Century Communities, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 4, 2021. This is an annual filing, not a standalone fourth-quarter report. Century Communities develops, builds and sells homes across 17 states through Century Communities and Century Complete, and provides mortgage, title and insurance services.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $3.161 billion | $2.536 billion | +24.7% |
| Home sales revenue | $3.027 billion | $2.481 billion | +22.0% |
| Income before income taxes | $270.2 million | $132.6 million | +103.7% |
| Net income | $206.2 million | $113.0 million | +82.4% |
| Diluted EPS | $6.13 | $3.62 | +69.3% |
| Homes delivered | 9,453 | 8,000 | +18.2% |
| Average delivered home price | $320,200 | $310,200 | +3.2% |
| GAAP homebuilding gross margin | 18.4% | 17.7% | +0.7 percentage point |
| Operating cash flow | $340.6 million provided | $68.8 million used | Improved |
Adjusted homebuilding gross margin, a non-GAAP measure excluding interest, inventory impairment and acquired-inventory purchase accounting, was 20.8%, compared with 20.3%. Adjusted EBITDA was $356.4 million versus $224.5 million; these non-GAAP measures should be considered alongside GAAP results.
Fourth-quarter 2020 home sales revenue was $946.8 million, income before taxes was $121.2 million and net income was $91.8 million, compared with $775.7 million, $54.0 million and $53.4 million, respectively, in fourth-quarter 2019. Diluted EPS was $2.72 versus $1.63.
Net new home contracts increased 37.7% to 10,822. Year-end backlog rose to 3,439 homes valued at $1.294 billion, up 66.1% in units and 102.9% in value. The company ended the year with 49,965 owned or controlled lots, 28.3% more than a year earlier.
Liquidity, debt and capital
- Cash and cash equivalents were $394.0 million at year-end, with a further $23.1 million held in escrow. The company reported $398.1 million of cash, cash equivalents and restricted cash in its cash-flow statement.
- Total debt was $1.154 billion, including $894.9 million of homebuilding notes and other financing and $259.1 million drawn on mortgage repurchase facilities. The $640 million revolving credit line had no borrowings outstanding; the company reported compliance with its covenants.
- Net homebuilding debt to net capital, a non-GAAP measure, fell to 27.2% from 45.2%. Operating cash flow was $340.6 million, versus cash used of $68.8 million in 2019.
- Senior notes included $400 million principal at 5.875% due 2025 and $500 million at 6.750% due 2027. The revolving credit line matures in 2023. Mortgage repurchase facilities had $259.1 million outstanding against aggregate capacity of up to $350 million and require renewal.
- Interest expense payments were $66.8 million, down from $74.9 million in 2019. The company paid no dividends and repurchased no shares in 2020.
Material changes and management commentary
- Results rebounded after slower sales in March and April 2020, with demand strengthening from May onward. Management attributed performance to low mortgage rates, limited housing inventory, demographic trends and increased interest in suburban and entry-level housing.
- Financial Services pretax income increased to $48.5 million from $10.7 million. Mortgage originations nearly doubled to 6,918 loans, and the capture rate among company homebuyers increased to 64% from 43%.
- Income tax expense rose to $64.1 million from $19.6 million; the 2019 rate benefited from a larger energy-efficient home tax credit. The 2020 credit reduced tax expense by $8.5 million and was extended through 2021.
- Inventory impairment charges were $2.2 million in 2020, compared with $4.8 million of inventory impairment and other charges in 2019. The 2019 results also included a $10.8 million loss on extinguishment of debt and a $2.8 million trade-name impairment related to the Wade Jurney Homes rebranding to Century Complete.
- Management said it expects to continue growing, maintaining prudent leverage and investing in land and communities, but gave no specific forward financial guidance in the supplied filing text. It cautioned that demand, affordability, costs and results remain uncertain.
Risks, contingencies and unusual factors
- COVID-19 created significant uncertainty. Though it did not materially adversely affect FY2020 results, future effects on employment, consumer confidence, mortgage availability, operations and demand remain uncertain.
- Higher demand also brought shortages and price increases for labor, land and materials, particularly lumber. Management offset most cost increases through selling-price increases during 2020, but warned that cost pressure could weigh on future margins.
- Key exposures include housing-market and interest-rate shifts, affordability and buyer cancellations; land values and inventory impairment; labor and material supply; weather and regulatory delays; construction-defect and warranty claims; and access to financing and mortgage resale markets.
- The mortgage business carries warehouse-facility renewal, loan-sale, servicing and representation-and-warranty risks. The filing reports no material cyber loss to date, but identifies cybersecurity and privacy compliance as risks.
- Ordinary-course legal claims, primarily related to construction, were not expected by management to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether the strong contract pace and backlog convert into closings at the reported prices and margins, and how cancellations affect conversion.
- Whether labor, lumber and other input-cost inflation, together with affordability and mortgage-rate changes, erodes gross margins or sales demand.
- Liquidity and refinancing capacity, including renewal of mortgage repurchase facilities, compliance with debt covenants, and maturities of the 2025 and 2027 notes.
- The quality and recoverability of land and inventory valuations, option-contract commitments and related deposits; the filing identifies impairment estimates as a critical audit matter.
- The sustainability of Financial Services earnings and mortgage capture rates, including loan-sale execution, servicing obligations and repurchase or indemnification claims.
- The impact of tax-credit changes and the higher 2020 effective tax rate on future after-tax earnings.