What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 103 added, 52 removed, 125 unchanged (55% of the section changed)

4 unchanged sentences

Legacy Housing Corporation builds, sells and finances manufactured homes and “tiny houses” that are distributed through a network of independent retailers and company-owned stores to consumers and manufactured housing communities.

We are the fifth largest producer of manufactured homes in the United States as ranked by the number of homes manufactured based on information available from the Manufactured Housing Institute and the Institute for Building Technology and Safety for the twelve month period ending December 31, 2022.

With current operations focused primarily in the southern United States, we offer our customers an array of quality homes ranging in size from approximately 395 to 2,667 square feet consisting of 1 to 5 bedrooms, with 1 to 3 1/2 bathrooms.

Our homes range in price, at retail, from approximately $33,000 to $180,000.

For the three months ended March 31, 2023, we sold 810 home sections (which are entire homes or single floors that are combined to create complete homes) and for the three months ended March 31, 2022, we sold 1,004 home sections.

For the three and six months ended June 30, 2023, we sold 793 and 1,603 home sections, respectively (which are entire homes or single floors that are combined to create complete homes).

For the three and six months ended June 30, 2022, we sold 999 and 2,003 home sections, respectively.

The Company has one reportable segment.

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Our 13 company-owned retail locations, including 11 Heritage Housing stores and two Tiny House Outlet stores exclusively sell our homes.

For the three months ended March 31, 2023, approximately 38% of our manufactured homes were sold in Texas, followed by 19% in Georgia, 8% in Louisiana, 7% in Florida, and 4% in Alabama.

For the three months ended March 31, 2022, approximately 49% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 8% in Florida, 7% in Louisiana and 5% in Arizona.

For the six months ended June 30, 2023, approximately 48% of our manufactured homes were sold in Texas, followed by 19% in Georgia, 7% in Louisiana, 4% in Florida, and 3% in Oklahoma.

For the six months ended June 30, 2022, approximately 50% of our manufactured homes were sold in Texas, followed by 11% in Georgia, 8% in Florida, 5% in Louisiana and 5% in Alabama.

We offer three types of financing solutions to our customers.

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● We have purchased several properties in our market area for the purpose of developing manufactured housing communities and subdivisions.

As of March 31, 2023, the cost of these properties include the following (dollars in thousands):

As of June 30, 2023, the cost of these properties include the following (dollars in thousands):

Date of Acquisition

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These solutions will be structured to give us an attractive return on investment when coupled with the gross margin we expect to make on products specifically targeted for sale to these new manufactured housing communities .

● Inflation has most recently been at it’s highest rate in the U.S.

over the last 30 years.

Our ability to maintain gross margins can be adversely impacted by sudden increases in specific costs, such as the increases in material and labor.

In addition, measures used to combat inflation, such as increases in interest rates, could also have an impact on the ability of home buyers to obtain affordable financing.

We continue to explore opportunities to minimize the impact of inflation on our future profitability.

● Finally, our financial performance will be impacted by our ability to fulfill current orders for our manufactured homes from dealers and customers.

Currently, our two Texas manufacturing facilities are operating at or near peak capacity, with limited ability to increase the volume of homes produced at those plants.

Our Georgia manufacturing facility has unutilized square footage available and with additional investment can add capacity to increase the number of homes that can be manufactured.

We intend to increase production at the Georgia facility over time, particularly in response to orders increasingly being generated from new markets in Florida and the Carolinas.

In order to maintain our growth, we must be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.

In order to maintain long term growth, we must be able to continue to properly estimate anticipated future volumes when making commitments regarding the level of business that we will seek and accept, the mix of products that we intend to manufacture, the timing of production schedules and the levels and utilization of inventory, equipment and personnel.

We are actively reviewing organic and inorganic opportunities to add production capacity in attractive regions to meet future demand.

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The following discussion should be read in conjunction with the information set forth in the financial statements and the accompanying notes appearing elsewhere in this Form 10-Q.

Comparison of Three Months ended March 31, 2023 and 2022 (in thousands)

Comparison of Three Months ended June 30, 2023 and 2022 (in thousands)

Three months ended

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Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales.

