Century Communities, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company develops, builds and sells single-family homes across 12 states, through Century Communities and Wade Jurney Homes, and provides mortgage and title services. Results include recent acquisitions and are not directly comparable with prior periods on a same-business basis.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $531.9 | $291.8 | $933.7 | $520.1 |
| Income before tax | $46.5 | $23.1 | $69.6 | $35.2 |
| Net income | $33.2 | $14.8 | $53.2 | $23.6 |
| Diluted EPS | $1.10 | $0.66 | $1.77 | $1.06 |
| Homes delivered | 1,384 | 753 | 2,325 | 1,361 |
| Average delivered home price | $377,300 | $381,900 | $394,400 | $377,700 |
| Homebuilding gross margin | 18.2% | 18.7% | 18.6% | 19.0% |
- Q2 home sales revenue was $522.2 million; financial services revenue was $8.0 million. Home sales revenue for the six-month period was $917.0 million.
- Q2 net income increased 124% year over year; six-month net income increased 125%. Growth reflects expanded operations, including acquisitions.
- Reported homebuilding gross margin declined year over year. Management attributed the decrease primarily to purchase-accounting costs on acquired work-in-process inventory. Excluding interest and those purchase-accounting costs, the company reported non-GAAP adjusted gross margins of 22.3% for Q2 and 22.7% for the six-month period, versus 21.1% and 21.4%, respectively, in 2017.
- SG&A was $63.6 million in Q2, or 12.2% of home sales revenue, and $120.2 million for six months, or 13.1%. The company cited higher commissions, compensation and headcount, advertising, and costs supporting growth.
Cash flow, debt and liquidity
- Operating cash flow was negative $80.9 million for the first six months, versus negative $39.3 million in 2017. Inventory investment used $124.9 million of cash; management cited lot purchases and 4,924 homes under construction.
- Investing cash outflow was $35.2 million, including the WJH acquisition and property and equipment purchases. Financing provided $46.4 million, including net revolving-credit borrowings and equity issuance.
- At June 30, cash and cash equivalents were $19.5 million; cash held in escrow was $43.9 million. Cash, cash equivalents and restricted cash totaled $24.0 million for cash-flow reporting purposes.
- Total debt was $960.3 million, up from $824.6 million at December 31, 2017. This included $777.3 million of senior notes, $130.0 million drawn on the revolving facility, and $53.0 million in mortgage repurchase facilities. Debt-to-capital was 54.4%; reported net homebuilding debt to net capital was 51.2%, compared with 46.9% at year-end.
- The revolving facility was increased to $590 million; $130 million was drawn, leaving $460 million available. The company reported covenant compliance. Mortgage facilities had potential capacity of up to $75 million, with $53 million outstanding.
Material changes, outlook and risks
- On June 14, Century acquired the remaining 50% of Wade Jurney Homes (WJH) for $37.5 million, making it wholly owned. The transaction generated a $7.2 million gain from remeasuring the previously held interest. WJH contributed $25.2 million of revenue and a $0.2 million pretax loss from the acquisition date through quarter-end.
- Q2 net new home contracts rose 51.1% to 1,543; first-half contracts increased 47.6% to 2,921. Backlog at June 30 was 3,199 homes valued at $987.3 million, up 134.2% in units and 88.9% in value year over year. The filing attributes growth in part to acquisitions and greater community count.
- Management said it expects cash outlays for land purchases and development to continue exceeding cash generated by operations as the business expands. It believes cash on hand, operating cash flow, revolver availability and potential debt or equity financing will meet foreseeable needs. No quantified earnings or delivery guidance is provided.
- Key risks include housing-market and mortgage-rate volatility, higher land, labor and materials costs, construction delays, land availability, leverage and floating-rate exposure, and integration and realization of expected benefits from acquisitions. The company also disclosed $900.3 million of outstanding land purchase and option contracts for 19,288 lots, with $28.3 million of non-refundable option deposits; it anticipates performing on 60%–70% during 2018. Letters of credit and performance bonds totaled $191.1 million.
- Ordinary-course litigation is primarily construction-defect related; management does not expect the matters to have a material adverse effect. The warranty reserve was $10.3 million at quarter-end. The company adopted ASC 606 in 2018, with no material overall financial-statement impact. Disclosure controls were reported effective.
Important facts for investors to verify
- How much of contract, delivery and backlog growth reflects acquired operations versus organic demand, and whether backlog converts to closings as expected.
- Whether cash use from inventory growth and land commitments remains financeable, given low cash balances and increased debt.
- How margins develop as acquisition-related purchase-accounting costs roll off, and whether non-GAAP adjusted margins are comparable to reported results.
- Whether WJH integration delivers the expected growth and ancillary mortgage/title benefits, while accounting for the quarter’s one-time remeasurement gain.
- Current availability and terms under credit and mortgage facilities, covenant headroom, floating-rate exposure, and the potential dilution from the $100 million at-the-market equity program.