Century Communities, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2016. Century Communities develops, builds, markets, and sells single-family attached and detached homes in Atlanta, Central Texas, Colorado, Houston, Nevada, and Utah. The company began Utah operations in May 2016, acquiring 47 finished lots in Salt Lake City. Financial amounts below are in millions unless noted.
Financial and operating performance
| Metric | Q2 2016 | Six months 2016 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $259.6 | $443.7 | Q2 $189.1; first half $345.5 |
| Home sales revenue | $257.2 | $438.3 | Q2 +37.7%; first half +28.5% |
| Operating income | $18.9 | $30.9 | Q2 $14.0; first half $23.2 |
| Income before tax | $19.1 | $31.5 | Q2 $14.4; first half $24.0 |
| Net income | $13.1 | $21.1 | Q2 +34.1%; first half +30.8% |
| Diluted EPS | $0.62 | $1.00 | Q2 $0.46; first half $0.76 |
| Homes delivered | 768 | 1,307 | Q2 +20.8%; first half +11.0% |
| Average delivered home price | $334,900 | $335,300 | Q2 +14.0%; first half +15.8% |
| Homebuilding gross margin | 19.2% | 19.6% | Q2 19.6%; first half 19.4% |
| Adjusted gross margin, excluding interest and acquired work-in-process accounting | 21.1% | 21.5% | Q2 21.3%; first half 21.4% |
- Demand and backlog: Net new contracts were 869 in Q2 (+21.0%) and 1,663 in the first half (+16.8%). June 30 backlog was 1,070 homes worth $406.7, up 6.5% in homes and 16.9% in value year over year. Selling communities increased 12.3% to 91. Cancellation rate was 17.6% for Q2 versus 18.6% in Q2 2015.
- Expenses and margins: Q2 SG&A rose 37.6% to $31.4, while remaining 12.2% of home sales revenue; first-half SG&A rose 29.3% to $56.6 and was 12.9% of home sales revenue versus 12.8%. Management attributed the higher costs mainly to compensation, commissions, advertising, and a larger community base. Reported Q2 gross margin fell 0.4 percentage points year over year; first-half margin increased 0.2 points.
- Cash flow: First-half operating cash use was $33.3 versus $72.2 in 2015, primarily reflecting lower inventory-related cash outflows ($49.8 versus $80.9). Investing used $3.9; financing provided $18.7. Cash declined $18.6 from year-end to $10.7.
- Balance sheet and debt: At June 30, assets were $971.1, inventories $869.7, liabilities $540.3, and equity $430.8. Debt and revolver borrowings totaled $412.9, including $252.4 of 6.875% senior notes due 2022 and $160.0 drawn on a $300.0 revolving facility maturing October 2018. The revolver bears a floating rate; the company reported compliance with all facility covenants.
Changes, outlook, and risks
- Revenue and earnings increased alongside higher home deliveries, higher average selling prices, and growth in active communities. Adjusted homebuilding gross margin was broadly stable year over year.
- Management said ongoing land acquisition and development may cause cash outlays to exceed operating cash generation as the business expands. The filing provides no numerical earnings or revenue guidance.
- Key exposures include housing-market and mortgage-rate conditions; availability and cost of land, labor, and materials; construction or approval delays; competition; and leverage and debt-service obligations. Floating-rate revolver borrowings expose the company to interest-rate changes; it reported no use of interest-rate derivatives.
- Land purchase and option contracts covered 5,161 lots with stated total value of $256.9; related non-refundable deposits were $3.6. Letters of credit and performance bonds totaled $53.4. Management stated ordinary-course litigation was not expected to have a material adverse effect.
- The company classified assets and liabilities for its Rhodes Ranch golf course as held for sale, believing disposition probable within one year. It also reduced the warranty reserve by $0.6 in the first half, lowering cost of home sales, based on favorable payment trends. Q2 tax expense included a $0.1 discrete charge related to restricted-stock vesting and a $0.6 benefit from energy credits for prior-year home deliveries.
Important facts for investors to verify
- Whether contract growth and the 1,070-home backlog convert to closings at expected prices and margins, particularly in Houston and the newly entered Utah market.
- Whether inventory investment and land development can be funded without materially increasing revolver borrowings; assess covenant headroom and the facility’s floating-rate exposure.
- Whether reported gross margins and the warranty reserve remain sustainable, including the effect of capitalized interest and reserve adjustments.
- Progress, timing, and potential proceeds from the Rhodes Ranch golf-course disposition, and any material development in construction-defect claims or contingent obligations.