Century Communities, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; dollar amounts below are in millions unless noted. Century develops, builds, markets and sells homes across seven U.S. markets and operates mortgage and title businesses.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $228.3 | $184.1 | +24.0% |
| Home sales revenue | $226.4 | $181.1 | +25.0% |
| Income before taxes | $12.1 | $12.4 | -3.0% |
| Net income | $8.8 | $8.0 | +10.2% |
| Diluted EPS | $0.40 | $0.38 | +$0.02 |
| Operating cash flow | -$10.5 | -$37.6 | Less cash used |
| Cash and cash equivalents at quarter-end | $23.5 | $29.5 at year-end 2016 | -$6.0 |
- Delivered 608 homes, up from 539; average selling price rose to $372,400 from $336,000.
- Homebuilding gross margin was 19.5%, versus 20.3%; adjusted margin excluding interest and purchase-accounting effects was 21.7%, versus 22.1%.
- SG&A rose 31.9% to $33.2 million and increased to 14.7% of home sales revenue from 13.9%.
- Backlog increased to 1,098 homes, valued at $436.0 million, up 13.3% in units and 20.7% in value year over year. Net new contracts increased 20.5% to 957; cancellation rate declined to 15% from 18%.
- Total assets were $1.026 billion at March 31, including $884.1 million of inventory. Total stockholders’ equity was $496.5 million.
- Debt was $447.9 million: $378.5 million of 6.875% senior notes due 2022, $65.0 million drawn on the revolving facility, and $4.4 million of insurance premium notes. The revolver commitment was increased to $400 million; maturity is October 2019. Debt-to-capital was 47.4% and net debt-to-net capital was 45.1%.
- The company reported compliance with all revolving-credit covenants. Its stated minimum liquidity covenant is $25 million; the filing does not provide a clear reconciliation of covenant liquidity to the reported cash balance.
Period comparison and management commentary
Revenue growth reflected higher home deliveries and selling prices. Deliveries and segment income improved notably in Nevada; Colorado and Atlanta also contributed higher revenue. Management attributed stronger contract activity and absorption to positive market conditions across its markets. Pretax income nevertheless edged down as higher SG&A and homebuilding costs offset growth; gross-margin pressure included higher interest allocated to cost of sales and a less favorable geographic mix.
Operating cash use improved substantially from the prior-year quarter, primarily because inventory investment was lower. Inventory still consumed $21.3 million of cash in Q1 2017. Financing cash flow included $127.5 million of senior-note proceeds and $15.0 million of at-the-market stock issuance proceeds, alongside substantial revolver repayments.
Outlook, events, risks and contingencies
- No specific earnings or delivery guidance is provided. Management says land purchases and development may cause cash outlays to exceed operating cash generation as the company expands.
- On April 10, 2017, Century agreed to acquire UCP, Inc. for estimated combined cash and stock consideration of approximately $213.4 million, excluding any debt assumed. Closing was expected by the end of Q3 2017 and remained subject to conditions, including UCP stockholder approval.
- Also on April 10, Inspire Home Loans entered into a mortgage-loan repurchase facility with a commitment of up to $25 million, expiring April 9, 2018.
- Century had purchase and option contracts for 9,363 lots totaling $362.2 million, with $11.4 million in nonrefundable deposits. It anticipated performing on 60%–70% of these contracts in the next 12 months. Outstanding letters of credit and performance bonds totaled $69.8 million.
- Ordinary-course litigation, primarily construction-defect claims, was not expected by management to materially affect results or financial condition. The company reduced its warranty reserve by $0.3 million in the quarter based on favorable payment trends.
- Risks highlighted include housing-market and mortgage-rate changes, availability and cost of land, labor and materials, construction delays, regulation, competition, leverage and debt service. Floating-rate revolver borrowings expose the company to interest-rate risk; it reported no interest-rate derivatives. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether backlog converts to closings at expected prices and margins, particularly given market and geographic mix.
- Whether SG&A growth and higher capitalized interest continue to pressure margins and earnings.
- Cash needs for inventory, land commitments and the UCP transaction, and covenant liquidity headroom beyond reported cash.
- Final UCP transaction terms, assumed debt, approval and closing status, and expected integration costs or benefits.
- Performance of weaker or early-stage markets, including Houston and Utah, and the sustainability of contract growth and lower cancellations.