LGI Homes, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. LGI Homes develops communities and builds and sells homes across 10 states. It reported 56 active communities and operated through five divisions, aggregated as one reportable segment.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Home sales revenue | $162.5 million | $120.7 million; up 34.6% |
| Home closings | 844 | 671; up 25.8% |
| Average sales price | $192,491 | $179,866; up 7.0% |
| Gross margin | $41.4 million; 25.5% | $31.5 million; 26.1% |
| Adjusted gross margin (non-GAAP) | $43.3 million; 26.7% | $33.6 million; 27.8% |
| Operating income | $17.3 million | $11.7 million; up 48.4% |
| Net income | $11.7 million | $7.7 million; up 51.9% |
| Basic / diluted EPS | $0.58 / $0.57 | $0.39 / $0.33 |
| Adjusted EBITDA (non-GAAP) | $19.6 million; 12.1% margin | $14.0 million; 11.6% margin |
Cash and cash equivalents were $47.6 million at March 31, 2016, versus $37.6 million at year-end 2015. Operating cash flow was negative $10.5 million, compared with negative $5.4 million a year earlier; inventory investment was the primary use of cash. Investing cash outflow was $0.2 million, while financing provided $20.7 million, including $18.0 million of net note proceeds and $3.5 million net proceeds from an at-the-market stock offering.
Total assets were $653.1 million, liabilities $389.6 million, and equity $263.5 million. Notes payable totaled $323.1 million on the balance sheet. The revolving facility had $248.0 million outstanding, $7.6 million in letters of credit, and $44.4 million available; it matures May 26, 2018. The company also had $85.0 million principal amount of 4.25% convertible notes due 2019. All $4.35 million of interest incurred in the quarter was capitalized into inventory, so no interest expense was reported in the income statement. The effective tax rate was 34.4%.
Material changes and operating trends
- Revenue growth reflected more closings, a higher average selling price, and expansion from 44 to 56 active communities year over year. Owned and controlled lots rose to 25,540 from 23,915 at December 31, 2015.
- Gross margin percentage declined 0.6 percentage points. Management attributed the decline to geographic mix, higher construction and lot costs, and expansion-related overhead, partly offset by higher home prices. Selling and G&A expenses declined as a percentage of revenue, reflecting operating leverage.
- Net orders were 1,135 versus 968; the cancellation rate increased to 22.8% from 21.4%. Ending backlog increased to 814 homes valued at $165.6 million, versus 601 homes and $115.6 million.
- The Southwest division recorded 166 closings versus 79, and Florida recorded 108 versus 67. Texas remained the largest division, contributing about 50% of revenue, down from 59% a year earlier.
Outlook, risks, and notable items
- No numerical full-year earnings or revenue guidance was provided. Management expected first closings in Seattle and Colorado Springs and construction to begin in Nashville during Q2 2016. It said cash, operating cash flow, revolver availability, and potential equity or debt issuance should fund foreseeable liquidity needs for at least 12 months. Results are seasonal, with more closings and generally higher capital needs in Q2–Q4.
- Key exposures include housing demand and mortgage rates, land availability and pricing, labor and material costs, development or construction delays, and the ability to expand successfully in new markets. A hypothetical 100-basis-point increase in variable borrowing rates would increase annual interest expense by about $2.5 million.
- Land options and purchase contracts covered 7,722 lots, with $204.5 million of commitments if purchases are completed, supported by $9.0 million in deposits and option payments. Outstanding letters of credit, surety bonds, and financial guarantees totaled $25.0 million; management did not expect material draws.
- Management reported compliance with revolving-credit covenants. Ordinary-course claims and environmental indemnities were disclosed; management considered material loss from these matters unlikely and had recorded no environmental reserve.
- In March, the company sold 150,000 shares through its ATM program for approximately $3.5 million net. A related-party option covers 106 finished lots for a base price of about $8.0 million; the first 21-lot closing occurred April 29, 2016.
Important facts for investors to verify
- Whether backlog converts to closings and how cancellations, including the higher reported cancellation rate, develop.
- Whether expansion and mix-related costs continue to pressure gross margin despite stronger sales and operating leverage.
- Available liquidity after land investment and whether the company maintains required credit-facility covenant levels.
- Exposure and flexibility associated with the $204.5 million of potential land and lot purchases, including the option to forfeit deposits.
- How much reported earnings benefit from capitalized interest and how non-GAAP adjusted gross margin and adjusted EBITDA reconcile to GAAP results.