SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-36491
Century Communities, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 68-0521411 | |
(State | (I.R.S. Employer | |
8390 East Crescent Parkway, Suite 650 | 80111 | |
(Address of principal executive offices) | (Zip |
(Registrant’s telephone number, including area code): (303) 770-8300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock, par value $0.01 per share | CCS | NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large |
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Non-accelerated Filer | o | Smaller Reporting Company | o | |||
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒x
On October 26, 2018, 30,758,85225, 2019, 31,347,379 shares of common stock, par value $0.01 per share, were outstanding.
CENTURY COMMUNITIES, INC.
FORM 10-Q
For the Three and Nine Months endedEnded September 30, 20182019
Century Communities, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 20182019 and December 31, 20172018
(in thousands, except share amounts)
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
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| 2018 |
| 2017 | 2019 | 2018 | ||||||
Assets |
| (Unaudited) |
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| (unaudited) | ||||||
Cash and cash equivalents |
| $ | 15,927 |
| $ | 88,832 | $ | 38,508 | $ | 32,902 | ||
Cash held in escrow |
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| 31,906 |
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| 37,723 | 30,362 | 24,344 | ||||
Accounts receivable |
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| 28,015 |
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| 12,999 | 17,929 | 13,464 | ||||
Inventories |
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| 1,834,897 |
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| 1,390,354 | 2,093,493 | 1,848,243 | ||||
Mortgage loans held for sale |
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| 62,440 |
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| 52,327 | 95,321 | 112,394 | ||||
Prepaid expenses and other assets |
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| 100,245 |
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| 60,812 | 129,925 | 140,397 | ||||
Property and equipment, net |
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| 32,827 |
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| 27,911 | 35,258 | 33,258 | ||||
Investment in unconsolidated subsidiaries |
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| — |
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| 28,208 | ||||||
Deferred tax assets, net |
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| 10,412 |
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| 5,555 | 14,277 | 13,763 | ||||
Amortizable intangible assets, net |
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| 5,205 |
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| 2,938 | 4,094 | 5,095 | ||||
Goodwill |
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| 30,620 |
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| 27,363 | 30,395 | 30,395 | ||||
Total assets |
| $ | 2,152,494 |
| $ | 1,735,022 | $ | 2,489,562 | $ | 2,254,255 | ||
Liabilities and stockholders' equity |
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Liabilities: |
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Accounts payable |
| $ | 40,614 |
| $ | 24,831 | $ | 78,695 | $ | 89,907 | ||
Accrued expenses and other liabilities |
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| 190,305 |
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| 150,356 | 206,818 | 213,157 | ||||
Notes payable |
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| 787,455 |
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| 776,283 | 896,272 | 784,777 | ||||
Revolving line of credit |
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| 236,000 |
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| — | 278,800 | 202,500 | ||||
Mortgage repurchase facilities |
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| 57,327 |
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| 48,319 | 77,798 | 104,555 | ||||
Total liabilities |
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| 1,311,701 |
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| 999,789 | 1,538,383 | 1,394,896 | ||||
Stockholders' equity: |
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Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding |
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| — |
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| — | ||||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 30,758,852 and 29,502,624 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively |
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| 308 |
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| 295 | ||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized, NaN outstanding | — | — | ||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,249,373 and 30,154,791 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 312 | 302 | ||||||||||
Additional paid-in capital |
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| 602,659 |
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| 566,790 | 627,211 | 595,037 | ||||
Retained earnings |
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| 237,826 |
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| 168,148 | 323,656 | 264,020 | ||||
Total stockholders' equity |
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| 840,793 |
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| 735,233 | 951,179 | 859,359 | ||||
Total liabilities and stockholders' equity |
| $ | 2,152,494 |
| $ | 1,735,022 | $ | 2,489,562 | $ | 2,254,255 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months endedEnded September 30, 20182019and 20172018
(in thousands, except share and per share amounts)
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| Three months ended September 30, | Nine months ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues |
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Homebuilding revenues |
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Home sales revenues |
| $ | 552,876 |
| $ | 374,935 |
| $ | 1,469,871 |
| $ | 888,942 | $ | 573,860 | $ | 552,876 | $ | 1,705,798 | $ | 1,469,871 | ||||
Land sales and other revenues |
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| 1,131 |
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| 1,826 |
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| 4,304 |
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| 6,216 | 6,083 | 1,131 | 8,837 | 4,304 | ||||||||
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| 554,007 |
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| 376,761 |
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| 1,474,175 |
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| 895,158 | 579,943 | 554,007 | 1,714,635 | 1,474,175 | ||||||||
Financial services revenue |
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| 7,722 |
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| 2,955 |
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| 21,292 |
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| 4,697 | 10,419 | 7,722 | 28,734 | 21,292 | ||||||||
Total revenues |
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| 561,729 |
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| 379,716 |
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| 1,495,467 |
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| 899,855 | 590,362 | 561,729 | 1,743,369 | 1,495,467 | ||||||||
Homebuilding cost of revenues |
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Cost of home sales revenues |
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| (460,144) |
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| (311,365) |
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| (1,206,924) |
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| (727,577) | (469,834) | (460,144) | (1,407,519) | (1,206,924) | ||||||||
Cost of land sales and other revenues |
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| (1,093) |
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| (2,104) |
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| (3,010) |
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| (4,994) | (4,624) | (1,093) | (6,115) | (3,010) | ||||||||
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| (461,237) |
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| (313,469) |
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| (1,209,934) |
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| (732,571) | (474,458) | (461,237) | (1,413,634) | (1,209,934) | ||||||||
Financial services costs |
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| (6,056) |
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| (2,450) |
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| (15,836) |
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| (4,648) | (8,174) | (6,056) | (22,750) | (15,836) | ||||||||
Selling, general and administrative |
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| (70,975) |
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| (46,165) |
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| (191,130) |
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| (113,597) | (72,834) | (70,975) | (216,987) | (191,130) | ||||||||
Loss on debt extinguishment | — | — | (10,832) | — | ||||||||||||||||||||
Acquisition expense |
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| (58) |
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| (7,205) |
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| (395) |
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| (8,645) | — | (58) | — | (395) | ||||||||
Equity in income of unconsolidated subsidiaries |
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| — |
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| 3,716 |
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| 14,849 |
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| 7,648 | — | — | — | 14,849 | ||||||||
Other income (expense) |
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| (545) |
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| 1,013 |
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| (553) |
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| 2,274 | (56) | (545) | (499) | (553) | ||||||||
Income before income tax expense |
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| 22,858 |
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| 15,156 |
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| 92,468 |
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| 50,316 | 34,840 | 22,858 | 78,667 | 92,468 | ||||||||
Income tax expense |
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| (5,810) |
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| (5,686) |
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| (22,207) |
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| (17,216) | (7,816) | (5,810) | (19,031) | (22,207) | ||||||||
Net income |
| $ | 17,048 |
| $ | 9,470 |
| $ | 70,261 |
| $ | 33,100 | $ | 27,024 | $ | 17,048 | $ | 59,636 | $ | 70,261 | ||||
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Earnings per share: |
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Basic |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.35 |
| $ | 1.42 | $ | 0.88 | $ | 0.56 | $ | 1.96 | $ | 2.35 | ||||
Diluted |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.33 |
| $ | 1.41 | $ | 0.87 | $ | 0.56 | $ | 1.95 | $ | 2.33 | ||||
Weighted average common shares outstanding: |
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Basic |
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| 30,232,376 |
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| 25,445,552 |
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| 29,885,858 |
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| 23,038,390 | 30,587,487 | 30,232,376 | 30,378,860 | 29,885,858 | ||||||||
Diluted |
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| 30,554,881 |
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| 25,726,137 |
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| 30,189,058 |
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| 23,275,320 | 30,906,235 | 30,554,881 | 30,641,194 | 30,189,058 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months endedEnded September 30, 20182019 and 20172018
(in thousands)
Nine Months Ended September 30, | ||||||
2019 | 2018 | |||||
Operating activities | ||||||
Net income | $ | 59,636 | $ | 70,261 | ||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||
