LGI Homes, Inc. — Q2 2020 Form 10-Q
Business and period: LGI Homes develops, builds and sells move-in-ready homes across U.S. markets under the LGI Homes and Terrata Homes brands. This unaudited report covers the three and six months ended June 30, 2020, compared with the same periods in 2019. Unless noted otherwise, amounts below are in millions of dollars.
Financial and operating results
- Q2 revenue and closings: Home sales revenue rose 4.3% to $481.6 million; 2,005 homes closed, up 3.1%. Average sales price increased 1.1% to $240,200. Revenue included $38.1 million of wholesale sales, representing 199 closings.
- Q2 profitability: Gross margin increased to $118.0 million, or 24.5% of revenue, from $111.3 million, or 24.1%. Operating income was $67.8 million, up 16.1%; net income was $55.6 million, up 20.8%. Diluted EPS was $2.21 versus $1.82.
- Six-month performance: Revenue increased 24.9% to $936.3 million, on 3,840 closings, up 21.1%; average sales price rose 3.2% to $243,836. Gross margin was $224.5 million (24.0%); operating income was $121.7 million, up 53.1%; net income was $98.5 million, up 52.9%. Diluted EPS was $3.88 versus $2.55.
- Expenses and tax: Q2 selling expense declined 11.6% to $30.0 million, while general and administrative expense increased 6.3% to $20.2 million. The six-month effective tax rate was 20.3%; the company cited a $3.5 million benefit from the retroactive extension of the energy-efficient homes credit, among other tax factors.
- Cash flow and liquidity: Operating cash flow was $146.1 million for the first half, compared with $18.9 million used in the prior-year period; the 2020 inflow included a $41.7 million inventory-related cash benefit. Investing used $1.7 million and financing used $133.6 million. Cash was $49.1 million at June 30, 2020, versus $38.3 million at year-end 2019.
- Debt and capital: Notes payable totaled $588.0 million, down from $690.6 million at year-end. The $650 million revolving facility had $282.9 million available to borrow under its borrowing base at June 30; $18.7 million of letters of credit were outstanding under the facility. The company reported compliance with its credit covenants. The $300 million senior notes carry a 6.875% rate and mature in 2026. First-half share repurchases were $31.3 million; $17.2 million remained authorized.
- Balance sheet and inventory: Total assets were $1.636 billion and total equity was $918.8 million at June 30. Real estate inventory was $1.458 billion, down from $1.500 billion at year-end; completed homes declined to $251.5 million from $325.5 million, while land, development and finished lots increased to $944.2 million from $912.7 million.
Changes, outlook and risks
- Q2 sales and closings were affected by COVID-19 restrictions, slower sales and more cancellations in March and April, and temporarily halted construction in certain markets. Construction resumed in April; sales pace and demand rebounded from May, according to management. Management cautioned that reduced starts during March and April may constrain completed-home availability and later closings.
- First-half net orders were 4,734, up from 4,196, but the cancellation rate increased to 21.8% from 17.8%. Ending backlog was 2,127 homes valued at $558.0 million, compared with 1,648 homes and $410.0 million a year earlier. Backlog is subject to cancellation and financing qualification.
- Active communities increased to 117 from 93 year over year. Owned or controlled lots declined to 44,307 from 48,062 at December 31, 2019, reflecting cash-management steps that included delaying or canceling land acquisitions. Management said it resumed land acquisitions, construction starts and higher marketing expenditures in May.
- Management stated it expected cash on hand, operating cash flow and credit-facility or capital-market access to fund current and foreseeable needs for at least 12 months, while emphasizing substantial uncertainty. No numerical full-year earnings or revenue guidance is provided in the filing.
- Key risks include further COVID-19 disruptions, unemployment and consumer confidence, mortgage availability and interest rates, subcontractor and material availability and costs, land values, construction delays, and access to capital. The company warned that prolonged disruption could weaken orders, closings, prices, cash generation and covenant compliance. A 100-basis-point increase in variable borrowing rates was estimated to add about $3.0 million in annual interest cost. LIBOR transition also remains under evaluation.
- Other items: the company amended its revolving credit agreement in April, extending 80% of commitments to May 2023 and easing the minimum EBITDA-to-interest covenant from 2.50x to 1.75x. Management said ordinary-course claims, environmental matters and outstanding bonds and letters of credit were not expected to have a material financial effect.
Important facts for investors to verify
- Whether the recovery in sales demand persists and whether elevated cancellations or mortgage-financing constraints affect backlog conversions.
- Whether lower starts and fewer controlled lots limit future closings, and how quickly land acquisitions and construction activity normalize.
- Cash generation quality: first-half operating cash flow benefited from inventory reductions; compare future cash flow with earnings and investment needs.
- Facility availability, borrowing-base capacity and covenant headroom under continued operating or market stress.
- How wholesale sales, product mix, pricing, lot costs and capitalized interest affect reported margins; management’s adjusted gross margin and EBITDA are non-GAAP measures and exclude items with economic costs.