Century Communities, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated. The filing is unaudited.
Business context
Century develops, builds, markets, and sells single-family homes across 15 states through its Century Communities and Wade Jurney Homes brands, and provides mortgage, title, and insurance services. In June 2018, the company acquired the remaining 50% of Wade Jurney Homes (WJH), making it wholly owned. Results also reflect the prior-year acquisitions of UCP and Sundquist Homes, so reported growth is not solely organic.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $561.7 | $379.7 | $1,495.5 | $899.9 |
| Income before tax | $22.9 | $15.2 | $92.5 | $50.3 |
| Net income | $17.0 | $9.5 | $70.3 | $33.1 |
| Diluted EPS | $0.56 | $0.37 | $2.33 | $1.41 |
| Homebuilding gross margin | 16.8% | 17.0% | 17.9% | 18.2% |
- Sales and operations: Home sales revenue was $552.9 million in Q3 and $1,469.9 million year to date. Deliveries were 1,746 and 4,071, respectively. Average delivered home price was $316,700 in Q3 and $361,100 year to date.
- Demand and backlog: Net new contracts increased 65.8% to 1,515 in Q3 and 53.4% to 4,436 year to date. September backlog was 2,988 homes valued at $931.0 million, up 79.6% by homes and 35.1% by value year over year. Management attributed growth partly to acquisitions and more selling communities. Monthly absorption moderated to 2.9 homes per community in Q3 from 3.2.
- Cash flow: Operating cash use was $217.0 million for the nine months, versus $125.4 million in 2017. Inventory investment used $243.4 million, reflecting lot purchases and homes under construction. Investing cash use was $39.7 million; financing provided $182.7 million. Cash, cash equivalents, and restricted cash totaled $19.7 million at period-end.
- Liquidity and debt: Cash and cash equivalents were $15.9 million, down from $88.8 million at year-end; cash held in escrow was $31.9 million. Total debt, including the revolver and mortgage repurchase facilities, was $1,080.8 million, compared with $824.6 million at year-end. The $590 million revolving facility had $236.0 million drawn and $354.0 million available; the company reported covenant compliance. Net homebuilding debt to net capital was 53.7%, versus 46.9% at year-end.
- Balance sheet: Total assets increased 24.1% to $2,152.5 million. Inventory rose 32.0% to $1,834.9 million. Stockholders’ equity was $840.8 million.
- Non-GAAP measures: Adjusted diluted EPS was $0.86 for Q3 and $2.83 for the nine months; adjusted EBITDA was $50.3 million and $163.1 million, respectively. These company-defined measures exclude specified items and are not substitutes for GAAP results.
Material changes and notable items
- Q3 revenue rose 47.9% and net income 80.0% year over year; nine-month revenue rose 66.2% and net income 112.3%. Acquisitions materially affected these comparisons.
- Reported homebuilding gross margin declined 0.2 percentage points in Q3 and 0.3 points year to date. The company attributed the decreases primarily to purchase-accounting charges on acquired work-in-process inventory. Excluding interest and those purchase-accounting effects, adjusted gross margin was 21.2% in Q3 and 22.1% year to date.
- Average selling prices decreased, largely reflecting WJH’s lower-priced homes. Q3 WJH deliveries averaged $152,100; its reported contribution also included acquisition-related purchase-accounting adjustments.
- SG&A increased 53.7% in Q3 and 68.3% year to date, partly due to higher commissions, compensation, headcount, and costs supporting growth. SG&A rose to 12.8% of home sales revenue in Q3 from 12.3%.
- The WJH step acquisition produced a $7.2 million remeasurement gain on the previously held interest, included in equity income from unconsolidated subsidiaries. The company also recorded $28.4 million of year-to-date purchase-accounting charges for acquired work-in-process inventory.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no material overall financial statement impact. Prior-period amounts were not recast.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management expects investment in land and development to continue to exceed cash generated from operations as the business grows, and believes cash, operating cash flow, revolver availability, and potential debt or equity financing will cover foreseeable liquidity needs.
- Risks highlighted include housing-market and home-price weakness, mortgage-rate increases and reduced financing availability, inflation in land, labor and materials, construction delays, land availability, leverage and floating-rate exposure, warranty or construction-defect claims, regulatory matters, and integration of acquired businesses.
- Outstanding letters of credit and performance bonds were $296.9 million, up from $158.6 million at year-end, principally related to land-development obligations. The filing says ordinary-course litigation, primarily construction-defect matters, is not expected to have a material adverse effect.
- Land purchase and option contracts covered 17,019 lots with a stated total of $760.4 million and $45.0 million of nonrefundable option deposits. The company anticipated performing on 50%–60% of these contracts over the next 12 months; timing and ultimate purchases remain subject to conditions.
- After quarter-end, on November 6, 2018, the board authorized repurchases of up to 4.5 million shares, potentially funded with cash and the revolving facility. The program is discretionary and does not assure any repurchases.
Important facts for investors to verify
- How much of the reported sales, contract, backlog, and earnings growth reflects acquisitions—especially the newly consolidated WJH—versus organic performance.
- Whether the large inventory investment, negative operating cash flow, and lower cash balance remain manageable alongside higher debt and the planned growth in land holdings.
- Whether backlog converts to deliveries and cash at expected prices, particularly given slower absorption and the lower average selling price from WJH’s product mix.
- The sustainability of margins after acquired-inventory purchase-accounting charges run off, and the effect of elevated SG&A and floating-rate debt costs.
- Progress integrating WJH, the realization of anticipated benefits, and any impact of share repurchases on liquidity, leverage, and share count.