Century Communities, Inc. annual report, FY2014

Century Communities, Inc. — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are noted separately below. The company develops, builds and sells single-family homes across Colorado, Central Texas, Houston, Nevada and Atlanta.

Financial performance and operating metrics

Metric	FY2014	FY2013
Total revenue	$362.4 million	$171.1 million
Operating income	$31.1 million	$17.9 million
Income before tax	$31.0 million	$18.1 million
Net income attributable to common stockholders	$20.0 million	$12.4 million
Basic and diluted EPS	$1.03	$0.95
Operating margin	8.6%	10.4%
Homebuilding gross margin	21.4%	24.2%

Revenue growth was driven principally by acquisitions and higher deliveries. Home sales revenue rose 105.6%; total revenue rose 111.8%.
The company delivered 1,046 homes, up 133.5%, while average delivered home price fell 12.0% to $336,400, largely reflecting the addition of lower-priced Atlanta, Houston and Nevada operations.
Net new orders increased 156.7% to 1,042. Year-end backlog rose to 772 homes valued at $246.3 million, up 247.7% by homes and 138.6% by value. Cancellation rate improved to 18% from 20%.
Reported homebuilding gross margin declined to 21.4%. Excluding interest in cost of sales and acquisition purchase-accounting adjustments, adjusted margin was 23.4%, versus 25.5% in 2013; management attributed the decline primarily to newer, lower-margin markets.
FY2014 cash flow from operations was negative $129.7 million, investing cash flow was negative $233.7 million, and financing cash flow was positive $286.8 million. Year-end cash was $33.5 million, down from $110.0 million.
At year-end, total assets were $676.0 million, inventory $556.3 million, total liabilities $310.8 million and equity $365.2 million.
Total debt was $229.6 million: $198.6 million of 6.875% senior notes due 2022, $20.0 million drawn on the revolving facility, and $11.0 million of land-development and insurance-premium notes and lease obligations. The $120 million revolver had $100 million undrawn, with potential accordion capacity of another $80 million, subject to terms and approvals.
The reported effective tax rate was 35.3%. Comparability with 2013 is affected by the company’s April 2013 conversion from an LLC to a taxable corporation.
Fourth quarter: Home sales revenue was $134.1 million, home gross margin $24.1 million, pretax income $11.0 million, net income $7.2 million and EPS $0.34.

Material changes versus the prior period

The company expanded through acquisitions: Las Vegas Land Holdings in April, Grand View Builders in August and Peachtree in November 2014; Jimmy Jacobs, acquired in 2013, expanded Central Texas operations. These acquisitions added markets, communities, inventory and revenue but make year-over-year comparisons less like-for-like.
Selling communities increased from 23 to 83, and owned and controlled lot inventory increased 37.4% to 11,463.
Home sales gross margin and operating margin decreased despite higher earnings, reflecting acquisition-related purchase accounting and expansion into lower-price, lower-margin markets.
The company issued $200 million principal amount of 6.875% senior notes and completed its June 2014 IPO, receiving approximately $193.3 million and $81.6 million in net proceeds, respectively. It entered a $120 million revolving credit agreement in October.
Cash used in operations and investing rose substantially as the company acquired businesses and invested in land, development and homes under construction.

Outlook, risks and unusual items

Management expects land acquisition and development spending to exceed cash generated from operations as the business expands. The filing provides no specific earnings, revenue or delivery guidance.
Key exposures include housing-market cyclicality, mortgage availability and interest rates, regional concentration, land and inventory valuation, construction-cost inflation, labor and material availability, weather and regulatory delays, and warranty or construction-defect claims.
The revolver has financial covenants, including leverage, interest coverage, minimum tangible net worth and minimum liquidity requirements. The company reported $25 million as the minimum liquidity covenant; covenant headroom is not clearly stated in the filing text provided.
Management identified material weaknesses in period-end financial reporting and information-technology controls, citing insufficient formalized procedures and experienced personnel. Remediation was underway through documentation, hiring and increased review; the weaknesses had not yet been reported as remediated.
Ordinary-course litigation, primarily construction-defect matters, was not expected by management to have a material adverse effect. Letters of credit and performance bonds outstanding were $34.0 million, up from $3.0 million. The Grand View earnout liability was estimated at $2.4 million; future payments depend on performance.
No inventory impairment was recorded in 2014 or 2013. Golf-course operations generated $5.8 million revenue against $6.3 million costs in 2014.
The filing’s selected financial data reports adjusted EBITDA of $40.489 million, while its reconciliation reports $40.989 million. This inconsistency should be checked against the filed financial statements.
Management described seasonal concentration in spring and summer orders and generally higher home deliveries and cash receipts in the second half of the year.

Most important facts for investors to verify

Resolve the adjusted EBITDA discrepancy ($40.489 million versus $40.989 million) and review the company’s non-GAAP definition and reconciliation.
Assess whether negative operating cash flow and the rapid inventory build can be funded without reducing liquidity or approaching revolver covenants.
Separate organic performance from acquired-business contributions; review acquired-market margins, purchase-accounting effects and integration results.
Track backlog conversion, cancellations, realized selling prices and margins, particularly in the newer markets.
Confirm remediation of the disclosed internal-control material weaknesses in subsequent filings.
Review the $2.4 million Grand View earnout, outstanding development bonds and letters of credit, and any changes in construction-defect or warranty exposures.