ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.
Business Overview
We are engaged in the design, construction and sale of new homes in the following markets:
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Central
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Southwest
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Southeast
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Florida
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Northwest
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Midwest
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Houston, TX
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Phoenix, AZ
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Atlanta, GA
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Tampa, FL
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Seattle, WA
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Minneapolis, MN
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Dallas/Ft. Worth, TX
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Tucson, AZ
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Charlotte, NC/SC
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Orlando, FL
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Portland, OR
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San Antonio, TX
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Albuquerque, NM
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Nashville, TN
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Fort Myers, FL
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Sacramento, CA
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Austin, TX
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Denver, CO
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Raleigh, NC
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Jacksonville, FL
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Oklahoma City, OK
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Colorado Springs, CO
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Winston-Salem, NC
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Birmingham, AL
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Our management team has been in the residential land development business since the mid-1990s. Since commencing home building operations in 2003, we have constructed and closed over
25,000
homes. During the
six months ended
June 30, 2018
, we had
3,059
home closings, compared to
2,272
home closings during the
six months ended
June 30, 2017
.
We sell homes under the LGI Homes and Terrata Homes brands. Our
79
active communities at
June 30, 2018
included
five
Terrata Homes communities.
Recent Developments
During June 2018, we closed on our first home in the Sacramento, California market.
On July 6, 2018, we completed an offering of
$300.0 million
aggregate principal amount of our
6.875%
Senior Notes due 2026 (the “Senior Notes”). We received net proceeds from the offering of the Senior Notes of approximately
$296.2 million
, after deducting the initial purchasers’ discounts and commissions and offering expenses. The net proceeds from the offering were used to repay a portion of the borrowings under the Credit Agreement.
On
August 2, 2018
, we acquired certain real estate assets owned by Wynn Homes and its affiliates for a purchase price of approximately
$80.0 million
, subject to certain post-closing adjustments. As a portion of the purchase price, we will issue to the owner of Wynn Homes, unregistered shares of our common stock, with the actual number of shares to be determined based on the lower of (i) the average stock price over a period of time prior to the acquisition or (ii) the average closing price of our common stock over a period of time occurring after the filing of this Quarterly Report on Form 10-Q.
Key Results
Key financial results as of and for the
three months ended
June 30, 2018
, as compared to the
three months ended
June 30, 2017
, were as follows:
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•
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Home sales revenues increased
29.5%
to
$419.8 million
from
$324.2 million
.
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•
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Homes closed increased
20.1%
to
1,815
homes from
1,511
homes.
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•
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Average sales price of our homes increased
7.8%
to
$231,321
from
$214,545
.
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•
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Gross margin as a percentage of home sales revenues decreased to
26.1%
from
26.6%
.
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•
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Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to
27.7%
from
28.0%
.
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•
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Net income before income taxes increased
28.8%
to
$62.7 million
from
$48.6 million
.
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•
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Net income increased
47.9%
to
$47.6 million
from
$32.2 million
.
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•
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EBITDA (non-GAAP) as a percentage of home sales revenues remained flat at
16.4%
.
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•
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Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues remained flat at
16.4%
.
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•
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Total owned and controlled lots increased
3.4%
to
46,855
lots at
June 30, 2018
from
45,321
lots at March 31, 2018.
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For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “
—Non-GAAP Measures
.”
Key financial results as of and for the
six months ended
June 30, 2018
, as compared to the
six months ended
June 30, 2017
, were as follows:
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•
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Home sales revenues increased
43.5%
to
$698.9 million
from
$487.1 million
.
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•
|
Homes closed increased
34.6%
to
3,059
homes from
2,272
homes.
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•
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Average sales price of our homes increased
6.6%
to
$228,464
from
$214,388
.
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•
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Gross margin as a percentage of home sales revenues decreased to
25.6%
from
26.7%
.
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•
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Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to
27.2%
from
28.0%
.
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•
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Net income before income taxes increased
43.4%
to
$93.9 million
from
$65.5 million
.
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•
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Net income increased
70.3%
to
$74.9 million
from
$44.0 million
.
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•
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EBITDA (non-GAAP) as a percentage of home sales revenues increased to
14.9%
from
14.7%
.
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•
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Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to
14.9%
from
14.7%
.
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•
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Total owned and controlled lots increased
18.0%
to
46,855
lots at
June 30, 2018
from
39,709
lots at
December 31, 2017
.
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For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “
—Non-GAAP Measures
.”
