LGI Homes, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. LGI develops, builds, markets and sells homes across multiple U.S. markets. It reported 71 active communities and 2,272 home closings in the first half.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Home sales revenue | $324.2m | $222.7m | $487.1m | $385.2m |
| Home closings | 1,511 | 1,128 | 2,272 | 1,972 |
| Average sales price | $214,545 | $197,450 | $214,388 | $195,328 |
| Gross margin | 26.6% | 26.5% | 26.7% | 26.1% |
| Adjusted gross margin (non-GAAP) | 28.0% | 27.8% | 28.0% | 27.3% |
| Operating income | $48.5m | $30.7m | $64.6m | $48.1m |
| Net income | $32.2m | $20.7m | $44.0m | $32.4m |
| Diluted EPS | $1.39 | $0.96 | $1.91 | $1.54 |
Q2 revenue rose 45.6% year over year, reflecting 34.0% more closings and an 8.7% higher average selling price. First-half revenue increased 26.5%, with closings up 15.2% and average selling price up 9.8%. Management attributed pricing gains to product mix, new-market price points and favorable pricing conditions. Adjusted gross margin excludes capitalized interest and purchase-accounting adjustments and is a non-GAAP measure.
- Cash flow: First-half operating cash use was $67.7m, versus $34.5m in 2016, primarily reflecting increased inventory investment associated with growth, more homes under construction and land acquisitions. Investing cash use was $0.3m; financing provided $45.8m. Cash declined $22.2m to $27.3m.
- Balance sheet and debt: At June 30, real estate inventory was $836.0m, total assets $931.7m, notes payable $442.9m and equity $406.4m. Notes payable included $363.6m carrying value under the revolving facility and $79.3m carrying value of 4.25% convertible notes due 2019.
- Liquidity: The amended revolving facility provides up to $600m, subject to borrowing-base limits, with potential expansion to $650m. Against a $530.8m borrowing base, $370.0m was drawn, $6.9m supported letters of credit and $153.9m was available. The company reported covenant compliance and expected to fund foreseeable needs for at least 12 months.
- Operating pipeline: Backlog at June 30 was 1,545 homes valued at $352.5m, versus 887 homes and $187.6m a year earlier. First-half net orders were 3,371; cancellation rate was 21.3%, compared with 22.2%.
Material changes, outlook and risks
- Gross margin improved year over year, which management linked to pricing and cost leverage; Q2 also benefited in part from a one-time reimbursement of community-development costs. Selling and G&A costs grew in dollars but declined as a percentage of Q2 revenue.
- The company expanded its Central division into Oklahoma and began Midwest start-up activity; both areas had no revenue at quarter-end. It also increased owned or controlled lots to 32,689 from 29,460 at year-end 2016 and active communities to 71 from 63.
- In May, LGI replaced its prior $400m revolving facility with a $600m facility maturing May 31, 2020. The company issued 154,900 shares through its ATM program in the first half for approximately $4.8m net proceeds.
- The $85m principal amount of convertible notes became eligible for holder conversion during July 1–September 30, 2017, following the share-price conversion trigger. No holders had elected conversion as of the filing date. A hypothetical 100-basis-point increase in variable borrowing rates would add approximately $3.7m to annual interest expense.
- Management provided no specific numerical earnings or revenue guidance in the supplied filing text. It cited seasonal variation, with historically more closings in Q2–Q4, and expressed confidence in meeting near-term liquidity needs.
- Key risks include mortgage-rate increases and reduced buyer affordability; housing-market or credit-market weakness; land, labor and construction-cost inflation; delays, weather and regulatory approvals; access to land and capital; and execution in new markets. Land option and purchase contracts covered 12,540 lots with $329.2m of potential purchase commitments and $12.6m of deposits. Letters of credit, bonds and guarantees totaled $32.9m. Management stated it did not expect claims, contingencies or these guarantees to materially affect results.
- Related-party matters included an option to purchase remaining finished lots from an affiliate of the CEO’s family member and three first-half home sales totaling approximately $0.7m to an affiliate of a director.
Investor facts to verify
- Whether convertible-note holders elected conversion during the disclosed July–September window and the resulting cash or share impact.
- Whether backlog converts to closings at expected prices and margins, considering cancellations and the small generally refundable buyer deposits.
- How inventory growth, land commitments and operating cash use affect available borrowing capacity and liquidity.
- The durability of margin gains, including the contribution of the one-time reimbursement and the impact of construction, lot and financing costs.
- The share-count presentation: the balance sheet lists 22,615,519 shares issued at June 30, while the statement of equity lists 22,615,429.