Depreciation and amortization | 9,793 | 8,803 | ||||
Stock-based compensation expense | 11,391 | 10,135 | ||||
Loss on debt extinguishment | 10,832 | — | ||||
Deferred income taxes | (514) | (804) | ||||
Distributions from unconsolidated subsidiaries | — | 7,432 | ||||
Equity in income of unconsolidated subsidiaries | — | (14,849) | ||||
(Gain) loss on disposition of assets | 846 | 1,399 | ||||
Changes in assets and liabilities: | ||||||
Cash held in escrow | (6,018) | 6,077 | ||||
Accounts receivable | (4,465) | (13,324) | ||||
Inventories | (215,771) | (243,355) | ||||
Prepaid expenses and other assets | 33,346 | (32,640) | ||||
Accounts payable | (11,212) | 3,267 | ||||
Accrued expenses and other liabilities | (53,901) | (9,285) | ||||
Mortgage loans held for sale | 17,073 | (10,114) | ||||
Net cash provided by (used in) operating activities | (148,964) | (216,997) | ||||
Investing activities | ||||||
Purchases of property and equipment | (11,633) | (11,893) | ||||
Business combinations net of acquired cash | — | (28,036) | ||||
Other investing activities | 78 | 272 | ||||
Net cash provided by (used in) investing activities | (11,555) | (39,657) | ||||
Financing activities | ||||||
Borrowings under revolving credit facilities | 1,184,800 | 520,000 | ||||
Payments on revolving credit facilities | (1,108,500) | (284,000) | ||||
Proceeds from issuance of senior notes due 2027 | 500,000 | — | ||||
Extinguishment of senior notes due 2022 | (391,942) | — | ||||
Proceeds from issuance of insurance premium notes and other | 12,629 | 11,838 | ||||
Principal payments on insurance notes payable and other | (19,275) | (2,173) | ||||
Extinguishments of debt assumed in business combination | — | (94,231) | ||||
Debt issuance costs | (6,075) | (3,521) | ||||
Net payments on mortgage repurchase facilities | (26,757) | 9,008 | ||||
Net proceeds from issuances of common stock | 25,817 | 31,230 | ||||
Repurchases of common stock upon vesting of stock based compensation | (3,588) | (5,483) | ||||
Repurchases of common stock under our stock repurchase program | (1,439) | — | ||||
Net cash provided by (used in) financing activities | 165,670 | 182,668 | ||||
Net increase (decrease) | $ | 5,151 | $ | (73,986) | ||
Cash and cash equivalents and Restricted cash | ||||||
Beginning of period | 36,441 | 93,713 | ||||
End of period | $ | 41,592 | $ | 19,727 | ||
Supplemental cash flow disclosure | ||||||
Cash paid for income taxes | $ | 20,722 | $ | 39,326 | ||
Cash and cash equivalents and Restricted cash | ||||||
Cash and cash equivalents | $ | 38,508 | $ | 15,927 | ||
Restricted cash (Note 6) | 3,084 | 3,800 | ||||
Cash and cash equivalents and Restricted cash | $ | 41,592 | $ | 19,727 |
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| Nine months ended September 30, | ||||
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| 2018 |
| 2017 | ||
Operating activities |
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Net income |
| $ | 70,261 |
| $ | 33,100 |
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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| 8,803 |
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| 5,073 |
Stock-based compensation expense |
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| 10,135 |
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| 6,521 |
Deferred income taxes |
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| (804) |
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| (2,766) |
Distribution of income from unconsolidated subsidiaries |
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| 7,432 |
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| 5,246 |
Equity in income of unconsolidated subsidiaries |
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| (14,849) |
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| (7,648) |
(Gain) loss on disposition of assets |
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| 1,399 |
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| 202 |
Changes in assets and liabilities: |
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Cash held in escrow |
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| 6,077 |
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| (22,218) |
Accounts receivable |
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| (13,324) |
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| (7,493) |
Inventories |
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| (243,355) |
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| (95,065) |
Prepaid expenses and other assets |
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| (32,640) |
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| (11,291) |
Accounts payable |
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| 3,267 |
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| (8,026) |
Accrued expenses and other liabilities |
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| (9,285) |
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| 9,027 |
Mortgage loans held for sale |
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| (10,114) |
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| (30,071) |
Net cash used in operating activities |
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| (216,997) |
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| (125,409) |
Investing activities |
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Purchases of property and equipment |
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| (11,893) |
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| (5,867) |
Business combinations, net of acquired cash |
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| (28,036) |
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| (77,457) |
Proceeds from sale of South Carolina operations |
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| — |
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| 17,074 |
Other investing activities |
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| 272 |
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| 128 |
Net cash used in investing activities |
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| (39,657) |
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| (66,122) |
Financing activities |
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Borrowings under revolving credit facilities |
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| 520,000 |
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| 75,000 |
Payments on revolving credit facilities |
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| (284,000) |
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| (270,000) |
Proceeds from issuance of senior notes |
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| — |
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| 523,000 |
Proceeds from insurance notes payable |
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| 11,838 |
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| — |
Extinguishments of debt assumed in business combination |
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| (94,231) |
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| (151,919) |
Principal payments on notes payable |
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| (2,173) |
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| (4,735) |
Debt issuance costs |
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| (3,521) |
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| (3,731) |
Net proceeds from mortgage repurchase facilities |
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| 9,008 |
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| 27,465 |
Net proceeds from issuances of common stock |
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| 31,230 |
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| 35,010 |
Repurchases of common stock upon vesting of stock based compensation |
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| (5,483) |
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| (4,141) |
Net cash provided by (used in) financing activities |
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| 182,668 |
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| 225,949 |
Net increase (decrease) |
| $ | (73,986) |
| $ | 34,418 |
Cash and cash equivalents and Restricted cash |
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Beginning of period |
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| 93,713 |
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| 30,954 |
End of period |
| $ | 19,727 |
| $ | 65,372 |
Supplemental cash flow disclosure |
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Cash paid for income taxes |
| $ | 39,326 |
| $ | 21,657 |
Cash and cash equivalents and Restricted cash |
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Cash and cash equivalents |
| $ | 15,927 |
| $ | 58,522 |
Restricted cash (Note 6) |
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| 3,800 |
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| 6,850 |
Cash and cash equivalents and Restricted cash |
| $ | 19,727 |
| $ | 65,372 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2019 and 2018
(in thousands)
Three Months Ended September 30, 2019 and 2018
Common Stock | ||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total Stockholders' Equity | ||||||||||
Balance at June 30, 2019 | 30,439 | $ | 304 | $ | 600,293 | $ | 296,632 | $ | 897,229 | |||||
Issuance of common stock, net | 799 | 8 | 23,146 | — | 23,154 | |||||||||
Vesting of restricted stock units | 11 | — | (151) | — | (151) | |||||||||
Stock-based compensation expense | — | — | 3,923 | — | 3,923 | |||||||||
Net income | — | — | — | 27,024 | 27,024 | |||||||||
Balance at September 30, 2019 | 31,249 | $ | 312 | $ | 627,211 | $ | 323,656 | $ | 951,179 | |||||
Balance at June 30, 2018 | 30,119 | $ | 301 | $ | 582,627 | $ | 220,778 | $ | 803,706 | |||||
Issuance of common stock, net | 600 | 6 | 16,915 | — | 16,921 | |||||||||
Vesting of restricted stock units | 40 | 1 | (695) | — | (694) | |||||||||
Stock-based compensation expense | — | — | 3,812 | — | 3,812 | |||||||||
Net income | — | — | — | 17,048 | 17,048 | |||||||||
Balance at September 30, 2018 | 30,759 | $ | 308 | $ | 602,659 | $ | 237,826 | $ | 840,793 |
Nine Months Ended September 30, 2019 and 2018
Common Stock | ||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total Stockholders' Equity | ||||||||||
Balance at December 31, 2018 | 30,155 | $ | 302 | $ | 595,037 | $ | 264,020 | $ | 859,359 | |||||
Issuance of common stock, net | 899 | 9 | 25,808 | — | 25,817 | |||||||||
Repurchase of common stock | (83) | (1) | (1,438) | — | (1,439) | |||||||||
Vesting of restricted stock units | 278 | 2 | (3,587) | — | (3,585) | |||||||||
Stock-based compensation expense | — | — | 11,391 | — | 11,391 | |||||||||
Net income | — | — | — | 59,636 | 59,636 | |||||||||
Balance at September 30, 2019 | 31,249 | $ | 312 | $ | 627,211 | $ | 323,656 | $ | 951,179 | |||||
Balance at December 31, 2017 | 29,503 | $ | 295 | $ | 566,790 | $ | 168,148 | $ | 735,233 | |||||
Adoption of ASC 606 | — | — | — | (583) | (583) | |||||||||
Issuance of common stock, net | 1,086 | 11 | 31,219 | — | 31,230 | |||||||||
Vesting of restricted stock units | 170 | 2 | (5,483) | — | (5,481) | |||||||||
Stock-based compensation expense | — | — | 10,133 | — | 10,133 | |||||||||
Net income | — | — | — | 70,261 | 70,261 | |||||||||
Balance at September 30, 2018 | 30,759 | $ | 308 | $ | 602,659 | $ | 237,826 | $ | 840,793 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 20182019
1. Basis of Presentation
Century Communities, Inc. (which we refer to as “we,” “our,“CCS,” or the “Company”), together with its subsidiaries, is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in the States of Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Iowa, Michigan, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah, and Washington. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our Century Communities and Wade Jurney Homes brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, first and second time move up, and active adultlifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Wade Jurney Homes brand solely targets first time homebuyers, in markets which are traditionally underserved by new homebuilders,primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our homebuilding operations are organized into the following five5 reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes. Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title and insurance services, respectively, to our home buyers have been identified as our Financial Services segment.
