Century Communities, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are also summarized below. Amounts are in U.S. dollars.
Business context and reporting period
Century Communities develops, builds, markets, and sells single-family attached and detached homes across ten states. Its reportable segments are West, Mountain, Texas, Southeast, and Financial Services (mortgage and title services). Results include UCP from August 4, 2017 and Sundquist Homes from October 31, 2017.
Key financial and operating metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $1,423.8 million | $994.4 million | +43.2% |
| Income before taxes | $84.2 million | $73.1 million | +15.1% |
| Net income | $50.3 million | $49.5 million | +1.5% |
| Diluted EPS | $2.03 | $2.33 | -12.9% |
| Homebuilding gross margin | 17.9% | 19.7% | -1.8 percentage points |
| Homes delivered | 3,640 | 2,825 | +28.8% |
| Average delivered home price | $386,100 | $346,500 | +11.4% |
| Year-end backlog | 1,320 homes; $572.9 million | 749 homes; $302.8 million | Homes +76.2%; value +89.2% |
Adjusted homebuilding gross margin, excluding interest and acquisition inventory accounting, was 21.4% versus 21.7%. Adjusted EBITDA was $150.5 million versus $100.3 million, and adjusted diluted EPS was $2.87 versus $2.36; these are non-GAAP measures and should be considered alongside GAAP results. The GAAP net margin was approximately 3.5%, compared with approximately 5.0% in 2016.
Cash flow: Operating activities used $114.6 million, versus $45.8 million used in 2016; investing activities used $134.4 million, including $130.0 million net cash outflow for acquisitions; financing activities provided $308.5 million. Cash and cash equivalents ended the year at $88.8 million, with $37.7 million held in escrow.
Debt and liquidity: Total debt was $824.6 million, up from $454.1 million. It included $379.2 million of 6.875% notes due 2022, $394.7 million of 5.875% notes due 2025, and $48.3 million on mortgage repurchase facilities. The $400 million revolving credit facility had no borrowings outstanding. Net debt to net capital was 48.7%, versus 46.1%.
Material changes and fourth-quarter results
- UCP and Sundquist expanded the West Coast footprint and added communities and lots. Their included post-acquisition results contributed $220.1 million of revenue and 427 deliveries. The acquisitions also drove purchase-accounting charges and contributed to higher corporate costs.
- Annual revenue growth reflected higher deliveries and average prices, stronger net new home contracts (+33.4% to 3,814), and the acquired businesses. Selling communities rose to 119 from 89; owned and controlled lots increased 68.3% to 30,784.
- Despite higher revenue and pretax income, net income was nearly flat and diluted EPS fell, with the larger share base, increased expenses, and higher income tax expense among the relevant factors. SG&A rose 44.2% to $176.3 million, remaining 12.5% of home sales revenue.
- Fourth-quarter home sales revenue was $516.5 million, gross margin from home sales was $90.7 million, pretax income was $33.8 million, net income was $17.2 million, and diluted EPS was $0.60. In Q4 2016, the corresponding figures were $292.4 million, $56.2 million, $21.9 million, $15.1 million, and $0.71.
Outlook, commentary, risks, and unusual items
- Management described market conditions as moderately improved, citing stable employment and household income growth and low existing-home inventory. It said the company was positioned for growth but gave no specific revenue, earnings, or delivery guidance.
- Management expected approximately $10 million of annualized cost synergies from the UCP merger beginning in 2018, while cautioning that integration costs and timing could reduce or delay the benefits.
- Management identified affordability, mortgage rates and lending standards, local economic conditions, labor and material costs, land availability, development approvals, and weather or natural disasters as risks to sales, margins, and execution. The cancellation rate increased to 21% from 20%.
- Acquisition expenses were $9.9 million, and purchase-accounting adjustments for acquired work-in-process inventory were $15.6 million. The company recorded $0.8 million of inventory impairment charges across five communities.
- The Tax Cuts and Jobs Act resulted in a provisional $2.8 million reduction in deferred tax assets; the company said its tax accounting remained incomplete. The effective tax rate was 40.2%, versus 32.3% in 2016.
- Ordinary-course litigation, primarily construction-defect claims, was not expected by management to have a material adverse effect. The company reported compliance with its credit-facility covenants. The financial-statement auditor issued an unqualified opinion; management reported effective controls, but excluded UCP and Sundquist from its internal-control assessment.
Important facts for investors to verify
- How much of reported growth and backlog expansion reflects acquired operations, and how much reflects comparable organic performance.
- Whether the company converts the $572.9 million backlog into closings and cash, and how cancellations and incentives affect realized prices and margins.
- Whether operating cash flow improves after the $114.6 million annual use of cash, given continued land, development, and construction investment.
- Debt-service capacity and refinancing exposure, including the 2022 and 2025 note maturities, floating-rate exposure, and covenant headroom.
- Progress on UCP and Sundquist integration, realization of expected synergies, and final purchase-price and tax accounting.
- The effect of the lower gross margin, tax-law changes, and acquisition-related costs on sustainable GAAP earnings and per-share results.