Results of Operations
The following table sets forth our results of operations for the periods indicated:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
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(dollars in thousands, except per share data and average home sales price)
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Statement of Income Data:
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Home sales revenues
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$
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419,847
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$
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324,178
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$
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698,871
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$
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487,089
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Expenses:
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Cost of sales
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310,082
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237,830
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519,847
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357,242
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Selling expenses
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29,301
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24,193
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52,250
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40,300
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General and administrative
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18,302
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13,680
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33,742
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24,945
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Operating income
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62,162
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48,475
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93,032
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64,602
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Other income, net
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(509
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)
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(167
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)
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(866
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)
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(882
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)
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Net income before income taxes
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62,671
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48,642
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93,898
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65,484
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Income tax provision
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15,063
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16,443
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18,988
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21,505
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Net income
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$
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47,608
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$
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32,199
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$
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74,910
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$
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43,979
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Basic earnings per share
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$
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2.11
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$
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1.49
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$
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3.34
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$
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2.05
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Diluted earnings per share
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$
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1.90
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$
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1.39
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$
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3.01
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$
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1.91
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Other Financial and Operating Data:
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Active communities at end of period
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79
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71
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79
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71
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Home closings
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1,815
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1,511
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3,059
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2,272
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Average sales price of homes closed
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$
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231,321
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$
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214,545
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$
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228,464
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$
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214,388
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Gross margin
(1)
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$
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109,765
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$
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86,348
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$
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179,024
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$
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129,847
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Gross margin %
(2)
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26.1
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%
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26.6
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%
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25.6
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%
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26.7
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%
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Adjusted gross margin
(3)
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$
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116,353
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$
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90,823
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$
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189,921
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$
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136,432
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Adjusted gross margin %
(2)(3)
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27.7
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%
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28.0
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%
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27.2
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%
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28.0
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%
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EBITDA
(4)
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$
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69,445
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$
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53,175
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$
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105,164
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$
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72,303
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EBITDA margin %
(2)(4)
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16.4
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%
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16.4
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%
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14.9
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%
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14.7
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%
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Adjusted EBITDA
(4)
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$
|
68,936
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$
|
53,145
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$
|
104,295
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$
|
71,593
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Adjusted EBITDA margin %
(2)(4)
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16.4
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%
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16.4
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%
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14.9
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%
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14.7
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%
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(1)
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Gross margin is home sales revenues less cost of sales.
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(2)
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Calculated as a percentage of home sales revenues.
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(3)
|
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “
—Non-GAAP Measures
” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
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(4)
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EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) other income, net and (vi) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items
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considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see “
—Non-GAAP Measures
” for a reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable.
Three Months Ended June 30,
2018
Compared to
Three Months Ended June 30,
2017
Homes Sales.
Our home sales revenues, closings, average sales price (ASP) and ending community count by division for the
three months ended
June 30, 2018
and
2017
were as follows (revenues in thousands):
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Three Months Ended June 30,
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2018
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2017
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Revenues
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Closings
|
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ASP
|
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Revenues
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Closings
|
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ASP
|
Central
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$
|
181,268
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|
850
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$
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213,256
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$
|
139,762
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|
679
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$
|
205,835
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Southwest
|
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73,030
|
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|
262
|
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278,740
|
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63,258
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|
|
248
|
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255,073
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Southeast
|
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60,369
|
|
|
298
|
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202,581
|
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51,487
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275
|
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187,225
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Florida
|
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55,018
|
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|
257
|
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214,078
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|
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48,974
|
|
|
245
|
|
|
199,894
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Northwest
|
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49,463
|
|
|
145
|
|
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341,124
|
|
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20,697
|
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|
64
|
|
|
323,391
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|
Midwest
|
|
699
|
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|
3
|
|
|
233,000
|
|
|
—
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—
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—
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Total home sales revenues
|
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$
|
419,847
|
|
|
1,815
|
|
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$
|
231,321
|
|
|
$
|
324,178
|
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|
1,511
|
|
|
$
|
214,545
|
|
|
|
|
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As of June 30,
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Community count
|
2018
|
|
2017
|
Central
|
29
|
|
|
25
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|
Southwest
|
14
|
|
|
16
|
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Southeast
|
17
|
|
|
14
|
|
Florida
|
12
|
|
|
12
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Northwest
|
5
|
|
|
4
|
|
Midwest
|
2
|
|
|
—
|
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Total community count
|
79
|
|
|
71
|
|
Home sales revenues for the
three months ended
June 30, 2018
were
$419.8 million
, an increase of
$95.7 million
, or
29.5%
, from
$324.2 million
for the
three months ended
June 30, 2017
. The increase in home sales revenues is primarily due to a
20.1%
increase in homes closed and an increase in the average sales price per home during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
. The increase in home closings was largely due to the increase in the number of active communities in the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
. The average sales price per home closed during the
three months ended
June 30, 2018
was
$231,321
, an increase of
$16,776
, or
7.8%
, from the average sales price per home of
$214,545
for the
three months ended
June 30, 2017
. The increase in the average sales price per home is primarily due to changes in product mix, price points in new markets and a favorable pricing environment. We increased our home sales revenues in our Central division by
$41.5 million
, or
29.7%
of home sales revenues, during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
, representing a
25.2%
increase in the number of homes closed in this division during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
. We increased our home sales revenues outside of the Central division by
$54.2 million
, or 29.4% of home sales revenues, during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
, representing a
16.0%
increase in the number of homes closed in these divisions during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
. Our active selling communities at
June 30, 2018
increased to
79
from
71
at
June 30, 2017
.