On August 4, 2017, we acquired UCP, Inc. (which we refer to as “UCP”) which was a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, and with operations in the States of California, Washington, North Carolina, South Carolina, and Tennessee. In connection with the merger, each share of UCP Class A common stock outstanding immediately prior to the closing was converted into $5.32 in cash and 0.2309 of a newly issued share of our common stock. Approximately 4.2 million shares of our common stock were issued and $100.2 million in cash was paid in connection with the merger for total consideration of $209.0 million. On October 31, 2017, we acquired substantially all the assets and operations and assumed certain liabilities of Sundquist Homes, LLC and affiliates (which we refer to as “Sundquist Homes”), a homebuilder with operations in the greater Seattle, Washington area, for approximately $50.2 million. On June 14, 2018, we acquired the remaining 50% ownership interest in WJH, LLC (which we refer to as “WJH” or “Wade Jurney Homes”) for $37.5 million. WJH specializes in providing single family homes for first time buyers. On the acquisition date, WJH had operations in Alabama, Florida, Georgia, North Carolina and South Carolina.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017,2018, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 that was filed with the SEC on March 1, 2018.February 13, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest, and variable interest entities for which the Company is deemed to be the primary beneficiary. We currently do not have any variable interest entities in which we are deemed the primary beneficiary. All intercompany accounts and transactions have been eliminated.
All numbers related to lots and communities disclosed in the notes to the consolidated financial statements are unaudited.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Reclassifications
In order to conform to current year presentation, mortgage loans held for investment and derivative assets of $1.0 million and $0.7 million, respectively, have been reclassified to prepaid expenses and other assets from mortgage loans held for sale on the condensed consolidated balance sheets as of December 31, 2018.
Recently IssuedAdopted Accounting Standards
Leases
The Financial Accounting Standards Board (which we refer to as “FASB”) has issued “Leases (Topic 842),”Accounting Standards Codification (ASC) 842, Leases (which we refer to as “ASC 842”) which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic
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most leases. ASC 842 is effective for the Company beginning January 1, 2019 and interim periods within the annual periods.period. We are currently evaluating the impact Topicadopted ASC 842 will have on our consolidated financial statements. We plan to adopt Topic 842 under
a modified retrospective approach using the option to apply the transition provisions on the effective date January 1, 2019. The modified retrospective approach allows the Company to carry forward our historical lease classification, and to present historical periods under legacy lease accounting guidance. The Company’s leases primarily consist of leases for office space, and computer and office equipment where we are the lessee.
ASC 842 includes several practical expedients which we elected upon adoption including to (a) not reassess the lease classification for any expired or existing leases and (b) not reassess whether previously capitalized initial direct costs qualify for capitalization under ASC 842. Additionally, we elected to utilize hindsight when determining the lease term.
The adoption of ASC 842 resulted in the establishment of a right of use asset of $17.7 million and a lease liability of $18.7 million on our condensed consolidated balance sheet as of January 1, 2019. The adoption of ASC 842 did not impact stockholders’ equity.
Recently AdoptedIssued Accounting Standards
Cash Flows
In AugustJune 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The standard changes the accounting for credit losses for most financial assets and certain other instruments. Credit losses which have historically been accounted for on an incurred loss basis will now be accounted for using an estimate of lifetime expected credit losses. This will generally result in earlier recognition of allowances for credit losses. The standard is effective for the Company on January 1, 2020. Upon adoption, the standard will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We anticipate ASU 2016-15, “Statement2016-13 will apply to certain of Cash Flows - Classification of Certain Cash Receiptsour loans held for investment and Cash Payments.” ASU 2016-15 consists of eight provisions that provide guidancecertain receivable balances. We do not anticipate this standard having a material effect on the classification of certain cash receiptsconsolidated financial statements and cash payments in the statement of cash flows. related disclosures.
In November 2016,August 2018, the FASB issued ASU 2016-18 “Statement of Cash Flows2018-15, “Intangibles – Restricted Cash.Goodwill and Other – Internal-Use Software (Subtopic 350-40).” ASU 2016-18 requiresThis standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a statement of cash flows explainservice contract with the change duringrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for the period in the total of cash, cash equivalents, and restricted cash when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. We adopted ASU 2016-15 and 2016-18 onCompany January 1, 2018.2020. Upon adoption, of 2016-18, we have included restricted cash in the beginning and ending balances on our Statements of Cash FlowsCompany has elected to presentapply the changes during the period in total cash, cash equivalents and restricted cash. Distributions from investments in unconsolidated subsidiaries are classified based on the nature of the activity of the investeestandard prospectively. The Company does not believe that generated the distribution on our Statements of Cash Flows. In accordance with ASU 2016-18, our prior year Statements of Cash Flows have also been retrospectively adjusted.
Revenue Recognition
On January 1, 2018, we adopted “Revenue from Contracts with Customers (ASC 606),” which we refer to as “ASC 606.” ASC 606 requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted ASC 606 as of January 1, 2018 using the modifiedretrospective approach to contracts which were not completed as of January 1, 2018.
While the adoption of ASC 606 did not result inthis standard will have a material impact to oureffect on its consolidated financial statements it did impact the following:and related disclosures.
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Under the modified retrospective approach, we have recorded an opening adjustment to decrease retained earnings by $0.6 million, related to model homes costs that were previously capitalized to inventory, but would have been expensed as incurred under ASC 606. This amount is included as a non-cash adjustment on our Condensed Consolidated Statements of Cash Flows. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting.
Effective January 1, 2018, the following accounting policies have been modified to reflect the adoption of ASC 606.
Home Sales Revenues - Under ASC 606, revenues from home sales and the related profit are recorded when our performance obligations are satisfied, which generally occurs when the respective homes are closed and title has passed to our homebuyers. We generally satisfy our performance obligations in less than one year from the contract date. Proceeds from home closings that are held for our benefit in escrow, are presented as “Cash held in escrow” on our Consolidated Balance Sheets. Cash held for our benefit in escrow is typically held by the escrow agent for less than a few days. When it is determined that the earnings process is not complete and we have remaining obligations, the related revenue and costs are deferred for recognition in future periods until those performance obligations have been
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satisfied. Prior to satisfying our performance obligations, we typically receive deposits from customers related to sold but undelivered homes. These deposits are classified as earnest money deposits and are included in Accrued expenses and other liabilities on our Consolidated Balance Sheets. Earnest money deposits totaled $19.0 million and $14.1 million at September 30, 2018 and December 31, 2017, respectively.
