Century Communities, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; financial statements are unaudited. Century Communities develops, builds, markets, and sells single-family homes across six U.S. operating segments: Atlanta, Central Texas, Colorado, Houston, Nevada, and Utah.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $253.4 million | $182.7 million | $697.2 million | $528.2 million |
| Operating income | $19.4 million | $15.8 million | $50.3 million | $39.0 million |
| Net income | $13.3 million | $10.6 million | $34.5 million | $26.7 million |
| Diluted EPS | $0.63 | $0.50 | $1.62 | $1.26 |
| Homes delivered | 706 | 578 | 2,013 | 1,756 |
- Q3 total revenue rose 38.7% and net income rose 26.1% year over year. Nine-month revenue rose 32.0% and net income rose 28.9%.
- Home sales revenue increased 38.0% in Q3 and 31.8% for the nine months, reflecting more deliveries and higher average selling prices. Average price was $351,400 in Q3 and $341,000 year to date, up 13.0% and 14.9%, respectively.
- Homebuilding gross margin was 20.3% in Q3 versus 21.3% a year earlier, and 19.9% for the nine months versus 20.0%. Management attributed the decline mainly to higher interest included in cost of home sales. Its non-GAAP adjusted margin excluding interest and acquired-inventory purchase accounting was 22.5% in Q3 and 21.8% year to date.
- SG&A was $30.9 million in Q3, up 39.5%; as a share of home sales revenue it was 12.5% versus 12.3%. The filing cites higher commissions, compensation, legal and other operating costs.
- Operating cash flow was negative $61.4 million for the nine months, compared with negative $146.9 million in 2015. Investing cash flow was negative $5.0 million; financing provided $54.5 million. Cash and cash equivalents fell to $17.4 million from $29.3 million at year-end. Inventory increased to $873.6 million from $810.1 million.
- At September 30, total debt was $450.3 million: $252.8 million of 6.875% senior notes due 2022 and $190.0 million drawn on the revolving facility, plus $7.6 million of insurance premium notes. The revolver was expanded to $380 million and extended to October 2019 in August 2016. Net debt to net capital was 47.6%, versus 46.0% at year-end. The company reported compliance with all credit agreement covenants.
- Total assets were $1.00 billion and stockholders’ equity was $445.6 million. Cash plus cash held in escrow totaled $45.1 million; escrow cash is generally held for less than a few days.
Operating trends and changes
- Net new home contracts increased 31.7% in Q3 to 628 and 20.5% year to date to 2,291. Cancellation rates were approximately 21.6% for Q3 and 18.7% year to date, down from 23.0% and 21.0% in the comparable 2015 periods.
- Backlog grew to 992 homes valued at $380.9 million, up 9.7% in units and 17.2% in value year over year. Average backlog selling price was $384,000.
- Q3 deliveries and revenue growth were strongest in Colorado and Atlanta among the larger operations. Houston delivered fewer homes and reported pretax losses of $0.7 million in Q3 and $2.4 million year to date. Utah began contributing activity in 2016.
- Owned and controlled lots totaled 17,203, up 30.7% from December 2015; controlled lots rose to 8,163. Total assets increased 9.1%, primarily reflecting investment in Atlanta and Nevada and entry into Utah.
Outlook, risks, contingencies, and notable items
- The filing provides no specific earnings or revenue guidance. Management said it is actively acquiring and developing lots and expects related cash outlays may exceed cash generated by operations as the business expands.
- Key stated risks include housing-market weakness, mortgage-rate and credit-market volatility, land availability and cost, labor and material costs, construction or entitlement delays, regulatory changes, competition, leverage, and retention of qualified personnel. The company does not use interest-rate derivatives and notes that inflation may pressure costs and home affordability.
- Land purchase and option contracts covered 8,163 lots with a stated total contract amount of $351.6 million; associated non-refundable deposits were $5.8 million. Letters of credit and performance bonds totaled $66.0 million. These are contingent commitments, not equivalent to funded debt.
- Ordinary-course legal matters include construction-defect claims; management does not expect their resolution to materially affect the company. No material changes to previously reported risk factors were disclosed, and disclosure controls were assessed as effective.
- The company reduced its warranty reserve by $0.3 million in Q3 and $0.9 million year to date, reducing home-sale costs, based on favorable payment trends. A $0.3 million energy-credit item also reduced Q3 tax expense.
- After quarter-end, on November 1, 2016, the company acquired a 50% interest in WJH LLC, a homebuilder targeting first-time buyers in the Southeast, for $15 million. Each owner also contributed $3 million to the venture; the partner retains day-to-day operating responsibility.
Investor verification points
- Verify that stronger orders and backlog convert to closings, particularly given the reported cancellation rates and market exposure.
- Monitor homebuilding gross margins, including interest capitalization and the gap between reported and adjusted margins.
- Assess cash needs for land development and construction against negative operating cash flow, revolver availability, and covenant requirements.
- Review segment-level trends, especially Houston’s losses, and the progress and funding implications of expansion into Utah and the WJH joint venture.
- Track the planned disposition of the Rhodes Ranch golf course, classified as held for sale, and any changes in related assets, liabilities, or proceeds.