Century Communities, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company builds and sells single-family homes, primarily in Colorado and Texas, with newly acquired operations in Nevada and Houston. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Home sales revenue | $90.7 | $41.5 | $217.7 | $107.5 |
| Homebuilding gross margin | $19.8; 21.9% | $9.5; 23.0% | $51.4; 23.6% | $26.4; 24.6% |
| Operating income | $6.3 | $3.9 | $19.9 | $13.2 |
| Income before tax | $6.7 | $3.8 | $19.9 | $13.3 |
| Net income | $4.1 | $2.4 | $12.8 | $9.4 |
| Basic and diluted EPS | $0.19 | $0.14 | $0.68 | $0.81 |
- Q3 deliveries were 258 homes, up 141% year over year; average selling price was $351,686, down 9.3%, reflecting the addition of lower-priced Houston and Nevada deliveries. Nine-month deliveries rose 87% to 584, and average price increased 8.2% to $372,832.
- Q3 net orders were 247, up 208%; cancellation rate was 22%, versus 29%. Backlog was 472 homes, up 74%, with reported value of approximately $190.0 million, versus $128.8 million.
- Homebuilding gross margin declined year over year, partly due to purchase-accounting adjustments to acquired inventory. Adjusted gross margin excluding interest in cost of sales was 22.7% in Q3 and 24.2% for nine months, compared with 24.3% and 25.8%, respectively.
- Golf-course and other revenue was $1.2 million in Q3, against $2.2 million of associated costs, for a $0.9 million gross loss. For nine months, the gross loss was $0.6 million. Management noted seasonal heat and reseeding closures affected Q3 golf activity.
- Cash was $101.7 million at September 30, down from $110.0 million at year-end. Nine-month operating cash flow was negative $109.3 million, principally reflecting a $116.4 million inventory cash outflow; investing cash flow was negative $178.6 million, mainly for acquisitions. Financing provided $279.6 million, including the notes and IPO proceeds.
- Total debt and revolving borrowings were $210.0 million at quarter-end, including $198.6 million carrying value of 6.875% senior notes due 2022. The notes are unsecured and have no financial covenants. The former revolving facility had been terminated; no revolver balance was outstanding.
- Total assets were $638.6 million, including $461.6 million of inventory; total liabilities were $270.8 million and stockholders’ equity was $367.8 million. The filing does not provide a current ratio or a quarter-end borrowing availability figure.
Changes, outlook, and material items
- Growth reflects acquisitions: Jimmy Jacobs expanded Central Texas; LVLH added 1,761 Las Vegas lots and two golf courses; Grand View entered Houston. The company reported 9,449 owned or controlled lots at September 30, versus 8,341 at year-end.
- In May, the company issued $200 million of senior notes and received approximately $193.3 million net proceeds; it used $99.2 million to repay the prior revolving loan. In June, its IPO of 4.0 million shares at $23 per share generated approximately $81.9 million net proceeds.
- For the nine-month comparison, reported EPS fell to $0.68 from $0.81 despite higher net income, amid a larger weighted-average share count and different tax/entity circumstances. Pro forma EPS was $0.77 versus $1.25; pro forma figures include acquisition and tax/conversion adjustments and are not GAAP results.
- Management said land acquisition and development cash outlays are expected to exceed cash generated by operations as the company expands. No specific earnings, revenue, or delivery guidance was provided. Homebuilding is seasonal, with order activity typically strongest in spring and deliveries and cash receipts weighted toward the second half.
- On October 21, 2014, the company entered a new revolving facility of up to $120 million, maturing in 2017, with potential lender-approved extensions and an option to seek up to $80 million in additional capacity. It includes leverage, interest-coverage, minimum liquidity, tangible-net-worth and risk-asset covenants; borrowings carry floating rates.
- After quarter-end, on November 13, the company acquired Peachtree Communities in Atlanta for approximately $55 million in cash, adding 2,120 owned or controlled lots in 36 communities. On November 5, the board authorized repurchases of up to 2 million shares; the filing does not indicate that repurchases had occurred.
- Material control issue: management identified a material weakness in the period-end financial reporting process, citing insufficiently formalized procedures and accounting personnel expertise. Remediation plans include documenting controls, adding experienced staff, and strengthening review. Management had not yet concluded that the weakness was remediated.
- Risks include housing-market and mortgage-rate changes, land and construction cost inflation, availability of land and capital, construction delays, acquisition integration, leverage, and the identified reporting-control weakness. The company reported ordinary-course construction-defect claims and stated it did not expect them to materially affect its financial condition, results, or cash flows. Letters of credit and performance bonds totaled $31.0 million; land options covered 2,490 lots with $138.5 million in purchase prices and $2.9 million in nonrefundable deposits.
Key facts investors should verify
- Progress and independent validation of remediation of the material weakness in period-end financial reporting.
- Acquisition integration, final purchase-price allocations, and performance of the Las Vegas, Houston, and Atlanta businesses; the LVLH and Grand View valuations were preliminary.
- Cash needs for land development and inventory growth, and compliance with the new facility’s financial covenants and minimum $25 million liquidity requirement.
- Underlying margin trends excluding purchase-accounting effects, and the sustainability of order growth, cancellation rates, backlog conversion, and average selling prices.
- The backlog value is stated as approximately $190.0 million in the operating-data table; the narrative describes it as approximately $191.5 million. Confirm the intended figure against the filed statements or company disclosures.