Home and Sales Facilities – Costs related to our model homes and sales facilities are treated in one of three ways depending on their nature. Costs directly attributable to the home including upgrades that are permanent and sold with the home are capitalized to inventory and included in cost of home sales revenues when the unit is closed to the home buyer. Marketing related costs, such as non-permanent signage, brochures and marketing materials as well as the cost to convert the model into a salable unit are expensed as incurred. Costs to furnish the model home sites, permanent signage, and construction of sales facilities are capitalized to property and equipment and depreciated over the estimated life of the community based on the number of lots in the community which typically range from 2 to 3 years.
2. Reporting Segments
Our homebuilding operations are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 1517 states. We build and sell homes under our Century Communities and Wade Jurney Homes brands. Our Century Communities brand is managed by geographic location, and each of our four4 geographic regions targets a wide range of buyer profiles including: first time, first and second time move up, and active adultlifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Each of our four geographic regions is considered a separate operating segment. Our Wade Jurney Homes brand solely targets first time homebuyers, in markets which are traditionally underserved by new homebuilders,primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our Wade Jurney Homes brand currently has operations in eight11 states and is managed separately from our four geographic regions, accordingly,regions. Accordingly, it is considered a separate operating segment.
The management of each of our four geographic regions and Wade Jurney Homes reports to our chief operating decision makers (which we refer to as “CODMs”), the Co-Chief Executive Officers of our Company. The CODMs review the results of our operations, including total revenue and income before income tax expense to determine profitability and to allocate resources. Accordingly, we have presented our homebuilding operations as the following five5 reportable segments:
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West (California and Washington)
Mountain (Colorado, Nevada and Utah)
Texas
Southeast (Georgia, North Carolina, South Carolina and Tennessee)
Wade Jurney Homes (Alabama, Arizona, Florida, Georgia, Indiana, Iowa, Michigan, North Carolina, Ohio, South Carolina, and Texas)
We have also identified our Financial Services operations, which provide mortgage, title, and insurance services to our homebuyers, as a sixth reportable segment. Our Corporate operations aresegment is a non-operating segment, as it serves to support our homebuilding, and to a lesser extent our financial services operations, through functions, such as our executive, finance, treasury, human resources, accounting and accountinglegal departments.
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The following table summarizes total revenue and income before income tax expense by operating segment, where adjustments for purchase price accounting are included in the relative segment (in thousands):
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| Three months ended September 30, |
| Nine months ended September 30, | ||||||||
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Revenue: |
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West | $ | 105,949 |
| $ | 73,684 |
| $ | 354,087 |
| $ | 73,684 |
Mountain |
| 162,912 |
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| 157,224 |
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| 488,928 |
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| 443,526 |
Texas |
| 56,220 |
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| 36,757 |
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| 157,793 |
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| 111,997 |
Southeast |
| 141,458 |
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| 109,096 |
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| 360,653 |
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| 265,951 |
Wade Jurney Homes |
| 87,468 |
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| — |
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| 112,714 |
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| — |
Financial Services |
| 7,722 |
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| 2,955 |
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| 21,292 |
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| 4,697 |
Corporate |
| — |
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| — |
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| — |
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| — |
Total revenue | $ | 561,729 |
| $ | 379,716 |
| $ | 1,495,467 |
| $ | 899,855 |
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Income (loss) before income tax expense: |
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West | $ | 7,478 |
| $ | 5,259 |
| $ | 29,494 |
| $ | 5,259 |
Mountain |
| 18,753 |
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| 19,101 |
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| 61,995 |
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| 56,137 |
Texas |
| 3,539 |
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| 2,166 |
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| 10,319 |
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| 6,407 |
Southeast |
| 10,401 |
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| 6,001 |
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| 24,106 |
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| 16,609 |
Wade Jurney Homes |
| 451 |
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| — |
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| 265 |
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| — |
Financial Services |
| 1,666 |
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| 505 |
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| 5,456 |
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| (192) |
Corporate |
| (19,430) |
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| (17,876) |
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| (39,167) |
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| (33,904) |
Total income before income tax expense | $ | 22,858 |
| $ | 15,156 |
| $ | 92,468 |
| $ | 50,316 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Revenue: | ||||||||||||
West | $ | 116,874 | $ | 105,949 | $ | 364,220 | $ | 354,087 | ||||
Mountain | 171,617 | 162,912 | 510,693 | 488,928 | ||||||||
Texas | 68,812 | 56,220 | 180,820 | 157,793 | ||||||||
Southeast | 118,610 | 141,458 | 356,236 | 360,653 | ||||||||
Wade Jurney Homes | 104,030 | 87,468 | 302,666 | 112,714 | ||||||||
Financial Services | 10,419 | 7,722 | 28,734 | 21,292 | ||||||||
Corporate | — | — | — | — | ||||||||
Total revenue | $ | 590,362 | $ | 561,729 | $ | 1,743,369 | $ | 1,495,467 | ||||
Income (loss) before income tax expense: | ||||||||||||
West | $ | 9,013 | $ | 7,478 | $ | 27,634 | $ | 29,494 | ||||
Mountain | 20,552 | 18,753 | 62,386 | 61,995 | ||||||||
Texas | 8,290 | 3,539 | 17,626 | 10,319 | ||||||||
Southeast | 7,079 | 10,401 | 17,467 | 24,106 | ||||||||
Wade Jurney Homes | 6,032 | 451 | 18,323 | 265 | ||||||||
Financial Services | 2,245 | 1,666 | 5,984 | 5,456 | ||||||||
Corporate | (18,371) | (19,430) | (70,753) | (39,167) | ||||||||
Total income before income tax expense | $ | 34,840 | $ | 22,858 | $ | 78,667 | $ | 92,468 |
The following table summarizes total assets by operating segment (in thousands):
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| December 31, | September 30, | December 31, | ||||||
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| 2018 |
| 2017 | 2019 | 2018 | ||||||
West |
| $ | 479,280 |
| $ | 394,215 | $ | 625,085 | $ | 502,381 | ||
Mountain |
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| 639,811 |
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| 571,880 | 674,894 | 621,757 | ||||
Texas |
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| 216,851 |
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| 192,078 | 222,819 | 209,550 | ||||
Southeast |
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| 468,144 |
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| 401,618 | 455,289 | 448,681 | ||||
Wade Jurney Homes |
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| 178,511 |
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| — | ||||||
Wade Jurney | 287,923 | 204,925 | ||||||||||
Financial Services |
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| 89,238 |
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| 63,137 | 144,682 | 146,710 | ||||
Corporate |
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| 80,659 |
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| 112,094 | 78,870 | 120,251 | ||||
Total assets |
| $ | 2,152,494 |
| $ | 1,735,022 | $ | 2,489,562 | $ | 2,254,255 |
Corporate assets primarily include certain cash and cash equivalents, certain property and equipment, our investment in unconsolidated subsidiaries, prepaid insurance, and deferred financing costs on our revolving line of credit.
3. Business Combinations
UCP, Inc.
On August 4, 2017, we acquired UCP, Inc., which was a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, and with operations in the States of California, Washington, North Carolina, South Carolina, and Tennessee. The merger was unanimously approved by the board of directors of both the Company and UCP and was also approved by UCP stockholders on August 1, 2017. In connection with the merger, each share of UCP Class A common stock outstanding immediately prior to the closing was converted into $5.32 in cash and 0.2309 of a newly issued share of our common stock. No fractional shares were issued in connection with the merger, and UCP stockholders received cash in lieu of any fractional shares. Approximately 4.2 million shares of our common stock were issued in connection with the merger and $100.2 million was paid in cash in connection with the merger. Outstanding UCP restricted stock units were also converted into an aggregate of 0.2 million of Century Communities restricted stock units pursuant to the merger. We determined that the total fair value of these awards was $6.2 million, of which $1.1 million was attributable to services performed by UCP employees prior to the merger and, as such, was included as consideration. We incurred approximately $9.6 million in acquisition related expenses. Total consideration of $209.0 million, inclusive of cash acquired of $20.3 million for this merger, is summarized as follows (in thousands, except per share amount):
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The acquired assets consisted of approximately 4,199 owned lots within 43 total communities in California, Washington, North Carolina, South Carolina and Tennessee. The 4,199 lots included 346 homes in backlog and 59 model homes. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination.
