LGI Homes, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. LGI Homes develops, builds, markets and sells new homes across eight states. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same periods in 2014. The company reported one homebuilding segment.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $158.8m | $106.4m | $279.5m | $182.3m |
| Net income | $14.0m | $9.0m | $21.7m | $13.6m |
| Diluted EPS | $0.66 | $0.43 | $0.97 | $0.65 |
| Gross margin | 26.8% | 26.7% | 26.5% | 26.3% |
| Adjusted gross margin* | 28.2% | 27.9% | 28.1% | 27.8% |
| Adjusted EBITDA* | $23.7m | $15.3m | $37.7m | $23.9m |
| Adjusted EBITDA margin* | 14.9% | 14.4% | 13.5% | 13.1% |
Operating growth. Q2 closings increased 28.9% to 853 homes; average selling price rose 15.8% to $186,197. For H1, closings increased 32.9% to 1,524 and average selling price rose 15.4% to $183,409. Management attributed revenue growth to more active communities, higher closings and average prices. Higher home prices supported gross margin, partly offset by construction, lot and carrying costs.
Balance sheet and cash flow. At June 30, cash was $49.7m, real estate inventory $407.1m, total assets $503.1m, total liabilities $298.1m, equity $205.1m and notes payable $239.9m. H1 operating cash flow was negative $1.8m, versus negative $67.5m a year earlier; investing cash use was $0.4m and financing cash inflow was $20.6m. Cash increased $18.4m from year-end. Inventory investment and working-capital movements remain important to cash generation.
Debt and liquidity. In May, LGI replaced its prior revolving facility with a $225m facility maturing in May 2018, with an option to request an increase to $300m subject to conditions. At quarter-end, $162.5m was drawn, $3.7m supported letters of credit and $58.8m remained available. The company also had $85m principal of 4.25% convertible notes due 2019, carried at $77.4m. Borrowings under the revolver bear interest at LIBOR plus 3.50%; management estimated a 100-basis-point rate increase would add about $1.6m of annual interest expense. All interest incurred in the periods shown was capitalized; cash interest paid in H1 was $4.6m. The company reported covenant compliance and stated it expected available resources to cover foreseeable needs for at least 12 months.
Material changes versus prior comparable periods
- Q2 revenue rose 49.3% and net income rose 54.7%; H1 revenue rose 53.3% and net income rose 59.0%.
- Active communities increased to 45 from 31 year over year. Owned and controlled lots totaled 22,192 at June 30, up from 19,883 at December 31, 2014.
- H1 net orders rose to 2,155 from 1,203; cancellation rate declined to 23.0% from 30.4%. Backlog reached 783 homes valued at $149.0m, versus 246 homes and $41.0m a year earlier.
- The Texas division contributed 58% of H1 home sales revenue, down from 70% in H1 2014, as other divisions expanded.
- H1 operating cash use improved substantially from the prior year, primarily reflecting differences in land and lot investment and deposits; it remained negative.
Outlook, risks, contingencies and unusual items
- The filing provides no specific full-year revenue, earnings or closing guidance. Management described its liquidity outlook as sufficient for foreseeable needs over at least 12 months.
- LGI formed a Northwest Division and contracted for finished lots in Seattle in June; it had no operations there at quarter-end. In July, it purchased finished lots and entitled land representing approximately 400 lots in Denver.
- Management cited housing demand and mortgage-rate sensitivity, seasonal patterns, land availability and cost, construction labor and materials costs, development delays, access to capital, competition, and successful expansion or integration of acquisitions among risks. Higher mortgage rates could impair buyer financing and demand.
- Land-option and purchase contracts covered 5,780 lots, with $7.5m in deposits and approximately $130.0m of remaining purchase commitments if completed. These arrangements expose the company to deposit losses and future funding needs; certain deposits are refundable under specified conditions.
- Letters of credit and performance and surety bonds totaled $17.3m. Management did not believe draws were likely to have a material effect. The filing also describes ordinary-course claims and environmental indemnities; no material effect or environmental reserve was reported.
- Warranty provision was $1.0m for H1, versus $0.4m in H1 2014; the quarter-end warranty reserve was $1.0m. H1 G&A included about $1.0m of additional annual performance-recognition and training-event costs.
- *Adjusted gross margin and adjusted EBITDA are non-GAAP measures; the company cautions they exclude items with economic or cash consequences and should not replace GAAP results or cash-flow analysis.
Important facts for investors to verify
- Whether closings, average selling prices, backlog conversion and cancellation rates remain strong, particularly as the company enters new markets.
- Whether gross-margin gains persist amid higher construction, lot and carrying costs, and whether warranty claims affect reserves.
- Cash conversion and funding needs as inventory and land commitments grow; assess the $130.0m of potential lot-purchase commitments alongside cash and revolver availability.
- Revolver covenant headroom, variable-rate debt exposure, and potential dilution or cash settlement associated with the convertible notes.
- Progress and costs in Seattle and Denver, and whether expansion and acquisition-related obligations develop as expected.