LGI Homes, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited results, compared with Q1 2018. LGI Homes develops, builds and sells homes across U.S. markets under the LGI Homes and Terrata Homes brands.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Home sales revenue | $287.6 million | $279.0 million | +3.1% |
| Home closings | 1,228 | 1,244 | -1.3% |
| Average sales price | $234,197 | $224,296 | +4.4% |
| Gross margin | $66.3 million; 23.1% | $69.3 million; 24.8% | Margin down 1.7 percentage points |
| Operating income | $21.1 million | $30.9 million | -31.7% |
| Net income | $18.3 million | $27.3 million | -32.8% |
| Diluted EPS | $0.73 | $1.10 | Down $0.37 |
| Operating cash flow | $(33.2) million | $(110.9) million | Cash use reduced by $77.7 million |
Adjusted gross margin, a non-GAAP measure, was 25.1% versus 26.4%; adjusted EBITDA was $27.3 million versus $35.4 million, with margin of 9.5% versus 12.7%. The filing cautions that these non-GAAP measures are supplemental and not substitutes for GAAP results or cash flow.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $35.1 million, down from $46.6 million at year-end 2018. Total assets were $1.436 billion; real estate inventory was $1.291 billion.
- Notes payable carrying value was $676.1 million, up from $653.7 million at December 31, 2018. Debt includes revolving-credit borrowings, $70 million principal of 4.25% convertible notes due November 2019, and $300 million principal of 6.875% senior notes due July 2026.
- The existing $500 million revolving facility had $74.7 million available to borrow at quarter-end, net of deferred purchase-price obligations; $5.1 million of letters of credit was outstanding under the facility. The company reported compliance with its covenants.
- On May 6, 2019, the company entered into a new $550 million revolving facility, expandable by up to $100 million, maturing May 31, 2022. Management said this increased pro forma available borrowing capacity to $116.5 million. The new agreement includes financial and operating covenants.
- Operating cash use reflected investment in inventory and working capital. Financing activities provided $21.8 million, primarily from net borrowings; cash decreased by $11.5 million during the quarter.
Material changes and operating trends
- Revenue growth came from higher average selling prices, partly offset by fewer closings. Management attributed the higher price to product mix, pricing in existing communities and higher price points in some newer markets.
- Profitability weakened as cost of sales rose 5.5%, faster than revenue, and selling and general and administrative expenses increased 16.7% and 19.4%, respectively. Management cited higher construction, lot and overhead costs, added personnel and advertising, community expansion, and Southeast start-up costs.
- Active communities increased to 87 from 79 year over year. Central and West revenue increased, while Northwest and Florida revenue declined amid community close-outs or transitions. Central remained the largest segment.
- Net orders were 1,948 versus 1,798; the cancellation rate improved to 17.4% from 20.6%. Ending backlog was 1,344 homes valued at $328.6 million, versus 1,370 homes and $357.9 million a year earlier. Backlog is subject to cancellation.
- Owned and controlled lots totaled 50,700 at March 31, down 1.4% from year-end. Land purchase contracts covered 20,722 lots, with $39.4 million in deposits and $673.9 million in potential purchase commitments if exercised.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects to fund current and foreseeable liquidity needs for at least the next 12 months using cash, operating cash flows, the revolving facility and, if needed, debt or equity markets.
- Management notes seasonal patterns: closings generally increase in the second through fourth quarters, so first-quarter results and quarter-end financial position may not indicate full-year performance.
- Key risks include housing-market and mortgage-rate changes, inflation and higher labor, material and land costs, land availability, construction or development delays, access to capital, leverage and debt service, and execution in new markets. A 100-basis-point increase in variable borrowing rates was estimated to raise annual interest cost by about $3.2 million.
- The $70 million principal of convertible notes was convertible during Q1 and remained convertible in Q2; the company stated it intended and believed it could settle conversions in cash. The notes mature November 15, 2019.
- The company adopted lease accounting in January 2019, recognizing $5.4 million of lease assets and liabilities at adoption; quarter-end lease liabilities were $5.3 million. Management said ordinary-course legal, environmental and regulatory matters were not expected to have a material financial effect.
Important facts for investors to verify
- Whether margin pressure from construction, lot and operating costs persists as home closings and community count evolve.
- Whether orders, cancellations and backlog convert into closings and revenue, given refundable deposits and cancellation risk.
- Available revolver capacity and covenant headroom under the May 2019 credit agreement, alongside the November 2019 convertible-note maturity and related cash needs.
- The scale, timing and funding of land commitments and inventory investment, and their effect on operating cash flow.
- Whether stated liquidity expectations remain supported by cash generation, borrowing availability and housing-market conditions.