The following table summarizes the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):
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During the nine months ended September 30, 2018, we recognized $1.5 million of expense related to refinements in our estimated fair value of inventories, which occurred during the period. This measurement period adjustment is included in “Cost of home sales revenues” on our Consolidated Statements of Operations.
Acquired inventories consist of both acquired land and work in process inventories. We determined the fair value for acquired land inventory with the assistance of a third-party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price, and absorption rates. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 20% based upon the stage of production of the individual lot. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. We have allocated all Goodwill to the West operating segment. Goodwill of $5.4 million will be deductible for tax purposes.
On August 17, 2017, we sold BMCH South Carolina, LLC, a subsidiary of UCP that was acquired as part of our acquisition of UCP, Inc., to a third party for approximately $17.1 million. Accordingly, the estimated fair value of the acquired assets of BMCH South Carolina, LLC was determined to be equal to the disposal price given the proximity of the two transactions.
We determined that UCP’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.
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Sundquist Homes
On October 31, 2017, we acquired substantially all the assets and operations and assumed certain liabilities of Sundquist Homes and affiliates, a homebuilder with operations in the greater Seattle, Washington area, for approximately $50.2 million in cash. The acquired assets include owned and controlled land, homes under construction and model homes. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination.
The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date of Sundquist Homes (in thousands):
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Acquired inventories consist of both acquired land and work in process inventories. We determined the fair value for acquired land inventory with the assistance of a third-party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price, and absorption rates. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 20% based upon the stage of production of the individual lot. Goodwill of $4.8 million will be deductible for tax purposes in connection with this acquisition.
We determined that Sundquist Homes’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.
WJH, LLC - Wade Jurney Homes
On June 14, 2018, we acquired the remaining 50% ownership interest in WJH for $37.5 million, whereby WJH became a 100% owned subsidiary of the Company. We initially acquired a 50% ownership interest in WJH in November 2016 as part of a joint venture, which was accounted for under the equity method of accounting. Our Wade Jurney Homes brand solely targets first time homebuyers in markets which are traditionally underserved by new homebuilders, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections.The acquired assets primarily include homes under construction that are in various stages of completion and are geographically dispersed. We determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single familysingle-family residences, we concluded that the acquisition represents a business combination. We incurred $0.2$0.4 million in acquisition costs which are reflected in acquisition expenses in our Consolidated Statements of Operations.costs.
Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, we valued our previously held equity interest in WJH at June 14, 2018 at $35.6 million, which iswas inclusive of an estimated discount for lack of control of $1.9 million, and recognized a gain of $7.2 million during the nine months ended September 30, 2018. The gain is included in “Equity in income
The following table outlines the total consideration transferred, inclusive of cash acquired and the fair value of our previously held equity interest (in thousands):
Cash consideration transferred for 50% ownership interest | $ | 37,500 | |
Previously held equity interest acquisition date fair value | 35,625 | ||
Net assets acquired | $ | 73,125 |
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The following table summarizes our preliminary estimates of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash and cash equivalents | $ | 9,464 |
Cash held in escrow | 260 | |
Accounts receivable | 1,042 | |
Inventories | 156,828 | |
Prepaid expenses and other assets | ||
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7,710 | ||
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| 3,600 |
Goodwill | 3,317 | |
$ | 182,221 | |
Accounts payable | $ | 12,516 |
Accrued expenses and other liabilities | 2,349 | |
| 94,231 | |
Total liabilities | 109,096 | |
| $ | 73,125 |
Acquired inventories consist primarily of work in process inventories. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. Amortizable intangible assets include acquired trade names and a non-compete agreement, which were estimated to have fair values of $3.0$3.3 million and $0.4$0.3 million, respectively, and are amortized over 10 years and 2 years, respectively.
The purchase price accounting reflected in the accompanying financial statements is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date).
WeCompany determined that WJH’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.
From the acquisition date, WJH’s results of operations, which include homebuilding revenues of $87.5 million and $112.7 million, respectively, and income before tax inclusive of purchase price accounting, of $0.5 million and $0.3 million, respectively, are included in our accompanying Consolidated Statement of Operations for the three and nine months ended September 30, 2018.
Unaudited Pro Forma Financial Information
Unaudited proPro forma revenuesrevenue and income before tax expense for the nine months ended September 30, 2018 givesgive effect to including the results of the acquisition of WJH. The effect of the WJH acquisition is reflected as though the acquisition date was as of January 1, 2018. Unaudited pro forma income before tax expense adjusts the operating results of WJH to reflect the additional costs that would have been recorded assuming the fair value adjustments had been applied as of the beginning of the period presentedyear preceding the year of the acquisition and excludes acquisition expense incurred related to the transactions (in thousands, except share and per share information):transactions.
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Nine Months Ended September 30, 2018 | ||
Total revenues |
| 1,645,858 |
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Income before tax expense | $ | 87,092 |
| (21,773) | |
Net income | $ | 65,319 |
Less: Undistributed earnings allocated to participating securities | (54) | |
Numerator for basic and diluted pro forma EPS | $ | |
65,265 | ||
Pro forma weighted average shares-basic | 29,885,858 | |
Pro forma weighted average shares-diluted | ||
30,189,058 | ||
Pro forma basic EPS | $ | 2.18 |
Pro forma diluted EPS | $ | 2.16 |
Unaudited pro forma revenues and income before tax expense for the nine months ended September 30, 2017 give effect to including the results
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| Three months ended September 30, |
| Nine months ended September 30, | ||
| 2017 |
| 2017 | ||
Total revenues | $ | 507,008 |
| $ | 1,373,689 |
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Income before tax expense | $ | 30,107 |
| $ | 91,445 |
Tax expense |
| (9,390) |
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| (23,496) |
Net income | $ | 20,717 |
| $ | 67,949 |
Less: Undistributed earnings allocated to participating securities |
| (108) |
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| (520) |
Numerator for basic and diluted pro forma earnings per share | $ | 20,609 |
| $ | 67,429 |
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Pro forma weighted average shares-basic |
| 27,034,192 |
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| 26,342,362 |
Pro forma weighted average shares-diluted |
| 27,314,777 |
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| 26,579,292 |
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Pro forma basic earnings per share | $ | 0.76 |
| $ | 2.56 |
Pro forma diluted earnings per share | $ | 0.75 |
| $ | 2.54 |
4. Inventories
Inventories included the following (in thousands):
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2018 |
| 2017 | 2019 | 2018 | ||||||
Homes under construction |
| $ | 1,158,072 |
| $ | 869,554 | $ | 1,205,232 | $ | 1,073,682 | ||
Land and land development |
|
| 625,253 |
|
| 479,038 | 820,126 | 720,719 | ||||
Capitalized interest |
|
| 51,572 |
|
| 41,762 | 68,135 | 53,842 | ||||
Total inventories |
| $ | 1,834,897 |
| $ | 1,390,354 | $ | 2,093,493 | $ | 1,848,243 |
13
5. Financial Services
Our Financial Services are principally comprised of our mortgage lending operations, Inspire Home Loans, Inc. (which we refer to as “Inspire”). Inspire is a full-service mortgage lender and primarily originates mortgage loans for our homebuyers. Inspire sells substantially all of the loans it originates and their related servicing rights in the secondary mortgage market within a short period of time after origination, generally within 30 days. Inspire primarily finances these loans underusing its mortgage repurchase facilities. Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $30.5$59.2 million and $10.0$26.2 million at September 30, 20182019 and December 31, 2017,2018, respectively, and carried a weighted average interest rate of approximately 4.8%3.8%, and 4.2%4.7%, respectively. As of September 30, 2019 and December 31, 2018, Inspire had mortgage loans held for sale with an aggregate fair value of $62.4$95.3 million and $112.4 million, respectively, and an aggregate outstanding principal balance of $60.0 million.$92.8 million and $108.0 million, respectively. Interest rate risks related to these obligations are mitigated by the preselling of loans to investors or through our interest rate hedging program.