Product sales decreased $8.5 million, or 16.4%, during the three months ended March 31, 2023 as compared to the same period in 2022.

This decrease was driven by a decrease in unit volumes and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements.

Product sales decreased $12.8 million, or 23.2%, during the three months ended June 30, 2023 as compared to the same period in 2022.

This decrease was driven by an industry wide decrease in unit volumes and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements.

Net revenue attributable to our factory-built housing consisted of the following during the three months of 2023 and 2022:

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Net revenue per product sold

For the three months ended March 31, 2023, our net revenue per product sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the first half of 2022, as rising material and labor costs were passed on to our customers.

We had decreases in inventory finance sales, direct sales and retail store sales, partially offset by an increase in commercial sales and other product sales.

For the three months ended June 30, 2023, our net revenue per product sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the first half of 2022, as rising material and labor costs were passed on to our customers.

We had decreases in direct sales, inventory finance sales and retail store sales, partially offset by an increase in commercial sales and other product sales.

Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales.

For the nine months ending March 31, 2023, we experienced a decrease in net revenue attributable to product sales due to the Company and the State of Georgia’s efforts to evaluate and improve the quality and consistency of homes manufactured in our Eatonton facility.

Consumer and MHP loans interest income grew $1.0 million, or 13.2%, during the three months ended June 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio balance and average outstanding consumer loan portfolio balance.

Between June 30, 2023 and June 30, 2022 our MHP note portfolio increased by $43.9 million and our consumer loan portfolio increased by $15.1 million.

Other revenue primarily consists of contract forfeitures, dealer finance fees and commercial lease rents and increased $0.2 million, or 13.4% during the three months ended June 30, 2023 as compared to the same period in 2022.

This increase was primarily due to $0.1 million increase in forfeited deposits, a $0.2 million increase in dealer finance fees, partially offset by a $0.1 million decrease in portfolio fees & servicer revenue.

Commercial lease rents were flat for the quarter.

The cost of product sales decreased $7.7 million, or 20.6%, during the three months ended June 30, 2023 as compared to the same period in 2022.

The decrease in costs is primarily related to the decrease in units sold.

Selling, general and administrative expenses decreased $0.4 million, or 6.3%, during the three months ended June 30, 2023 as compared to the same period in 2022.

This decrease was primarily due to a $0.4 million decrease in consulting and professional fees, a $0.2 million decrease in warranty costs and a net $0.3 million decrease in other miscellaneous costs, partially offset by a $0.1 million increase in salaries and incentive costs, a $0.2 million increase in legal expense, and a $0.2 million increase in loan loss provision.

Dealer incentive expense decreased $0.5 million, or 122.8%, during the three months ended June 30, 2023 as compared to the same period in 2022.

Other income (expense), net was flat during the three months ended June 30, 2023 as compared to the same period in 2022.

There was a decrease of $0.2 million in non-operating interest income, net offset by an increase of $0.2 million in miscellaneous income, net.

Income tax expense was $3.1 million during the three months ended June 30, 2023 compared to $3.8 million for the same period in 2022.

The effective tax rate for the three months ended June 30, 2023 was 17.0% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

The effective tax rate for the three months ended June 30, 2022 was 18.1% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

Comparison of Six Months ended June 30, 2023 and 2022 (in thousands)

Six months ended

Product sales

Consumer and MHP loans interest

Total net revenue

Operating expenses:

Cost of product sales

Selling, general administrative expenses

Dealer incentive

Income from operations

Other income (expense)

Non‑operating interest income

Miscellaneous, net

Interest expense

Income before income tax expense

Income tax expense

Product sales primarily consist of direct sales, commercial sales, inventory finance sales and retail store sales.

Product sales decreased $21.4 million, or 20.0%, during the six months ended June 30, 2023 as compared to the same period in 2022.

This decrease was driven by an industry wide decrease in unit volumes and a decrease in the conversion of certain independent dealer consignment arrangements to financing arrangements.

