Legacy Housing Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY2018. The filing is an annual report, not a standalone fourth-quarter report. Legacy builds, sells and finances manufactured homes and tiny houses, primarily in the southern United States. It reported one operating segment.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total net revenue | $169.0 million | $161.9 million | +4.4% |
| Product sales | $143.2 million | $139.2 million | +2.9% |
| Operating income | $37.8 million | $32.8 million | +15.4% |
| Net income | $28.8 million | $21.5 million | +34.1% |
| Diluted earnings per share | $1.18 | $1.07 | +10.3% |
| Operating cash flow | $(4.2) million | $2.8 million | Down $7.0 million |
| Investing cash flow | $(15.1) million | $(4.5) million | Greater investment outflow |
| Financing cash flow | $18.4 million | $3.8 million | Higher financing inflow |
- Operating margin was approximately 22.4% of total revenue; net margin was approximately 17.1%. Product gross margin, calculated as product sales less cost of product sales, was approximately 26.7%, versus 23.0% in FY2018.
- Cash and cash equivalents were $1.7 million at year-end, down from $2.6 million. Total assets were $283.6 million and stockholders’ equity was $222.4 million.
- Year-end lines of credit totaled $30.9 million outstanding, against $27.4 million of reported availability across the two facilities. The company reported compliance with financial covenants. The $45 million Capital One revolver had a May 2020 maturity; management said a replacement, expanded and extended facility had been negotiated but was not yet closed when the filing was signed.
- Consumer loans were $105.0 million net of fees and allowance; MHP notes were $92.3 million, and other notes receivable were $13.5 million gross. Consumer loan rates averaged about 14%; MHP notes generally carried rates of prime plus 4%, with an 8% floor.
Material changes and business drivers
- Home-section sales were 3,904, compared with 3,950 in 2018. Product sales rose despite essentially flat volume, with reported revenue per product sold increasing 2.7% to about $42,154.
- Commercial sales to manufactured-home communities increased to $64.4 million from $33.1 million, while company-owned retail sales rose to $16.1 million from $13.2 million. Consignment sales declined to $42.9 million from $54.8 million, and direct sales fell to $15.2 million from $32.7 million.
- FY2018 included $8.9 million of FEMA-related sales following Hurricane Harvey; management cited their nonrecurrence as a key reason direct sales declined. Sales mix shifted toward community and company-store channels, which management said have higher margins.
- Interest income from consumer and MHP loans grew 18.3% to $22.2 million as those portfolios expanded. MHP notes increased by about $34.4 million year over year.
- SG&A increased 21.2% to $25.5 million, including higher public-company, retail-store, contractor, loan-loss-reserve and advertising costs. Interest expense fell to $0.7 million from $2.5 million, primarily after IPO proceeds were used to reduce borrowings.
- Operating cash flow turned negative, principally reflecting increased MHP loan originations net of collections, growth in leased home units and reduced growth in operating liabilities. Investing outflows included $11.9 million in third-party development loans and $3.6 million for land development.
Outlook, risks and unusual items
- Management expected to open two to four additional retail centers by the end of 2020; each was estimated to require $0.5 million to $1.5 million. The two Texas plants were operating at or near peak capacity; expanding output at the Georgia facility would require additional investment.
- Management stated that cash, operating cash flow and credit availability should fund operations and growth for the next 12 to 18 months. This outlook should be considered alongside FY2019 negative operating cash flow and the pending replacement credit agreement.
- The filing described the emerging coronavirus pandemic as a potential source of reduced home sales and production, higher loan losses or deferred payments, supply disruptions, project delays and weaker operating cash flow. Management said the effect could range from minor to material and reported offering discounts and modified terms, reducing production labor, suspending overtime and cutting non-production pay.
- One customer accounted for 28% of FY2019 net sales; a separate disclosure states an independent third party and affiliates represented 26.8% of product sales. MHP notes with that third party and affiliates represented 38.3% of principal outstanding, versus 8.1% in 2018.
- Consumer loan repossession rates, measured by units, were approximately 3.1% in 2019 versus 2.3% in 2018. Consumer loans over 90 days past due were approximately 1.2% of the portfolio at year-end. Management reported minimal MHP-note past-due balances and no MHP-note charge-offs in either year.
- Management did not expect pending or threatened ordinary-course litigation to have a material adverse effect, but noted outcomes remain uncertain. Maximum contingent retailer inventory repurchase obligations were approximately $0.26 million, down from $2.19 million; no reserve was recorded.
- Disclosure controls and internal control over financial reporting were deemed ineffective at December 31, 2019 because of unremediated material weaknesses involving loan-loss allowances, inventory costing, revenue recognition, taxes, transaction processing, period-end accruals, accounting staffing, system access, journal approvals, segregation of duties and IT safeguards. The independent auditor did not attest to internal control effectiveness.
- The company paid no cash dividends and stated it had no foreseeable plans to do so. It repurchased 300,000 shares in April 2019 for $3.1 million; additional repurchases occurred in March 2020.
Investor verification priorities
- Confirm execution and terms of the replacement Capital One facility, its borrowing base, maturity, covenants and available liquidity.
- Assess the quality and concentration of MHP lending, particularly the 38.3% exposure to one third party and its affiliates, and track borrower payment performance and loss allowances.
- Reconcile negative operating cash flow with reported earnings, loan growth, land and community-development investments, and management’s 12–18 month liquidity assessment.
- Track customer concentration, channel mix, production capacity and whether planned retail expansion and Georgia plant investment deliver expected returns.
- Review progress in remediating material weaknesses and any effects on financial reporting reliability; monitor pandemic-related changes to sales, collections, production and liquidity.