Mortgage loans held-for-sale, including the rights to service the mortgage loans, as well as the derivative instrument used to economically hedge our interest rate risk, which are typically forward commitments on mortgage backed securities, are carried at fair value and changes in fair value are reflected in Financial Services Revenuefinancial services revenue on the condensed consolidated statement of operations. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without havingat fair value improves financial reporting by more accurately reflecting the underlying transaction. Refer to apply complex hedge accounting provisions.Note 12 – fair value disclosures for further information regarding our derivative instruments.
6. Prepaid Expenses and Other Assets
Prepaid expenses and other assets included the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2018 |
| 2017 | 2019 | 2018 | ||||||
Prepaid insurance |
| $ | 21,238 |
| $ | 6,549 | $ | 29,311 | $ | 20,226 | ||
Lot option and escrow deposits |
|
| 53,213 |
|
| 35,700 | 50,758 | 51,038 | ||||
Performance deposits |
|
| 4,177 |
|
| 3,295 | 6,814 | 4,552 | ||||
Deferred financing costs revolving line of credit, net |
|
| 4,440 |
|
| 1,795 | 3,530 | 4,155 | ||||
Restricted cash |
|
| 3,800 |
|
| 4,881 | 3,084 | 3,539 | ||||
Secured notes receivable |
|
| 4,885 |
|
| 2,753 | ||||||
Other |
|
| 8,492 |
|
| 5,839 | ||||||
Secured note receivable | 2,632 | 4,947 | ||||||||||
Right of use assets | 16,760 | — | ||||||||||
Insurance receivable and other | 17,036 | 51,940 | ||||||||||
Total prepaid expenses and other assets |
| $ | 100,245 |
| $ | 60,812 | $ | 129,925 | $ | 140,397 |
(1)Restricted cash is comprisedconsists of customerearnest money deposits for home sale contracts held in escrow pursuant toby third parties as required by various jurisdictions, and certain state laws and pledge accounts related tobalances associated with our mortgage repurchase facilities.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities included the following (in thousands):
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|
|
| ||||||
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|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2018 |
| 2017 | 2019 | 2018 | ||||||
Earnest money deposits |
| $ | 18,988 |
| $ | 14,077 | $ | 13,805 | $ | 13,990 | ||
Warranty reserve |
|
| 10,272 |
|
| 8,531 | 9,990 | 7,970 | ||||
Accrued compensation costs |
|
| 25,892 |
|
| 22,129 | 22,636 | 29,770 | ||||
Land development and home construction accruals |
|
| 96,763 |
|
| 61,918 | 117,511 | 77,748 | ||||
Liability for product financing arrangement |
|
| 13,326 |
|
| 19,751 | ||||||
Accrued interest |
|
| 16,060 |
|
| 14,435 | 18,327 | 15,636 | ||||
Income taxes payable |
|
| — |
|
| 851 | ||||||
Other |
|
| 9,004 |
|
| 8,664 | ||||||
Lease liabilities - operating leases | 17,380 | — | ||||||||||
Liability for product financing arrangements and other | 7,169 | 68,043 | ||||||||||
Total accrued expenses and other liabilities |
| $ | 190,305 |
| $ | 150,356 | $ | 206,818 | $ | 213,157 |
14
8. Warranties
Generally, we provide each homeowner with product warranties covering workmanship and materials for one year from the time of closing, and warranties covering structural systems for eight to 10 years from the time of closing. Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on our Consolidated Balance Sheets,the condensed consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internala model that incorporates historical payment trends and adjust the amounts recorded if necessary. Based on favorable warranty payment trends relative to our estimates at the time of home closing, we reducedWe decreased our warranty reserve by $0.6 million during the three months ended September 30, 2019 and $0.8during the same period in 2018. We decreased our warranty reserve by $0.4 million during the three and nine months ended September 30, 2018, respectively, which is2019, compared to a $0.8 million decrease during the same period in 2018. These adjustments are included as a reduction toin cost of homeshome sales revenues on our Consolidated Statementscondensed consolidated statements of Operations.
The following table summarizes the changesoperations. Changes in our warranty accrual are detailed in the table below (in thousands):
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|
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|
|
|
| ||||||||||||
|
| Three months ended September 30, |
| Nine months ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Beginning balance |
| $ | 10,269 |
| $ | 3,057 |
| $ | 8,531 |
| $ | 2,479 | $ | 9,768 | $ | 10,269 | $ | 7,970 | $ | 8,531 | ||||
Warranty reserve assumed in business combination |
|
| — |
|
| 6,202 |
|
| 397 |
|
| 6,202 | — | — | — | 397 | ||||||||
Warranty expense provisions |
|
| 1,568 |
|
| 1,245 |
|
| 4,789 |
|
| 2,827 | 1,665 | 1,568 | 5,433 | 4,789 | ||||||||
Payments |
|
| (968) |
|
| (710) |
|
| (2,688) |
|
| (1,458) | (870) | (968) | (3,063) | (2,688) | ||||||||
Warranty adjustment |
|
| (597) |
|
| (944) |
|
| (757) |
|
| (1,200) | (573) | (597) | (350) | (757) | ||||||||
Ending balance |
| $ | 10,272 |
| $ | 8,850 |
| $ | 10,272 |
| $ | 8,850 | $ | 9,990 | $ | 10,272 | $ | 9,990 | $ | 10,272 |
9. Debt
Our outstanding debt obligations included the following as of September 30, 20182019 and December 31, 20172018 (in thousands):
|
|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2018 |
| 2017 | 2019 | 2018 | ||||||
6.750% senior notes, due May 2027(1) | $ | 494,178 | $ | — | ||||||||
5.875% senior notes, due July 2025(1) | 395,944 | 395,415 | ||||||||||
6.875% senior notes, due May 2022(1) |
| $ | 380,224 |
| $ | 379,238 | — | 380,567 | ||||
5.875% senior notes, due July 2025(1) |
|
| 395,238 |
|
| 394,725 | ||||||
3.278% insurance premium notes, due June 2019 |
|
| 9,673 |
|
| — | ||||||
Other financing obligations |
|
| 2,320 |
|
| 2,320 | ||||||
Insurance premium notes and other financing obligations | 6,150 | 8,795 | ||||||||||
Notes payable |
|
| 787,455 |
|
| 776,283 | 896,272 | 784,777 | ||||
Revolving line of credit, due April 2022 |
|
| 236,000 |
|
| — | 278,800 | 202,500 | ||||
Mortgage repurchase facilities |
|
| 57,327 |
|
| 48,319 | ||||||
Mortgage repurchase facility | 77,798 | 104,555 | ||||||||||
Total debt |
| $ | 1,080,782 |
| $ | 824,602 | $ | 1,252,870 | $ | 1,091,832 |
(1)The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.
Issuance of 6.750% Senior Notes Due 2027
In May 2019, the Company completed a private offering of $500.0 million aggregate principal amount of the Company’s 6.750% Senior Notes due 2027 (the “2027 Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933. The 2027 Notes were issued under the Indenture, dated as of May 23, 2019, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2019 Indenture,” as it may be supplemented or amended from time to time). The 2027 Notes were issued at 100% of their principal amount and we received net proceeds of $493.9 million. The 2027 Notes contain certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the 2027 Notes is due June 2027, with interest only payments due semi-annually in June and December of each year, beginning on December 1, 2019.
