Century Communities, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Century develops, builds and sells attached and detached homes across 15 states through Century Communities and Wade Jurney Homes (WJH), and also provides mortgage, title and insurance services.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $533.1 million | $401.8 million | +32.7% |
| Home sales revenue | $523.3 million | $394.8 million | +32.5% |
| Income before tax | $23.0 million | $23.1 million | -0.5% |
| Net income | $17.1 million | $20.0 million | -14.5% |
| Basic / diluted EPS | $0.57 / $0.56 | $0.68 / $0.67 | Lower |
| Homebuilding gross margin | 17.1% | 19.1% | -2.0 percentage points |
| Adjusted homebuilding gross margin | 19.8% | 23.2% | -3.4 percentage points |
| Adjusted EBITDA (non-GAAP) | $40.4 million | $42.3 million | -4.4% |
| Adjusted diluted EPS (non-GAAP) | $0.60 | $0.75 | Lower |
Century delivered 1,663 homes, up 76.7%, while average selling price fell 25.0% to $314,700. The increase in deliveries largely reflects consolidation of WJH, acquired in full in June 2018, so reported year-over-year growth is not directly comparable. Net new contracts rose 34.8% to 1,858. Backlog grew 35.2% to 2,376 homes, but its value declined 2.7% to $718.4 million; the lower average price reflects WJH’s lower-priced homes. Overall monthly absorption declined 10.8% to 3.3, with management citing muted early-quarter sales amid macroeconomic uncertainty.
Homebuilding gross margin pressure reflected geographic mix, ongoing cost pressure and higher buyer incentives. SG&A rose 22.0% to $68.9 million, but improved to 13.2% of home sales revenue from 14.3%, which management attributed to cost controls, process improvements and scale. Corporate pretax loss increased to $20.0 million from $12.3 million, with higher compensation and legal costs among the drivers.
Cash flow, balance sheet and liquidity
- Operating activities used $59.4 million of cash, versus $44.6 million used in Q1 2018. Inventory growth was a significant use of cash; inventories were $1.944 billion at quarter-end, up from $1.848 billion at year-end.
- Investing activities used $3.3 million. Financing activities provided $67.8 million, principally reflecting increased net revolver borrowings. Cash and cash equivalents were $38.1 million; cash held in escrow was $24.7 million.
- Total debt was $1.165 billion, up from $1.092 billion at December 31, 2018. This included $786.9 million of notes payable, $287.0 million drawn on the revolving credit facility and $90.9 million outstanding under mortgage repurchase facilities. The revolver had $353.0 million available under its $640 million commitment, and the company reported covenant compliance.
- Net homebuilding debt to net capital, a non-GAAP measure, was 53.6%, compared with 52.0% at year-end. Total assets were $2.323 billion and stockholders’ equity was $875.4 million.
- Letters of credit and performance bonds totaled $298.0 million. Land purchase and option contracts covered 17,332 lots with a stated total of $397.8 million; associated non-refundable option deposits were $37.4 million. The company anticipated performing on 50%–60% of these contracts over the next 12 months.
Outlook, risks and notable items
No specific earnings, revenue or delivery guidance is provided in the filing. Management expects land-purchase and development cash outlays to continue exceeding operating cash generation as the company grows its lot supply, and believes cash on hand, operating cash flows, revolver availability and potential capital-market access will fund foreseeable needs.
Key risks identified include housing-market and home-price downturns, mortgage-rate and credit-market volatility, land availability, labor and material cost inflation, construction delays, regulatory approvals, leverage and floating-rate exposure, and construction-defect, warranty and litigation claims. The company also cautions that it may not remain compliant with, or retain access to, its uncommitted mortgage repurchase facilities. Management said ordinary-course legal matters, primarily construction-defect claims, are not expected to have a material adverse effect; no material changes to previously reported risk factors were noted.
WJH contributed $89.6 million of Q1 homebuilding revenue and $4.0 million of pretax income, including $1.7 million of remaining purchase-accounting adjustment. Q1 2018 included $3.2 million of equity income from unconsolidated subsidiaries, which was absent in Q1 2019. The company adopted lease accounting on January 1, 2019, recognizing a $17.7 million right-of-use asset and an $18.7 million lease liability, with no effect on equity. The estimated 2019 annual effective tax rate was 26.7%; discrete items reduced the rate in the quarter.
Important facts for investors to verify
- How much of reported revenue, deliveries, contracts and backlog growth reflects WJH consolidation, and how comparable results look on a pro forma basis.
- Whether gross-margin pressure from incentives, costs and delivery mix persists, and whether backlog value and absorption improve.
- Cash conversion and funding needs as inventory and land-development investment grow, including progress on the expected land-contract takedowns.
- Debt, revolver availability, covenant headroom and continued access to the mortgage repurchase facilities.
- Exposure under performance bonds, construction-defect claims, warranty reserves and insurance recoveries.