Century Communities, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included below. The company develops, builds, markets and sells single-family attached and detached homes across six operating segments: Atlanta, Central Texas, Colorado, Houston, Nevada and Utah.
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $994.4 million | $734.5 million | +35.4% |
| Operating income | $71.9 million | $59.0 million | +21.8% |
| Net income | $49.5 million | $39.9 million | +24.2% |
| Diluted EPS | $2.33 | $1.88 | +23.9% |
| Homes delivered | 2,825 | 2,401 | +17.7% |
| Average delivered home price | $346,500 | $302,100 | +14.7% |
| Homebuilding gross margin | 19.7% | 20.2% | Down 0.5 percentage point |
| Adjusted gross margin, excluding interest and acquired work-in-process accounting | 21.7% | 21.9% | Down 0.2 percentage point |
| Adjusted EBITDA | $99.9 million | $77.8 million | +28.4% |
| Cash and cash equivalents, year-end | $29.5 million | $29.3 million | Nearly flat |
| Total debt, year-end | $454.1 million | $390.2 million | +$63.8 million |
Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside, not instead of, GAAP net income. Year-end inventories were $857.9 million (up from $810.1 million), and total assets were $1.01 billion. Net debt to net capital, the company’s non-GAAP leverage measure, was 46.1%, versus 46.0% a year earlier.
Cash flow: Cash used in operating activities was $45.8 million, compared with $162.7 million used in 2015, principally reflecting a smaller inventory-related cash outflow. Investing activities used $23.2 million, including $17.0 million invested in unconsolidated subsidiaries and higher property and equipment purchases. Financing activities provided $69.2 million. The company ended the year with $29.5 million of cash.
Liquidity and debt: Debt included $253.1 million of 6.875% senior notes due 2022, $195.0 million drawn on a $380 million revolving facility, and $6.0 million of insurance premium notes. The company reported $185.0 million of unused revolver capacity and potential additional capacity under the facility’s accordion provisions. It reported compliance with its credit agreement covenants at year-end. The revolving facility matures October 21, 2019 and bears floating-rate interest.
Fourth quarter 2016: Home sales revenue was $292.4 million, gross margin from home sales was $56.2 million, pretax income was $21.9 million, net income was $15.1 million and basic and diluted EPS was $0.71.
Material changes and operating trends
- Net new home contracts rose 21.4% to 2,860; year-end backlog grew 4.9% to 749 homes, with aggregate value up 11.7% to $302.8 million. The cancellation rate declined to 20% from 21%.
- Owned and controlled lots increased 39.0% to 18,296. The controlled share of the lot position rose to 52.7% from 31.6%, supporting the company’s stated use of options to manage land risk.
- Revenue growth reflected higher deliveries and average selling prices, with management citing moderate market improvement, stable employment and income growth, and low existing-home inventory.
- Segment results were uneven: Colorado generated $51.7 million of pretax income, Atlanta $31.1 million and Nevada $15.6 million. Houston’s pretax loss widened to $2.8 million; Utah, newly entered in 2016, reported a $0.7 million pretax loss.
- Gross margin declined mainly because higher debt balances increased interest included in home cost of sales. SG&A rose 39.1% to $122.2 million and increased to 12.5% of home sales revenue from 12.1%.
- The company entered Utah and Charlotte, North Carolina, and acquired a 50% interest in WJH LLC, a homebuilder targeting first-time buyers in the Southeast. It also formed Inspire Home Loans during the fourth quarter and continued title services in selected markets.
Outlook, risks and unusual items
Management provided no quantified earnings or delivery guidance. It said future results depend on local economies and could be hurt by lower employment or household incomes, reduced household formation, rising inventories, weaker affordability, higher mortgage rates or tighter lending standards. It described its strategy as pursuing returns on inventory while maintaining prudent leverage, broad product offerings, a land pipeline that includes option contracts, selective market expansion and cost control; it cautioned that the strategy’s success is not assured.
- Housing and geographic exposure: Homebuilding is cyclical, and operations are concentrated in a limited number of markets. Atlanta and Colorado represented 34.5% and 36.0% of revenue, respectively. Market downturns, competition, cancellations and price pressure could affect sales and margins.
- Land, construction and regulation: Land values and inventory may require write-downs; labor, material, utility and water shortages or cost increases, weather and geological events, permitting delays, environmental rules and development fees may raise costs or delay projects. No inventory impairment was recorded in 2016; four communities were tested.
- Debt and interest rates: Floating-rate borrowings expose the company to higher interest expense; the company said it did not hedge interest-rate fluctuations. Debt covenants, refinancing needs and access to capital may constrain growth or liquidity.
- Warranty, litigation and insurance: Construction-defect and warranty claims arise in the ordinary course. Management stated that outstanding ordinary-course litigation was not expected to have a material adverse effect. The warranty reserve was $2.5 million at year-end; the 2016 reserve included a $1.4 million reduction based on favorable payment experience.
- Expansion and mortgage operations: The WJH investment is jointly managed, and the company’s mortgage business is new. Management highlighted execution, underwriting, loan default and loan repurchase or indemnity risks associated with mortgage origination.
- Subsequent financing: On January 26, 2017, the company issued an additional $125 million of 6.875% senior notes due 2022 and reported net proceeds of approximately $125.4 million. This post-year-end issuance is not included in December 31, 2016 debt figures.
- Contingencies and governance: Outstanding land purchase and option contracts covered 9,633 lots with a stated total of $373.6 million and $10.5 million of non-refundable option deposits. The company also had $70.1 million of letters of credit and performance bonds. Co-CEOs Dale and Robert Francescon beneficially owned 23.3% of common stock at year-end, creating potential control and related-party conflicts described in the filing.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016. The independent auditor audited the financial statements but was not engaged to express an opinion on internal control effectiveness. No dividends were declared or paid in 2016 or 2015.
Important facts for investors to verify
- Whether contract growth and backlog convert into deliveries and cash receipts, particularly given the 20% cancellation rate and seasonal cash-flow pattern.
- Whether the expanded lot position, including the higher proportion of controlled lots, can be developed and sold profitably without materially increasing land exposure or inventory write-down risk.
- Whether margin pressure from capitalized interest, SG&A growth and Houston’s losses improves as the company expands.
- Current revolver availability, covenant headroom, floating-rate exposure and the impact of the January 2017 note issuance on leverage and debt service.
- Performance and capital requirements of the WJH investment, Utah and Charlotte expansion, and the newly formed mortgage operation.
- The assumptions supporting warranty accruals, land valuations, option deposits and the company’s conclusion that litigation and environmental matters are not expected to be material.