LGI Homes, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. LGI Homes develops communities and builds and sells homes across multiple U.S. markets. Results are unaudited.
Key financial and operating metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Home sales revenue | $487.4 million | $546.1 million | Down 10.7% |
| Homes closed | 1,366 | 1,599 | Down 14.6% |
| Average sales price per closing | $356,777 | $341,495 | Up 4.5% |
| Gross margin | $98.8 million; 20.3% | $158.4 million; 29.0% | Down 8.7 percentage points |
| Operating income | $26.1 million | $95.7 million | Down 72.8% |
| Net income | $27.0 million | $78.7 million | Down 65.7% |
| Diluted EPS | $1.14 | $3.25 | Down |
| Operating cash flow | $77.6 million | $(137.8) million | Improved |
Margins and expenses: Adjusted gross margin, a non-GAAP measure, was $107.6 million (22.1% of revenue), versus $165.2 million (30.3%). Adjusted EBITDA was $35.3 million (7.2% margin), versus $102.9 million (18.8%). Selling expense rose 24.4% to $42.8 million, and general and administrative expense increased 5.9% to $30.0 million. Management attributed margin pressure mainly to higher construction costs, capitalized interest and sales incentives.
Cash, debt and liquidity: Cash and equivalents were $43.0 million at March 31, up from $32.0 million at year-end. Notes payable totaled $1.046 billion, down from $1.117 billion; this included $756.2 million drawn on the variable-rate revolver and $300.0 million of 4.0% senior notes due 2029, net of debt issuance costs. The company reported $315.8 million available under its credit facility at quarter-end. Real estate inventory was $2.881 billion. Operating cash flow benefited in part from inventory decreasing by $15.9 million and increases in other assets and accounts payable. Investing cash use was $4.9 million; financing cash use was $61.8 million.
Material changes and business activity
- Closings and revenue fell year over year, while average selling price increased. Management linked lower closings to weaker absorption following higher mortgage rates and longer construction cycles.
- Performance varied by segment: Central revenue fell 42.7%; Southeast, West and Florida revenue rose 44.0%, 41.9% and 49.3%, respectively; Northwest revenue declined 27.3%.
- Active communities increased to 99 from 88 a year earlier. Owned or controlled lots declined to 69,724 from 71,904 at December 31, 2022.
- Net orders were 2,219 versus 1,973, while the cancellation rate was 15.9% versus 15.6%. Backlog fell 36.0% year over year to 1,555 homes valued at $561.4 million.
- Retail home revenue was $456.2 million; wholesale revenue was $31.2 million, down from $51.8 million. Wholesale closings represented 7.5% of total closings versus 13.3%.
Outlook, risks and unusual items
- Management reported improved demand during Q1 compared with Q4 2022, citing targeted marketing, incentives, more affordable home offerings and a first-quarter decline in interest rates. It selectively increased construction starts, while emphasizing close monitoring of local demand and inventory. No numerical full-year earnings or revenue guidance is provided.
- Management expects affordability constraints and supply-chain delays to continue affecting demand and operations; it also expects inflation-related cost pressure to persist through 2023. It views long-term housing fundamentals as supportive but cautions that interim results are seasonal and not necessarily indicative of full-year performance.
- Interest-rate risk is material: $756.2 million of revolver borrowings carried a variable SOFR-based rate; a hypothetical 100-basis-point increase would add approximately $7.6 million to annual interest cost. Interest on inventory-related financing is capitalized rather than expensed as incurred.
- On April 28, 2023, after quarter-end, the company amended its revolving credit agreement. The $1.13 billion facility may be increased by up to $170 million subject to conditions; lenders holding $775 million of commitments extended maturity to April 2027, while other commitments retain an April 2025 maturity.
- Risks include mortgage-rate and housing-market changes, inflation, construction and labor availability, delays in development, land values, access to financing, and capital-market volatility. The filing added a specific risk that banking-sector turmoil could affect liquidity or limit access to credit-facility capacity if participating lenders default or cannot fund commitments.
- Outstanding letters of credit, surety bonds and financial guarantees totaled $361.1 million. Land purchase contracts involved $439.7 million of potential commitments if completed, generally with forfeiture of deposits as the principal consequence of not proceeding. Management stated it did not expect ordinary-course claims or these guarantees to have a material effect.
- No shares were repurchased in Q1 2023; $211.5 million remained under the repurchase authorization. Management reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether improving orders and demand translate into closings, and whether cancellations or backlog conversion change materially.
- Whether gross margins recover as incentives, construction costs and capitalized interest evolve.
- Revolver borrowing availability, lender participation, covenant compliance and the effect of variable rates; confirm implementation of the post-quarter credit amendment.
- Inventory, lot commitments and land-banking obligations, including the cash required for future development and takedowns.
- How supply-chain delays, inflation, mortgage affordability and banking or capital-market conditions affect operations and liquidity.
Adjusted gross margin, EBITDA and adjusted EBITDA are company-defined non-GAAP measures; the filing cautions that they are supplements, not substitutes for GAAP results or cash-flow analysis.