Century Communities, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company develops, builds, markets, and sells single-family homes across five segments: Atlanta, Central Texas, Colorado, Houston, and Nevada.
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $189.1 million | $79.9 million | $345.5 million | $129.5 million |
| Operating income | $14.0 million | $8.2 million | $23.2 million | $13.6 million |
| Net income | $9.8 million | $5.3 million | $16.1 million | $8.7 million |
| Basic and diluted EPS | $0.46 | $0.30 | $0.76 | $0.50 |
| Homes delivered | 636 | 198 | 1,178 | 326 |
| Average delivered home price | $293,700 | $390,500 | $289,600 | $389,600 |
| Homebuilding gross margin | 19.6% | 24.7% | 19.4% | 24.8% |
- Home sales revenue was $186.8 million in Q2 and $341.1 million for the first half, increases of 141.6% and 168.6%, respectively. Management attributed growth primarily to higher deliveries following the 2014 acquisitions of Peachtree, Grand View, and Las Vegas Land Holdings (LVLH).
- Net new home contracts rose 155.5% in Q2 to 718 and 221.4% in the first half to 1,424. June 30 backlog was 1,005 homes valued at approximately $348.0 million, up 155.1% in units and 107.3% in value year over year. The cancellation rate was 19%, versus 17% in Q2 2014.
- Gross margin fell as the newer Atlanta and Houston markets had lower average prices and margins, and due to higher capitalized interest recognized in cost of sales and acquisition purchase-accounting charges. Excluding interest and purchase accounting, the company’s non-GAAP adjusted gross margin was 21.3% in Q2 (26.5% prior year) and 21.4% for the first half (26.1% prior year).
- Selling, general and administrative expense was $22.8 million in Q2 and $43.7 million in the first half; it increased in dollars with expansion but declined as a share of home sales revenue to 12.2% and 12.8%, respectively.
Cash flow, balance sheet, debt, and liquidity
- At June 30, cash was $32.6 million, down from $33.5 million at year-end 2014. Total assets were $781.1 million and stockholders’ equity was $383.1 million.
- Six-month operating cash flow was negative $72.2 million, primarily reflecting an $80.9 million cash investment in inventories as land acquisition, development, and home construction expanded. Investing cash outflow was $1.0 million; financing provided $72.3 million.
- Inventories increased to $661.7 million from $556.3 million at year-end. Total notes payable and revolving credit borrowings were $304.5 million, compared with $229.6 million. This included $257.7 million of 6.875% senior notes due 2022 and $40.0 million drawn on a $120 million revolving facility. The company reported compliance with facility covenants at quarter-end.
- After quarter-end, on July 31, the revolving facility was increased to $200 million and its maturity extended to October 2018; the company may request a further increase of up to $100 million, subject to terms and conditions.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash needs for land purchases and development are expected to exceed cash generated by operations as the company grows its lot supply and communities. Homebuilding cash flows are seasonal, with more deliveries and cash receipts typically in the second half.
- Risks cited include housing-market and mortgage-rate changes, access to land and capital, labor and material costs, construction or approval delays, regulation, competition, and leverage and debt service. Floating-rate revolver borrowings expose the company to interest-rate risk.
- Land options covered 1,567 lots with a stated total of $78.7 million; related non-refundable deposits were $4.1 million. Outstanding letters of credit and performance bonds totaled $39.3 million. Management said ordinary-course litigation, including construction-defect claims, was not expected to have a material adverse effect.
- The company sold the Tuscany golf-course operations for $4.0 million, including a $3.0 million secured note, and exercised a put option to sell the Rhodes Ranch golf course for $5.9 million, with closing due by June 1, 2016. A $0.6 million favorable warranty-reserve adjustment reduced Q2 cost of home sales.
- Management continued remediation of previously identified material weaknesses in period-end financial reporting and information-technology controls; the weaknesses had not yet been deemed remediated. The filing reported no material changes to the risk factors in the prior Form 10-K.
Important facts for investors to verify
- How much of revenue, contracts, and backlog growth reflects acquisitions versus organic growth, and how acquired markets affect future pricing and margins.
- Whether gross-margin pressure, cancellation levels, and inventory investment stabilize as acquired businesses are integrated.
- Cash requirements for the expanded land and construction pipeline, borrowing availability under the amended revolver, and ongoing covenant compliance.
- Progress and timing of remediation of the disclosed internal-control material weaknesses.
- Collection and repayment terms for the Tuscany secured note, and completion of the Rhodes Ranch sale by its stated deadline.