Legacy Housing Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Legacy manufactures and sells manufactured and tiny homes, and provides dealer, consumer and manufactured-home-park financing. It reports one operating segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $49.9 | $57.3 | $155.4 | $181.5 |
| Product sales | $37.0 | $48.7 | $122.5 | $155.6 |
| Consumer and MHP loan interest | $8.8 | $7.0 | $25.0 | $21.3 |
| Income from operations | $19.0 | $16.9 | $54.9 | $55.6 |
| Net income | $16.1 | $14.7 | $47.4 | $48.1 |
| Diluted earnings per share | $0.64 | $0.58 | $1.89 | $1.92 |
| Operating cash flow | — | $(5.3) | $0.8 |
- Q3 revenue fell 12.9% year over year, mainly from lower product sales, while net income rose 9.2%. Nine-month revenue declined 14.3% and net income declined 1.5%.
- Product sales fell 24.0% in Q3 and 21.3% year to date. Management attributed the year-to-date decline primarily to lower industry-wide volumes; units sold fell 17.1%, and revenue per unit declined 5.0%.
- Product gross margin, calculated as product sales less product costs, was approximately 32.9% in Q3 versus 31.2% a year earlier, and 31.8% year to date versus 32.7%. Commercial sales carry lower margins than company retail and inventory-financed sales.
- Loan interest revenue grew 25.7% in Q3 and 17.6% year to date as consumer and MHP loan portfolios expanded. Other revenue rose substantially, including from higher forfeited customer deposits.
- Cash and cash equivalents were approximately $0.5 million at September 30, down from $2.8 million at year-end 2022. Operating cash use reflected lending and portfolio growth, including $36.9 million of net MHP note activity and $12.2 million of net consumer-loan activity.
- Investing cash use was $7.6 million, including $13.9 million of notes issued, partly offset by $8.5 million from selling Treasury securities. Financing provided $10.6 million, primarily net borrowings on credit lines.
- Total assets were $495.6 million and stockholders’ equity was $429.5 million. Current assets of $95.1 million exceeded current liabilities of $44.0 million. Inventory totaled $42.1 million.
Debt, liquidity and financial position
- Legacy replaced its Capital One revolver with a four-year Prosperity Bank senior secured revolving facility on July 28, 2023. The facility has a $50 million commitment and a $25 million accordion feature, and matures July 28, 2027.
- At September 30, $13.0 million was outstanding, $37.0 million was available, and the stated interest rate was 7.95%. The company reported compliance with its financial covenants. Interest expense was $0.6 million for the first nine months, versus $0.3 million a year earlier.
- Management said cash, operating cash flow and credit availability should be sufficient to fund operations and growth for the next 12 to 18 months. The filing reports no other off-balance-sheet arrangements considered reasonably likely to affect the company materially, but discloses contingent dealer-home repurchase obligations.
Outlook, risks and unusual items
- No formal numerical revenue or earnings guidance is provided. Management said it expects the Eatonton, Georgia facility to meet or exceed historical levels in 2024, subject to market conditions, after addressing quality and consistency issues.
- Management cited inflation and material and labor costs, higher interest rates and homebuyer financing affordability, production capacity, and the ability to estimate demand and manage production and inventory as factors affecting performance. It is reviewing opportunities to expand capacity, including in Florida and the Carolinas.
- The company adopted the current expected credit loss standard in 2023, increasing portfolio allowances by $0.9 million and reducing opening retained earnings by $0.7 million, net of tax. Nine-month cash flow also reflects significant lending and manufactured-housing-community development activity.
- Three MHP borrowers and affiliates represented 15.4%, 16.9% and 28.9% of MHP note principal, respectively. The concentration and credit performance of these exposures warrant monitoring.
- Consumer loans totaled $154.5 million before allowance; $2.2 million, or 1.4%, was past due. MHP notes had minimal past-due balances and no charge-offs reported for the periods shown. Repossessed homes were $1.5 million.
- Maximum contingent repurchase exposure under dealer inventory financing agreements was $4.8 million, down from $8.9 million at year-end; no reserve was recorded. Legal proceedings are ordinary-course matters; the company recorded a $0.7 million legal reserve and said it did not expect pending or threatened litigation to have a material adverse effect, while noting outcomes remain uncertain.
- Disclosure controls were assessed as ineffective because previously identified material weaknesses remained unremediated. Weaknesses involve accounting processes, user access and journal-entry controls, segregation of duties, and IT safeguards. Management was pursuing remediation and targeted completion by year-end 2023, but said controls had not operated long enough to demonstrate remediation.
Most important facts for investors to verify
- Whether weaker home volumes persist and whether the Georgia facility recovery and 2024 production expectations are achieved.
- Loan-portfolio growth, credit performance, allowance adequacy and exposure to the largest MHP borrowers.
- Liquidity and borrowing costs: cash was low, operating cash flow was negative, and the new revolver carried a 7.95% rate at quarter-end.
- Progress in remediating the material weaknesses and whether disclosure controls become effective.
- The timing and sustainability of revenue from forfeited deposits and other non-product sources, and the resolution of legal and repurchase contingencies.