Century Communities, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company develops and sells single-family homes across 17 states through Century Communities and Wade Jurney Homes, and provides mortgage, title and insurance services. Comparisons are affected by the June 2018 acquisition of the remaining interest in Wade Jurney Homes (WJH).
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $620.0m | $531.9m | $1,153.0m | $933.7m |
| Income before tax | $20.8m | $46.5m | $43.8m | $69.6m |
| Net income | $15.5m | $33.2m | $32.6m | $53.2m |
| Diluted EPS | $0.51 | $1.10 | $1.07 | $1.77 |
| Homes delivered | 1,967 | 1,384 | 3,630 | 2,325 |
| Homebuilding gross margin | 17.2% | 18.2% | 17.2% | 18.6% |
Q2 revenue rose 16.6%, while net income declined 53.3%; six-month revenue increased 23.5%, while net income declined 38.7%. Higher deliveries and WJH contributed to revenue growth. Reported diluted EPS also includes a $10.8m loss on extinguishment of debt in 2019 and, in 2018, equity-method income from WJH and a gain associated with its acquisition. Adjusted diluted EPS, a non-GAAP measure, was $0.77 for Q2 and $1.38 for the first half, versus $1.21 and $1.98, respectively.
- Q2 home sales revenue was $608.6m. Average selling price was $309,400 versus $377,300 a year earlier; the comparison reflects the different contribution of WJH and product/geographic mix.
- Net new home contracts increased 41.4% to 2,182 in Q2 and 38.3% to 4,040 in the first half, primarily driven by WJH. At June 30, backlog was 2,591 homes valued at $784.2m, down 19.0% in units and 20.6% in value year over year.
- Homebuilding gross margin fell to 17.2%. Management cited geographic mix, cost pressure and higher incentives. Adjusted gross margin excluding interest and purchase accounting was 19.6% for Q2 and 19.7% for the first half, also lower year over year.
- Q2 selling, general and administrative expense increased 18.2% to $75.2m and was 12.4% of home sales revenue, compared with 12.2% a year earlier. First-half SG&A increased 20.0% to $144.2m.
Cash flow, balance sheet and debt
- Operating activities used $93.0m in cash in the first half, compared with $80.9m used in the prior-year period, as inventory investment and lower net income weighed on cash flow. Investing activities used $6.2m; financing activities provided $97.5m.
- At June 30, cash and cash equivalents were $31.7m, with $25.8m held in escrow; cash, cash equivalents and restricted cash totaled $34.8m. Inventory was $2.010b, up from $1.848b at year-end 2018.
- Total debt was $1.203b, versus $1.092b at December 31, 2018. This included $890.6m of notes payable, $212.0m drawn on the $640m revolving facility and $100.7m under mortgage repurchase facilities. The company reported compliance with the revolving facility and repurchase-facility covenants.
- Net homebuilding debt to net capital, a non-GAAP measure, was 53.8%, up from 52.0% at year-end. The revolving facility matures in April 2022; $428m of nominal capacity remained undrawn, subject to facility terms.
Material changes, outlook and risks
In May 2019, the company issued $500m of 6.750% senior notes due 2027, receiving net proceeds of $494.3m, and extinguished $385m principal of 6.875% notes due 2022. The refinancing generated the $10.8m reported loss. The company reported no specific earnings or delivery guidance in this filing. Management stated it expects cash outlays for land purchases and development to continue to exceed operating cash generation as it grows its lot supply, and believes available cash, operating cash flow, revolving borrowings and potential capital-market access can fund foreseeable needs.
Key risks include housing-market and mortgage-rate volatility, affordability, land availability and development timing, inflation in land, labor and materials, construction defects and warranty claims, leverage and floating-rate exposure, and continued access to mortgage warehouse facilities. Outstanding land purchase and option contracts covered 16,988 lots totaling $371.6m, with $41.4m in non-refundable option deposits; the company anticipated performing on 50%–60% of these contracts during the following 12 months. Letters of credit and performance bonds totaled $294.3m. Management did not expect ordinary-course litigation to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether new contracts convert into closings and stabilize the backlog, which was materially lower year over year despite higher contract activity.
- Whether gross-margin pressure from incentives, geographic mix and construction costs persists, and how segment results evolve.
- How continued inventory investment and negative operating cash flow affect liquidity and borrowing needs.
- Debt-service costs and covenant headroom after the refinancing, including exposure to floating rates and availability of mortgage repurchase facilities.
- Whether the company performs on planned land purchase and option commitments and maintains adequate warranty and construction-claim reserves.