Business context and reporting period
LGI Homes, Inc. designs, develops, constructs and sells homes across U.S. markets. This Form 10-K covers the fiscal year ended December 31, 2021; references to 2021 versus 2020 are annual comparisons, not full-year guidance. The company reported 10,442 home closings, including retail and wholesale sales, and operated 101 active communities at year-end.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Home sales revenue | $3.050 billion | $2.368 billion |
| Home closings | 10,442 | 9,339 |
| Average selling price per closing | $292,104 | $253,553 |
| Gross margin | $818.0 million; 26.8% | $603.1 million; 25.5% |
| Operating income | $547.7 million | $364.7 million |
| Net income | $429.6 million | $323.9 million |
| Diluted earnings per share | $17.25 | $12.76 |
| Cash from operating activities | $21.7 million | $202.2 million |
Adjusted gross margin was 28.2% and adjusted EBITDA margin was 19.4% in 2021; both are non-GAAP measures. For the fourth quarter, revenue was $801.1 million and net income was $111.3 million, compared with $897.4 million and $136.4 million, respectively, in Q4 2020.
Liquidity, debt and capital
Year-end cash was $50.5 million. Notes payable had a carrying value of $805.2 million, comprising $517.4 million drawn under the revolving credit facility and $300.0 million principal of 2029 senior notes, net of debt costs. The company reported $321.3 million available to borrow under its $850 million facility and compliance with its covenants. The facility matures in April 2025; the 2029 notes bear 4.000% interest. Operating cash generation fell sharply as real estate inventory increased by $463.6 million. Financing cash flow included $193.8 million of share repurchases.
Material changes versus the prior period
- Annual revenue rose 28.8%, closings increased 11.8%, and average selling price rose 15.2%. Management attributed higher margins to price increases that exceeded rising input costs, along with operating leverage.
- Despite annual growth, Q4 revenue and net income were lower year over year. Year-end backlog declined to 2,055 homes valued at $659.2 million from 2,964 homes and $775.5 million a year earlier; 2021 net orders fell to 9,533 from 11,070.
- Owned or controlled lots increased 49.3% to 91,845, while active communities decreased from 116 to 101. Management cited rapid absorptions, replacement-community timing and limited finished-lot availability.
- Operating cash flow declined to $21.7 million from $202.2 million, primarily reflecting inventory investment. Inventory rose to $2.086 billion from $1.569 billion.
Outlook, risks and unusual items
- Management expected supply-chain disruption, extended construction cycles and increased land, labor, material and construction costs to continue into 2022. It said pricing had generally absorbed cost increases, but that may not continue.
- For 2022, the company expected wholesale closings to represent approximately 10% of annual closings and Terrata Homes closings approximately 5%. It planned to continue in existing markets and land development in Utah; no earnings or revenue forecast was provided.
- Key risks include mortgage-rate increases and reduced buyer affordability, finished-lot and land availability, subcontractor and material constraints, inflation, community development delays, inventory impairment, COVID-19 effects, and weather, regulatory and environmental exposures.
- The company issued $300 million of 4.000% 2029 notes and redeemed its $300 million 6.875% 2026 notes, recording a $14.0 million debt-extinguishment loss, including a $10.3 million redemption premium. The 2021 tax provision included $16.2 million of federal energy-efficient-home credits; comparable 2020 credits included $29.7 million of retroactive benefits. The credit applied to qualifying homes closed through December 31, 2021, and future extension was uncertain.
- Two 2021 asset acquisitions expanded the Minneapolis and Austin positions. The company reported $206.8 million of letters of credit, surety bonds and guarantees, and said it did not expect material draws. Management said ordinary-course legal and regulatory matters were not expected to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether sales, pricing and margins can hold up as mortgage rates rise and cost inflation and construction delays persist.
- Whether the enlarged lot pipeline can be developed into replacement communities on schedule, and the funding and return implications of its raw-land mix.
- How backlog, cancellations and order trends evolve after the 2021 decline and the decision to delay contracts until vertical construction began.
- Whether operating cash flow improves as inventory investment normalizes, while maintaining liquidity and compliance with credit covenants.
- The effect of the expired federal tax credit, debt refinancing and variable-rate exposure; management estimated a 100-basis-point rate increase above the facility floor would add about $5.2 million in annual interest cost.