LGI Homes, Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This annual filing includes fourth-quarter results; it is not a standalone quarterly report. LGI designs, builds, markets and sells homes, primarily to entry-level buyers, across multiple U.S. markets. The company reported one aggregated segment.
Business context and operating performance
LGI expanded its community base and geographic reach during 2016. Active communities increased to 63 from 52, and owned or controlled lots rose to 29,460 from 23,915. The company closed 4,163 homes, including 44 Terrata luxury homes. Texas generated 51.2% of annual home sales revenue.
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Home sales revenue | $838.3 million | $630.2 million |
| Home closings | 4,163 | 3,404 |
| Average sales price | $201,374 | $185,146 |
| Gross margin | $221.6 million; 26.4% | $166.9 million; 26.5% |
| Adjusted gross margin (non-GAAP) | $232.8 million; 27.8% | $175.1 million; 27.8% |
| Operating income | $111.5 million | $79.7 million |
| Income before taxes | $113.7 million | $80.3 million |
| Net income | $75.0 million | $52.8 million |
| Diluted EPS | $3.41 | $2.44 |
Fourth quarter 2016: Home sales revenue was $236.8 million, gross margin $64.3 million, income before taxes $34.9 million, net income $23.2 million, and diluted EPS $1.01.
Cash flow, debt and liquidity
- Cash and cash equivalents were $49.5 million at year-end, versus $37.6 million a year earlier. Real estate inventory increased to $717.7 million from $531.2 million.
- Operating cash flow was negative $108.2 million, compared with negative $89.2 million in 2015, primarily reflecting increased investment in real estate inventory. Investing cash flow was negative $0.7 million; financing cash flow was positive $120.9 million.
- Notes payable totaled $400.5 million net on the balance sheet. The revolving facility had $325.0 million outstanding, $6.3 million in letters of credit, and $53.7 million available under its $385.0 million commitment. It carried a variable rate of LIBOR plus 3.50% at year-end and matures in 2019.
- The company had $85.0 million principal amount of 4.25% convertible notes due 2019. The notes became convertible for the January–March 2017 period; no holders had elected conversion by the filing date. The credit facility commitment was increased to $400.0 million on February 28, 2017.
- LGI reported compliance with its credit-facility covenants at year-end. A hypothetical 100-basis-point increase in variable borrowing rates was estimated to raise annual interest expense by approximately $3.2 million.
Material changes, outlook and risks
Revenue rose 33.0% year over year, reflecting 22.3% more closings and an 8.8% increase in average selling price. Management attributed the higher average price to product mix, higher price points in some newer markets and favorable pricing. Gross margin percentage edged down from 26.5% to 26.4%, as higher construction, lot and carrying costs largely offset higher prices. Selling and general and administrative expenses declined as a proportion of revenue.
Management cited continued growth opportunities in existing and new markets, with planned 2017 launches including Raleigh, Portland and Minneapolis. It planned to diversify entry-level offerings with townhomes in select markets and expected luxury-series and homesite-related closings to remain below 5% of annual closings in 2017. A bulk sales agreement covers 156 homes for delivery during 2017 through the first quarter of 2018; these homes and values were excluded from reported backlog. No specific revenue or earnings guidance is provided in the filing.
- Demand and financing: Higher mortgage rates, tighter lending standards, or changes to government-backed mortgage programs could reduce buyer qualification and sales.
- Land, inventory and execution: Land acquisition and development are capital-intensive; slower sales, lower prices, higher carrying costs, or delays could pressure margins and lead to inventory impairments. Year-end inventory included 895 completed homes and 742 homes in progress.
- Costs and concentration: Labor, subcontractor and material shortages or price increases could raise build costs. Despite expansion, Texas remained the largest revenue contributor, exposing results to regional economic weakness.
- Contingencies: Management said ordinary-course claims and regulatory matters were not expected to have a material financial effect. The company also disclosed unsecured environmental indemnities with no stated term or damage limitation.
- Unusual items: The convertible notes’ temporary conversion eligibility creates a potential near-term cash repayment or settlement consideration. The company also disclosed related-party lot purchases and consulting fees.
Most important facts for investors to verify
- Whether the 156-home bulk sale closes on the expected schedule, and its impact on reported revenue, margins and cash flow.
- Whether convertible-note holders elect conversion, and how any conversion is settled; reconcile the notes’ contractual 2019 maturity with their temporary 2017 conversion window.
- Whether cash generation improves as land and home inventory grows, and how much liquidity remains available after letters of credit and covenant requirements.
- Whether home prices and gross margins can withstand higher land, construction, labor and financing costs, particularly in the Texas market.
- Whether planned market expansions and community growth achieve expected sales absorption and returns without material inventory impairment or additional equity dilution.