Legacy Housing Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. Legacy builds, sells and finances manufactured homes and tiny houses, primarily in the southern United States. It reported one operating segment and ranked as the fourth-largest U.S. manufactured-home producer by units, based on cited industry data.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total net revenue | $176.7 million | $169.0 million | +4.6% |
| Product sales | $148.0 million | $143.2 million | +3.4% |
| Operating income | $47.6 million | $37.8 million | +25.8% |
| Net income | $38.0 million | $28.8 million | +31.7% |
| Diluted EPS | $1.57 | $1.18 | +33.1% |
| Cash and cash equivalents, year-end | $0.8 million | $1.7 million | Down $1.0 million |
- Operating margin increased to approximately 26.9% from 22.4%; net margin rose to approximately 21.5% from 17.1%. Product gross margin, calculated from product sales less cost of product sales, was approximately 25.9%, down from 26.7%.
- Product sales per product sold increased 3.9% to approximately $43,800, while reported home-section volume was nearly flat at 3,814 versus 3,904. Sales mix shifted toward commercial/community, consignment and company-store sales; direct sales declined.
- Consumer and manufactured-housing-community (MHP) loan interest revenue increased 14.3% to $25.4 million. Year-end consumer loan principal was $115.6 million; MHP loans outstanding were $136.3 million. Average contractual rates were 13.8% for consumer loans and approximately 7.5% for MHP community financing.
- Net cash used in operating activities was $2.0 million, compared with $4.2 million used in 2019. Loan originations—particularly MHP lending—absorbed cash despite higher net income. Investing activities used $2.7 million; financing activities provided $3.8 million.
- Year-end assets were $338.6 million and stockholders’ equity was $259.2 million. Current assets of $55.0 million compared with current liabilities of $36.4 million. Cash was limited at $0.8 million.
- Capital One revolving-credit borrowings were $36.2 million at year-end, with $33.8 million reported available under the borrowing base. The facility’s maximum commitment is $70 million and maturity is March 2024; its year-end rate was 2.15%. The company reported compliance with covenants, including a maximum debt-to-EBITDA ratio of 4:1. The separate Veritex facility was repaid and terminated in April 2020.
Material changes and notable items
- Commercial sales increased to $70.2 million from $64.4 million; consignment sales rose to $43.8 million from $42.9 million; and company-owned retail sales rose to $17.4 million from $16.1 million. Direct sales fell to $11.7 million from $15.2 million.
- SG&A declined to $19.1 million from $25.5 million, reflecting, among other items, lower warranty costs, loan losses, salaries and professional fees, as well as a 2019 expense reclassification. Cost of product sales rose 4.6%, primarily from higher material and labor costs.
- FY2020 included a $1.1 million net gain from settling a lawsuit with a former vendor. Interest expense increased to $1.1 million from $0.7 million. The effective tax rate was 22.2%, compared with 23.3%.
- The MHP loan portfolio grew by approximately $44.2 million during 2020. One independent third party and its affiliates represented 52.9% of MHP principal outstanding, up from 38.3% in 2019. One customer accounted for 29% of net sales; a customer and affiliates accounted for 28.7% of product sales.
- Legacy repurchased 145,065 shares during 2020 at an average $9.77 per share; approximately $5.5 million remained available under its $10 million repurchase authorization. It paid no cash dividends and said it had no near-term plans to do so.
Outlook, risks and contingencies
- Management said cash, operating cash flow and available credit were expected to fund operations and growth for the next 12 to 18 months and into the foreseeable future. It planned to open one to two additional retail centers by the end of 2021, after delaying earlier expansion plans amid the COVID-19 pandemic.
- Management identified pandemic-related uncertainty, including potential loan losses or payment deferrals, lower demand, workforce or facility disruptions, permitting delays, supply constraints and reduced operating cash flow. Actions included discounts and modified purchase terms, reduced production labor, suspended overtime and reduced pay for non-production workers.
- The two Texas plants were operating at or near peak capacity; expanding Georgia production would require additional investment. The company also intended to begin construction in 2021 on a wastewater plant for its Bastrop County land; the planned facility could serve 1,075 home sites.
- Material risks include consumer and MHP credit performance, reliance on a concentrated MHP borrower group and significant customer sales, competition, material and labor costs, retailer and consumer financing availability, regulation, and execution of retail and community-development growth plans. Consumer loans past due totaled 2.2% of principal at year-end, versus 1.4% a year earlier; $1.6 million of consumer loans were on nonaccrual status.
- Pending ordinary-course litigation includes contract, warranty, construction-defect, product-liability and personal-injury claims. Management did not expect current matters to materially affect financial position, liquidity or results, but acknowledged outcomes remain uncertain. Maximum contingent retailer-inventory repurchase obligations were approximately $140,000; no reserve was recorded.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 because material weaknesses identified in 2019 had not been fully remediated. Weaknesses included loan-loss allowances, inventory costing, revenue recognition, income taxes, payables and treasury processing, staffing, system access and journal-entry controls, segregation of duties, and IT safeguards. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether management’s remediation plans address the disclosed material weaknesses, and whether subsequent filings report effective controls.
- Credit quality, delinquencies, collections and loss reserves in the expanding MHP and consumer loan portfolios, especially the concentrated MHP exposure.
- How much of reported earnings growth reflects sustainable operations versus lower expenses and the $1.1 million settlement gain; also verify cash conversion given negative operating cash flow.
- Availability and borrowing-base capacity under the Capital One facility, covenant headroom, and the company’s ability to fund planned retail, factory and community-development investments.
- Exposure to major customers, sales concentration, material and labor inflation, and the effect of pandemic-related demand or supply disruptions.
- Execution, permitting and funding for the planned retail-center expansion and Bastrop wastewater project, and the status and potential cost of litigation and warranty claims.