Legacy Housing(LEGH) - 2018 Q4 - Annual Report

Part I Business Legacy Housing, the fourth largest U.S. manufactured home producer, integrates manufacturing, distribution, and financing for affordable housing in the southern U.S. - The company is the fourth largest producer of manufactured homes in the United States, focusing on the affordable housing market with homes priced between $22,000 and $95,000[11] - Legacy operates a vertically integrated business model that includes manufacturing, distribution through 114 independent and 12 company-owned retail locations, and offering financing solutions to customers[12][14][15] Geographic Sales Distribution (as % of Total Net Sales) | Location | % of 2018 Total Net Sales | % of 2017 Total Net Sales | | :--- | :--- | :--- | | Texas | 56% | 62% | | Georgia | 13% | 8% | | Louisiana | 11% | 4% | | Oklahoma | 4% | 5% | | Colorado | 2% | 8% | Our Company Legacy Housing, founded in 2005 and IPO'd in 2018, manufactures and sells affordable homes through a vertically integrated model. - The company was founded in 2005, converted to a Delaware corporation on January 1, 2018, and completed its IPO in December 2018[11][16] - Home section sales increased from 3,274 in 2017 to 3,950 in 2018[11] - The company's vertical integration allows it to offer a complete solution from manufacturing to financing[12] Our Market Opportunity The company targets the affordable housing market, serving households with incomes below $60,000 due to cost advantages of manufactured homes. - The target market is households with annual incomes below $60,000, which comprised a majority of U.S. households in 2016[18] - The average sale price for new single-family homes (including land) increased by approximately 42% since 2009, while manufactured home prices increased by only 14% in the same period[22] - The manufactured housing industry shipped 92,891 homes in 2017, with annualized shipments increasing to approximately 102,000 in the first half of 2018[25][26] Our Competitive Advantages Legacy's competitive advantages include efficient production, vertical integration, an expansive distribution network, and tailored financing solutions. - Operates three manufacturing facilities in Texas and Georgia, producing an average of 75 home sections (approx. 62 homes) per week[13][29] - Offers three types of financing: floor plan financing for independent retailers, consumer financing for end-users, and financing for manufactured home community owners[31] Retail Financing Loan Statistics (as of Dec 31, 2018) | Metric | Value | | :--- | :--- | | Number of Customers | > 3,000 | | Average Interest Rate | ~14.0% | | Repossession Rate (2018) | ~2.3% | Our Growth Strategy The growth strategy involves expanding retail presence, enhancing financing, product innovation, community owner agreements, and selective acquisitions. - Key growth initiatives include expanding the network of company-owned retail locations, which are expected to be more productive and have higher gross margins than independent retailers[34] - The company intends to expand financing solutions, noting that it financed approximately 37% of homes sold to consumers in 2018[34] - In 2018, the company acquired approximately 489 acres of land in Texas for $5.0 million to develop manufactured housing communities, with development expected to begin in the first half of 2019[34][36] Our Products Legacy produces HUD-compliant manufactured homes and tiny houses, selling 3,950 home sections in 2018 with a $13.3 million backlog at year-end. - Products include manufactured homes built to HUD standards and tiny houses (320-400 sq. ft.) not requiring HUD standards[40] - In 2018, the company sold 3,950 home sections, including 245 tiny houses[41] - As of December 31, 2018, the order backlog was approximately 416 home sections, valued at $13.3 million[45] Distribution Legacy distributes homes across 15 states through independent and company-owned retailers, and direct community sales, with a $2.2 million contingent repurchase obligation. 2018 Product Sales by Distribution Channel | Channel | % of 2018 Product Sales | | :--- | :--- | | Independent Retail Distributors | 67% | | Company-Owned Retail Locations | 9% | | Direct Sales to Community Owners | 24% | - The maximum contingent obligation under repurchase agreements with third-party lenders for independent retailer inventory was approximately $2.2 million as of December 31, 2018[50] Financing Solutions for Our Customers Legacy provides floor plan, consumer, and MHP community financing, with $101.0 million in consumer loans and $57.9 million in MHP loans outstanding. Financing Portfolio Overview (as of Dec 31, 2018) | Financing Type | Principal Outstanding | Number of Loans | Average Rate/Fee | | :--- | :--- | :--- | :--- | | Consumer Financing | $101,049,000 | 2,868 | 14% avg. contractual rate | | MHP Community Financing | $57,935,000 | 346 | Typically Prime + 4.0% (8% floor) | | Floor Plan (Consignment) | $28,373,000 | N/A | 0.5% to 1.4% monthly fee | - Consignment sales, where revenue is recognized upon final sale to the end consumer, totaled $50.1 million in 2018[58] Risk Factors This section is not applicable as the company qualifies as a smaller reporting company. - Not applicable for smaller reporting companies[84] Unresolved Staff Comments The company reports no unresolved staff comments. - None[85] Properties The company owns two manufacturing facilities and leases one, operates 12 retail locations (3 owned, 9 leased), and incurred $542,000 in rent expense in 2018. Key Facilities | Location | Type | Owned/Leased | | :--- | :--- | :--- | | Fort Worth, TX | Manufacturing | Owned | | Commerce, TX | Manufacturing | Owned | | Eatonton, GA | Manufacturing | Leased | | Various | 12 Retail Locations | 3 Owned, 9 Leased | | Bedford, TX | Corporate HQ | Leased | - Total rent expense for leased properties was $542,000 in 2018, up from $340,000 in 2017[88] Legal Proceedings The company is involved in ordinary course legal proceedings, which management believes will not materially affect its financial position or operations. - The company is party to legal proceedings arising in the ordinary course of business[89] - Management does not believe that currently pending litigation will have a material adverse effect on the company's financial position or results[90] Mine Safety Disclosures This section is not applicable to the company's operations. - Not applicable[91] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on NASDAQ under "LEGH" on December 14, 2018, with no plans for future cash dividends. - Common stock began trading on NASDAQ under "LEGH" on December 14, 2018[94] - The company has no plans to pay cash dividends and intends to retain earnings for future operations and growth[95] Selected Financial Data This section is not applicable as the company qualifies as a smaller reporting company. - Not applicable for smaller reporting companies[98] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, total net revenue grew 25.7% to $161.9 million, while net income decreased to $21.5 million due to increased tax expense from corporate conversion. Financial Performance Summary (2018 vs 2017) | Metric (in thousands) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenue | $161,877 | $128,736 | 25.7% | | Product Sales | $139,165 | $109,750 | 26.8% | | Income from Operations | $32,800 | $28,095 | 16.7% | | Net Income | $21,513 | $26,348 | (18.4)% | | Pro Forma Net Income (2017) | - | $16,900 | - | - The decrease in net income was primarily due to a $9.1 million income tax expense in 2018 after converting from a pass-through partnership to a C corporation[139] - The company plans to open 8 to 12 additional retail centers by the end of 2020 and increase production at its Georgia facility[105][107] Results of Operations In 2018, product sales grew 26.8% from volume and price increases, interest income rose 19.9%, and tax expense included a one-time corporate conversion cost. - Product sales growth was driven by a 17.0% increase in the volume of homes sold and an 8.4% increase in net revenue per product sold, attributed to price increases and a shift in sales mix towards higher-margin channels[132][133][134] - Interest income from consumer and MHP loans grew 19.9% due to a $10.5 million increase in the consumer loan portfolio and an $8.4 million increase in the MHP note portfolio[135] - The 2018 income tax expense of $9.1 million included a one-time, non-cash expense of $2.1 million to record a net deferred tax liability upon converting to a C corporation[139] Liquidity and Capital Resources As of December 31, 2018, cash was $2.6 million, operating cash flow decreased, investing cash flow increased due to land acquisition, and financing activities provided cash from IPO proceeds. Cash Flow Summary (in thousands) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,820 | $4,373 | | Net cash used in investing activities | $(4,453) | $(1,938) | | Net cash provided by (used in) financing activities | $3,804 | $(3,016) | - Financing activities in 2018 were primarily driven by $43.5 million in net proceeds from the IPO, which were used for a net paydown of $39.4 million on lines of credit[144] Indebtedness as of Dec 31, 2018 (in thousands) | Facility | Outstanding Balance | | :--- | :--- | | Capital One Revolver | $3,679 | | Veritex Community Bank Revolver | $10,000 | | Notes Payable | $3,965 | | Total | $17,644 | Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company. - Not applicable for smaller reporting companies[156] Financial Statements and Supplementary Data This section presents audited financial statements for 2018 and 2017, including balance sheets, statements of operations, cash flows, and notes. Balance Sheet Highlights (as of Dec 