LGI Homes, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are to the three months ended March 31, 2014 unless noted. LGI Homes develops, builds, markets and sells new homes across eight states. It reports as one homebuilding segment, organized into four operating divisions.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Home sales revenue | $120.7 million | $75.9 million |
| Home closings | 671 | 485 |
| Average selling price | $179,866 | $156,535 |
| Gross margin | $31.5 million; 26.1% | $19.5 million; 25.7% |
| Adjusted gross margin (non-GAAP) | $33.6 million; 27.8% | $20.9 million; 27.5% |
| Operating income | $11.7 million | $7.1 million |
| Net income | $7.7 million | $4.6 million |
| Basic / diluted EPS | $0.39 / $0.33 | $0.22 / $0.22 |
| Adjusted EBITDA (non-GAAP) | $14.0 million; 11.6% margin | $8.6 million; 11.3% margin |
Revenue increased 59.0%, closings rose 38.4%, and average selling price increased 14.9%. Management attributed revenue growth primarily to more active communities and closings, as well as a higher average price reflecting product mix and favorable pricing. Gross margin improved modestly; higher selling prices were partly offset by increased construction and lot costs. Adjusted gross margin and adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $39.0 million at March 31, 2015, up from $31.4 million at year-end 2014. Total assets were $466.5 million and equity was $190.8 million.
- Operating cash flow was negative $5.4 million, compared with negative $41.4 million a year earlier. Inventory increased by $14.5 million during the quarter; the filing attributes the year-over-year reduction in operating cash use mainly to smaller inventory and pre-acquisition cash outflows than in Q1 2014.
- Investing cash outflow was $0.5 million; financing cash inflow was $13.5 million, principally from net borrowings. Cash increased $7.6 million.
- Notes payable totaled $230.0 million, versus $216.1 million at December 31, 2014: $152.9 million drawn on a $200.0 million secured revolver and $77.1 million carrying value of 4.25% convertible notes due 2019. Revolver availability was $46.5 million, net of letters of credit.
- All $3.36 million of interest incurred in the quarter was capitalized to inventory; reported interest expense was zero. The revolver rate was 3.75% at quarter-end. Management estimated that a 100-basis-point increase in its average variable borrowing rate would add about $1.5 million to annual interest expense.
- The company reported compliance with credit-facility covenants, including a liquidity requirement effective March 31, 2015. It stated that cash, operating cash generation and revolver availability should fund foreseeable needs for at least 12 months. The filing does not specify the covenant calculation of liquidity in this excerpt.
Material changes, outlook and risks
- Active communities increased to 44 from 28 a year earlier, and owned or controlled lots rose to 21,286 from 19,883 at December 31, 2014. Backlog increased to 601 homes valued at $115.6 million, versus 324 homes and $52.6 million a year earlier; the cancellation rate declined to 21.4% from 29.5%.
- Q1 included 15 closings in the new Denver market and six Terrata Homes closings. A second Terrata community in South Carolina was expected to open for sales in mid-2015. The Oakmont acquisition contributed to the company’s Charlotte presence; 81 Oakmont-related homes closed during the quarter, generating a $0.324 million earnout payable in Q2.
- Management gave no specific earnings or revenue guidance. It noted seasonal patterns: closings generally increase in the second through fourth quarters, and Q1 results may not represent full-year performance.
- General and administrative expense included approximately $1.0 million of additional annual performance-recognition and training costs. Selling and G&A expenses rose with higher closings, community count and staffing.
- Land option and purchase contracts covered 4,987 lots, with $6.8 million in deposits and approximately $106.0 million of remaining purchase commitments if completed. Letters of credit, performance and surety bonds totaled $13.0 million. Management did not expect material draws or material effects from ordinary-course claims; it also disclosed uncapped environmental indemnities and no recorded environmental reserves.
- Key risks cited include housing-market and mortgage-rate changes, inflation and higher land, labor and material costs, land availability, construction or entitlement delays, access to capital, leverage, and expansion or acquisition execution. The company reported no derivatives for trading or speculative purposes.
- On April 30, 2015, after quarter-end, shareholders approved flexible settlement provisions for the convertible notes, allowing the company to elect cash, shares or a combination upon conversion. The notes’ initial conversion price was approximately $21.52 per share.
Important facts for investors to verify
- Whether backlog growth converts to closings, and how cancellations, mortgage availability and the minimal buyer deposit affect conversion.
- Whether higher selling prices and margins persist as lot, construction and labor costs change.
- Cash needs for land development and construction relative to operating cash flow, revolver availability, covenant liquidity and total debt.
- Execution and returns from community growth, new markets, Terrata Homes and the Oakmont acquisition, including the variable earnout.
- Potential share dilution or cash requirements under the convertible notes, and the exposure represented by land commitments, bonds and indemnities.