production workers.
- Concentration risk is notable: one independent third party and affiliates represented 37.0% of nine-month product sales. That party and affiliates also accounted for 51.1% of MHP note principal at September 30; the notes were secured. Consumer loans past due were 1.7% of the portfolio, versus 1.4% at December 31, 2019; nonaccrual consumer loans were $1.898 million.
- Contingencies include ordinary-course litigation, including warranty, product-liability, and personal-injury claims; management did not expect pending matters to have a material adverse effect, while noting outcomes remain uncertain. Maximum contingent home-repurchase obligations were approximately $0.603 million, with no reserve recorded because management considered the obligation immaterial.
- Disclosure controls were deemed ineffective at September 30, 2020 because of previously identified material weaknesses involving accounting processes, experienced personnel, access and journal-entry controls, segregation of duties, and IT safeguards. Management expected remediation by the end of fiscal 2021.
- The company expects lease accounting adoption in 2022 to materially increase reported assets and liabilities, with no material income-statement impact expected. The expected impact of the credit-loss standard, effective for the company in 2023, remained under evaluation.
Key facts for investors to verify
- Whether operating cash flow improves as lending originations and collections evolve, and how loan growth is funded.
- Credit quality, delinquencies, reserves, and recoveries in consumer loans and MHP notes, including the large MHP borrower concentration.
- Continued compliance with the Capital One revolver covenants, remaining borrowing availability, and the impact of variable interest rates.
- Progress in remediating internal-control material weaknesses and whether controls are tested and found effective.
- Whether COVID-19, production capacity, material and labor costs, and retail expansion plans affect sales, margins, and development projects.
- The nonrecurring nature of the $1.075 million vendor-settlement gain and the filing’s differing narrative description of Q3 product-sales movement; the financial statements report a 3.4% increase.