31, in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Total Assets | $235,038 | $208,335 | | Total Liabilities | $45,758 | $84,064 | | Total Equity | $189,280 | $124,271 | Statement of Operations Highlights (Year ended Dec 31, in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Total Net Revenue | $161,877 | $128,736 | | Income from Operations | $32,800 | $28,095 | | Net Income | $21,513 | $26,348 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure. - None[289] Controls and Procedures Disclosure controls and procedures were ineffective as of December 31, 2018, due to material weaknesses in internal control over financial reporting, with remediation efforts ongoing. - Disclosure controls and procedures were determined to be ineffective as of December 31, 2018, due to material weaknesses in internal control over financial reporting[291] - Identified material weaknesses include: insufficient accounting processes (e.g., allowance for loan loss, revenue recognition), lack of experienced personnel for SEC reporting, and inadequate policies for system access and segregation of duties[293] - Remediation efforts are in process, including hiring additional personnel, designing new internal controls, and providing further training[293] Other Information The company reports no other information. - None[298] Part III Directors, Executive Officers and Corporate Governance The company's leadership includes co-founders as Executive Chairman and CEO, with a five-member board and three independent committees established post-IPO. Executive Officers and Directors | Name | Position(s) | | :--- | :--- | | Curtis D. Hodgson | Executive Chairman of the Board | | Kenneth E. Shipley | President, Chief Executive Officer and Director | | Jeffrey V. Burt | Chief Financial Officer and Treasurer | | Neal J. Suit | Executive Vice President, General Counsel and Secretary | | Mark E. Bennett | Director | | Philip T. Blazek | Director | | John A. Isakson | Director | - The board has determined that directors Mark E. Bennett, Philip T. Blazek, and John Isakson are independent under Nasdaq rules[318] - The board has three standing committees: Audit, Compensation, and Nominating and Governance, established in December 2018[319] Executive Compensation Co-founders Hodgson and Shipley receive $50,000 annual salaries, with primary compensation from equity, and a 2018 Incentive Compensation Plan was adopted with 2,500,000 shares available. 2018 Summary Compensation | Name and Position | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | | Curtis D. Hodgson (Executive Chairman) | 50,000 | — | 50,000 | | Kenneth E. Shipley (President & CEO) | 50,000 | — | 50,000 | | Jeffrey V. Burt (CFO) | 223,654 | 30,000 | 253,654 | | Neal J. Suit (General Counsel) | 183,077 | 30,000 | 213,077 | - Co-founders Hodgson and Shipley's compensation is primarily driven by their equity ownership, with each receiving a fixed annual salary of $50,000[331][332] - The company adopted a 2018 Incentive Compensation Plan making 2,500,000 shares available for future awards to executives, employees, and directors[339][343] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 27, 2019, directors and executive officers collectively owned 50.4% of common stock, with co-founder Curtis D. Hodgson holding 36.2%. Beneficial Ownership (as of March 27, 2019) | Name | Percentage Ownership | | :--- | :--- | | Curtis D. Hodgson | 36.2% | | Kenneth E. Shipley | 13.8% | | William Shipley | 13.4% | | Douglas Shipley | 13.4% | | All directors and executive officers as a group | 50.4% | Certain Relationships and Related Transactions, and Director Independence The company conducts transactions with related parties, including $3.6 million in home sales to Bell Mobile Homes in 2018, and has adopted a related person transaction policy. - The company sells manufactured homes to Bell Mobile Homes, a retailer owned by a significant shareholder. Sales totaled $3.6 million in 2018 and $2.5 million in 2017[357] - A $1.5 million note payable to a related party was paid in full on October 18, 2018[359] - The board of directors has adopted a written policy for the review and approval of related person transactions exceeding $120,000[363] Principal Accounting Fees and Services The company incurred approximately $1.5 million in audit fees from Grant Thornton LLP in FY 2018, primarily for annual financial statements and IPO-related services. Auditor Fees (Grant Thornton LLP) | Fee Category | FY 2018 | FY 2017 | | :--- | :--- | :--- | | Audit Fees | ~$1,507,067 | $0 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents and material contracts, with no financial statement schedules included. - Lists all exhibits filed with the report, such as corporate governance documents, material contracts, and certifications[373][374][375] - Financial Statement Schedules are not included as they are not applicable or required[375]