LGI Homes, Inc. — 2019 Form 10-K
Business and period. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below identify the fourth quarter. LGI Homes designs, builds and sells primarily move-in-ready homes, with a focus on entry-level buyers, across 31 markets in 18 states. It reported 106 active communities at year-end and 7,690 home closings for the year.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Home sales revenue | $1.838 billion | $1.504 billion |
| Home closings | 7,690 | 6,512 |
| Average sales price | $239,032 | $231,020 |
| Gross margin | $436.5 million; 23.7% | $379.9 million; 25.3% |
| Operating income | $227.5 million | $200.1 million |
| Net income | $178.6 million | $155.3 million |
| Diluted EPS | $7.02 | $6.24 |
| Operating cash flow | $(41.9) million | $(116.7) million |
Adjusted gross margin, a non-GAAP measure, was $475.0 million, or 25.8%, versus $405.6 million, or 27.0%. Adjusted EBITDA was $266.7 million, or 14.5% of revenue, versus $226.5 million, or 15.1%. The company cautions that these non-GAAP measures are supplemental and not substitutes for GAAP results or cash flow.
Fourth quarter: Revenue was $605.6 million, gross margin $142.2 million, pretax income $84.9 million, net income $64.9 million, and diluted EPS $2.52. In fourth-quarter 2018, the corresponding figures were $425.2 million, $103.6 million, $56.2 million, $42.7 million, and $1.72.
Balance sheet and liquidity: Cash was $38.3 million at year-end, down from $46.6 million. Real estate inventory was $1.500 billion, up from $1.228 billion. Total assets were $1.666 billion; total liabilities were $820.9 million; and equity was $845.2 million. Notes payable totaled $690.6 million net of discounts and issuance costs. Face borrowings comprised approximately $399.6 million under the revolving credit facility and $300 million of 6.875% Senior Notes due 2026. The facility had $228.0 million available to borrow, net of stated obligations, and matures May 31, 2022. The company reported compliance with its credit covenants, including a $50 million minimum-liquidity requirement.
Operating cash outflow reflected a $266.7 million increase in real estate inventory, partly offset by earnings and working-capital movements. Investing cash outflow was $1.8 million; financing cash inflow was $35.4 million. The filing says existing cash, operating cash generation and available financing should fund foreseeable liquidity needs for at least 12 months.
Changes versus the prior year
- Revenue rose 22.2%, primarily from 18.1% more closings and a 3.5% increase in average selling price. Active communities increased from 88 to 106.
- Net income increased 15.0%, but gross margin declined 1.6 percentage points. Management attributed the margin pressure principally to higher lot costs and capitalized interest, and secondarily to a higher number of wholesale closings.
- Operating cash outflow improved from $116.7 million to $41.9 million, but remained negative as inventory investment continued.
- Owned and controlled lots fell 6.6% to 48,062. Ending backlog increased to 1,233 homes worth $290.4 million from 624 homes worth $156.1 million; the cancellation rate declined to 20.6% from 24.2%.
- The $70 million convertible notes matured in November 2019 and were repaid in cash; 2,381,751 common shares were issued for the conversion premium.
Outlook, risks and unusual items
- Management expected to open communities in additional markets during 2020 and anticipated entering Salt Lake City, with construction and sales expected to begin in 2021. It forecast wholesale closings of 5%–10% of annual closings in 2020 and luxury-series closings below 3%; no specific total revenue or earnings guidance is provided in the filing.
- Principal risks include mortgage availability and rates, homebuyer affordability, land acquisition and development costs, labor and material availability and pricing, inventory carrying costs, competition, weather and natural disasters, regulation and environmental liabilities, and access to capital. The company also highlights variable-rate debt and the planned phaseout of LIBOR.
- A hypothetical 100-basis-point increase in the average rate on variable-rate debt would increase annual interest cost by approximately $4.0 million. The company did not hedge interest-rate exposure at year-end.
- Land purchase contracts covered 16,205 lots with an aggregate purchase price of $539.1 million and $35.1 million of deposits. Outstanding letters of credit, surety bonds and financial guarantees totaled $108.7 million; management did not expect material draws. Management stated that ordinary-course claims and proceedings were not expected to materially affect the company.
- No real estate inventory impairment charges were recorded in 2017–2019. The auditor’s critical audit matter was estimation and allocation of land development costs, which depends on judgments about schedules, costs and reimbursements.
Investor verification priorities
- Check whether backlog converts to closings at expected prices and whether the lower cancellation rate persists; deposits are generally minimal and refundable if financing is unavailable.
- Track gross margin recovery or further pressure from lot costs, capitalized interest, construction costs and wholesale sales mix.
- Assess cash conversion and inventory growth alongside debt maturities, revolving-facility availability and compliance with the $50 million liquidity covenant.
- Review land development cost estimates, purchase-contract takedowns and potential inventory impairments, given the auditor’s identified critical audit matter.
- Verify the transition from LIBOR and the impact of floating-rate borrowing; also monitor the dilution associated with the convertible-note settlement.
Audit and controls: Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting as of December 31, 2019.