Century Communities, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; it also reports fourth-quarter results. Century Communities develops, builds and sells homes in 15 states through Century Communities and Wade Jurney Homes, and provides mortgage, title and insurance services.
Financial results and operating metrics
- Revenue: $2.147 billion, up 50.8% from 2017. Home sales revenue was $2.110 billion; financial services revenue was $31.7 million.
- Profit: Income before tax was $128.5 million, up 52.7%; net income was $96.5 million, up 91.8%. Diluted EPS was $3.17 versus $2.03. Adjusted diluted EPS was $3.94, a non-GAAP measure.
- Margins: GAAP homebuilding gross margin was 17.5%, down from 17.9%. The company reported adjusted homebuilding gross margin of 21.6% versus 21.4%, excluding interest and purchase-accounting effects; this is non-GAAP.
- Homes and backlog: Deliveries rose 67.6% to 6,099; net new contracts rose 48.3% to 5,657. Average delivered home price declined 10.4% to $346,000, primarily reflecting the addition of lower-priced Wade Jurney Homes. Year-end backlog was 2,181 homes valued at $669.5 million, up 65.2% by homes and 16.9% by value.
- Cash flow and liquidity: Operating cash flow was negative $195.6 million, compared with negative $111.3 million in 2017, largely reflecting increased inventory investment. Investing cash flow was negative $43.5 million; financing cash flow was positive $181.8 million. Year-end cash was $32.9 million.
- Debt and capital: Total debt was $1.092 billion, up from $824.6 million; stockholders’ equity was $859.4 million. The $590 million revolving credit facility had $202.5 million drawn and $387.5 million available at year-end. Net homebuilding debt to net capital was 52.0%, versus 46.9%.
Material changes versus the prior year
- Growth was partly acquisition-driven. Century acquired the remaining 50% of Wade Jurney Homes on June 14, 2018, for $37.5 million; results were consolidated from that date. WJH contributed $210.1 million of revenue from 1,377 deliveries and reported a pretax loss of $0.8 million, including purchase-accounting effects.
- Management described the first half of 2018 as stronger than the second half. Rising mortgage rates and home prices outpaced income growth, weakening affordability and contributing to an industry-wide slowdown in the latter half.
- Effective tax rate declined to 25.0% from 40.2%, reflecting the lower federal statutory rate and other tax items. The 2018 tax expense includes a $1.5 million deferred-tax-asset remeasurement related to tax reform.
- Inventory increased to $1.848 billion from $1.390 billion; owned and controlled lots increased 23.2% to 37,919. Homebuilding gross margin was affected by $38.1 million of purchase-accounting adjustments for acquired work-in-process inventory.
Fourth-quarter results, outlook and risks
- Fourth quarter: Home sales revenue was $640.2 million, pretax income $36.1 million, net income $26.2 million and diluted EPS $0.85.
- Outlook: Management said it believed the company was positioned for future growth, subject to market conditions. The filing provides no specific numerical forecast. Management identified employment, household income and formation, inventory supply, mortgage rates, lending standards and affordability as factors that could affect sales and deliveries.
- Principal risks: Housing-market cyclicality and weaker demand; rising rates and financing constraints; land and inventory valuation; labor, material and construction-cost pressures; weather and regulatory delays; and substantial leverage. Most senior-note principal is due in 2022, and the company cautioned that refinancing may not be available on acceptable terms.
- Contingencies and unusual items: Ordinary-course legal and construction claims were not expected by management to materially affect results. Inventory impairment charges were $0.8 million in 2018. Century recognized a $7.2 million gain on remeasurement of its previously held WJH interest. The company repurchased 604,061 shares for approximately $11.0 million and did not pay dividends.
- Controls: Management and the auditor reported effective internal control over financial reporting, but WJH was excluded from the 2018 controls assessment following its acquisition.
Important facts for investors to verify
- How much of revenue, deliveries and backlog growth reflects acquisitions versus comparable organic performance, particularly for WJH.
- Whether the second-half slowdown persists and how it affects orders, cancellations, incentives, realized prices and gross margins.
- Whether operating cash flow improves as inventory investment moderates, and whether year-end cash and revolver availability are adequate for planned land and construction spending.
- The company’s ability to refinance or repay debt, especially 2022 maturities, and maintain compliance with credit-facility covenants.
- WJH integration, purchase-accounting estimates and controls coverage, as well as potential warranty, construction-defect and other claim costs.