Century Communities, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops, builds, markets and sells single-family homes across regional homebuilding segments, with mortgage and title services. Results include UCP, Inc. only from its August 4 acquisition date. Unless otherwise stated, dollar amounts are in millions.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $379.7 | $253.4 | $899.9 | $697.2 |
| Income before tax | $15.2 | $19.7 | $50.3 | $51.3 |
| Net income | $9.5 | $13.3 | $33.1 | $34.5 |
| Diluted EPS | $0.37 | $0.63 | $1.41 | $1.62 |
| Homebuilding gross margin | 17.0% | 20.3% | 18.2% | 19.9% |
| Adjusted EBITDA (non-GAAP) | $32.5 | $26.4 | $83.2 | $69.0 |
Home sales revenue was $374.9 million for the quarter and $888.9 million year to date. The company delivered 968 homes in Q3 and 2,329 in the nine-month period; average selling prices were $387,300 and $381,700, respectively. Reported homebuilding gross margin fell partly because of higher interest included in cost of sales and acquisition-related purchase-accounting charges. Excluding those items, adjusted gross margin was 21.0% in Q3 and 21.2% year to date, versus 22.5% and 21.8% a year earlier. These adjusted measures are non-GAAP.
Cash flow, debt and liquidity
- Cash and cash equivalents were $58.5 million at September 30, 2017, up from $29.5 million at year-end; cash held in escrow was $42.3 million. The filing does not characterize all escrow cash as freely available liquidity.
- For the first nine months, operating cash use was $130.8 million, investing cash use was $66.1 million, and financing provided $225.9 million. Inventory investment was a major operating cash use.
- Total debt was $803.5 million, versus $454.1 million at December 31, 2016; stockholders’ equity was $653.0 million. Debt-to-capital was 55.2%, and net debt-to-net capital was 51.8% at September 30.
- Debt included $378.9 million of 6.875% senior notes due 2022 and $394.9 million of 5.875% senior notes due 2025. The company had no borrowings under its $400 million revolving credit facility and reported compliance with its covenants. Its financial-services subsidiary had $27.5 million outstanding under mortgage repurchase facilities, collateralized by mortgage loans held for sale.
Material changes and operating developments
- UCP acquisition: completed August 4 for stated total consideration of approximately $206.6 million, including cash and stock. It added 4,199 owned lots across 43 communities. UCP contributed $77.6 million of homebuilding revenue and $5.6 million of net income for the period included in the filing. Purchase-price accounting remains preliminary, and Q3 acquisition expense was $7.2 million.
- Demand indicators improved: net new home contracts rose 45.5% in Q3 and 26.2% year to date. Backlog increased 67.7% to 1,664 homes, with a stated sales value of approximately $689.3 million. Owned and controlled lots rose 74.9% to 31,996.
- Corporate losses increased to $17.9 million in Q3 and $33.9 million year to date, reflecting acquisition costs, compensation and other overhead. Southeast pretax income declined despite higher deliveries and sales, as new-market startup expenses weighed on results.
- Financial services began mortgage operations in Q2; the company reported $4.7 million of financial-services revenue year to date.
- On October 31, 2017, after quarter-end, the company acquired substantially all assets and operations of Sundquist Homes for approximately $51.5 million in cash.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said it was actively acquiring and developing lots and expected land and development spending to grow; those cash outlays may exceed cash generated by operations. Management cited positive market conditions and stronger demand, but cautioned that actual results may differ materially from forward-looking statements.
- Key stated risks include housing-market and home-price downturns; mortgage-rate and credit-market volatility; land, labor and material availability or cost; construction and entitlement delays; leverage and debt service; and successful integration of UCP.
- Inflation can raise land, financing, labor, material and construction costs; higher mortgage rates may reduce buyer affordability. The company said it may not be able to offset cost increases through pricing in weak markets.
- Outstanding land purchase and option contracts covered 17,150 lots valued at $754.1 million, with $11.2 million of non-refundable deposits. The company anticipated performing on 60%–70% of contracts over the next 12 months; timing and amounts may change.
- Letters of credit and performance bonds totaled $70.1 million. Ordinary-course claims, primarily construction-defect matters, were not expected by management to have a material adverse effect. The warranty reserve was $8.9 million; favorable payment trends led to a $0.9 million Q3 reserve reduction.
- The company reported effective disclosure controls. Integration of UCP into internal financial-reporting controls was still in process.
Important facts for investors to verify
- Whether UCP integration, preliminary purchase accounting and expected acquisition benefits develop as anticipated, and how much of reported growth is attributable to the acquisition.
- Whether backlog converts to closings and revenue, and whether homebuilding margins stabilize after the reported declines and purchase-accounting effects.
- Whether inventory investment and land commitments can be funded while maintaining covenant compliance and adequate available liquidity.
- The trajectory of debt, interest costs, cash generation and share dilution following debt and equity issuance.
- The filing gives net debt-to-net capital of 51.8% at September 30; verify the comparable prior-period figure, as the filing’s summary table and detailed reconciliation show different December 2016 percentages.