LGI Homes, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. LGI Homes designs, builds and sells homes across 17 states, principally to entry-level buyers. It operated 88 active communities at year-end, up from 78 in 2017, and closed 6,512 homes during 2018.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Home sales revenue | $1,504.4 million | $1,258.0 million |
| Home closings | 6,512 | 5,845 |
| Average sales price | $231,020 | $215,220 |
| Gross margin | $379.9 million; 25.3% | $320.4 million; 25.5% |
| Operating income | $200.1 million | $169.8 million |
| Net income | $155.3 million | $113.3 million |
| Diluted earnings per share | $6.24 | $4.73 |
| Cash and cash equivalents at year-end | $46.6 million | $67.6 million |
| Net notes payable at year-end | $653.7 million | $475.2 million |
Revenue rose 19.6%, reflecting 11.4% more closings and a 7.3% increase in average selling price. Net income increased 37.1%; the lower effective tax rate (22.0%, versus 33.9%) contributed to the increase. Higher construction and lot costs, product mix and wholesale closings contributed to the slight decline in gross margin percentage. Adjusted gross margin was 27.0% versus 26.9%, and adjusted EBITDA was $226.5 million versus $188.2 million; both are non-GAAP measures.
For the fourth quarter, revenue was $425.2 million, net income was $42.7 million and diluted EPS was $1.72, compared with $405.0 million, $35.6 million and $1.43, respectively, in fourth-quarter 2017.
Cash flow, debt and liquidity
- Operating cash flow was negative $116.7 million, compared with negative $68.5 million in 2017, chiefly reflecting investment in inventory and land, and changes in payables and accrued liabilities. Investing cash flow was negative $74.9 million, including the Wynn Homes acquisition. Financing cash flow was positive $170.7 million.
- Year-end debt included $293.8 million drawn under the revolving facility, $70.0 million principal of 4.25% convertible notes due November 2019, and $300.0 million principal of 6.875% senior notes due July 2026. The revolver matures in May 2021 and bears interest at LIBOR plus 2.90% at year-end.
- The $500 million revolving facility had $26.3 million available to borrow at year-end, subject to its borrowing base and terms. The company reported compliance with all facility covenants and stated it expected to meet foreseeable liquidity needs for at least 12 months using cash, operating cash flow and available financing.
- Management estimated that a 100-basis-point increase in rates on variable-rate borrowings would raise annual interest cost by approximately $2.9 million. No interest-rate hedges were in place.
Material changes, outlook and risks
- The company acquired Wynn Homes assets in North Carolina for approximately $78.5 million, including about 200 homes under construction and more than 4,000 owned or controlled lots. It recorded approximately $0.8 million in acquisition-related costs.
- Owned or controlled lots increased 29.5% to 51,442. Real estate inventory rose to $1.23 billion from $918.9 million; the company reported no inventory impairment charges for 2016–2018.
- Management expected to open communities in additional markets in 2019. It expected luxury-series homes to represent less than 5% of annual closings and wholesale closings approximately 5%. The filing does not provide a clear numerical forecast for revenue, earnings or closings.
- Key risks include higher mortgage rates or tighter lending standards, rising land, labor and construction costs, home-price or demand weakness, inventory carrying costs and impairments, dependence on subcontractors, and exposure to permitting, environmental and weather-related delays. Results are seasonal, with more closings typically in the second through fourth quarters.
- Year-end backlog was 624 homes, valued at $156.1 million, down from 816 homes and $191.8 million. The reported figures exclude homes under bulk-sale agreements. Buyer deposits are generally small and may be refundable if financing is not obtained.
- Land purchase contracts covered 22,820 lots with an aggregate purchase price of $776.2 million; related deposits were $40.0 million. Outstanding letters of credit, surety bonds and financial guarantees totaled $77.5 million. Management did not believe material claims, guarantees or bond draws were probable or expected to materially affect the company.
- The company repurchased 39,000 shares for $1.5 million under a newly authorized $50 million repurchase program. It stated that it did not intend to pay cash dividends for the foreseeable future.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How the 2019 maturity of the remaining convertible notes was repaid, refinanced or settled, and the effect on cash and share dilution.
- Whether operating cash generation improves as inventory and land investment expand, and how much revolver availability remains under borrowing-base and covenant calculations.
- Whether gross margins stabilize amid rising lot and construction costs, including the effects of wholesale sales and changing product mix.
- Backlog conversion, cancellations and sales pace, while accounting for the exclusion of bulk-sale contracts from reported backlog.
- Execution and returns from Wynn Homes and the expanded land position, including the company’s $776.2 million of land-purchase commitments and related deposit exposure.