Four
of the
eight
active selling communities added between
June 30, 2017
and
June 30, 2018
were outside of our Central division. All divisions added communities by expanding into new markets or deepening existing markets with the exception of the Southwest division, which had two fewer active communities due to close out or transition between certain of its active communities, and our Florida division, which maintained the same level of active communities for the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
.
Cost of Sales and Gross Margin (home sales revenues less cost of sales).
Cost of sales increased for the
three months ended
June 30, 2018
to
$310.1 million
, an increase of
$72.3 million
, or
30.4%
, from
$237.8 million
for the
three months ended
June 30, 2017
. This increase is primarily due to a
20.1%
increase in homes closed during the three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
, and, to a lesser degree, product mix and higher construction costs. Gross margin for the
three months ended
June 30, 2018
was
$109.8 million
, an increase of
$23.4 million
, or
27.1%
, from
$86.3 million
for the
three months ended
June 30, 2017
. Gross margin as a percentage of home sales revenues was
26.1%
for the
three months ended
June 30, 2018
and
26.6%
for the
three months ended
June 30, 2017
. This decrease in gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs and to a lesser extent due to
103
wholesale home closings during
the
three months ended
June 30, 2018
compared to
65
wholesale home closings during the
three months ended
June 30, 2017
, partially offset by higher average home sales prices.
Selling Expenses.
Selling expenses for the
three months ended
June 30, 2018
were
$29.3 million
, an increase of
$5.1 million
, or
21.1%
, from
$24.2 million
for the
three months ended
June 30, 2017
. Sales commissions increased to
$16.3 million
for the
three months ended
June 30, 2018
from
$12.6 million
for the
three months ended
June 30, 2017
, primarily due to a
29.5%
increase in home sales revenues during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
. Selling expenses as a percentage of home sales revenues were
7.0%
and
7.5%
for the
three months ended
June 30, 2018
and
2017
, respectively. The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues.
General and Administrative.
General and administrative expenses for the
three months ended
June 30, 2018
were
$18.3 million
, an increase of
$4.6 million
, or
33.8%
, from
$13.7 million
for the
three months ended
June 30, 2017
. The increase in general and administrative expenses as a percentage of home sales revenues is
4.4%
and
4.2%
for the
three months ended
June 30, 2018
and
2017
, respectively. The increases are primarily due to professional fees and additional compensation costs associated with an increase of active communities and home closings during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
.
Operating Income, Net Income before Taxes and Net Income.
Operating income for the
three months ended
June 30, 2018
was
$62.2 million
, an increase of
$13.7 million
, or
28.2%
, from
$48.5 million
for the
three months ended
June 30, 2017
. Net income before income taxes for the
three months ended
June 30, 2018
was
$62.7 million
, an increase of
$14.0 million
, or
28.8%
, from
$48.6 million
for the
three months ended
June 30, 2017
. The following divisions contributed to net income before income taxes during the
three months ended
June 30, 2018
: Central -
$34.2 million
or
54.6%
; Southwest -
$10.2 million
or
16.3%
; Florida -
$7.6 million
or
12.1%
; Southeast -
$7.6 million
or
12.1%
; and Northwest -
$5.8 million
or
9.2%
. Net income for the
three months ended
June 30, 2018
was
$47.6 million
, an increase of
$15.4 million
, or
47.9%
, from
$32.2 million
for the
three months ended
June 30, 2017
. The increases in operating income, net income before taxes and net income are primarily attributed to a
20.1%
increase in homes closed, the
7.8%
increase in average home sales price, a decrease in the effective tax rate, and operating leverage realized related to selling expenses during the
three months ended
June 30, 2018
as compared to the
three months ended
June 30, 2017
.
Six Months Ended June 30,
2018
Compared to
Six Months Ended June 30,
2017
Homes Sales.