Net revenue attributable to our factory-built housing consisted of the following during the six months of 2023 and 2022:

Six Months Ended

(in thousands)

Products sold

Total products sold

Net revenue per product sold

For the six months ended June 30, 2023, our net revenue per product sold decreased primarily due to changes in our product sales mix slightly offset by increases in unit prices over the first half of 2022, as rising material and labor costs were passed on to our customers.

We had decreases in inventory finance sales, direct sales, retail store sales, and other product sales, partially offset by an increase in commercial sales.

Our commercial sales have lower margins than sales through our company-owned retail stores and our inventory financed sales.

For the six months ending June 30, 2023, we experienced a decrease in net revenue attributable to product sales due to the Company and the State of Georgia’s efforts to evaluate and improve the quality and consistency of homes manufactured in our Eatonton facility.

These efforts have resulted in a temporary decrease in the rate of issuing HUD Labels of Certification and shipping finished homes from our Eatonton facility.

We increased shipments from our Eatonton facility during the first quarter of 2023 and plan to meet or exceed historical levels in 2023.

Consumer and MHP loans interest income grew $0.9 million, or 13.9%, during the three months ended March 31, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note

portfolio balance and average outstanding consumer loan portfolio balance.

Between March 31, 2023 and March 31, 2022 our MHP note portfolio increased by $44.0 million and our consumer loan portfolio increased by $14.1 million.

Other revenue primarily consists of dealer finance fees and commercial lease rents and increased $0.5 million, or 33.3% during the three months ended March 31, 2023 as compared to the same period in 2022.

This increase was primarily due to a $0.4 million increase in dealer finance fees and a $0.1 million increase in commercial lease rents.

The cost of product sales decreased $4.8 million, or 14.1%, during the three months ended March 31, 2023 as compared to the same period in 2022.

We increased shipments from our Eatonton facility during the second quarter of 2023 and plan to meet or exceed historical levels in 2023, pending market conditions.

Consumer and MHP loans interest income grew $1.9 million, or 13.5%, during the six months ended June 30, 2023 as compared to the same period in 2022 and is related to our increase in average outstanding MHP note portfolio

balance and average outstanding consumer loan portfolio balance.

Between June 30, 2023 and June 30, 2022 our MHP note portfolio increased by $43.9 million and our consumer loan portfolio increased by $15.1 million.

Other revenue primarily consists of contract forfeitures, dealer finance fees and commercial lease rents and increased $0.8 million, or 27.1% during the six months ended June 30, 2023 as compared to the same period in 2022.

This increase was primarily due to $0.2 million increase in forfeited deposits, a $0.6 million increase in dealer finance fees and a $0.1 million increase in commercial lease rents and a $0.1 million increase in setup and service sales, partially offset by a $0.2 million decrease in portfolio fees & servicer revenue.

The cost of product sales decreased $12.5 million, or 17.5%, during the six months ended June 30, 2023 as compared to the same period in 2022.

The decrease in costs is primarily related to the decrease in units sold.

Selling, general and administrative expenses decreased $2.2 million, or 29.3%, during the three months ended March 31, 2023 as compared to the same period in 2022.

This decrease was primarily due to a $3.3 million decrease in salaries and incentive costs and a $0.4 million decrease in legal expense, partially offset by a $0.9 million increase in warranty costs, a $0.1 million increase in loan loss provision related to the adoption of ASU 2016-13 Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , a $0.2 million increase in loan loss provision not related to the adoption of ASU 2016-13, a $0.1 million increase in advertising costs and a net $0.2 million increase in other miscellaneous costs.

Dealer incentive expense decreased $0.1 million, or 52.4%, during the three months ended March 31, 2023 as compared to the same period in 2022.

Other income (expense), net was flat during the three months ended March 31, 2023 as compared to the same period in 2022.

There was an increase of $0.2 million in miscellaneous income, net offset by a decrease of $0.2 million in non-operating interest income.

Income tax expense was $3.4 million during the three months ended March 31, 2023 compared to $3.6 million for the same period in 2022.

The effective tax rate for the three months ended March 31, 2023 was 17.4% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.

