Century Communities, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Century Communities develops, builds and sells homes across 17 states through its Century Communities and Century Complete brands, and provides mortgage, title and insurance services.
Financial and operating results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $776.4 million | $620.0 million | $1,379.1 million | $1,153.0 million |
| Income before tax | $50.1 million | $20.8 million | $84.2 million | $43.8 million |
| Net income | $38.5 million | $15.5 million | $64.6 million | $32.6 million |
| Diluted EPS | $1.15 | $0.51 | $1.93 | $1.07 |
| Homes delivered | 2,480 | 1,967 | 4,344 | 3,630 |
| Homebuilding gross margin | 16.9% | 17.2% | 17.2% | 17.2% |
| Operating cash flow | — | $173.8 million | $(93.0) million |
Q2 revenue rose about 25% year over year and net income more than doubled; first-half revenue increased about 20% and net income about 98%. Q2 average delivered-home price was $301,400 versus $309,400 a year earlier; first-half average was $303,900 versus $311,800. Adjusted homebuilding gross margin, a non-GAAP measure excluding specified items, was 19.5% for Q2 and 19.8% for the first half, compared with 19.6% and 19.7%, respectively.
Net new home contracts increased 22% in Q2 and 25% in the first half. June 30 backlog was 2,778 homes, worth $962.8 million, up 7% in units and 23% in value year over year. Adjusted EBITDA was $74.0 million for Q2 and $125.8 million for the first half; these are non-GAAP measures.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $173.5 million and cash held in escrow was $46.6 million. Total assets were $2.55 billion and stockholders’ equity was $1.13 billion.
- Total debt was $1.10 billion, including $897.7 million of notes payable, $197.5 million outstanding under financial-services mortgage repurchase facilities, and no balance on the $640 million revolving credit facility. The revolver matures in April 2023; the company reported covenant compliance.
- Senior notes comprise $500 million principal at 6.75%, due 2027, and $400 million at 5.875%, due 2025. Homebuilding debt to net capital was 37.5% at June 30, versus 45.2% at December 31, 2019; it was 53.8% at June 30, 2019.
- First-half operating cash flow improved from a $93.0 million use to $173.8 million provided, aided by higher earnings and favorable working-capital changes, including a $138.0 million inventory decrease. Investing used $4.9 million; financing used $50.5 million. Cash and restricted cash totaled $177.0 million at period-end.
Material changes and unusual items
- Home sales and contracts rebounded sharply in May and June after weaker trends in mid-March and April. Management attributed stronger demand to historically low mortgage rates, limited supply and changing customer preferences.
- Financial Services revenue rose to $25.7 million in Q2 from $9.9 million, and pretax income rose to $13.0 million from $2.2 million, substantially contributing to consolidated growth.
- Q2 homebuilding gross margin declined to 16.9% from 17.2%, with impairment charges and increased incentives contributing. Inventory impairment and other charges were $0.9 million in Q2 and $1.7 million for the first half, including charges in Texas and Century Complete communities.
- Q2 SG&A included a $2.9 million pretax cumulative catch-up increase in stock-based compensation related to revised expected performance-share vesting. First-half restructuring costs were $1.6 million. The prior-year periods included a $10.8 million debt-extinguishment loss.
- Inventory was $1.90 billion, down from $2.00 billion at year-end. Owned and controlled lots totaled 34,832, down 11% from year-end; the company expected to perform on 50%–60% of outstanding purchase and option contracts over the following 12 months.
Outlook, risks and contingencies
The filing provides no numerical earnings or delivery guidance. Management said the pandemic had not materially adversely affected Q2 results and reported that the company could build and sell homes in all markets as of the filing date. It cautioned that demand and longer-term effects remained uncertain amid high unemployment, changing reopening restrictions, consumer confidence and credit availability. Management said cash, operating cash flow and available financing were expected to meet foreseeable liquidity needs, while noting future capital access was not assured.
- COVID-19 could weaken demand, increase cancellations and incentives, constrain labor or materials, delay construction, impair inventory, and reduce mortgage-origination revenue. The company had reduced workforce and costs, slowed land development and temporarily drew on its revolver before repaying those borrowings in Q2.
- Outstanding land purchase and option contracts covered 15,635 lots with an approximate $659.8 million purchase price; related non-refundable option deposits were $31.8 million.
- Letters of credit and performance bonds totaled $335.9 million. The company reported ordinary-course construction-defect and other claims, but did not expect their resolution to materially affect its financial condition, results or cash flows.
- Management identified housing cyclicality, unemployment, mortgage availability and rates, construction costs, land availability, leverage, and potential inventory impairments as material risks. It reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor items to verify
- Whether post-quarter demand, contracts, cancellations, pricing and backlog sustained the Q2 rebound as pandemic conditions evolved.
- Whether incentives, homebuilding margins, inventory valuations and land commitments changed materially after June 30.
- Cash conversion and liquidity, including revolver availability, mortgage repurchase-facility exposure, debt maturities and covenant compliance.
- How much of the reported earnings improvement reflects Financial Services performance and other potentially variable or unusual items.
- Potential costs or dilution from performance-based equity awards and the July 2020 amended executive employment agreements.