Our home sales revenues, closings and average sales price (ASP) by division for the
six months ended
June 30, 2018
and
2017
were as follows (revenues in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
|
Revenues
|
|
Closings
|
|
ASP
|
|
Revenues
|
|
Closings
|
|
ASP
|
Central
|
|
$
|
288,766
|
|
|
1,371
|
|
|
$
|
210,624
|
|
|
$
|
204,680
|
|
|
994
|
|
|
$
|
205,915
|
|
Southwest
|
|
127,313
|
|
|
459
|
|
|
277,370
|
|
|
96,384
|
|
|
380
|
|
|
253,642
|
|
Southeast
|
|
105,477
|
|
|
527
|
|
|
200,146
|
|
|
79,334
|
|
|
426
|
|
|
186,230
|
|
Florida
|
|
97,461
|
|
|
466
|
|
|
209,144
|
|
|
73,174
|
|
|
368
|
|
|
198,842
|
|
Northwest
|
|
79,155
|
|
|
233
|
|
|
339,721
|
|
|
33,517
|
|
|
104
|
|
|
322,279
|
|
Midwest
|
|
699
|
|
|
3
|
|
|
233,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total home sales revenues
|
|
$
|
698,871
|
|
|
3,059
|
|
|
$
|
228,464
|
|
|
$
|
487,089
|
|
|
2,272
|
|
|
$
|
214,388
|
|
Home sales revenues for the
six months ended
June 30, 2018
were
$698.9 million
, an increase of
$211.8 million
, or
43.5%
, from
$487.1 million
for the
six months ended
June 30, 2017
. The increase in home sales revenues is primarily due to a
34.6%
increase in homes closed and an increase in the average sales price per home during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. This increase in home closings was largely due to the overall increase in the number of active communities in the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. The average sales price per home closed during the
six months ended
June 30, 2018
was
$228,464
, an increase of
$14,076
, or
6.6%
, from the average sales price per home of
$214,388
for the
six months ended
June 30, 2017
. This increase in the average sales price per home was primarily due to changes in product mix, higher price points in certain new markets and a favorable pricing environment. We increased our home sales revenues in our Central division by
$84.1 million
, or 41.1% of home sales revenues, during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
, representing a
37.9%
increase in the number of homes closed in this division during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. We increased our home sales revenues in our divisions other than our Central division by
$127.7 million
, or 45.2% of home sales revenues, during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
, representing
a
32.1%
increase in the number of homes closed in these divisions during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. Our active selling communities at
June 30, 2018
increased to
79
from
71
at
June 30, 2017
.
Four
of the
eight
active selling communities added between
June 30, 2017
and
June 30, 2018
were outside of our Central division, contributing to the further geographic diversification of our business. All divisions added communities by expanding into new markets or deepening existing markets with the exception of the Southwest division, which had two fewer active communities due to close out or transition between certain of its active communities, and our Florida division, which maintained the same level of active communities for the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
.
Cost of Sales and Gross Margin (home sales revenues less cost of sales).
Cost of sales increased for the
six months ended
June 30, 2018
to
$519.8 million
, an increase of
$162.6 million
, or
45.5%
, from
$357.2 million
for the
six months ended
June 30, 2017
. This increase is primarily due to a
34.6%
increase in homes closed during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
, and to a lesser degree, product mix. The increase in average cost of sales per home is primarily due to changes in construction costs associated with product mix and lot costs. Gross margin for the
six months ended
June 30, 2018
was
$179.0 million
, an increase of
$49.2 million
, or
37.9%
, from
$129.8 million
for the
six months ended
June 30, 2017
. Gross margin as a percentage of home sales revenues was
25.6%
for the
six months ended
June 30, 2018
and
26.7%
for the
six months ended
June 30, 2017
. This decrease in gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs and lot costs partially offset by higher average home sales price for the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
, and to a lesser extent due to
134
wholesale home closings during the
six months ended
June 30, 2018
compared to
72
wholesale home closings during the
six months ended
June 30, 2017
.
Selling Expenses.
Selling expenses for the
six months ended
June 30, 2018
were
$52.3 million
, an increase of
$12.0 million
, or
29.7%
, from
$40.3 million
for the
six months ended
June 30, 2017
. Sales commissions increased to
$27.4 million
for the
six months ended
June 30, 2018
from
$19.1 million
for the
six months ended
June 30, 2017
, largely due to a
43.5%
increase in home sales revenues during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. Selling expenses as a percentage of home sales revenues were
7.5%
and
8.3%
for the
six months ended
June 30, 2018
and
2017
, respectively. The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
.
General and Administrative.
General and administrative expenses for the
six months ended
June 30, 2018
were
$33.7 million
, an increase of
$8.8 million
, or
35.3%
, from
$24.9 million
for the
six months ended
June 30, 2017
. The increase in the amount of general and administrative expenses is primarily due to professional fees and additional compensation costs associated with an increase of active communities and home closings during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
. General and administrative expenses as a percentage of home sales revenues were
4.8%
and
5.1%
for the
six months ended
June 30, 2018
and
2017
, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues reflects leverage realized from the increase in home sales revenues during the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
.
Operating Income, Net Income before Income Taxes and Net Income.