In connection with this issuance, the Company deferred $6.1 million of issuance costs, which is presented in the notes payable line item of the condensed consolidated balance sheet.
Extinguishment of 6.875% Senior Notes Due 2022
During the nine months ended September 30, 2019, the Company extinguished $385.0 million in outstanding principal of our 6.875% Senior Notes due 2022 (the “2022 Notes”). The extinguishment was the result of two separate transactions whereby a tender offer validly tendered $189.3 million of the 2022 Notes on March 23, 2019 and the remaining $195.7 million was redeemed in accordance with the Indenture agreement on June 10, 2019. The transaction resulted in a loss of $10.8 million, which is presented in loss on debt extinguishment in the consolidated statement of operations for the nine months ended September 30, 2019.
Revolving lineLine of creditCredit
On October 21, 2014, we entered into aWe are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto. On June 5, 2018, we entered into an Amendedthereto and Restated Credit Agreementcertain of our subsidiaries, which, as amended and restated the Credit Agreement. The Amended and Restated Credit Agreementmost recently on February 12, 2019, provides us with a revolving line of credit of up to $540.0$640.0 million, and unless terminated earlier, will mature on April 30, 2022. Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date and are entitled to request an increase in the size of the credit facility by an amount not exceeding $100.0 million. If the existing lenders elect not to provide the full amount of a requested increase, we may invite one or more other lender(s) to become a party to the Amended and Restated Credit Agreement, subject to the approval of the Administrative Agent.date. Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. On June 28, 2018, we entered into a Joinder Agreement which increased the credit facility to $590.0 million by exercising $50.0 million of the $100.0 million accordion feature and added a new lender. As of September 30, 2018,2019, we had $236.0$278.8 million outstanding under the credit facility leaving $354.0 million in availability and were in compliance with all covenants.
15
Mortgage Repurchase Facilities – Financial Services
On May 4, 2018 and September 14, 2018, Inspire entered into a Mortgage Warehouse Line of Credit,mortgage warehouse facilities, with Comerica Bank, upon the expirationand J.P. Morgan, respectively. The mortgage warehouse lines of our first Master Repurchase Agreement. The Mortgage Warehouse Line of Creditcredit (which we refer to as the “Third Master Repurchase Agreement”“repurchase facilities”) providesprovide Inspire with an uncommitted Mortgage Warehouse Line of Creditrepurchase facilities of up to $40an aggregate of $140 million, secured by the mortgage loans financed thereunder. Our existing Second Master Repurchase Agreements provided Inspire with revolving mortgage loan repurchase facilities of up to $35 million, providing Inspire a total potential lending capacity of up to $75 million. Amounts outstanding under the Repurchase Facilitiesrepurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2018,2019, we had $57.3$77.8 million outstanding under the Repurchase Facilitiesthese repurchase facilities and were in compliance with all covenants underthereunder. No assurance can be provided, however, that we will remain in compliance with the agreements.covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business. During the three and nine months ended September 30, 20182019 and 2017,2018, we incurred interest expense on our Repurchase Facilities $0.4the repurchase facilities of $0.6 million and $0.8 million, respectively, and $0.1 million and $0.1$0.4 million, respectively, which are included in “Financialfinancial services costs”costs on our Consolidated Statementscondensed consolidated statements of Operations.operations. During the nine months ended September 30, 2019 and 2018, we incurred interest expense on the repurchase facilities of $2.1 million and $0.8 million, respectively.
10. Interest
Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. As our qualifying assets exceeded our outstanding debt during the three and nine months ended September 30, 20182019 and 2017,2018, we capitalized all interest costs incurred during these periods, except for interest incurred on our Repurchase Facilities. mortgage repurchase facilities.
Our interest costs are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three months ended September 30, |
| Nine months ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest capitalized beginning of period |
| $ | 47,797 |
| $ | 35,668 |
| $ | 41,762 |
| $ | 28,935 | $ | 63,068 | $ | 47,797 | $ | 53,842 | $ | 41,762 | ||||
Interest capitalized during period |
|
| 16,109 |
|
| 13,338 |
|
| 43,387 |
|
| 31,902 | 19,325 | 16,109 | 55,792 | 43,387 | ||||||||
Less: capitalized interest in cost of sales |
|
| (12,334) |
|
| (8,794) |
|
| (33,577) |
|
| (20,625) | (14,258) | (12,334) | (41,499) | (33,577) | ||||||||
Interest capitalized end of period |
| $ | 51,572 |
| $ | 40,212 |
| $ | 51,572 |
| $ | 40,212 | $ | 68,135 | $ | 51,572 | $ | 68,135 | $ | 51,572 |
11. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (which we refer to as the “TCJA”) was signed into law. The TCJA significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate, commencing in 2018, from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income, elimination of net operating loss carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits including the deduction for domestic production activities.
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) which addresses the application of ASC Topic 740 to the TCJA. SAB 118 outlines that if the accounting for the effects of the TCJA is incomplete, but a reasonable estimate can be made, then provisional amount should be reflected in the financial statements.
Our accounting for the impacts of the TCJA related to current and deferred taxes, and in particular our deferred taxes related to our acquisition of UCP and Sundquist Homes was incomplete when we issued our consolidated financial statements for the year ended December 31, 2017. During the three and nine months ended September 30, 2018, we continued to refine our accounting for the TCJA, including refining certain calculations associated with UCP’s distributive share of its investment in UCP, LLC at the acquisition date of August 4, 2017 in accordance with I.R.C. §704(c). These refinements resulted in measurement period adjustments increasing our income tax provision for the three months ended September 30, 2018 by $0.5 million and benefiting our income tax provision for the nine months ended September 30, 2018 by $1.2 million.
At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 20182019 estimated annual effective tax rate of 26.6%27.9% is driven by our blended federal and state statutory rate of 24.9%25.2%, and certain other permanent differences between GAAP and tax which increased our rate by 1.7%2.7%.
For the three months ended September 30, 2018,2019, our estimated annual rate of 26.6% was impacted by discrete items which had a net impact of benefiting our rate by 1.2%, including federal energy credits for homes delivered in 2017.
16
For the nine months ended September 30, 2018 our estimated annual rate of 26.6%27.9% was impacted by discrete items which had a net impact of decreasing our rate by 2.6%. The discrete items recognized during5.5%, including federal energy tax credits claimed in the current period related to homes closed in prior years. For the nine months ended September 30, 2018 included federal energy credits for homes delivered in 20172019 our estimated annual rate of 27.9% was impacted by discrete items which benefitedhad a net impact of decreasing our rate by 1.7%3.7%, including federal energy tax credits and excess tax benefits for vested stock-based compensation which benefited our rate by 1.7%, and measurement period adjustments under SAB 118 described above, which benefited our rate by 1.3%. These items were partially offset by a discrete item for deferred taxes related to our step acquisition of WJH, and certain return to provision items, which increased our rate by 2.1%.compensation.
For the three and nine months ended September 30, 2019 and 2018, we recorded income tax expense of $7.8 million and $5.8 million, respectively. For the nine months ended September 30, 2019 and 2018, we recorded income tax expense of $19.0 million and $22.2 million, respectively.
12. Fair Value Disclosures
Accounting Standards Codification Topic 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date.
Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date.
