Century Communities, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Century Communities develops, builds, markets, and sells single-family homes across five segments: Atlanta, Central Texas, Colorado, Houston, and Nevada. Results are unaudited. Comparisons with Q1 2014 are substantially affected by the 2014 acquisitions of businesses that now comprise the Atlanta, Houston, and Nevada segments.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $156.4 million | $49.7 million |
| Home sales revenue | $154.3 million | $49.7 million |
| Operating income | $9.2 million | $5.4 million |
| Income before tax | $9.5 million | $5.2 million |
| Net income | $6.4 million | $3.4 million |
| Diluted earnings per share | $0.30 | $0.20 |
| Operating cash flow | $(37.8) million | $(18.8) million |
- Home deliveries rose 323.4% to 542. Average delivered-home price fell 26.6% to $284,800, mainly reflecting the acquired markets’ lower price points and sales mix.
- Homebuilding gross margin declined to 19.1% from 25.0%. Excluding capitalized interest charged to sales and purchase-accounting impacts on acquired work-in-process inventory, the company’s non-GAAP adjusted margin was 21.5%, versus 25.5%.
- Selling, general, and administrative expense increased 198.9% to $20.9 million, but declined to 13.6% of home sales revenue from 14.1%. Higher compensation, commissions, advertising, amortization, and public-company costs contributed to the increase.
- Net new orders increased 335.8% to 706; backlog increased 259.4% to 920 homes, with an aggregate sales value of $308.0 million. The cancellation rate rose to 18.5% from 14.8%.
- At March 31, 2015, the company had 87 selling communities and 12,449 owned or controlled lots, compared with 23 communities and 10,095 lots a year earlier.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $26.6 million at March 31, 2015, down from $33.5 million at December 31, 2014. Total assets were $718.2 million; inventory was $599.7 million.
- Notes payable and revolving credit borrowings totaled $262.3 million, up from $229.6 million at year-end. This included $198.7 million of 6.875% senior notes due 2022 and $55.0 million drawn on a $120 million revolving facility. The revolver balance bore interest at 2.92% at quarter-end.
- Operating cash outflow was $37.8 million, driven primarily by a $43.6 million inventory investment. Investing cash outflow was $1.2 million; financing provided $32.2 million, principally from $35.0 million of revolver borrowings. Cash decreased by $6.8 million.
- The company reported compliance with all revolving-credit covenants at March 31, including a minimum liquidity requirement of $25 million. It expects land and development spending to exceed operating cash generation as it grows its lot supply.
- After quarter-end, on April 9, 2015, Century issued an additional $60 million of 6.875% senior notes at 98.26% of principal and used the net proceeds to repay outstanding revolver borrowings.
Outlook, risks, and notable items
- The filing provides no numerical earnings or revenue guidance. Management describes continued land acquisition and development as a priority and expects related cash outlays to exceed cash generated from operations.
- Management cites housing-market and mortgage-rate volatility, land availability and cost, labor and material prices, construction delays, regulatory approvals, competition, access to capital, and leverage as risks. Results and cash needs are seasonal; deliveries and cash receipts have historically been weighted toward the second half of the year.
- Letters of credit and performance bonds outstanding for land-development obligations totaled $37.7 million. Land options covered 1,635 lots with $81.7 million in stated purchase value and $3.0 million of non-refundable deposits.
- The company is involved in ordinary-course claims, primarily construction-defect matters, and management does not expect them to materially affect financial condition, results, or cash flows.
- Management said previously identified material weaknesses in period-end financial reporting and information-technology processes were still being remediated. Planned steps include formalizing controls, adding experienced accounting resources, and strengthening review and oversight; remediation had not yet been concluded.
- Management noted that acquisition fair-value estimates, including acquired inventory and intangible assets, rely on assumptions and may differ from actual outcomes.
Important facts for investors to verify
- How much of the sharp growth in deliveries, orders, backlog, and revenue reflects acquired operations versus organic growth in existing markets.
- Whether margins stabilize as the mix of markets changes and acquisition-related inventory accounting and capitalized interest effects diminish.
- Whether backlog converts to closings as expected, particularly given the higher cancellation rate, and whether selling prices and order absorption remain resilient.
- Cash use for land, development, and construction; covenant liquidity headroom; and the effect of the post-quarter $60 million notes issuance on debt and revolver availability.
- Progress in remediating the disclosed internal-control material weaknesses and any changes in management’s assessment.