Operating income for the
six months ended
June 30, 2018
was
$93.0 million
, an increase of
$28.4 million
, or
44.0%
, from
$64.6 million
for the
six months ended
June 30, 2017
. Net income before income taxes for the
six months ended
June 30, 2018
was
$93.9 million
, an increase of
$28.4 million
, or
43.4%
, from
$65.5 million
for the
six months ended
June 30, 2017
. The following divisions contributed to net income before income taxes during the
six months ended
June 30, 2018
: Central -
$50.0 million
or
53.3%
; Southwest -
$15.2 million
or
16.2%
; Florida -
$11.6 million
or
12.3%
; Southeast -
$11.9 million
or
12.7%
; and Northwest -
$8.9 million
or
9.4%
. Net income for the
six months ended
June 30, 2018
was
$74.9 million
, an increase of
$30.9 million
, or
70.3%
, from
$44.0 million
for the
six months ended
June 30, 2017
. The increases in operating income, net income before income taxes and net income are primarily attributed to a
34.6%
increase in homes closed, a higher average sales price, a decrease in the effective tax rate, and improved leverage realized during the
six months ended
June 30, 2018
as compared to
six months ended
June 30, 2017
.
Non-GAAP Measures
In addition to the results reported in accordance with U.S. GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition,
other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Home sales revenues
|
|
$
|
419,847
|
|
|
$
|
324,178
|
|
|
$
|
698,871
|
|
|
$
|
487,089
|
|
Cost of sales
|
|
310,082
|
|
|
237,830
|
|
|
519,847
|
|
|
357,242
|
|
Gross margin
|
|
109,765
|
|
|
86,348
|
|
|
179,024
|
|
|
129,847
|
|
Capitalized interest charged to cost of sales
|
|
6,588
|
|
|
4,338
|
|
|
10,900
|
|
|
6,413
|
|
Purchase accounting adjustments
(1)
|
|
—
|
|
|
137
|
|
|
(3
|
)
|
|
172
|
|
Adjusted gross margin
|
|
$
|
116,353
|
|
|
$
|
90,823
|
|
|
$
|
189,921
|
|
|
$
|
136,432
|
|
Gross margin %
(2)
|
|
26.1
|
%
|
|
26.6
|
%
|
|
25.6
|
%
|
|
26.7
|
%
|
Adjusted gross margin %
(2)
|
|
27.7
|
%
|
|
28.0
|
%
|
|
27.2
|
%
|
|
28.0
|
%
|
|
|
(1)
|
Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
|
|
|
(2)
|
Calculated as a percentage of home sales revenues.
|
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) other income, net and (vi) adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
(i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land;
(ii) they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
(iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements or improvements;
(iv) they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
(v) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and
(vi) other companies in our industry may calculate them differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, our EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA and adjusted EBITDA along with other comparative tools, together with
GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our EBITDA or adjusted EBITDA. EBITDA and adjusted EBITDA are not intended as alternatives to net income as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flows as a measure of liquidity. You should therefore not place undue reliance on our EBITDA or adjusted EBITDA calculated using these measures.
The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
|
$
|
47,608
|
|
|
$
|
32,199
|
|
|
$
|
74,910
|
|
|
$
|
43,979
|
|
Income taxes
|
|
15,063
|
|
|
16,443
|
|
|
18,988
|
|
|
21,505
|
|
Depreciation and amortization
|
|
186
|
|
|
195
|
|
|
366
|
|
|
406
|
|
Capitalized interest charged to cost of sales
|
|
6,588
|
|
|
4,338
|
|
|
10,900
|
|
|
6,413
|
|
EBITDA
|
|
69,445
|
|
|
53,175
|
|
|
105,164
|
|
|
72,303
|
|
Purchase accounting adjustments
(1)
|
|
—
|
|
|
137
|
|
|
(3
|
)
|
|
172
|
|
Other income, net
|
|
(509
|
)
|
|
(167
|
)
|
|
(866
|
)
|
|
(882
|
)
|
Adjusted EBITDA
|
|
$
|
68,936
|
|
|
$
|
53,145
|
|
|
$
|
104,295
|
|
|
$
|
71,593
|
|
EBITDA margin %
(2)
|
|
16.4
|
%
|
|
16.4
|
%
|
|
14.9
|
%
|
|
14.7
|
%
|
Adjusted EBITDA margin %
(2)
|
|
16.4
|
%
|
|
16.4
|
%
|
|
14.9
|
%
|
|
14.7
|
%
|
|
|
(1)
|
Adjustments result from the application of purchase accounting related to prior acquisitions and represent the amount of the fair value step-up adjustments for real estate inventory included in cost of sales.
|
|
|
(2)
|
Calculated as a percentage of home sales revenues.
|
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (generally $1,000 or less). The deposits are refundable if the retail homebuyer is unable to obtain mortgage financing. We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed. Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings. Homes in backlog are generally closed within one to two months, although we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.
