LGI Homes, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance sheet compared with December 31, 2015. LGI Homes develops, builds, markets and sells homes across multiple U.S. markets. It reported 59 active communities at quarter-end.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Home sales revenue | $216.3 million | $174.0 million | $601.5 million | $453.5 million |
| Gross margin | $56.8 million; 26.3% | $46.0 million; 26.4% | $157.3 million; 26.1% | $120.0 million; 26.5% |
| Operating income | $29.1 million | $23.0 million | $77.2 million | $56.0 million |
| Net income | $19.5 million | $15.4 million | $51.8 million | $37.1 million |
| Diluted EPS | $0.86 | $0.76 | $2.39 | $1.72 |
| Home closings | 1,052 | 934 | 3,024 | 2,458 |
| Average selling price | $205,613 | $186,248 | $198,905 | $184,488 |
For Q3, revenue grew 24.3%, closings 12.6%, and average selling price 10.4% year over year. Nine-month revenue grew 32.6%, closings 23.0%, and average selling price 7.8%. Gross margin percentage edged down in both comparisons. Adjusted gross margin, a company-defined non-GAAP measure, was 27.7% for Q3 and 27.5% year to date, versus 27.5% and 27.8%, respectively, in 2015.
Cash flow, balance sheet and liquidity
- Cash: $45.9 million at September 30, up from $37.6 million at December 31, 2015.
- Operating cash flow: $67.0 million used in the first nine months, compared with $24.4 million used in the prior-year period. The principal driver was a $143.1 million increase in real estate inventory.
- Financing cash flow: $75.9 million provided, including $50.0 million net proceeds from notes payable and approximately $29.0 million net proceeds from stock issuances. Investing activities used $0.6 million.
- Debt: Notes payable totaled $354.9 million, versus $304.6 million at year-end. This comprised $277.2 million carrying value under the revolving facility and $77.7 million carrying value of 4.25% convertible notes due 2019. Revolver borrowings were $280.0 million, with $7.0 million of letters of credit and $73.0 million available under the $360.0 million facility.
- Liquidity and leverage indicators: Total liabilities were $438.1 million and total equity $330.6 million. Real estate inventory rose to $676.9 million from $531.2 million. Management said expected cash, operating cash generation, revolver availability and potential capital-market access should fund foreseeable needs for at least 12 months. The company reported compliance with its credit covenants.
Material developments, outlook and risks
- Active communities increased to 59 from 50 year over year; owned or controlled lots totaled 29,856, up from 23,915 at December 31, 2015. The company attributed revenue growth primarily to more closings from a larger community base and higher selling prices. It cited product mix, new-market price points and favorable pricing as contributors to higher prices.
- Management attributed lower gross-margin percentages mainly to higher construction and lot costs, partly offset by higher selling prices. Selling and general and administrative expense rates improved with operating leverage.
- The company gave no specific revenue, earnings or closing guidance. It noted the homebuilding business is seasonal and expected that pattern to continue; closings and capital needs are generally higher in the second through fourth quarters.
- At quarter-end, the convertible notes became eligible for holder conversion during October 1–December 31, 2016, following the stock-price trigger. No holders had elected conversion by the filing date. The company said it intended and believed it had the ability to settle conversions in cash, though the notes permit flexible settlement.
- Land options and purchase contracts covered 11,088 lots, with $251.1 million of aggregate purchase commitments if completed and $10.4 million of deposits. Outstanding letters of credit, surety bonds and financial guarantees totaled $26.7 million. Management did not expect material losses from these arrangements or ordinary-course claims; environmental indemnities are uncapped, with no identified claims or recorded reserves.
- Key disclosed risks include higher mortgage rates and reduced buyer affordability, rising land, labor and construction costs, credit-market or housing downturns, land-development delays, and the availability and cost of capital, insurance and surety bonds. A 100-basis-point increase in variable borrowing rates was estimated to raise annual interest expense by approximately $2.8 million.
Important facts for investors to verify
- Whether home-price growth and increased closings can continue without further gross-margin pressure from construction and lot costs.
- How inventory investment, land commitments and community expansion affect operating cash flow and available liquidity.
- Whether the $73.0 million reported revolver availability and covenant headroom remain adequate as borrowing and development needs change.
- Whether convertible-note holders convert, and the resulting cash, dilution and balance-sheet effects.
- Whether backlog of 777 homes valued at $165.0 million converts to closings; contracts have low deposits and may be cancelled.