WCI Reports Third Quarter 2006 Results
biz.yahoo.com
Tuesday November 7, 7:00 am ET
Third Quarter Financial Highlights:
-----------------------------------
-- Net income: $10.7 million - down 73.0%
-- Diluted EPS: $0.25 - down 70.6%
-- Revenues: $427.2 million - down 31.3%
-- New orders: $120.1 million - down 82.0%
-- Backlog at September 30, 2006: $1.41 billion
-- Reduced projected 2006 diluted EPS to $2.50 to $3.00 from $2.75 to
$3.25
-- Projected 2007 diluted EPS of $1.00 to $2.00
BONITA SPRINGS, Fla., Nov. 7, 2006 (PRIMEZONE) -- WCI Communities, Inc. (NYSE:WCI), a leading builder of traditional and tower residences in highly amenitized lifestyle communities, today reported its results for the third quarter of 2006. For the three months ended September 30, 2006, net income fell 73.0% to $10.7 million, compared with $39.7 million in the third quarter of 2005, while diluted earnings per share (EPS) fell 70.6% to $0.25 from $0.85. Revenues for the third quarter of 2006 were $427.2 million, compared with $621.9 million for the third quarter of 2005, a 31.3% decrease. The aggregate value of Traditional and Tower Homebuilding orders for the quarter fell 82.0% over the same period a year ago to $120.1 million, while the number of unit orders declined 81.5% to 140.
``Our results this quarter continue to reflect the impact of dramatically lower demand for our Florida traditional and tower homes,'' said Jerry Starkey, WCI's President and CEO. ``Traditional home cancellations were about twice our historical rate during the quarter and we also experienced a higher rate of defaults in our Tower Division. The low order levels and defaults each had an impact on our earnings this quarter, as did our decision to abandon land option contracts, which resulted in a charge of $14.0 million or $0.25 EPS. Given the lack of visibility on demand, we have taken steps to operate the company through a protracted period of lower demand. We are making significant reductions to overhead, including reductions in our workforce that are expected to reduce our payroll, incentive and benefit costs about $60.0 million annually. We are also severely limiting our land spending and are pursuing the disposition of certain recreational amenity assets. The lower land spending is not expected to adversely impact our growth beyond 2007 as WCI already has considerable land holdings, which have a remaining projected build-out of approximately 18,500 units and were purchased an average of five years ago. Another 2,675 units are currently under option. We continue to focus on direct cost reductions in home construction and land development. For the next several quarters, WCI will focus on generating cash flow and reducing debt. Eight towers are expected to close in the fourth quarter of 2006, with another six expected to close in the first half of 2007. We are carefully monitoring the tower closings, as collecting these tower receivables is a key driver of our cash flow and debt reduction during this slower demand period. Attached to this release is a schedule of our towers under construction, which illustrates the percent sold, expected closing date, and average deposit collected per tower. Also attached is an updated land table. We hope our investors find this expanded information useful.''
For the nine month period ended September 30, 2006, net income totaled $73.6 million compared with $131.6 million earned during the year-to-date 2005 while EPS declined 40.0% to $1.68 from $2.80 for the same period a year ago. Revenues decreased 13.1% to $1.53 billion from $1.76 billion in the year earlier period. For the nine month period ended September 30, 2006, the aggregate value of Traditional and Tower Homebuilding orders declined 64.1% over the same period a year ago to $693.3 million while the number of unit orders decreased 65.8% to 829. The company's backlog fell to $1.41 billion, down 43.8% from $2.51 billion reported a year earlier.
Traditional Homebuilding
Third quarter 2006 revenues for Traditional Homebuilding, including lot sales, fell 31.9% to $211.9 million from $311.2 million for the third quarter of 2005. The company closed 279 homes compared with 582 for the same period a year ago. Florida revenues totaled $159.9 million or 75.5% of total Traditional Homebuilding revenues versus $220.9 million or 71.0% for the third quarter of 2005. Revenues from WCI's Northeast Division accounted for 4.7% of Traditional Homebuilding revenues during the third quarter of 2006 versus 15.9% during the same period a year ago while the company's Mid-Atlantic Division accounted for 19.8% and 13.1% for the third quarters of 2006 and 2005, respectively. Gross margin as a percentage of revenue for Traditional Homebuilding increased 290 b.p. to 22.6% for the third quarter of 2006, in part due to deposits retained on defaulted closings adding 80 b.p. and cost savings related to recently completed subdivision land development projects adding 104 b.p., partially offset by a 110 b.p. reduction due to asset impairments.
