Century Communities, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Century Communities develops, builds, and sells single-family homes across 17 states through its Century Communities and Century Complete brands. It also provides mortgage, title, and insurance services.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $794.4 million | $590.4 million | $2,173.4 million | $1,743.4 million |
| Net income | $49.8 million | $27.0 million | $114.3 million | $59.6 million |
| Diluted EPS | $1.48 | $0.87 | $3.41 | $1.95 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $315.8 million | $(149.0) million |
- Q3 home deliveries rose 20.7% to 2,283; average delivered-home price increased to $333,000 from $303,500. Nine-month deliveries rose 20.0% to 6,627.
- Homebuilding gross margin was 17.5% in Q3 versus 18.1%; for nine months it was 17.3% versus 17.5%. SG&A declined as a share of home sales revenue to 11.3% in Q3 from 12.7%.
- Financial Services revenue rose to $32.0 million in Q3 from $10.4 million, and segment pretax income increased to $17.5 million from $2.2 million. Management attributed the improvement principally to higher loan-sale volume.
- At September 30, cash and cash equivalents were $288.3 million, with $26.3 million held in escrow. Total debt was $1,069.3 million, including $895.9 million in notes payable and $173.4 million under mortgage repurchase facilities. The $640 million revolving credit line had no borrowings; the company reported covenant compliance.
- Net homebuilding debt to net capital, a non-GAAP measure, was 32.9%, versus 45.2% at year-end 2019 and 53.8% at September 30, 2019.
- Backlog increased 34.7% year over year to 3,699 homes, with a stated sales value of $1.309 billion. Net new contracts rose 56.6% in Q3 and 35.7% for the nine-month period.
Material changes and management commentary
Revenue and net income increased substantially year over year, supported by higher deliveries, pricing, and mortgage-related activity. Nine-month operating cash flow improved from use of cash to generation of cash; the filing attributes this primarily to higher earnings and favorable working-capital changes, including a $160.9 million inventory-related cash benefit. Cash increased to $288.3 million from $55.4 million at December 31, 2019.
Management reported that home sales rebounded after slowing in mid-March and April, with strong demand continuing through Q3. It cited historically low mortgage rates, limited supply, and buyer interest in suburban homes as supportive factors. The company increased land acquisition and development activity in Q3, ending with 44,963 owned or controlled lots, up 29.1% from June 30. It did not provide specific earnings or revenue guidance.
Risks, contingencies, and unusual items
- COVID-19’s duration and economic effects remain uncertain. Management highlighted risks to demand, employment, consumer confidence, mortgage availability, cancellations, and future inventory recoverability, while noting no material adverse effect on Q2 or Q3 results to date.
- Management cited building-cost pressure, particularly lumber, as a possible source of future margin pressure. Other identified risks include labor and material availability, land and construction costs, interest rates, and housing-market declines.
- The nine-month results included $1.7 million of inventory impairment and other charges and $1.6 million of restructuring costs. No inventory impairment was recorded in Q3. The prior-year nine-month period included a $10.8 million loss on debt extinguishment.
- Outstanding land purchase and option contracts covered 24,996 lots with an approximate purchase price of $999.4 million and $31.3 million of non-refundable option deposits. The company anticipated performing on 50%–60% of these contracts over the next 12 months, with remaining performance in later periods, if any.
- Letters of credit and performance bonds totaled $360.1 million. The company stated that ordinary-course litigation, primarily construction-defect matters, was not expected to have a material adverse effect.
Investor verification points
- Assess whether strong Q3 contract and backlog growth converts to deliveries and revenue, and whether demand persists amid COVID-19 and elevated unemployment.
- Track gross margins, especially lumber and other construction costs, and compare reported GAAP margins with management’s adjusted non-GAAP measures.
- Review the sustainability and working-capital components of operating cash flow, alongside the company’s expanded land commitments and planned development activity.
- Monitor debt, mortgage repurchase-facility exposure, covenant compliance, and the timing and cost of land-contract commitments.