LGI Homes, Inc. — Q1 2014 Form 10-Q
Business and period. Unaudited results cover the three months ended March 31, 2014. LGI Homes builds entry-level homes and operated in Texas, Arizona, Florida, Georgia and New Mexico. The company reported four operating divisions as one homebuilding segment. Comparisons with Q1 2013 require caution: 2014 includes the LGI/GTIS joint ventures consolidated after their acquisition in November 2013, while 2013 results are those of the predecessor. Management also provides pro forma comparisons that assume the acquisition occurred earlier.
Financial and operating performance
- Revenue and closings: Home sales revenue was $75.9 million, up 253.5% from $21.5 million reported in Q1 2013; total revenue was also $75.9 million versus $22.0 million. The company closed 485 homes versus 151 reported in 2013 (253 on a pro forma basis). Average selling price rose 10.0% to $156,535; versus the pro forma comparison, it increased 10.8%.
- Profit and margins: Gross margin was $19.5 million, or 25.7% of home sales, versus $5.7 million and 26.4% reported in 2013 (pro forma margin: 26.6%). Operating income was $7.1 million versus $2.4 million. Net income was $4.6 million, or $0.22 per diluted share, versus $2.5 million; pro forma net income was $3.5 million. Adjusted EBITDA, a non-GAAP measure, was $8.6 million, with an 11.3% margin, versus $2.6 million and 12.1% (pro forma margin: 10.3%). Adjusted gross margin was $20.9 million, or 27.5%, versus $5.8 million and 26.9%.
- Drivers and costs: Growth reflected higher closings, a higher average selling price, and expansion into Florida and the Southeast. Reported gross margin was pressured by higher construction and developed-lot costs and a $1.1 million purchase-accounting inventory step-up expense. Selling and administrative costs rose with the business; management cited approximately $1.2 million of additional accounting and professional fees in the historical comparison.
- Cash flow and liquidity: Operating cash outflow was $41.4 million versus $5.0 million in Q1 2013, principally reflecting investment in inventory and land deposits. Investing cash outflow was $0.3 million; financing provided $13.3 million, including $15.0 million of borrowings and $1.7 million of repayments. Cash fell to $25.7 million from $54.1 million at year-end. Real estate inventory was $177.5 million, up from $142.0 million.
- Debt: Notes payable were $48.8 million, up from $35.5 million at year-end. At March 31, the $50 million secured revolving facility was nearly fully drawn, with $1.2 million available under its borrowing base. Its stated rate had a 4.0% floor; all $599,000 of interest incurred in the quarter was capitalized, so no interest expense was reported in the income statement.
Changes, outlook and risks
- Expansion and pipeline: Active communities increased to 28 from 17 on a pro forma year-ago basis; owned and controlled lots totaled 17,028, up from 14,895 at December 31. Net orders were 619 versus 212, but the cancellation rate also rose to 29.5% from 22.9%. Ending backlog was 324 homes valued at $52.6 million, compared with 128 homes and $19.4 million.
- Management outlook: Management expects continued growth in existing markets, more price points and product lines, and expansion into new markets, citing favorable market demographics and economics. It expected 2014 land, development, construction and operating cash outlays to exceed cash generated from operations, but believed cash, operating flows and revolving credit availability could fund foreseeable needs for at least 12 months. The filing provides no numerical earnings or closing guidance. Results are seasonal; management says more closings generally occur in Q2–Q4.
- Subsequent financing: On April 28, 2014, the company replaced the prior facility with a $135 million senior secured revolving credit facility, potentially expandable to $200 million, maturing April 28, 2017. Availability depends on the borrowing base and the agreement includes financial and other covenants.
- Land and related-party item: At quarter-end, land deposits and option payments were $13.4 million and related contracts covered 8,776 lots with $137.9 million of potential purchase commitments; generally, the company could terminate by forfeiting deposits. On May 7, it agreed to buy approximately 1,980 acres in South Carolina from a Family Principal-owned entity for $13.65 million, with an additional estimated $2.0–$2.75 million reimbursement for development-contract costs, subject to closing conditions.
- Risks and contingencies: Risks include mortgage-rate and housing-market changes, inflation and higher land, labor and material costs, land availability, development delays, financing and borrowing-base constraints, expansion execution, and insurance or regulatory matters. The company reported $0.6 million of performance and surety bonds and unsecured environmental indemnities with no recorded reserve; management said ordinary-course claims and bond draws were not expected to have a material effect. No inventory impairment indicators were reported for the quarter.
Most important facts for investors to verify
- Assess underlying growth using the pro forma comparison, not only reported year-over-year growth, given the November 2013 joint-venture acquisition and consolidation.
- Track gross margin and construction/lot costs, including the remaining effects of purchase accounting; distinguish GAAP results from management’s non-GAAP adjusted measures.
- Monitor operating cash burn, inventory and land commitments against cash, borrowing-base availability, and the covenants of the new credit facility.
- Follow orders, cancellations and backlog conversion; deposits are minimal and generally refundable when buyers cannot obtain financing.
- Review execution and funding needs for geographic expansion and the South Carolina related-party land transaction.