As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Backlog Data
|
|
Six Months Ended June 30,
|
2018
(4)
|
|
2017
(5)
|
Net orders
(1)
|
|
3,427
|
|
|
3,371
|
|
Cancellation rate
(2)
|
|
22.5
|
%
|
|
21.3
|
%
|
Ending backlog – homes
(3)
|
|
1,184
|
|
|
1,545
|
|
Ending backlog – value
(3)
|
|
$
|
296,904
|
|
|
$
|
352,543
|
|
|
|
(1)
|
Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.
|
|
|
(2)
|
Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.
|
|
|
(3)
|
Ending backlog consists of homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which the required deposit has been made. Ending backlog is valued at the contract amount.
|
|
|
(4)
|
41
units and values related to bulk sales agreements are not included in the table above.
|
|
|
(5)
|
59
units and values related to bulk sales agreements are not included in the table above.
|
Land Acquisition Policies and Development
We increased our active communities to
79
as of
June 30, 2018
from
78
as of
December 31, 2017
. We also increased our lot inventory to
46,855
owned or controlled lots as of
June 30, 2018
from
39,709
owned or controlled lots as of
December 31, 2017
.
The table below shows (i) home closings by division for the
six months ended
June 30, 2018
and (ii) our owned or controlled lots by division as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
As of June 30, 2018
|
Division
|
|
Home Closings
|
|
Owned
(1)
|
|
Controlled
|
|
Total
|
Central
|
|
1,371
|
|
|
13,656
|
|
|
10,190
|
|
|
23,846
|
|
Southwest
|
|
459
|
|
|
2,445
|
|
|
1,672
|
|
|
4,117
|
|
Southeast
|
|
527
|
|
|
5,010
|
|
|
7,535
|
|
|
12,545
|
|
Florida
|
|
466
|
|
|
2,034
|
|
|
1,566
|
|
|
3,600
|
|
Northwest
|
|
233
|
|
|
1,143
|
|
|
1,292
|
|
|
2,435
|
|
Midwest
|
|
3
|
|
|
271
|
|
|
41
|
|
|
312
|
|
Total
|
|
3,059
|
|
|
24,559
|
|
|
22,296
|
|
|
46,855
|
|
|
|
(1)
|
Of the
24,559
owned lots as of
June 30, 2018
,
14,823
were raw/under development lots and
9,736
were finished lots.
|
Homes in Inventory
When entering a new community, we build a sufficient number of move-in ready homes to meet our budgets. We base future home starts on closings. As homes are closed, we start more homes to maintain our inventory. As of
June 30, 2018
, we had a total of
1,522
completed homes, including information centers, and
1,781
homes in progress.
Raw Materials and Labor
When constructing homes, we use various materials and components. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Typically, the raw materials and most of the components used in our business are readily available in the United States. In addition, the majority of our raw materials is supplied to us by our subcontractors, and is included in the price of our contract with such subcontractors. Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers. Substantially all of our construction work is done by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply
markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber.
Seasonality
In all of our regions, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters of the year. Thus, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenue and capital requirements are generally similar across our second, third and fourth quarters.
As a result of seasonal activity, our quarterly results of operation and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of
June 30, 2018
, we had
$48.9 million
of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.
Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of a business combination.
We generally rely on our ability to finance our operations by generating operating cash flows, borrowing under our revolving credit facility or the issuance and sale of shares of our common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We also rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects.
Under our
$300.0 million
shelf registration statement on Form S-3, which was declared effective in August 2015, we have the ability to access the debt and equity capital markets as needed as part of our ongoing financing strategy. At
June 30, 2018
, we have used approximately $55.0 million of the securities registered under the shelf registration statement. We currently intend to renew our shelf registration statement prior to its expiration in August 2018.
We believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from our revolving credit facility or through accessing debt or equity capital, as needed.
Revolving Credit Facility
On May 25, 2018, we entered into that certain Third Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent, which was amended as of June 19, 2018 by that certain First Amendment thereto (the “First Amendment”; such credit agreement, as amended by the First Amendment, the “Credit Agreement”). The Credit Agreement has substantially similar terms and provisions to our second amended and restated credit agreement entered into in May 2017 with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2017 Credit Agreement”) but, among other things, provides for an increase of the revolving credit facility from $600.0 million to
$750.0 million
(which was reduced in July 2018 upon issuance of the Senior Notes (as defined herein) to $450.0 million), which could be increased at our request by up to $50.0 million if the lenders make additional commitments, subject to the terms and conditions of the Credit Agreement.
The Credit Agreement matures on May 31, 2021. Before each anniversary of the closing of the Credit Agreement, we may request a one-year extension of the maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or greater than
$0.5 million
. The revolving credit facility is currently unsecured, but we have agreed to provide collateral if we fail to meet certain financial conditions in the future. As of
June 30, 2018
, the borrowing base under the Credit Agreement was
$677.4 million
, of which borrowings of
$495.0 million
were outstanding,
$10.1 million
of letters of credit were outstanding and the remaining
$172.3 million
was available to borrow.
