LGI Homes, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Amounts are in U.S. dollars. LGI Homes develops, builds and sells homes across multiple U.S. markets under the LGI Homes and Terrata Homes brands.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Home sales revenue | $454.7 million | $287.6 million |
| Homes closed | 1,835 | 1,228 |
| Average sales price | $247,808 | $234,197 |
| Gross margin | $106.6 million; 23.4% | $66.3 million; 23.1% |
| Operating income | $53.9 million | $21.1 million |
| Net income | $42.8 million | $18.3 million |
| Diluted earnings per share | $1.67 | $0.73 |
| Operating cash flow | $58.8 million provided | $33.2 million used |
| Cash and cash equivalents | $118.2 million | $38.3 million at Dec. 31, 2019 |
| Notes payable, carrying value | $744.4 million | $690.6 million at Dec. 31, 2019 |
- Revenue rose 58.1% and closings rose 49.4% year over year; average sales price increased 5.8%. Management attributed growth to more closings, community expansion, product mix and higher price points in certain newer markets.
- Cost of sales increased 57.3% to $348.2 million. Gross margin percentage improved modestly, reflecting pricing, mix and operating leverage, partly offset by a higher share of wholesale closings. Selling and G&A expenses were 7.2% and 4.4% of revenue, respectively, versus 9.3% and 6.4%.
- Non-GAAP adjusted gross margin was $116.1 million, or 25.5%; adjusted EBITDA was $63.6 million, or 14.0% of revenue. These measures exclude specified items and should not be treated as GAAP results or cash available for debt service.
- Cash increased by $79.9 million during the quarter. Financing activities provided $22.6 million, including $128.1 million of borrowings and $75.0 million of repayments; the company also spent $31.3 million on share repurchases. Investing activities used $1.5 million.
- At March 31, the $650 million revolving facility had $137.1 million available to borrow under its borrowing-base calculation, with $15.0 million of letters of credit outstanding. The borrowing base was $904.8 million and included $752.7 million of borrowings, including the senior notes. The company reported covenant compliance.
Material changes and operating indicators
- Active communities increased to 113 from 87 a year earlier; owned and controlled lots totaled 50,273, up 4.6% from year-end 2019.
- Wholesale revenue rose to $44.3 million from $6.1 million; wholesale closings were 199, or 10.8% of total closings, versus 30, or 2.4%.
- Net orders were 2,481 versus 1,948. The cancellation rate increased to 18.3% from 17.4%. Ending backlog grew to 1,879 homes valued at $446.3 million, from 1,344 homes valued at $328.6 million.
- Real estate inventory was $1.48 billion, down from $1.50 billion at year-end. Completed homes, including information centers, totaled 1,780; 1,857 homes were in progress.
- The company repurchased 567,028 shares for $31.3 million during the quarter; $17.2 million remained under the repurchase authorization at March 31.
Outlook, risks and unusual items
- COVID-19: Some markets temporarily halted construction during the quarter; construction had resumed by the filing date. Management said sales had slowed significantly and cancellations were affected, and expected the pandemic to adversely affect future quarters. It could not estimate the full impact. Risks include weaker demand, mortgage financing constraints, operating interruptions, supply or labor disruptions, inventory impairments and land-option abandonments.
- Liquidity outlook: Management believed cash, operating cash flow and available financing or capital-market access would fund current and foreseeable needs for at least 12 months. It cautioned that pandemic-related market volatility could constrain financing access and provided no assurance of completing financing transactions.
- Credit amendment after quarter-end: On April 30, 2020, lenders representing 80% of revolving commitments extended their commitments to May 31, 2023; remaining commitments retained their prior maturity. The amendment lowered the minimum EBITDA-to-interest covenant from 2.50 to 1.75, raised the letter-of-credit sublimit to $40 million and set a 0.70% LIBOR floor.
- Interest-rate risk includes variable-rate revolver borrowings of $452.7 million; management estimated a 100-basis-point rate increase would raise annual interest costs by approximately $4.5 million. The company also noted LIBOR’s planned phase-out and was evaluating its replacement.
- Other exposures include $560.7 million of potential purchases under land contracts covering 18,855 lots, supported by $34.8 million in deposits; $118.5 million of letters of credit and surety/performance bonds; and ordinary-course litigation, regulatory and environmental matters. Management did not expect these matters or guarantees to have a material effect.
- No full-year earnings or operating guidance is provided in the filing. Results are seasonal, and the first quarter may not represent full-year performance.
Most important facts for investors to verify
- Subsequent-quarter orders, cancellations, closings, pricing and backlog conversion as COVID-19 conditions evolve.
- Cash generation, inventory levels, land commitments and the availability of revolving-credit borrowing capacity.
- Compliance with credit covenants under the amended facility and the timing and terms of lender commitments not extended to 2023.
- Potential inventory or land-option impairments, and the effect of mortgage availability, unemployment, construction costs and subcontractor capacity.
- Whether wholesale sales, community expansion and reported non-GAAP margin improvements are sustainable; compare non-GAAP measures with GAAP results.