Century Communities, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 13, 2014. Amounts below are in millions unless stated otherwise. Century Communities develops and sells single-family homes, primarily in Colorado, Texas, and—following its April acquisition—in Nevada.
Business context and material developments
- Acquired substantially all of Las Vegas Land Holdings (LVLH) assets on April 1 for approximately $165 million, adding 1,761 lots, five communities, and two golf courses. Purchase accounting remained preliminary; the recorded goodwill was $13.5 million.
- Issued $200 million of 6.875% senior notes due 2022, receiving approximately $193.3 million net proceeds, and repaid $99.2 million on the revolving loan. Completed its June IPO of 4.0 million shares at $23 per share, generating approximately $82.1 million net proceeds to the company.
- On August 12, after quarter-end, acquired substantially all operations and assets of Grand View Builders in Houston for approximately $14 million plus performance-based earnouts; valuation was still in process.
Financial performance and operating metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Home sales revenue | $77.3 | $41.3 | $127.0 | $66.0 |
| Homebuilding gross margin | $19.1; 24.7% | $10.7; 25.8% | $31.5; 24.8% | $16.9; 25.6% |
| Operating income | $8.2 | $6.4 | $13.6 | $9.3 |
| Income before tax | $8.0 | $6.5 | $13.2 | $9.6 |
| Net income | $5.3 | $3.9 | $8.7 | $6.9 |
| Basic and diluted EPS | $0.30 | $0.32 | $0.50 | $0.51 |
| Net cash used in operating activities | — | — | $52.1 | $45.0 |
- Q2 home deliveries rose 57% to 198; average selling price increased 19% to $390,545. Net orders rose 125% to 279. Quarter-end backlog was 394 homes valued at $167.8 million, versus 188 homes and $83.5 million a year earlier.
- For the six months, deliveries rose 59% to 326 and home sales revenue rose 92%. Reported EPS declined year over year, despite higher net income, amid a larger weighted-average share count. 2013 tax comparisons are also affected by the company’s April 2013 conversion to a taxable corporation.
- Q2 selling, general and administrative expense rose 164% to $11.3 million, including higher compensation and incentive costs, IPO-related compensation, commissions, and acquisition-related amortization. Acquisition expenses were $0.8 million for the six-month period.
- Homebuilding gross margin declined; management attributed the decrease in part to fair-value step-up costs on acquired LVLH homes. Excluding interest on home sales, adjusted gross margin, a non-GAAP measure, was 25.3% in Q2 versus 27.1% a year earlier.
Financial position, liquidity, and debt
- At June 30, cash and cash equivalents were $167.7 million; total assets were $612.8 million, inventories $383.9 million, total liabilities $249.6 million, and stockholders’ equity $363.2 million.
- Debt was $201.2 million, including $198.5 million carrying value of the senior notes. The $100 million revolving facility had no borrowings at quarter-end, with $0.8 million of letters of credit outstanding and $99.2 million stated availability; the facility terminated July 1. The company reported compliance with its covenants at June 30.
- Six-month cash flows included $165.4 million used in investing, primarily for LVLH, and $275.3 million provided by financing, primarily from the notes and IPO. Operating cash use reflected, among other items, a $58.1 million increase in inventories. Cash increased to $167.7 million from $110.0 million at year-end.
- Outstanding letters of credit and performance bonds totaled $23.0 million. The company had options on 4,392 lots totaling $127.3 million, supported by $3.4 million of non-refundable deposits.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management said land acquisition and development outlays may exceed operating cash generation as the company expands its lot supply. It described typical homebuilding seasonality: spring orders generally convert into more second-half deliveries, while construction outlays are often highest in the second and third quarters. Forward-looking risks include housing and mortgage-market conditions, land and capital availability, cost inflation, construction delays, regulation, competition, leverage, and staffing.
Ordinary-course claims, primarily construction-defect matters, were not expected by management to have a material adverse effect; the company records losses when considered probable and estimable. It reported no material changes to previously disclosed risk factors. Adoption of the new revenue standard was not expected to be assessed yet; the company said it could not determine the impact.
Important facts for investors to verify
- Final LVLH purchase accounting, including acquired inventory valuation and goodwill, and the effect of the acquisition on ongoing margins and results.
- Grand View Builders’ final purchase accounting, earnout terms, and post-acquisition performance.
- Ability to fund continued land investment and growth given operating cash outflows, lot-option commitments, and the termination of the revolving facility.
- Sustainability of order and backlog growth, home pricing, cancellation rates, and gross margins across the expanded markets.
- Debt service obligations under the 6.875% notes and the nature and timing of obligations secured by letters of credit and performance bonds.