LGI Homes, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013, with unaudited fourth-quarter data. LGI Homes builds and sells entry-level homes across Texas, Arizona, Florida, Georgia and New Mexico. Results are not fully comparable year over year: the company completed its IPO and reorganization on November 13, 2013, and acquired the remaining interests in four joint ventures, consolidating them from that date. Pro forma figures include those ventures as if acquired at the start of 2012.
Key financial and operating metrics
| Metric | FY 2013 reported | FY 2012 reported |
|---|---|---|
| Total revenue | $162.8 million | $76.2 million |
| Home sales revenue | $160.1 million | $73.8 million |
| Net income | $21.7 million | $9.9 million |
| Gross margin | $38.7 million; 24.2% of home sales | $19.3 million; 26.1% |
| Adjusted EBITDA (non-GAAP) | $21.3 million; 13.3% of home sales | $11.0 million; 14.9% |
| Cash and cash equivalents at year-end | $54.1 million | $7.1 million |
| Real estate inventory at year-end | $142.0 million | $28.5 million |
| Notes payable at year-end | $35.5 million | $15.0 million |
Reported 2013 net income includes a $6.4 million non-cash gain from remeasuring LGI’s pre-existing joint-venture interests upon acquisition. In the more comparable pro forma presentation, 2013 home sales were $241.0 million versus $143.4 million in 2012, and net income was $21.7 million versus $18.3 million. Pro forma gross margin declined to 25.4% from 27.3%; pro forma adjusted EBITDA margin declined to 11.8% from 14.0%.
Fourth quarter: Home sales revenue was $65.0 million, gross margin was $12.9 million, income before taxes was $9.9 million and net income was $9.1 million. The filing’s quarterly table does not provide a clear fourth-quarter closing count.
Volume and backlog: Reported closings increased 98.1% to 1,062 homes, and average selling price rose 9.4% to $150,722. On a pro forma basis, closings increased 52.3% to 1,617 and average price rose 10.4% to $149,018. Year-end backlog was 190 homes valued at $30.1 million, versus 67 homes and $9.8 million a year earlier; the cancellation rate fell to 23.5% from 26.6%.
Cash flow and liquidity: Operating cash flow was negative $54.5 million, primarily reflecting land and finished-lot investment. Investing cash outflow was $31.3 million, including the net cash payment for the joint-venture acquisitions. Financing cash inflow was $132.7 million, driven largely by IPO proceeds and increased borrowings. The company reported $54.1 million of cash at year-end and believed available cash, operating cash generation and credit facilities would cover foreseeable needs for at least 12 months.
At December 31, 2013, the company had $35.5 million drawn under former revolving facilities totaling $37.0 million, with $1.5 million available under the borrowing base. Borrowings bore a 4.0% floor rate and were variable-rate debt. In January 2014, the company replaced these arrangements with a $50.0 million secured revolving facility maturing June 30, 2016, subject to borrowing-base limits and financial covenants.
Material changes and unusual items
- Active communities at year-end increased to 25 from 10 reported in 2012. Owned or controlled lots increased to 14,895 from 3,033 reported for 2012.
- The IPO issued 10.35 million shares at $11.00 per share and generated $102.6 million net proceeds. Approximately $36.8 million of cash and $4.5 million of stock consideration were used to acquire GTIS partners’ interests.
- The acquisition produced $12.0 million of goodwill and a $0.7 million trade-name intangible. A $7.4 million fair-value step-up was recorded on acquired inventory; $3.5 million was charged to cost of sales for inventory sold during 2013.
- General and administrative expense rose to $13.6 million from $6.1 million; approximately $3.2 million of the increase related to reorganization, IPO and financial-reporting costs.
Outlook, risks and contingencies
- No quantified earnings, revenue or closing guidance was provided. Management planned continued growth in existing markets, potential expansion into Charlotte and Denver subject to suitable conditions and leadership, and broader product offerings. For 2014, it anticipated homes up to 4,000 square feet priced at $300,000–$450,000, alongside its existing lower-priced products.
- Management planned to continue acquiring finished lots in Florida and the Southeast and to undertake more lot development in Texas and the Southwest, where attractively priced finished lots were limited. Land purchase and option commitments covered 8,214 lots with an aggregate remaining purchase price of $111.1 million; deposits were $3.0 million.
- Principal risks include rising mortgage rates and tighter lending standards, reliance on government-backed financing programs including USDA, land and inventory exposure, construction-cost and skilled-labor pressures, subcontractor availability, regulatory and environmental constraints, weather events, and geographic concentration. Management said the October 2013 federal shutdown negatively affected closings that month.
- The company reported ordinary-course real estate claims that management did not expect to materially affect results. It also provided unsecured environmental indemnities to certain lenders with no stated term or damage limit; management reported no known claims and no recorded reserve.
- Management concluded disclosure controls were effective. The filing did not include management’s assessment or auditor attestation of internal control over financial reporting, citing the newly public company transition and emerging-growth-company exemption. No material inventory impairment charges were recorded in 2011–2013.
Important facts for investors to verify
- Separate reported results from pro forma results and assess the effect of the November 2013 joint-venture acquisition and the $6.4 million remeasurement gain.
- Track whether closings, backlog conversion and cancellation rates support the expanded lot base and 2014 growth plans.
- Review gross-margin pressure, especially higher construction and developed-lot costs, and the added cost burden from new markets and public-company expenses.
- Assess liquidity against land commitments, inventory investment, the borrowing-base restrictions and covenants of the $50.0 million facility.
- Monitor buyer access to mortgage financing, including changes to FHA and USDA programs, and the effect of interest-rate increases on affordability and sales.