LGI Homes(LGIH) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) Presents LGI Homes' unaudited consolidated financial statements, detailing increased inventory, notes payable, mixed revenue and net income, and negative operating cash flow Consolidated Balance Sheets Total assets increased to $2.87 billion driven by real estate inventory, while liabilities grew to $1.36 billion due to notes payable, and equity rose to $1.51 billion Consolidated Balance Sheet Highlights | Account | June 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $42.0M | $50.5M | ($8.5M) | | Real estate inventory | $2,633.7M | $2,085.9M | $547.8M | | Total Assets | $2,873.4M | $2,351.9M | $521.5M | | Liabilities & Equity | | | | | Notes payable | $1,155.5M | $805.2M | $350.2M | | Total Liabilities | $1,359.4M | $956.0M | $403.4M | | Total Equity | $1,513.9M | $1,395.8M | $118.1M | Consolidated Statements of Operations Q2 2022 home sales revenues decreased 8.6% while net income increased 4.4%, contrasting with a 15.2% revenue decline and 7.2% net income decrease for the six-month period Quarterly Performance (Three Months Ended June 30) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Home sales revenues | $723.1M | $791.5M | -8.6% | | Operating income | $159.0M | $146.0M | +8.9% | | Net income | $123.4M | $118.1M | +4.4% | | Diluted EPS | $5.20 | $4.71 | +10.4% | Year-to-Date Performance (Six Months Ended June 30) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Home sales revenues | $1,269.1M | $1,497.5M | -15.2% | | Operating income | $254.7M | $268.5M | -5.1% | | Net income | $202.1M | $217.8M | -7.2% | | Diluted EPS | $8.43 | $8.66 | -2.7% | Consolidated Statements of Equity Total equity increased to $1.51 billion by June 30, 2022, driven by $202.1 million in net income, partially offset by $95.1 million in stock repurchases - For the six months ended June 30, 2022, total equity increased by $118.1 million, reflecting net income of $202.1 million, offset by stock repurchases totaling $95.1 million ($57.7M in Q1 and $37.4M in Q2)[18] Consolidated Statements of Cash Flows Net cash used in operating activities was $263.3 million for H1 2022 due to inventory investment, offset by $257.2 million from financing activities, resulting in cash and cash equivalents of $42.0 million Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | ($263.3M) | $139.9M | | Net cash used in investing activities | ($2.5M) | ($29.8M) | | Net cash from (used in) financing activities | $257.2M | ($34.3M) | | Net (decrease) increase in cash | ($8.5M) | $75.8M | | Cash at end of period | $42.0M | $111.7M | Notes to the Consolidated Financial Statements Notes detail accounting policies, $2.63 billion in real estate inventory, a $1.1 billion credit facility amendment, increased stock repurchase program to $550 million, and segment-level data - Real estate inventory increased to $2.63 billion as of June 30, 2022, up from $2.09 billion at the end of 2021, with homes in progress seeing a significant jump from $449.7 million to $684.4 million[31] - On April 29, 2022, the company amended its credit agreement, increasing commitments by $250.0 million to a total of $1.1 billion and replacing LIBOR with SOFR as the benchmark interest rate[39] - In February 2022, the Board of Directors increased the stock repurchase program authorization by $200.0 million, bringing the total to $550.0 million As of June 30, 2022, $211.5 million remained available for repurchases[52] Segment Revenues | Segment | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Central | $316.7M | $348.0M | $579.0M | $636.7M | | Southeast | $117.6M | $159.7M | $190.0M | $296.3M | | Northwest | $70.8M | $106.2M | $173.7M | $224.4M | | West | $124.0M | $80.8M | $179.5M | $162.0M | | Florida | $94.1M | $96.8M | $146.9M | $178.1M | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2022 market headwinds from rising mortgage rates, impacting demand and cancellations, while highlighting increased ASP and gross margins, and outlining strategic responses and liquidity position Business Overview and Key Results The housing market faced Q2 2022 headwinds from rising mortgage rates, leading to decreased home closings but increased average sales prices and expanded gross margins, prompting strategic adjustments - In Q2 2022, a rapid increase in mortgage interest rates led to decreased demand and a higher than normal cancellation rate as potential homebuyers paused or reconsidered purchases[85] - The company's strategy to combat market headwinds includes increasing targeted advertising and slowing the pace of new home starts to match current absorption levels[86] Key Results - Q2 2022 vs Q2 2021 | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Home Sales Revenues | $723.1M | $791.5M | -8.6% | | Homes Closed | 2,027 | 2,856 | -29.0% | | Average Sales Price | $356,719 | $277,140 | +28.7% | | Gross Margin % | 32.0% | 27.0% | +500 