For the third quarter of 2006, the value of Traditional Homebuilding orders declined 57.5% to $118.8 million. Gross demand was down 51.2%, however rising cancellations, at a rate of 34.2% versus 5.8% in the same period a year ago and a 30.7% cancellation rate in the second quarter of 2006, pushed net new orders down 66.0%. Two active adult communities in Florida accounted for over a third of the cancellations this quarter. The average price for Traditional Homebuilding orders for the third quarter of 2006 rose 25.0% to $825,000 compared with $660,000 for the third quarter of 2005, due entirely to mix changes, as the current quarter's orders contained a smaller percentage of active adult homes, which carry a lower price. Incentives and discounts on new orders for the quarter averaged 9.5% vs. 4.8% for the homes closed in the quarter. Traditional Homebuilding backlog at September 30, 2006 was $1.02 billion, down 29.7% over the third quarter 2005's $1.45 billion.
For the nine month period ended September 30, 2006, Traditional Homebuilding revenues decreased 1.7% to $757.0 million. The company closed 1,143 homes compared with 1,487 for the same period a year ago. Gross margin as a percentage of revenue rose to 22.0% versus 17.3% for the nine months ended September 30, 2006, primarily because gross margins were depressed during 2005 due to the impact of 2004 hurricanes on the timing of deliveries and resulting construction cost of homes in backlog. The company currently expects its gross margin as a percentage of Traditional Homebuilding revenue to range from 19% to 20% for the fourth quarter of 2006, and from 18% to 20% for 2007.
Tower Homebuilding
For the three months ended September 30, 2006, revenues in the Tower Homebuilding Division decreased 32.2% to $172.3 million from $254.0 million for the same period a year ago. Fewer sales in buildings under construction and less progression of percentage of completion among the 18 towers under construction and recognizing revenue during the third quarter of 2006, which have a total projected sell-out value of over $2.1 billion, contributed to the decline in revenues. In comparison, there were 20 towers, with a total sellout value of $2.2 billion, under construction and recognizing revenue during the third quarter 2005. No new towers began recognizing revenue during the third quarter of 2006 while four began revenue recognition in the third quarter of 2005. Tower Homebuilding gross margin as a percentage of revenue declined 707 b.p. to 18.0% for the quarter from 24.7% for the three months ended September 30, 2005. During each quarter, the company reviews the cost estimates for each tower under construction and makes adjustments to reflect actual increases or decreases in current and expected future costs. For the third quarter of 2006, $13.3 million (780 b.p.) of unfavorable adjustments to estimates were made related to towers under construction. These adjustments included additional direct construction costs ($4.9 million,) additional estimated interest costs anticipated associated with longer tower construction cycles ($3.9 million,) an increase in the tower default reserve ($2.2 million,) and increases in building insurance costs ($2.3 million.)
Tower Homebuilding orders for the third quarter 2006 totaled negative four (comprised of nine new contracts less 13 defaults) versus 333 in the third quarter of 2005. No new towers converted to contract during the third quarter this year. Tower Homebuilding backlog at September 30, 2006 totaled $384.3 million, a 63.7% decrease over the $1.06 billion backlog at September 30, 2005. For the balance of the year, eight towers, consisting of 637 units and with a projected sell-out value of approximately $680.0 million, are expected to close. Those towers are over 94% sold.
During the quarter, the company completed and delivered one tower, consisting of 45 units, and experienced nine defaults in that tower plus another four defaults in other towers recently closed or under construction. For the nine months ended September 30, 2006, seven towers with 407 units were completed with a total of 19 defaults, producing a default rate of approximately 4.7%.
Year-to-date 2006, revenues in the Tower Homebuilding Division fell 13.0% to $606.2 million. Gross margin as a percentage of revenue declined to 21.5% from 25.5% the same period last year, due principally to cost adjustments in the second and third quarters of the year. Gross margin as a percentage of revenue for the Tower Homebuilding Division for the fourth quarter is expected to range from 24% to 25% and range from 20% to 23% for 2007.
Real Estate Services
Revenues for the Real Estate Services Division for the third quarter 2006 were $23.4 million, a 42.8% decrease from the $40.9 million recorded for the same period a year ago. The decline was primarily due to the continued slow market for new and resale homes during the quarter. Transactions for Prudential Florida WCI Realty declined 41.3% over the same period a year ago. Gross margin as a percentage of revenue for the period was 0.5% compared with 16.2% in the third quarter 2005.
