LGI Homes, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Comparison is with Q1 2016 unless otherwise noted. LGI develops, builds, markets and sells homes across multiple U.S. markets; it reported 69 active communities and six operating divisions at quarter-end.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Home sales revenue | $162.9 million | $162.5 million | +0.3% |
| Home closings | 761 | 844 | -9.8% |
| Average selling price | $214,075 | $192,491 | +11.2% |
| Gross margin | $43.5 million; 26.7% | $41.4 million; 25.5% | Margin +1.2 percentage points |
| Operating income | $16.1 million | $17.3 million | -6.9% |
| Income before taxes | $16.8 million | $17.8 million | -5.5% |
| Net income | $11.8 million | $11.7 million | +0.7% |
| Diluted EPS | $0.52 | $0.57 | Lower |
| Net cash used in operations | $47.2 million | $10.5 million | Greater cash use |
Adjusted gross margin, a non-GAAP measure, was $45.6 million, or 28.0%, versus $43.3 million, or 26.7%. Management attributes stronger gross margin percentage mainly to higher average selling prices and leverage of construction and lot costs. Selling and administrative expenses rose 14.3% and 13.2%, respectively, reflecting advertising and costs associated with more communities and fewer closings.
Balance sheet, debt and liquidity
- At March 31, cash was $31.6 million, down from $49.5 million at year-end 2016. Real estate inventory was $788.8 million, up from $717.7 million; total assets were $867.6 million and total equity was $373.2 million.
- Notes payable totaled $426.2 million carrying value, including $350.0 million outstanding on the revolving facility and $78.8 million carrying value of 4.25% convertible notes. The revolver had $43.3 million available after $6.7 million of letters of credit; it matures May 27, 2019. Revolver borrowings bear interest at LIBOR plus 3.25% at quarter-end.
- Operating cash use primarily reflected a $70.3 million inventory build, associated with community growth, homes under construction and land acquisitions. Financing provided $29.5 million, including $25.0 million of revolver proceeds and stock-sale proceeds. Cash declined $17.9 million during the quarter.
- Management said it expected to fund current and foreseeable liquidity needs for at least 12 months through cash, operating cash flows, revolver availability and potential equity or debt financing. The company reported compliance with its credit facility covenants.
Material changes, outlook and risks
- Revenue was nearly flat despite fewer closings, as average selling price rose. Texas revenue fell to $64.9 million from $80.4 million; Florida revenue rose to $24.2 million from $20.2 million. Management cited product mix, new-market price points and a favorable pricing environment for higher selling prices, and timing of land and construction inventory and lower opening backlog for fewer closings.
- Net orders increased to 1,402 from 1,135; cancellation rate declined to 18.9% from 22.8%. Ending backlog was 1,087 homes valued at $253.8 million, versus 814 homes and $165.6 million. Reported backlog excludes 92 homes associated with a bulk sales agreement for 156 homes scheduled during 2017 and Q1 2018.
- The company entered Raleigh and Portland and formed a Midwest division, purchasing Minneapolis finished lots and expecting construction and sales there in Q3 2017. It reported 17 closings in Raleigh and Portland during the quarter. No numerical full-year earnings or revenue guidance was provided.
- The $85 million principal amount of convertible notes became eligible for holder conversion during April 1–June 30, 2017, following the share-price condition being met. No holders had elected conversion by the filing date. The company stated it intended and believed it could settle principal in cash, while conversion could affect dilution and liquidity.
- Key disclosed risks include housing and mortgage-rate conditions, inflation and rising land, labor or material costs, land availability and development timing, expansion into new markets, access to capital, and leverage. A 100-basis-point increase in average rates on variable-rate debt was estimated to increase annual interest expense by approximately $3.5 million.
- Land option and purchase contracts covered 8,437 lots, with $10.7 million in deposits and $243.3 million of potential purchase commitments if consummated. Letters of credit, surety bonds and financial guarantees totaled $34.7 million. Management did not expect material losses from these arrangements or ordinary-course claims and proceedings.
- The company adopted share-based compensation guidance in 2017; it recognized a $0.6 million tax benefit related to stock compensation. Management said this contributed to net income and the lower effective tax rate versus the prior-year period.
Important facts for investors to verify
- Whether the improved order and backlog figures convert into closings, particularly given low customer deposits and the possibility of cancellations.
- How the bulk sales agreement affects reported closings, revenue, margins and cash flows; its associated homes are excluded from disclosed backlog.
- Inventory growth, operating cash use, land commitments and remaining revolver availability, including compliance with the facility’s minimum-liquidity covenant.
- Whether convertible noteholders elect conversion during the disclosed window and the resulting cash, share-count and diluted-EPS effects.
- Whether higher home prices and improved gross margin persist as selling and administrative expenses rise and construction, land and financing costs change.