Century Communities, Inc. — Q1 2018 Form 10-Q
Business context and period. The homebuilder develops and sells single-family homes across ten states through West, Mountain, Texas and Southeast segments, with mortgage and title operations reported as Financial Services. This unaudited filing covers the three months ended March 31, 2018; amounts below are in U.S. dollars. Results include UCP and Sundquist Homes, acquired in 2017, while Q1 2017 results do not include those businesses for the full quarter, limiting direct comparability.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $401.8 million | $228.3 million; up 76% |
| Home sales revenue | $394.8 million | $226.4 million; up 74% |
| Income before tax | $23.1 million | $12.1 million |
| Net income | $20.0 million | $8.8 million |
| Diluted EPS | $0.67 | $0.40 |
| Homes delivered / average selling price | 941 / $419,600 | 608 / $372,400 |
| Homebuilding gross margin | 19.1% | 19.5% |
| Adjusted gross margin, excluding interest and acquired-inventory purchase accounting | 23.2% | 21.7% |
| Adjusted EBITDA (non-GAAP) | $42.3 million | $19.8 million |
Net new home contracts increased 44% to 1,378. Backlog rose 60% to 1,757 homes, representing $738.0 million of sales value, up 69%. The filing attributes growth in part to the 2017 acquisitions and more selling communities; backlog also benefited from demand and pricing strength in the company’s markets.
By segment, Q1 2018 revenue was $118.9 million in West, $145.5 million in Mountain, $38.0 million in Texas, $93.8 million in Southeast and $5.6 million in Financial Services. Income before tax was $9.9 million, $17.9 million, $1.8 million, $4.7 million and $1.2 million, respectively; Corporate reported a $12.3 million loss.
Cash flow, debt and liquidity
- Operating cash flow was negative $44.6 million, versus negative $10.1 million a year earlier. The principal use was an $82.4 million inventory outflow, reflecting lot purchases and homes under construction.
- Investing cash flow was negative $2.1 million; financing cash flow was negative $11.1 million. Cash and cash equivalents declined to $30.0 million from $88.8 million at year-end. Cash held in escrow was $21.5 million; cash plus restricted cash totaled $36.0 million.
- Total debt was $813.8 million, down from $824.6 million at December 31, 2017. It included $379.5 million of 6.875% senior notes due 2022, $394.9 million of 5.875% notes due 2025, and $37.0 million outstanding under mortgage repurchase facilities.
- The $400 million revolving credit facility had no borrowings and was fully available; the company reported compliance with its covenants. Mortgage repurchase facilities had stated capacity of $60 million. Management said it expects cash on hand, operating cash, revolver availability and potential debt or equity market access to fund foreseeable needs.
- Net debt to net capital was 50.2%, compared with 48.7% at year-end 2017. The increase reflects lower cash, despite lower total debt and higher equity.
Material changes, outlook and risks
- Acquisitions and comparability: UCP and Sundquist expanded operations, lots and selling communities. UCP contributed $103.4 million of Q1 homebuilding revenue and Sundquist $21.4 million. Acquisitions materially affect year-over-year comparisons.
- Margins and expenses: Reported homebuilding gross margin declined to 19.1%, primarily due to purchase-price accounting charges on acquired work-in-process inventory. Excluding those charges and interest, the company’s non-GAAP adjusted margin increased. SG&A rose $23.3 million, mainly from higher commissions, compensation and staffing, advertising, and other corporate costs.
- Accounting and tax items: ASC 606 was adopted January 1, 2018, with no material overall financial-statement impact reported. The company deferred $1.4 million of revenue and $1.1 million of costs for unsatisfied obligations, primarily landscaping. A $1.7 million tax benefit from refining acquisition-related tax accounting and other discrete tax benefits contributed to a 13.4% Q1 effective tax rate; management’s estimated 2018 annual rate was 26.5%.
- Outlook: The filing provides no specific revenue, earnings or delivery guidance. Management expects land and development investment to continue, with cash outlays for lot growth expected to exceed operating cash generation. It anticipated completing 60%–70% of outstanding land purchase and option contracts during 2018.
- Risks and contingencies: Disclosed risks include housing-market and mortgage-rate changes, inflation in land, labor and materials, land availability, construction delays, leverage and interest rates, acquisition integration, regulation, and warranty or construction-defect claims. Land purchase and option contracts covered 14,432 lots with a total stated value of $661.5 million and $19.9 million of non-refundable option deposits. Letters of credit and performance bonds totaled $87.5 million. Management did not expect ordinary-course litigation to have a material adverse effect.
- Controls: Management concluded disclosure controls were effective as of March 31, 2018 and reported no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue, contract, delivery and backlog growth reflects acquired operations versus organic performance; compare with the filing’s supplemental pro forma data.
- Whether backlog converts to closings at expected prices and margins, and whether cancellations remain manageable; the reported cancellation rate was 16% versus 15%.
- Whether inventory investment and construction spending produce sufficient operating cash flow, given the quarter’s $44.6 million operating cash outflow and reduced cash balance.
- How acquired-inventory purchase accounting and other acquisition effects will change reported margins as they run off, and whether underlying margin improvement is sustained.
- Debt maturities, covenant compliance, interest-rate exposure, and the availability and terms of financing, including the revolver and mortgage repurchase facilities.
- Potential changes to preliminary acquisition valuations, tax accounting, warranty reserves, land commitments, performance obligations and contingencies.