The effective tax rate for the three months ended March 31, 2022 was 18.1% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.

Selling, general and administrative expenses decreased $2.6 million, or 19.3%, during the six months ended June 30, 2023 as compared to the same period in 2022.

This decrease was primarily due to a $3.2 million decrease in salaries and incentive costs, a $0.4 million decrease in consulting and professional fees, a $0.2 million decrease in legal expense and a net $0.1 million decrease in other miscellaneous costs, partially offset by a $0.7 million increase in warranty costs, a $0.1 million increase in loan loss provision related to the adoption of ASU 2016-13 Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , a $0.4 million increase in loan loss provision not related to the adoption of ASU 2016-13, and a $0.1 million increase in advertising costs.

Dealer incentive expense decreased $0.7 million, or 95.5%, during the six months ended June 30, 2023 as compared to the same period in 2022.

Other income (expense), net was flat during the six months ended June 30, 2023 as compared to the same period in 2022.

There was a decrease of $0.3 million in non-operating interest income offset by an increase of $0.3 million in miscellaneous income, net.

Income tax expense was $6.5 million during the six months ended June 30, 2023 compared to $7.4 million for the same period in 2022.

The effective tax rate for the six months ended June 30, 2023 was 17.2% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction, partially offset by state income taxes.

The effective tax rate for the six months ended June 30, 2022 was 18.1% and differs from the federal statutory rate of 21% primarily due to a federal tax credit for energy efficient construction and partially offset by state income taxes.

Liquidity and Capital Resources

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We have not incurred any losses from such accounts and management considers the risk of loss to be minimal.

We believe that cash flow from operations, cash and cash equivalents at March 31, 2023, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

In 2020, we negotiated a new credit agreement with Capital One, N.A.

We believe that cash flow from operations, cash and cash equivalents at June 30, 2023, and availability on our lines of credit will be sufficient to fund our operations and provide for growth for the next 12 to 18 months and into the foreseeable future.

In 2020, we negotiated a credit agreement with Capital One, N.A.

that expanded and extended our credit availability (see Indebtedness – Capital One Revolver , below).

As of March 31, 2023, we had approximately $3.0 million in cash and cash equivalents, compared to $2.8 million as of December 31, 2022.

As of June 30, 2023, we had approximately $1.5 million in cash and cash equivalents, compared to $2.8 million as of December 31, 2022.

On July 28, 2023, the Company entered into a new Credit Agreement with Prosperity Bank and terminated the Revolver with Capital One.

See Note 18 – Subsequent Events in our June 30, 2023 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

Cash Flow Activities

Three Months Ended

Six Months Ended

(in thousands)

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Net cash used in operating activities

Net cash provided by investing activities

Net cash provided by financing activities

Net change in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents at end of period

Comparison of Cash Flow Activities from March 31, 2023 to March 31, 2022

Net cash used in operating activities increased $1.6 million during the three months ended March 31, 2023, compared to the same period in 2022, primarily as a result of increased MHP originations net of collections, increased dealer inventory loan originations net of collections, increased volume of consumer loan originations net of principal collections, decrease in customer deposits, increased inventories, an increase in other assets and a decrease in accounts payable.

The increase in cash used in operating activities was partially offset by a decrease in accounts receivable, a decrease in prepaid expenses and other current assets and an increase in accrued liabilities.

Net cash used in investing activities of $2.2 million in 2023 was primarily attributable to $3.1 million used for loans to third parties for the development of manufactured housing parks and $0.8 million used for the acquisition of property plant and equipment.

These were offset by $1.1 million in proceeds from the sale of leased property, $0.5 million of collections related to loans to third parties for the development of manufactured housing parks and collections of $0.1 million from our purchased consumer loans.

Net cash provided by financing activities of $5.3 million in 2023 was attributable to net proceeds of $5.3 million on our lines of credit.

Net cash used in financing activities of $2.9 million in 2022 was attributable to net payments of $2.9 million on our lines of credit.

