Century Communities, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unless otherwise stated, amounts are in millions of dollars. Century develops, builds and sells single-family homes in Colorado, Texas, Nevada and Georgia, across five operating segments.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $182.7 | $92.0 | $528.2 | $221.5 |
| Operating income | $15.8 | $6.3 | $39.0 | $19.9 |
| Income before tax | $15.9 | $6.7 | $39.9 | $19.9 |
| Net income | $10.6 | $4.1 | $26.7 | $12.8 |
| Diluted EPS | $0.50 | $0.19 | $1.26 | $0.68 |
| Homebuilding gross margin | 21.3% | 21.9% | 20.0% | 23.6% |
| Adjusted EBITDA (non-GAAP) | $19.9 | $8.4 | $53.0 | $24.5 |
- Cash flow: Nine-month operating cash use was $146.9 million, versus $109.3 million a year earlier, principally reflecting a $156.5 million inventory cash outflow. Investing cash use was $2.7 million; financing provided $128.9 million. Cash declined $20.7 million to $12.8 million.
- Balance sheet and debt: September 30 total assets were $860.1 million, including $741.6 million of inventory; liabilities were $465.1 million and equity $394.9 million. Debt and revolver borrowings totaled $362.3 million, up from $229.6 million at year-end 2014. This included $257.8 million of 6.875% senior notes due 2022 and $100 million drawn on a $200 million revolving facility, amended in July 2015 and maturing October 2018.
- Liquidity: The company reported $12.8 million cash and stated it was compliant with all credit-agreement covenants, including a minimum-liquidity covenant of $25 million. The filing does not clarify the composition or calculation of covenant liquidity.
Changes versus the prior comparable periods
- Revenue and earnings rose substantially, alongside home deliveries: Q3 deliveries increased 124% to 578; nine-month deliveries increased 201% to 1,756. Net new contracts rose 93% in Q3 to 477 and 176% year to date to 1,901.
- Growth reflects acquisitions—Peachtree (Atlanta), Grand View (Houston) and LVLH (Nevada)—and more active communities, rather than solely organic growth. Selling communities rose to 97 from 49; owned and controlled lots increased 46% to 13,797.
- Average delivered home prices fell 11.6% in Q3 to $311,000 and 20.4% year to date to $296,700, primarily because newer, lower-priced markets contributed a larger share of deliveries. Backlog increased 91.5% to 904 homes, valued at $325.1 million, while its average price fell 10.7% to $359,700.
- Gross margin declined, particularly year to date. Management attributed pressure to market mix, increased capitalized interest flowing through cost of sales, and acquired work-in-process accounting. Adjusted homebuilding margin excluding interest and purchase accounting was 22.8% for Q3 (23.1% prior year) and 21.9% year to date (24.9% prior year).
- SG&A rose in dollars with the expanded business, but declined as a share of home sales revenue: 12.3% in Q3 versus 13.9%, and 12.7% year to date versus 14.2%.
Outlook, risks and unusual items
- No quantified earnings, revenue or delivery guidance is provided. Management expects land acquisition and development cash outlays to exceed cash generated from operations as it grows lot supply. It describes customary homebuilding seasonality, with orders typically strongest in spring and more deliveries and cash receipts in the second half.
- Key risks include housing-market and mortgage-rate changes, availability and cost of land, labor and materials, construction or approval delays, access to capital, leverage and debt service, regulation, and competition. The revolving facility has floating-rate exposure; the company reported no interest-rate derivatives.
- Material weaknesses in period-end financial reporting and information-technology controls remained under remediation. Planned actions include formalizing controls and procedures, adding experienced accounting staff, and strengthening review and oversight; management said remediation would require controls to operate for sufficient time.
- Letters of credit and performance bonds outstanding were $53.7 million, up from $34.0 million at year-end. Land contracts covered 5,038 lots totaling $122.4 million, with $4.2 million in nonrefundable deposits; options generally can be terminated by forfeiting deposits.
- Management said ordinary-course construction-defect litigation was not expected to have a material adverse effect. In Q3, it reduced the warranty reserve by $0.1 million and the Grand View earnout liability by $1.3 million, both benefiting reported results. The Tuscany golf course was sold for $4.0 million, including a $3.0 million secured note; another golf course was classified as held for sale under a $5.9 million put option.
Investor verification priorities
- Reconcile covenant liquidity with the $12.8 million cash balance and confirm available revolver capacity, borrowing conditions and compliance headroom.
- Assess cash conversion and funding needs: operating cash use, inventory growth, land commitments, deposits and planned development spending.
- Separate acquisition-driven growth from underlying market performance; track deliveries, contracts, cancellations, backlog conversion and segment margins.
- Review debt growth, floating-rate exposure, interest capitalized in inventory, and the impact of capitalized interest on future cost of sales.
- Track the control-remediation process and any future disclosure that the identified material weaknesses have been remediated.
- Verify the income-tax comparison: the financial statements report 2015 tax expense of $5.4 million for Q3 and $13.2 million year to date, versus $2.6 million and $7.1 million in 2014; one MD&A sentence appears to mismatch these period comparisons.