The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $400.0 million plus 75% of the net proceeds of all equity issuances plus 50% of the amount of our positive net income in any fiscal quarter after December 31, 2017, (ii) a leverage ratio of not greater than 64.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.00. The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At
June 30, 2018
, we were in compliance with all of the covenants contained in the Credit Agreement.
Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026 (the “Senior Notes”) in an offering to persons reasonably believed to be qualified institutional buyers in the United States
pursu
ant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019 and maturing on July 15, 2026. Terms of the Senior Notes are governed by an indenture, dated July 6, 2018, among us, our subsidiaries that guarantee our obligations under our revolving credit facility (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee.
We received net proceeds from the offering of the Senior Notes of approximately
$296.2 million
, after deducting the initial purchasers’ discounts and commissions and offering expenses. The net proceeds from the offering were used to repay a portion of the borrowings under the Credit Agreement. The impact of the offering of the Senior Notes will be recorded in the third quarter of 2018.
In connection with the issuance of the Senior Notes, we reduced the revolving commitment under the Credit Agreement from $750.0 million to $450.0 million pursuant to the First Amendment. We expect to record approximately $3.1 million in debt extinguishment costs related to the Credit Agreement during the third quarter of 2018.
Convertible Notes
In November 2014, we issued
$85.0 million
aggregate principal amount of our
4.25%
Convertible Notes due 2019 (the “Convertible Notes”) pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act. The Convertible Notes mature on November 15, 2019 and bear interest at a rate of
4.25%
, payable semi-annually in arrears on May 15 and November 15 of each year.
Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events. On or after May 15, 2019, the holders of Convertible Notes can convert their Convertible Notes at any time at their option. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and belief that we have the ability, to settle in cash the conversion of any Convertible Notes that the holders elect to convert. The initial conversion rate of the Convertible Notes is
46.4792
shares of our common stock for each
$1,000
principal amount of Convertible Notes, which represents an initial conversion price of approximately
$21.52
per share of our common stock. The conversion rate is subject to adjustments upon the occurrence of certain specified events.
During the fourth quarter of 2017, we received notice from holders of
$15.0 million
principal amount of the Convertible Notes to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the issuance of
486,679
shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2 million loss on the extinguishment of debt and a cash payment of
$15.0 million
for the principal amount of such Convertible Notes. As of
June 30, 2018
, we have
$70.0 million
aggregate principal amount of Convertible Notes outstanding.
During the
second
quarter of
2018
, the Convertible Notes were convertible because the closing sale price of our common stock was greater than 130% of the
$21.52
conversion price on at least 20 trading days during the 30 trading day period ending on March 31, 2018. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of April 1, 2018 through June 30, 2018 (inclusive). The Convertible Notes continue to be convertible during the third quarter of 2018. As of the date of the filing of this Quarterly Report on Form 10-Q, no other conversion notices have been received by us.
On July 6, 2018, concurrently with the offering of the Senior Notes, we entered into that certain First Supplemental Indenture, dated as of July 6, 2018, among us, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee, which supplements the indenture governing the Convertible Notes, pursuant to which (i) the subordination provisions in the indenture governing the Convertible Notes were eliminated, (ii) each Subsidiary Guarantor agreed (A) to, concurrently with the issuance of the Senior Notes, fully and unconditionally guarantee the Convertible Notes to the same extent that such Subsidiary Guarantor is guaranteeing the Senior Notes and (B) that such Subsidiary Guarantor’s guarantee of the Convertible Notes ranks equally with such Subsidiary Guarantor’s guarantee of the Senior Notes and (iii) the Company agreed to not, directly or indirectly, incur any
indebtedness in the form of, or otherwise become liable in respect of, any notes or other debt securities issued pursuant to an indenture or note purchase agreement (including the Senior Notes) unless such indebtedness is equal with or contractually subordinated to the Convertible Notes in right of payment.
Letters of Credit, Surety Bonds and Financial Guarantees
We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts, development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit.
Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled
$60.7 million
as of
June 30, 2018
. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and surety bonds are not generally released until all development and construction activities are completed. We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of
June 30, 2018
will be drawn upon.
Cash Flows
Six Months Ended June 30,
2018
Compared to
Six Months Ended June 30,
2017
Net cash used in operating activities during the
six months ended
June 30, 2018
was
$95.7 million
as compared to
$67.7 million
during the
six months ended
June 30, 2017
. The
$28.0 million
increase in net cash used in operating activities was primarily attributable to cash outlays for the
$26.8 million
increase in the net change in real estate inventory year-over-year, which was primarily related to our increased community count, additional homes under construction and land acquisitions, and to the
$60.3 million
decrease in accounts payable, accrued expenses and other liabilities, which was primarily related to payment of income taxes. Year-over-year change in net cash provided by working capital items were a
$30.0 million
decrease in accounts receivable, and a
$3.9 million
decrease in other assets, offset by a
$7.9 million
increase in cash paid for pre-acquisition costs and deposits year-over-year. The increase in cash used in operating activities reflects our continued growth and, to a lesser extent, the timing of home sales and homebuilding activities.
