Legacy Housing Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Filed August 3, 2022. The company manufactures, sells and finances manufactured homes and tiny houses, primarily in the southern United States, and reports one operating segment. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $197.5 million | $176.7 million | +11.8% |
| Product sales | $166.0 million | $147.5 million | +12.5% |
| Operating income | $58.9 million | $47.6 million | +23.8% |
| Net income | $49.9 million | $38.0 million | +31.3% |
| Diluted EPS | $2.05 | $1.57 | +$0.48 |
| Operating cash flow | $60.3 million | $(1.8) million | Improved $62.1 million |
- Product cost was $114.1 million, up 3.9%; SG&A was $23.3 million, up 22.2%. Approximate product gross margin (product sales less cost of product sales) rose to 31.3% from 25.6%; operating margin increased to 29.8% from 26.9%, and net margin to 25.3% from 21.5%.
- Product sales increased despite lower volume: reported products sold declined 10.9% to 3,011, while revenue per product sold rose 26.3% to about $55,100, driven by higher pricing amid material and labor inflation. Separately, the filing reports 3,635 home sections sold in 2021 versus 3,814 in 2020.
- Consumer and manufactured-home-park (MHP) loan interest revenue grew 7.2% to $27.2 million. Other income was $4.3 million. The 2020 comparison included a $1.1 million vendor-litigation settlement gain; 2021 had none.
- Cash was $1.0 million at year-end. Total assets were $366.7 million and stockholders’ equity was $309.4 million. Current assets of $92.5 million exceeded current liabilities of $41.9 million (about 2.2x).
- Capital One revolving-credit borrowings were reported at approximately $8.2 million at year-end, down from $36.2 million. The company reported $61.8 million of available credit under the $70 million facility. Interest expense was $0.9 million. The facility matures March 2024 and is secured by receivables and loan portfolios.
- Investing cash outflow was $31.9 million, including $36.8 million of notes issued to third parties, primarily for manufactured-home-park development, and $6.0 million of property and equipment purchases. Financing cash outflow was $28.1 million, primarily net revolving-credit repayments.
Material changes and business developments
- Product-sales mix shifted: direct sales rose to $25.2 million from $11.2 million; consignment sales rose to $63.5 million from $43.8 million; commercial sales fell to $46.8 million from $70.2 million. Company-owned retail sales were $20.0 million versus $17.4 million.
- Sales to manufactured-housing communities represented 30% of product sales, versus 49% in 2020; independent retailers represented 57% versus 39%. Texas accounted for about 50% of 2021 manufactured-home sales, with Georgia at 16%.
- Consumer loans outstanding were $129.1 million principal across 3,334 loans, at a reported average contractual rate of 13.5%. MHP notes were about $103.0 million across 530 loans, at an average contractual rate of 7.6%. A $44.9 million principal collection from one MHP borrower in September 2021 is expected by management to reduce MHP interest income in 2022.
- The company originated $34.1 million in MHP lot-development loans during 2021. Two MHP borrowers and their affiliates accounted for 10.4% and 30.1% of MHP principal outstanding, respectively.
- The company operated three manufacturing facilities, 13 company-owned retail locations and served 176 independent retail locations. It planned to expand company-owned retail and develop housing sites; the Georgia plant had capacity potential, while the two Texas plants were near peak capacity.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management stated that operating cash flow, cash and credit availability at December 31, 2021 were expected to fund operations and growth for 12–18 months and beyond. That assessment should be read alongside the subsequent credit and filing events below.
- Raw-material availability and pricing were volatile, and higher material and labor costs were largely passed through to customers. Supply-chain disruption, production capacity, weather, housing-market conditions, consumer financing availability and the continuing effects of COVID-19 were identified as business risks.
- Restatement: The company corrected previously issued 2021 quarterly statements for errors involving inventory-related payables, prepaid inventory, inventory costing, property and equipment, classifications, accrued liabilities and taxes. Restated third-quarter 2021 net income was $13.0 million, $1.7 million below the originally reported amount. For the nine months ended September 30, 2021, restated net income was $36.3 million, $0.2 million above originally reported. The filing’s restatement tables provide period-specific details; the stated FY2021 annual results are presented in the audited annual financial statements.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses, including in revenue recognition, accounts payable, prepaid expenses, inventory costing, financial-statement preparation, system access, journal-entry approvals, segregation of duties and IT safeguards. Remediation was ongoing. The auditors gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Subsequent financing and listing events: Capital One notified the company on June 21, 2022 that the revolver was in default because of late filing and delayed delivery of financial statements; the company entered a forbearance agreement on July 28, 2022. Nasdaq granted an exception allowing specified late filings by September 27, 2022. The 10-K also says previously filed 2022 quarterly statements should no longer be relied upon.
- Legal proceedings include contract, warranty, product-liability and personal-injury claims. Accrued legal reserves were $2.8 million; management estimated a liability range of $2.6 million to $5.0 million and did not expect pending matters to materially affect results, while noting outcomes remain uncertain.
- Contingent repurchase obligations on retailer inventory financing were up to $4.9 million at year-end, without deduction for resale value; no reserve was recorded. No cash dividends were paid, and management said it expected to retain earnings.
Important facts for investors to verify
- Review the quarterly restatement tables and confirm how the accounting errors affected reported periods, controls and any subsequent filings.
- Check the status and terms of the Capital One forbearance, covenant compliance, borrowing-base availability and credit-facility maturity.
- Assess progress in remediating material weaknesses and the reliability and timeliness of future financial reporting.
- Monitor MHP borrower concentration, collections, loan-loss performance and the anticipated decline in MHP interest income following the large principal repayment.
- Track whether pricing continues to offset material and labor inflation, and whether production capacity and supply availability constrain shipments.
- Review the resolution of legal claims and potential retailer repurchase obligations, and confirm the use and repayment profile of development loans.