Century Communities, Inc. — Q2 2017 Form 10-Q
Business context and period. Homebuilder operating across seven U.S. markets, with mortgage and title services. This unaudited report covers the three and six months ended June 30, 2017; dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $291.8 | $259.6 | $520.1 | $443.7 |
| Income before tax | $23.1 | $19.1 | $35.2 | $31.5 |
| Net income | $14.8 | $13.1 | $23.6 | $21.1 |
| Diluted EPS | $0.66 | $0.62 | $1.06 | $1.00 |
| Homes delivered | 753 | 768 | 1,361 | 1,307 |
| Average delivered home price | $381,900 | $334,900 | $377,700 | $335,300 |
| Homebuilding gross margin | 18.7% | 19.2% | 19.0% | 19.6% |
| Adjusted EBITDA (non-GAAP) | $31.6 | $25.5 | $50.8 | $42.5 |
- Home sales revenue was $287.6 million in Q2 and $514.0 million for the first half. Financial services contributed $1.7 million of revenue in its launch period.
- Cash and cash equivalents were $336.8 million at June 30, versus $29.5 million at year-end 2016. Operating cash flow was negative $39.9 million for the first half; financing activities provided $353.1 million.
- Total debt was $787.4 million, compared with $454.1 million at year-end; stockholders’ equity was $521.8 million. Net debt to net capital was 44.9%, versus 46.1% at year-end. No borrowings were outstanding on the $400 million revolving credit facility; $10.6 million was outstanding under the mortgage repurchase facility.
- Inventories were $927.0 million, including $586.6 million of homes under construction and $304.8 million of land and development. Total assets were $1.41 billion.
Material changes versus comparable periods
- Q2 revenue rose 12.4% and net income rose 12.9% year over year; first-half revenue rose 17.2% and net income rose 11.9%.
- Q2 deliveries declined 2.0%, while average selling price increased approximately 14.0%. First-half deliveries increased 4.1%, with average price up approximately 12.6%.
- Net new home contracts increased 17.5% in Q2 and 18.9% in the first half. Backlog grew 27.7% to 1,366 homes, representing $522.6 million in sales value.
- Reported homebuilding gross margin declined 0.5 percentage points in Q2 and 0.6 points for the first half. Management attributed the decrease primarily to higher interest costs included in cost of sales. Adjusted gross margin excluding interest and acquired-work-in-process accounting was 21.1% in Q2 versus 21.1%, and 21.4% for the first half versus 21.5%.
- Segment performance was mixed: Colorado and Nevada income before tax increased; Atlanta income declined with fewer deliveries; Houston remained loss-making. Charlotte began operations in 2017 and recorded a $0.6 million first-half pretax loss.
Outlook, risks, contingencies and unusual items
- Debt covenant: The May 2017 senior-note issuance resulted in a 1.58-to-1.0 leverage ratio at June 30, above the credit facility’s 1.50-to-1.0 limit. The company obtained a lender waiver effective until its compliance certificate for the quarter ending September 30, 2017 is due. Management expected the ratio to fall below the limit following the UCP merger; this was an expectation, not a completed outcome in this filing.
- UCP merger: The announced transaction provides $5.32 cash and 0.2309 Century share per UCP Class A share, with approximately 4.2 million Century shares expected to be issued. UCP shareholders approved the deal August 1; closing was expected August 4, 2017.
- Liquidity and land commitments: Management said land purchases and development may require cash outlays exceeding cash generated from operations as the business expands. Contracts covered 12,859 lots totaling $442.5 million, with $9.4 million in non-refundable deposits; the company anticipated completing 60%–70% of contracted purchases over the following 12 months. Letters of credit and performance bonds totaled $72.1 million.
- Operating risks: The filing identifies exposure to housing-market and home-price declines, mortgage-rate and credit-market volatility, rising land, labor and material costs, construction delays, regulatory changes, competition, warranty and construction-defect claims, leverage, and merger-integration risks. Ordinary-course litigation was not expected by management to have a material adverse effect; no material change to previously disclosed risk factors was reported.
- Other items: A $0.3 million warranty reserve reduction benefited first-half homebuilding costs. Adoption of stock-compensation guidance produced $1.0 million of excess tax benefits. The company reported effective disclosure controls and no changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the UCP merger closed as expected, the final consideration and share issuance, and its effect on leverage and covenant compliance.
- The status of the temporary leverage-covenant waiver and compliance with all credit-facility tests after the waiver period.
- Whether backlog converts to closings and cash receipts, particularly given the 18% Q2 cancellation rate and negative first-half operating cash flow.
- Whether gross margins stabilize as interest costs, construction costs and home prices change.
- The terms, timing and funding requirements of the $442.5 million lot-contract commitments and the availability of revolving credit under applicable covenants.