LGI Homes, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. LGI Homes develops, builds, markets and sells homes; it operated in eight states and reported one homebuilding segment. Comparisons below are year over year.
Financial and operating results
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $174.0m | $92.5m | $453.5m | $274.8m |
| Home closings | 934 | 557 | 2,458 | 1,704 |
| Average selling price | $186,248 | $166,097 | $184,488 | $161,296 |
| Gross margin | $46.0m; 26.4% | $25.3m; 27.3% | $120.0m; 26.5% | $73.2m; 26.6% |
| Operating income | $23.0m | $9.9m | $56.0m | $30.8m |
| Net income | $15.4m | $7.0m | $37.1m | $20.7m |
| Diluted EPS | $0.76 | $0.34 | $1.72 | $0.99 |
| Adjusted EBITDA margin (non-GAAP) | 14.4% | 11.9% | 13.9% | 12.7% |
Q3 revenue rose 88.0% and net income rose 118.8%; nine-month revenue increased 65.0% and net income 79.4%. Higher closings, average selling prices and operating leverage drove growth. Gross margin percentage declined in Q3 and was nearly flat for the nine months. Management attributed pressure to higher construction, lot and carrying costs, partly offset by higher selling prices. Adjusted gross margin, a non-GAAP measure, was 27.5% in Q3 and 27.8% for nine months, also below the respective prior-year periods.
Balance sheet, cash flow and funding
At September 30, 2015, cash was $36.5m, real estate inventory $460.5m and total assets $547.0m. Total liabilities were $322.7m and equity $224.2m. Inventory rose from $367.9m at year-end 2014, including homes in progress increasing to $111.5m from $55.8m.
For the first nine months, operating cash flow was negative $24.4m, compared with negative $129.6m in 2014, mainly reflecting lower inventory-related cash use, higher earnings and increased payables and accruals. Investing cash outflow was $0.9m; financing cash inflow was $30.3m. Cash increased $5.1m from year-end.
Notes payable totaled $247.8m, including $170.0m drawn on a new $225.0m revolving facility and $77.8m carrying value for $85.0m principal of 4.25% convertible notes due 2019. The facility had $51.6m available after $3.4m of letters of credit, and matures in May 2018. LGI reported compliance with its covenants. Management stated it expected cash, operating cash generation, revolver availability and potential ATM proceeds to meet foreseeable needs for at least 12 months. A 100-basis-point increase in the variable borrowing rate would raise annual interest expense by approximately $1.7m, based on period-end borrowings.
Business developments, outlook and risks
Active communities increased to 50 from 34 year over year; owned and controlled lots totaled 23,419. Nine-month net orders were 3,063, cancellation rate 25.1%, and backlog was 755 homes valued at $147.7m, versus 242 homes and $42.4m a year earlier. Backlog contracts may be cancelled, including when buyers cannot obtain financing.
The company established a $30m at-the-market equity program and sold 100,000 shares in September for approximately $2.8m net. It also entered a new revolving credit agreement, replacing its prior facility. No specific earnings or revenue guidance was provided. Management noted seasonal variation, with closings generally higher in the second through fourth quarters, and said quarterly results may not predict full-year results.
Risks highlighted include housing and mortgage-rate volatility, inflation and higher construction costs, land availability and pricing, development delays, financing and liquidity needs, leverage, competition, regulatory matters, and execution in new markets. Land purchase options and contracts covered 6,729 lots with $154.5m of commitments if completed; deposits were $7.5m. Letters of credit and surety bonds totaled $18.8m. Management did not expect ordinary-course claims, environmental matters, or bond and letter-of-credit draws to materially affect results. The filing also identifies a related-party option to purchase 106 finished lots for approximately $8.0m and consulting fees to the CEO’s family member.
Important facts for investors to verify
- Whether strong closing and order growth continues, and how much backlog converts to closings after cancellations and financing qualification.
- Whether margin pressure from construction, lot and carrying costs persists as the company expands its communities and inventory.
- Cash requirements for land, development and homebuilding, and the trend in operating cash flow alongside rising inventory and debt.
- Revolver availability, covenant headroom and compliance; the stated $40m minimum-liquidity covenant and the company’s liquidity position under its defined calculation.
- Potential dilution from the ATM program, equity awards and convertible notes, and the assumptions underlying performance-based compensation and Oakmont earnout estimates.
- Exposure to land-option commitments, surety obligations, related-party arrangements and other contingencies.