Net cash used in investing activities was
$0.4 million
and
$0.3 million
during the
six months ended
June 30, 2018
and
2017
, respectively, and reflects the purchase of property and equipment.
Net cash provided by financing activities totaled
$77.4 million
during the
six months ended
June 30, 2018
, as compared to
$45.8 million
during the
six months ended
June 30, 2017
. The
$31.6 million
increase in net cash provided by financing activities in the
six months ended
June 30, 2018
as compared to the
six months ended
June 30, 2017
consists primarily of the
$35.0 million
increase in net borrowings under our revolving credit facility, offset by the
$4.1 million
decrease in net proceeds realized from the issuance and sale of shares of our common stock.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development entitlements or the completion of development activities and the delivery of finished lots. We also utilize contracts with land sellers as a method of acquiring lots and land in staged takedowns, which helps us manage the financial and market risk associated with land holdings and minimize the use of funds from our corporate financing sources. Such contracts generally require a non-refundable deposit for the right to acquire land or lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller. In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract. As of
June 30, 2018
, we had
$27.9 million
of cash deposits pertaining to land purchase contracts for
22,296
lots with an aggregate purchase price of
$665.4 million
. Approximately
$12.7 million
of the cash deposits as of
June 30, 2018
are secured by third-party guarantees or indemnity mortgages on the related property.
Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing conditions and local market dynamics. Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.
Inflation
Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers.
Contractual Obligations
As of June 30, 2018, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of
Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in our
Annual Report on Form 10-K
for the fiscal year ended
December 31, 2017
. See
Item 5
. Other Information of Part II of this Quarterly Report on Form 10-Q for a discussion of certain contractual obligations under the asset purchase agreement for the Wynn Homes acquisition.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.
Revenue Recognition
Effective January 1, 2018, we adopted the FASB ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605,
“Revenue Recognition”
(“Topic 605”) and most industry-specific guidance. Topic 606 also supersedes certain cost guidance included in Subtopic 605-35,
“Revenue Recognition—Construction-Type and Production-Type Contracts.”
Topic 606’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. We adopted Topic 606 using the modified retrospective transition method only with respect to contracts not completed at the date of adoption. We have developed the additional expanded disclosures required; however, the adoption of Topic 606 did not have a material effect on our consolidated statements of operations, balance sheets or cash flows.
We recognize revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the following five-step process specified in Topic 606.
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Identify the contract(s) with a customer
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Identify the performance obligations
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Determine the transaction price
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Allocate the transaction price
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Recognize revenue when the performance obligations are met
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Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing.
Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses.
With exception of the aforementioned, we believe that there have been no significant changes to our critical accounting policies during the
six months ended
June 30, 2018
as compared to those disclosed in
Management
’
s Discussion and Analysis of Financial Condition and Results of Operations
included in our
Annual Report on Form 10-K
for the fiscal year ended
December 31, 2017
.
Cautionary Statement about Forward-Looking Statements
From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
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adverse economic changes either nationally or in the markets in which we operate, including, among other things, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
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a slowdown in the homebuilding industry;
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volatility and uncertainty in the credit markets and broader financial markets;
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the cyclical and seasonal nature of our business;
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our future operating results and financial condition;
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our business operations;
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changes in our business and investment strategy;
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the success of our operations in recently opened new markets and our ability to expand into additional new markets;
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our ability to successfully extend our business model to building homes with higher price points, developing larger communities and producing and selling multi-unit products, townhouses, wholesale products and acreage home sites;
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our ability to develop our projects successfully or within expected timeframes;
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our ability to identify potential acquisition targets and close such acquisitions;
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our ability to successfully integrate any acquisitions with our existing operations;
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availability of land to acquire and our ability to acquire such land on favorable terms or at all;
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availability, terms and deployment of capital;
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decisions of the lender group of our revolving credit facility;
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the occurrence of the specific conversion events that enable early conversion of our 4.25% Convertible Notes due 2019;
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decline in the market value of our land portfolio;
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disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets;
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shortages of or increased prices for labor, land or raw materials used in land development and housing construction;
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delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control;
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uninsured losses in excess of insurance limits;
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the cost and availability of insurance and surety bonds;
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changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations;
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the timing of receipt of regulatory approvals and the opening of projects;
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the degree and nature of our competition;
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increases in taxes or government fees;
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poor relations with the residents of our projects;
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existing and future litigation, arbitration or other claims;
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availability of qualified personnel and third-party contractors and subcontractors;
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information system interruptions or breaches in security;
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our ability to retain our key personnel;
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our leverage and future debt service obligations;
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the impact on our business of any future government shutdown;
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other risks and uncertainties inherent in our business;
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You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances
on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.