bps | | Net Income | $123.4M | $118.1M | +4.4% | Key Results - H1 2022 vs H1 2021 | Metric | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Home Sales Revenues | $1.3B | $1.5B | -15.2% | | Homes Closed | 3,626 | 5,417 | -33.1% | | Average Sales Price | $350,005 | $276,438 | +26.6% | | Gross Margin % | 30.7% | 27.0% | +370 bps | | Net Income | $202.1M | $217.8M | -7.2% | Results of Operations Q2 2022 saw an 8.6% revenue decline due to fewer closings, offset by a 28.7% ASP increase and improved gross margin to 32.0%, while H1 2022 revenue fell 15.2% with G&A expenses rising - The increase in gross margin percentage for both Q2 and H1 2022 was primarily due to raising home prices higher than the increases in input costs[101][116] - General and administrative expenses increased 25.0% in Q2 and 19.5% in H1 2022 compared to the prior year, mainly due to increased personnel costs and professional fees[103][118] - Wholesale home sales revenues decreased significantly, from $94.7 million (430 homes) in Q2 2021 to $36.9 million (146 homes) in Q2 2022, due to a strategic prioritization of retail sales and cost volatility[99] Non-GAAP Measures The company presents non-GAAP Adjusted Gross Margin and EBITDA, with Adjusted Gross Margin reaching 33.1% in Q2 2022 and 31.9% in H1 2022, reflecting core operating performance Adjusted Gross Margin Reconciliation | | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Gross margin | $231.4M | $214.1M | $389.8M | $404.0M | | Capitalized interest | $5.7M | $10.4M | $10.2M | $21.1M | | Purchase accounting | $2.0M | $1.4M | $4.3M | $2.3M | | Adjusted gross margin | $239.1M | $226.0M | $404.3M | $427.4M | | Adjusted gross margin % | 33.1% | 28.5% | 31.9% | 28.5% | Backlog As of June 30, 2022, backlog decreased 73.6% to 1,266 homes valued at $445.1 million, with the cancellation rate rising to 20.8% due to market shifts and strategic changes Backlog and Cancellation Data | Metric | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net orders | 2,837 | 7,254 | -61.0% | | Cancellation rate | 20.8% | 14.8% | +600 bps | | Ending backlog – homes | 1,266 | 4,801 | -73.6% | | Ending backlog – value | $445.1M | $1,434.4M | -68.9% | - The company modified its timing for entering sales contracts to later in the construction cycle to mitigate cost volatility, which contributed to the lower backlog[134] Liquidity and Capital Resources As of June 30, 2022, the company had $42.0 million in cash, relying on operating cash flow and its $1.1 billion credit facility, with $203.7 million available, and repurchased $95.1 million in stock - The company's credit facility was increased to $1.1 billion in April 2022 As of June 30, 2022, borrowings (including Senior Notes) were $1.2 billion against a borrowing base of $1.4 billion, with $203.7 million available[153][155] - Net cash used in operating activities was $263.3 million for H1 2022, primarily due to a $547.6 million increase in real estate inventory[161] - Net cash provided by financing activities was $257.2 million for H1 2022, driven by $371.2 million in borrowings, which offset $95.1 million in stock repurchases[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, impacting mortgage affordability and variable-rate debt costs, with a 100 bps rate increase potentially raising annual interest costs by $8.7 million - The company's main market risk is from interest rate fluctuations, which can impact both housing demand and its own financing costs[176] - As of June 30, 2022, a hypothetical 100 basis point increase in interest rates on the $868.6 million of variable rate debt would increase annual interest cost by approximately $8.7 million[179] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective[181] - There were no material changes to the company's internal control over financial reporting during the second quarter of 2022[185] PART II - OTHER INFORMATION Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K have occurred - There have been no material changes to the risk factors from the company's 2021 Form 10-K[186] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, the company repurchased 417,861 shares for $37.4 million under its $550 million stock repurchase program, with $211.5 million remaining available Share Repurchases for Q2 2022 | Period | Shares Purchased | Average Price Paid | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | April 2022 | 0 | $0.00 | $0 | | May 2022 | 177,761 | $95.63 | $17.0M | | June 2022 | 240,100 | $85.15 | $20.4M | | Total Q2 | 417,861 | $89.61 | $37.4M | - As of June 30, 2022, approximately $211.5 million remained available for purchase under the company's stock repurchase program[188] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and Inline XBRL data, and incorporates previously filed documents by reference - Exhibits filed include Sarbanes-Oxley certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents[191]