Century Communities, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Dollar figures below are in millions unless noted. Century Communities develops and sells single-family attached and detached homes across Atlanta, Central Texas, Colorado, Houston, and Nevada. The company reported that it began Utah operations in May 2016, after quarter-end.
Financial performance and position
- Revenue: $184.1, up 17.7% year over year. Home sales revenue was $181.1, up 17.3%; land sales contributed $2.0, versus none in Q1 2015. Golf course and other revenue declined to $1.0 from $2.1.
- Profit: Operating income was $12.0, up from $9.2; net income was $8.0, up 25.7% from $6.4. Basic and diluted EPS rose to $0.38 from $0.30. Operating margin was approximately 6.5% versus 5.9%; net margin was approximately 4.3% versus 4.1%.
- Homebuilding margins: Gross margin increased to 20.3% from 19.1%. The company’s non-GAAP adjusted margin, excluding interest and purchase-accounting effects, was 22.1% versus 21.5%.
- Cash flow: Operating activities used $37.6, similar to $37.8 used a year earlier; inventory investment was the main cash use. Investing activities used $2.1. Financing activities provided $21.8, including $25.0 net borrowing under the revolver and $2.6 of share repurchases and withholding-related repurchases. Cash fell to $11.4 from $29.3.
- Assets and inventory: Total assets were $957.6, up 4.3% from year-end 2015. Inventory rose to $867.4 from $810.1, including $469.4 of homes under construction and $373.2 of land and development.
- Debt and liquidity: Notes payable and revolver borrowings totaled $415.1, up from $390.2 at year-end; this included $252.1 of 6.875% senior notes due 2022 and $160.0 drawn on a $300.0 revolving facility maturing October 2018. The facility’s stated undrawn amount was $140.0 before any other constraints. The company said it complied with all credit covenants, including a $25.0 minimum liquidity requirement. Cash alone was below that threshold; the filing does not specify the components of covenant liquidity.
- Equity: Stockholders’ equity was $416.5, compared with $409.5 at December 31, 2015.
Changes in operations and demand
- Deliveries were nearly flat at 539 homes versus 542, while average delivered price increased 18.0% to $336,000. Management attributed the price increase mainly to product mix and pricing strength, particularly in Atlanta and Colorado.
- Net new contracts increased 12.5% to 794. The cancellation rate improved to approximately 17.5% from 18.5%; average monthly absorption per community declined to 3.04 from 3.14.
- Backlog increased 5.3% to 969 homes; its sales value rose 17.3% to $361.3, with average backlog price of $372,900. Management cited community growth and activity in Colorado, partly offset by softer Texas markets.
- Segment revenue rose in Atlanta, Central Texas, and Colorado, but fell in Houston and Nevada. Colorado reported $10.8 of pretax income and Atlanta $5.3; Houston recorded a $0.8 pretax loss, compared with a $0.4 loss a year earlier.
- Selling, general and administrative expense increased 20.3% to $25.2, slightly faster than home sales revenue; it was 13.9% of home sales revenue versus 13.6%. The filing cites higher compensation, commissions, advertising, depreciation, and operating scale.
Outlook, risks, and unusual items
- No quantified earnings, revenue, or delivery guidance is provided. Management expects land purchase and development cash outlays to exceed cash generated by operations as the company grows its lot supply. It also describes normal homebuilding seasonality: orders typically peak in spring, with more deliveries and cash receipts in the second half.
- Key disclosed risks include housing and employment conditions, mortgage rates and financing availability, land and labor costs, construction delays, regulatory approvals, competition, and leverage and debt-service obligations. Floating-rate revolver borrowings expose the company to interest-rate changes; it reported no use of interest-rate derivatives.
- Warranty estimates were reduced by $0.385 based on favorable payment trends, lowering cost of home sales. The quarter also included $0.169 of acquisition expense and $0.220 of gain on disposition of assets. Interest was largely capitalized into inventory; reported income-statement interest expense was not representative of all financing costs incurred.
- Letters of credit and performance bonds outstanding were $63.7. The company reported ordinary-course construction-defect claims and other litigation, but management did not expect a material adverse effect. A $5.9 fixed-price put option for the Rhodes Ranch golf course was expected to close by June 1, 2016; related assets and liabilities were classified as held for sale.
- Management reported effective disclosure controls as of March 31, 2016, no changes in internal control over financial reporting, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How covenant liquidity is calculated and how much revolver capacity is available after letters of credit and other restrictions.
- Whether backlog converts to closings as expected, particularly in Texas, and whether pricing and gross-margin gains persist.
- How ongoing land investment affects operating cash flow, cash balances, and borrowing needs through the seasonal second half.
- The impact of floating-rate debt, capitalized interest, and future debt service on margins and liquidity.
- Completion and proceeds of the Rhodes Ranch golf-course sale, and any material change in litigation or warranty estimates.