LGI Homes, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. LGI Homes develops, builds, markets, and sells new homes across multiple U.S. markets. This unaudited filing covers the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company reported 77 active communities and 37,063 owned or controlled lots at quarter-end.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Home sales revenue | $365.9 million | $216.3 million | $853.0 million | $601.5 million |
| Home closings | 1,729 | 1,052 | 4,001 | 3,024 |
| Average selling price | $211,623 | $205,613 | $213,193 | $198,905 |
| Gross margin | 25.1% | 26.3% | 26.0% | 26.1% |
| Operating income | $50.4 million | $29.1 million | $115.0 million | $77.2 million |
| Net income | $33.7 million | $19.5 million | $77.7 million | $51.8 million |
| Diluted EPS | $1.40 | $0.86 | $3.32 | $2.39 |
- Q3 revenue increased 69.2%, closings increased 64.4%, and average selling price increased 2.9% year over year. Nine-month revenue rose 41.8%, closings 32.3%, and average selling price 7.2%.
- Gross margin percentage declined in Q3 and was nearly unchanged year to date. Management attributed pressure mainly to higher construction costs; Q3 and year-to-date margins were also affected by wholesale home closings. Adjusted gross margin, a company-defined non-GAAP measure, was 26.5% for Q3 and 27.4% year to date, versus 27.7% and 27.5%, respectively.
- Cash flow: Nine-month operating cash outflow was $72.2 million, compared with $67.0 million in 2016, largely reflecting inventory investment associated with growth, more homes under construction, and land acquisitions. Investing cash outflow was $0.5 million; financing cash inflow was $71.1 million. Cash ended at $48.0 million, down from $49.5 million at year-end 2016.
- Balance sheet and liquidity: Real estate inventory was $902.6 million, up from $717.7 million at December 31, 2016. Total liabilities were $576.3 million and equity was $446.7 million. Notes payable totaled $464.1 million, including $390.0 million outstanding under the revolving facility and $85.0 million principal amount of convertible notes. The $600 million revolving facility had $203.0 million available after $6.9 million of letters of credit; the company reported compliance with its covenants.
Material changes, outlook, and risks
- Growth in closings and revenue was supported by expansion to 77 active communities from 59 a year earlier, alongside higher average selling prices. Owned or controlled lots rose to 37,063 from 29,460 at year-end 2016.
- Backlog at September 30 was 1,328 homes valued at $308.1 million, compared with 777 homes and $165.0 million a year earlier. The nine-month cancellation rate was 24.1%, versus 23.7%.
- Management said it expects cash on hand, operating cash generation, revolving-facility availability, and potential debt or equity financing to fund current and foreseeable liquidity needs for at least 12 months. The filing provides no specific earnings or revenue guidance.
- Management cited higher construction and lot costs as pressures on margins. Key disclosed risks include housing-market and mortgage-rate changes, inflation, land and labor availability and costs, development delays, access to capital, and execution in new markets. A hypothetical 100-basis-point increase in the average rate on variable-rate debt would add approximately $3.9 million to annual interest cost.
- The convertible notes became eligible for holder conversion during October 1–December 31, 2017; as of the filing date, no holders had elected to convert. The company said it intended and believed it could settle principal in cash.
- Land option and purchase contracts covered 16,312 lots with a potential aggregate purchase price of $406.3 million; deposits were $13.5 million. Outstanding letters of credit, surety bonds, and financial guarantees totaled $45.9 million. Management did not expect these guarantees to have a material effect or be drawn upon.
- The company entered a wholesale bulk-sales agreement for 47 Washington homes expected to close in the first half of 2018. It closed 96 wholesale homes in Q3; management noted wholesale closings contributed to gross-margin pressure.
Important facts for investors to verify
- Whether construction, lot, and wholesale-sales cost pressures persist and affect gross margins.
- How inventory investment, land commitments, and community expansion affect operating cash flow and revolver usage.
- Whether holders convert the notes during the disclosed conversion window and how any conversion is settled.
- Whether backlog converts to closings as expected, given the cancellation rate and customers’ financing contingencies.
- Progress and realized costs or margins for the Washington bulk sale and the company’s newer markets.