Comparison of Cash Flow Activities from June 30, 2023 to June 30, 2022

Net cash used in operating activities increased $3.5 million during the six months ended June 30, 2023, compared to the same period in 2022, primarily as a result of increased MHP originations net of collections, increased dealer inventory loan originations net of collections, increased volume of consumer loan originations net of principal collections, increased inventories, decrease in customer deposits, decrease in accounts payable and accrued liabilities and a decrease in dealer incentive liability.

The increase in cash used in operating activities was partially offset by an increase in escrow liability.

Net cash provided by investing activities of $3.9 million in 2023 was primarily attributable to $8.5 million in proceeds from the sale of treasury notes, $1.1 million in proceeds from the sale of leased property, $0.9 million of collections related to loans to third parties for the development of manufactured housing parks and collections of $0.2 million from our purchased consumer loans.

These were offset by $5.3 million used for loans to third parties for the development of manufactured housing parks and $1.5 million used for the acquisition of property plant and equipment.

Net cash provided by financing activities of $2.2 million in 2023 was attributable to net proceeds of $2.1 million on our lines of credit and $0.1 million received from the exercise of stock options.

Net cash used in financing activities of $7.1 million in 2022 was attributable to net proceeds of $4.6 million on our lines of credit and $2.5 million in proceeds from other liabilities.

Capital One Revolver.

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The Revolver accrues interest at one-month SOFR plus 2.00%.

The interest rates in effect as of March 31, 2023 and December 31, 2022 are 6.66% and 6.12%, respectively.

The interest rates in effect as of June 30, 2023 and December 31, 2022 are 7.17% and 6.12%, respectively.

Amounts available under the Revolver are subject to a formula based on eligible consumer loans and MHP Notes and are secured by all accounts receivable, consumer loans and MHP Notes.

The amount of available credit under the Revolver was $12,162 and $17,400 as of March 31, 2023 and December 31, 2022, respectively.

The amount of available credit under the Revolver was $15,315 and $17,400 as of June 30, 2023 and December 31, 2022, respectively.

In connection with the Revolver, we paid certain arrangement fees and other fees of approximately $295, which were capitalized as unamortized debt issuance costs and will be amortized to interest expense over the life of the Revolver.

For the three months ended March 31, 2023 and 2022, interest expense under the Revolver was $91 and $56, respectively.

The outstanding balance as of March 31, 2023 and December 31, 2022 was $7,838 and $2,545, respectively.

For the three months ended June 30, 2023 and 2022, interest expense under the Revolver was $195 and $182, respectively.

For the six months ended June 30, 2023 and 2022, interest expense under the Revolver was $286 and $239, respectively.

The outstanding balance as of June 30, 2023 and December 31, 2022 was $4,685 and $2,545, respectively.

The Revolver requires the Company to comply with certain financial and non-financial covenants.

We were in compliance with all financial covenants as of as of March 31, 2023, including that we maintain a tangible net worth of at least $120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

We were in compliance with all financial covenants as of as of June 30, 2023, including that we maintain a tangible net worth of at least $120,000 and that it maintain a ratio of debt to EBITDA of 4 to 1, or less.

Contractual Obligations

The following table is a summary of contractual cash obligations as of March 31, 2023:

The following table is a summary of contractual cash obligations as of June 30, 2023:

Payments Due by Period (in thousands)

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Our obligation under this repurchase agreement ceases upon the purchase of the home by the retail customer.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $8,396 and $8,925 as of March 31, 2023 and December 31, 2022, respectively, without reduction for the resale value of the homes.

The maximum amount of our contingent obligations under such repurchase agreements was approximately $6,740 and $8,925 as of June 30, 2023 and December 31, 2022, respectively, without reduction for the resale value of the homes.

We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of March 31, 2023.

We consider our obligations on current contracts to be immaterial and accordingly we have not recorded any reserve for repurchase commitment as of June 30, 2023.

Critical Accounting Estimates

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Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our March 31, 2023 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

For information regarding recent accounting pronouncements, see Note 1 – Nature of Operations, Recent Accounting Pronouncements to our June 30, 2023 Condensed Financial Statements, included in Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report.

Emerging Growth Company Status

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis