LGI Homes, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. LGI Homes develops, builds and sells entry-level, move-up and luxury homes across six U.S. operating segments. The interim financial statements are unaudited.
Financial and operating highlights
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Home sales revenue | $380.4 million | $365.9 million | $1,079.2 million | $853.0 million |
| Homes closed | 1,601 | 1,729 | 4,660 | 4,001 |
| Average sales price | $237,582 | $211,623 | $231,597 | $213,193 |
| Operating income | $51.7 million | $50.4 million | $144.7 million | $115.0 million |
| Net income before taxes | $49.0 million | $50.9 million | $142.9 million | $116.4 million |
| Net income | $37.7 million | $33.7 million | $112.6 million | $77.7 million |
| Diluted EPS | $1.52 | $1.40 | $4.57 | $3.32 |
| GAAP gross margin | 25.6% | 25.1% | 25.6% | 26.0% |
| Adjusted gross margin (non-GAAP) | 27.4% | 26.5% | 27.3% | 27.4% |
- Quarterly trends: Revenue rose 4.0% despite closings falling 7.4%, as average selling price increased 12.3%. Pretax income declined 3.7%, while net income rose 12.0%, primarily reflecting a lower effective tax rate. Q3 EBITDA margin was 14.6% versus 15.4%; adjusted EBITDA margin was 15.5% versus 15.3% (both non-GAAP).
- Nine-month trends: Revenue increased 26.5%, closings increased 16.5%, and average selling price rose 8.6%. Net income increased 45.0%. Gross margin declined 0.4 percentage points, which management attributed mainly to higher construction and lot costs and a greater number of wholesale closings. Nine-month EBITDA margin was 14.9% versus 15.1%; adjusted EBITDA margin was 15.1% versus 14.9% (non-GAAP).
- Cash flow: For the first nine months, operating cash flow was negative $102.0 million, compared with negative $72.2 million a year earlier; investing cash flow was negative $74.2 million, including the Wynn Homes acquisition; financing cash flow was positive $146.6 million. Cash declined to $38.0 million from $67.6 million at December 31, 2017.
- Balance sheet and liquidity: At September 30, total assets were $1,333.8 million, real estate inventory $1,188.0 million, notes payable $627.7 million, total liabilities $721.4 million and equity $612.4 million. Notes payable increased from $475.2 million at year-end. The company reported $99.8 million available under its credit agreement at September 30 and stated it complied with all covenants. On October 18, the revolving commitment increased from $450 million to $500 million.
Material developments, outlook and risks
- In August, the company acquired Wynn Homes assets for approximately $77.8 million—$73.8 million cash and $4.0 million in stock—adding about 200 homes under construction and more than 4,000 owned or controlled lots, and expanding its North Carolina presence. Purchase accounting remained preliminary; acquisition-related costs of approximately $0.8 million were expensed.
- In July, LGI issued $300 million of 6.875% senior notes due 2026 and used net proceeds of approximately $296.2 million to repay revolving-credit borrowings. A $3.1 million Q3 debt-extinguishment loss reflected previously capitalized credit-agreement costs. The company also had $70 million principal amount of 4.25% convertible notes due 2019; those notes were convertible during Q3 and Q4 under their terms.
- Owned and controlled lots increased 35.1% from December 31, 2017, to 53,647. Land purchase contracts covered 26,836 lots with potential purchase commitments of $778.3 million; deposits were $38.3 million. The company had $56.0 million of letters of credit, surety bonds and related obligations.
- Management said available cash, operating cash flows and financing sources were expected to meet current and foreseeable liquidity needs for at least 12 months. The filing provides no specific earnings or revenue guidance.
- Key disclosed risks include mortgage-rate increases and housing-market weakness, inflation and higher land, labor and construction costs, land-development delays, access to financing, leverage and debt service, and successful integration of acquisitions. Management said ordinary-course claims and regulatory matters were not expected to materially affect results. The IRS had begun a 2016 federal tax examination and Texas had notified the company of a 2015 franchise-tax examination; no proposed federal adjustments were reported as of quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher selling prices and expanded communities can sustain revenue growth if closings soften, and how market-level results develop.
- Whether gross margins stabilize amid rising land and construction costs; review GAAP results alongside the company’s non-GAAP adjusted margins and reconciliations.
- Cash needs for inventory growth and land commitments, and the company’s actual borrowing availability and covenant headroom under the expanded credit facility.
- Final Wynn Homes purchase-price allocation, integration results and the effect of convertible-note conversions or repayment on cash and share dilution.