For the nine month period, revenues in the Real Estate Services Division totaled $87.1 million, down 32.2% from the $128.5 million recorded for the nine months ended September 30, 2005. Gross margin as a percentage of revenue over the period decreased to 6.8% from 17.3% in the same period a year ago on weaker results from the company's real estate brokerage and mortgage banking businesses.
Other Items
Revenues for the Amenities Division for the third quarter 2006 were $16.2 million, a 24.6% increase from $13.0 million for the same period a year ago. Gross margin totaled a loss of $3.3 million for the third quarter 2006 versus a loss of $1.5 million in the third quarter of 2005.
Land sale revenues for the third quarter 2006 totaled $1.4 million compared with $899,000 for the third quarter of 2005. Other revenue totaled $2.0 million. Gross margin on other revenue totaled a loss of $13.4 million, due primarily to the write-down of option deposits and other costs on three land parcels, that were terminated during the quarter. Approximately $12.3 million was related to a large Southwest Florida community where entitlements were delayed.
Other income, including hurricane costs and recoveries, for the three months ended September 30, 2006 totaled $9.5 million compared with $1.5 million in the third quarter of 2005. The September 30, 2006 figure includes $5.9 million of hurricane recoveries related to Hurricane Ivan, which impacted the company in September 2004. The company also recognized a $2.6 million gain on the sale of a 50.1% interest in a newly formed joint venture with an affiliate of Wells Fargo Home Mortgage. This mortgage company joint venture will replace the company's mortgage banking operation.
Selling, general, and administrative expenses including real estate taxes (SG&A) as a percentage of revenue for the third quarter 2006 totaled 10.5%, up from 7.4% in the third quarter of the previous year due to lower revenues. The effective income tax rate for the quarter of 24.9% benefited from a one-time tax benefit of $2.9 million. The company expects its tax rate going forward to approximate its recent historical rate of 38.0% to 39.0%.
Cash Flow/Financial Position/Balance Sheet
For the nine months ended September 30, 2006, net cash used in operating activities, including the purchase and development of real estate inventories, totaled $605.0 million compared with cash used of $115.2 million in the same period a year ago. The company expects a large inflow of cash in the next three to nine months related to the closing of 14 towers. In total, the closing of over 1,100 tower units over the period is expected to result in a net cash inflow of approximately $1.1 billion.
On September 7th, 2006, the company's Board of Directors increased WCI's common stock share repurchase authorization by three million shares to a total of five million shares, to be made within predetermined parameters set by the company's Board of Directors. On September 15th, 2006, WCI filed a form 8-K in which it stated that it had entered into an agreement pursuant to which the company could enter into call option transactions with respect to up to five million shares of its common stock. In mid-September through October, the company did purchase a series of capped call options, allowing it to repurchase up to five million shares of its common stock one year from the date of each option contract. The option payment that WCI paid an investment bank approximated $25.7 million, with approximately $20.3 million paid and recorded during the fourth quarter.
Total liquidity, measured as the sum of cash plus available capacity under the unsecured revolving facility, totaled approximately $379.9 million at September 30, 2006. In addition, letters of credit of $31.6 million were outstanding as of September 30, 2006. The maximum amount available to borrow under the company's senior unsecured revolving credit facility is $930 million. The facility matures in June of 2010. The ratio of net debt to net capitalization increased to 65.4% compared with 58.4% at September 30, 2005 and 62.1% at June 30, 2006. The company continues to expect its net debt to net capitalization rate to fall significantly by the end of the year due to its seasonal pattern of deliveries, which historically is highest in the fourth quarter of the year. In addition, if the expectation of a high percentage of tower contracts closing as scheduled is realized, the company expects leverage to continue to fall during 2007.
Guidance
For 2006, the company currently projects the following:
-- EPS of $2.50 to $3.00, depending on traditional and tower
homebuilding closings and certain land or recreational amenity
sales
-- Revenues of $2.1 billion to $2.3 billion
-- Debt to Capital ratio of 59% - 62%
For 2007, the company currently projects the following:
-- EPS of $1.00 to $2.00, depending on traditional and tower
homebuilding orders and land sales
-- Revenues of $1.3 billion to $1.7 billion
-- Traditional Homebuilding Division gross margins between 18% and 20%
-- Tower Homebuilding Division gross margins between 20% and 23%
-- Year-end Debt to Capital ratio of 49% - 52% |
