LGI Homes, Inc. — FY 2020 Form 10-K
Business and reporting period. The filing covers the fiscal year ended December 31, 2020, with unaudited quarterly results. LGI Homes designs, builds and sells move-in-ready homes across 18 states. It reported 116 active communities at year-end and 9,339 home closings for the year.
Financial and operating performance
- FY revenue and earnings: Home sales revenue was $2.368 billion, up 28.8% from 2019. Operating income was $364.7 million, net income was $323.9 million, and diluted EPS was $12.76, compared with $227.5 million, $178.6 million and $7.02, respectively, in 2019.
- Closings and pricing: Closings increased 21.4% to 9,339; average sales price rose 6.1% to $253,553. Year-end backlog was 2,964 homes valued at $775.5 million, versus 1,233 homes and $290.4 million a year earlier. The cancellation rate was 21.6%, compared with 20.6% in 2019.
- Margins: Gross margin was $603.1 million, or 25.5% of revenue, versus $436.5 million, or 23.7%, in 2019. Adjusted gross margin, a non-GAAP measure, was 27.4%, compared with 25.8%. Management cited favorable pricing, product mix and operating leverage; a larger wholesale share partly offset margin gains.
- Fourth quarter: Revenue was $897.4 million, gross margin $243.3 million, net income $136.4 million and diluted EPS $5.34. In Q4 2019, the corresponding figures were $605.6 million, $142.2 million, $64.9 million and $2.52.
- Cash flow: Operating activities provided $202.2 million, versus using $41.9 million in 2019. Investing activities used $5.6 million and financing activities used $198.9 million. Cash decreased $2.4 million to $35.9 million.
- Balance sheet and liquidity: Real estate inventory was $1.569 billion; total assets were $1.826 billion and equity was $1.139 billion. Notes payable were $538.4 million net on the balance sheet; principal obligations were $546.6 million, including $246.6 million under the revolver and $300 million of 6.875% senior notes due 2026. The company reported $392.5 million available to borrow under its $650 million credit facility and compliance with all facility covenants at year-end.
- Other metrics: Owned or controlled lots increased 28.0% to 61,504. LGI repurchased 718,993 shares for $48.1 million during 2020. No cash dividends had been paid.
Changes versus prior period and unusual items
- Revenue rose 28.8%, closings rose 21.4%, and gross margin expanded 1.8 percentage points year over year. Active communities increased from 106 to 116.
- Net income benefited from $41.2 million of federal energy-efficient home tax credits, including $29.7 million relating to homes closed in prior open tax years. The credits reduced the effective tax rate to 11.9% from 23.0%; the prior-year tax rate did not include these credits.
- COVID-19 temporarily halted construction in certain markets in March 2020; construction resumed in April. Sales slowed and cancellations increased early in the year, then demand rebounded from May. Earlier reductions in starts constrained closings in the second and third quarters.
- Operating cash flow improved from 2019, when substantial cash was invested in inventory. In 2020, inventory growth used $70.2 million of cash, while higher accounts receivable used $59.5 million.
Outlook, risks and contingencies
- Management expected strong demand to be supported by low mortgage rates, interest in single-family homes and limited available housing, but said COVID-19’s duration and effects remained uncertain. It believed available cash, operating cash flow and potential borrowing or capital-market access would fund foreseeable needs for at least 12 months.
- For 2021, the company expected wholesale closings to represent approximately 10%–15% of annual closings and Terrata Homes closings to be less than 2%. It expected the energy-efficient home tax credit to affect 2021 results to a lesser extent; the statutory extension covered qualifying deliveries through December 31, 2021.
- Risks include pandemic-related restrictions or weaker demand, mortgage availability and rates, land acquisition and development costs, labor and subcontractor availability, and construction-material inflation. LGI reported a significant lumber cost increase in the second half of 2020 and warned of possible further pressure.
- The company had $34.1 million in deposits on land purchase contracts covering 26,236 lots with a stated aggregate purchase price of $663.0 million. Contractual obligations are generally subject to conditions and may be terminated, often with deposit forfeiture.
- Outstanding letters of credit, surety bonds and financial guarantees totaled $143.8 million; management did not believe a draw was probable or that these items would materially affect results. Management also said ordinary-course legal and regulatory matters were not expected to have a material effect. Environmental indemnities to certain counterparties have no stated term or damage limit.
- The revolving facility is LIBOR-based; the company had not yet amended it for the benchmark transition and was evaluating the replacement rate. A hypothetical 100-basis-point increase above the facility’s LIBOR floor was estimated to increase annual interest cost by approximately $2.5 million.
Important facts for investors to verify
- Whether backlog converts to closings at expected prices and timing, including the effect of cancellations and mortgage qualification.
- Whether margin gains persist as lumber, labor and land costs change, and as wholesale mix evolves.
- The repeatability of 2020 earnings excluding the $41.2 million tax-credit benefit, including the retroactive portion.
- Current borrowing availability, covenant headroom, debt maturities and the eventual replacement of LIBOR under the credit facility.
- Land-contract exposure, inventory valuation and development-cost estimates. The auditor identified land development cost measurement and allocation as a critical audit matter because estimates depend on project schedules, costs and reimbursements.
- The filing received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.