The following table presents carrying values and estimated fair values of financial instruments (in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 | ||||||||
|
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|
|
|
|
|
|
|
|
|
| Hierarchy |
| Carrying |
| Fair Value |
| Carrying |
| Fair Value | ||||
Secured notes receivable(1) |
| Level 2 |
| $ | 4,885 |
| $ | 4,885 |
| $ | 2,753 |
| $ | 2,727 |
Mortgage loans held for sale(2) |
| Level 2 |
| $ | 62,440 |
| $ | 62,440 |
| $ | 52,327 |
| $ | 52,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.875% senior notes(3) |
| Level 2 |
| $ | 380,224 |
| $ | 385,528 |
| $ | 379,238 |
| $ | 397,044 |
5.875% senior notes (3) |
| Level 2 |
| $ | 395,238 |
| $ | 368,238 |
| $ | 394,725 |
| $ | 400,225 |
3.278% insurance premium notes(4) |
| Level 2 |
| $ | 9,673 |
| $ | 9,673 |
| $ | — |
| $ | — |
Revolving line of credit(4) |
| Level 3 |
| $ | 236,000 |
| $ | 236,000 |
| $ | — |
| $ | — |
Other financing obligation(4) |
| Level 2 |
| $ | 2,320 |
| $ | 2,320 |
| $ | 2,320 |
| $ | 2,320 |
Mortgage repurchase facilities(4) |
| Level 2 |
| $ | 57,327 |
| $ | 57,327 |
| $ | 48,319 |
| $ | 48,319 |
September 30, 2019 | December 31, 2018 | |||||||||||||
Hierarchy | Carrying | Fair Value | Carrying | Fair Value | ||||||||||
Secured notes receivable(1) | Level 2 | $ | 2,632 | $ | 2,577 | $ | 4,947 | $ | 4,830 | |||||
Mortgage loans held for sale(2) | Level 2 | $ | 95,321 | $ | 95,321 | $ | 112,394 | $ | 112,394 | |||||
Derivative assets(3) | Level 2 | $ | 1,593 | $ | 1,593 | $ | 726 | $ | 726 | |||||
6.750% senior notes(4) (5) | Level 2 | $ | 494,178 | $ | 535,550 | $ | — | $ | — | |||||
6.875% senior notes(4) (5) | Level 2 | $ | — | $ | — | $ | 380,567 | $ | 372,488 | |||||
5.875 % senior notes (4) (5) | Level 2 | $ | 395,944 | $ | 413,000 | $ | 395,415 | $ | 356,000 | |||||
3.278% insurance premium notes(6) | Level 2 | $ | 6,150 | $ | 6,150 | $ | 6,475 | $ | 6,475 | |||||
Revolving line of credit(6) | Level 3 | $ | 278,800 | $ | 278,800 | $ | 202,500 | $ | 202,500 | |||||
Other financing obligation(6) | Level 2 | $ | — | $ | — | $ | 2,320 | $ | 2,320 | |||||
Mortgage repurchase facilities(6) | Level 2 | $ | 77,798 | $ | 77,798 | $ | 104,555 | $ | 104,555 |
(1) |
|
|
|
|
|
|
|
|
Estimated fair value of the secured notes receivable was based on cash flow models discounted at market interest rates which considered the underlying risks of the note.
(2)The mortgage loans held for sale are carried at fair value, which is based on quoted market prices for committed mortgage loans.
(3)Derivative instruments are carried at fair value and based on market prices for similar instruments. Changes in fair value are reflected in financial services revenue on the condensed consolidated statement of operations. As of September 30, 2019 and December 31, 2018, we had immaterial amounts of derivative liabilities which are presented within accrued expenses and other liabilities on the condensed consolidated balance sheets. Refer to Note 5 – financial services for further information regarding our derivative instruments.
(4)Estimated fair value of the senior notes is based on recent trading activity in inactive markets.
(5)Carrying amounts include any associated unamortized deferred financing costs, premiums and discounts. As of September 30, 2019, these amounts totaled $5.8 million and $4.1 million for the 6.750% senior notes and 5.875% senior notes, respectively. As of December 31, 2018, these amounts totaled $4.9 million and $4.6 million for the 6.875% senior notes and 5.875% senior notes, respectively.
(6)Carrying amount approximates fair value due to short-term nature and interest rate terms.
The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities are measured at fair value when acquired in a business combination. Long-lived assets determined to be impaired are measured at fair value.
13. Stock-Based Compensation
During the nine months ended September 30, 2018,2019, we granted performance share units (which we refer to as “PSUs”) covering up to 0.3 million shares of common stock, assuming maximum level of performance, with a grant date fair value of $28.10$22.01 per share that are subject to both service and performance vesting conditions. The quantity of shares that will vest under the PSUs rangeranges from 0% to 250% of a targeted number of shares for each participant and will be determined based on an achievement of a three-yearthree year pre-tax income performance goal. During the nine months ended September 30, 2018,2019, we also granted restricted stock units (which we refer to as “RSUs”) covering 0.30.6 million shares of common stock with a grant date fair value of $30.43$23.85 per share that vest over a one to three-yearthree year period. As of September 30, 2018, we had no remaining unvested restricted stock awards (which we refer to as “RSAs”) outstanding.
17
A summary of our outstanding RSUs and PSUs, assuming maximum level of performance, are as follows (in thousands, except years):
As of September 30, | |||
Unvested | 1,225 | ||
Unrecognized compensation cost | $ | 16,421 | |
Period to recognize compensation cost |
|
During the three months ended September 30, 20182019 and 2017,2018, we recognized stock-based compensation expense of $3.8$3.9 million and $2.6$3.8 million, respectively. During the nine months ended September 30, 20182019 and 2017,2018, we recognized stock-based compensation expense of $10.1$11.4 million and $6.5$10.1 million, respectively. Stock-based compensation expense is included in selling, general, and administrative expense on our Consolidated Statementscondensed consolidated statements of Operations.operations.
14. Stockholders’ Equity
Our authorized capital stock consists of 100.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of September 30, 20182019 and December 31, 2017,2018, there were 30.831.2 million and 29.430.2 million shares of common stock issued and outstanding, respectively, inclusiverespectively.
On May 10, 2017, our stockholders approved the adoption of the RSAs then outstanding.
Century Communities, Inc. 2017 Omnibus Incentive Plan (which we refer to as our “2017 Incentive Plan”), which replaced our First Amended & Restated 2013 Long-Term Incentive Plan. We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which approximately 0.6 million shares rolled over into the 2017 Incentive Plan when it became effective. On May 8, 2019, our stockholders approved an amended and restated 2017 Omnibus Incentive Plan, which increased the number of shares of our common stock authorized for issuance under the 2017 Incentive Plan by an additional 1.631 million shares. We issued 39.6 thousand and 0.3 million shares of our common stock related to the vesting of RSUs during the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, approximately 1.0 million shares remained available for issuance under the Century Communities, Inc. 2017 Omnibus Incentive Plan.2019.
On November 7, 2016, we entered into a Distribution Agreement (which we refer to as the “First Distribution Agreement”) with J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc. (which we refer to collectively as the “Sales Agents”), relating to our common stock. Under the First Distribution Agreement, we were authorized to offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through any of the Sales Agents in “at-the-market” offerings. On August 9, 2017, we entered into a second Distribution Agreement (which we refer to as the “Second Distribution Agreement”) with the Sales Agents, which superseded and replaced the First Distribution Agreement, pursuant to which we were authorized to offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the Sales Agents in at-the-market offerings. On July 3, 2018, we entered into a third Distribution Agreement (which we refer to as the “Third Distribution Agreement”) with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Distribution Agreement”), as its sales agents (which we refer to as the “New Sales Agents”), which superseded and replaced the Second Distribution Agreement, pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the New Sales Agentssales agents party thereto in at-the-market“at-the-market” offerings. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million shares and 0.9 million shares, respectively, of our common stock under the Distribution Agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total offering costs of $0.6 million and $0.7 million, respectively.During the three and nine months ended September 30, 2018, we sold and issued an aggregate of 0.6
million and 1.1 million shares of our common stock under the Second and Third Distribution Agreements, which provided gross proceeds net of commissions of $17.1$17.4 million and $31.7$32.4 million, respectively, and, in connection with such sales, paid total commissionsoffering costs of $0.5 million and fees$1.1 million respectively. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the Sales Agentsterms of $0.3the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. This Distribution Agreement had $56.1 million and $0.6 million, respectively. During the three and nine months endedremaining as of September 30, 2017, we sold and issued an aggregate of 0.4 million and 1.4 million, respectively, shares of our common stock under the First and Second Distribution Agreements, which provided net proceeds of $10.0 million and $34.6 million, respectively, and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million and $0.7 million, respectively.2019.
15. Earnings Per Share
We use the two-class method of calculating EPS, where applicable, as our previously issued non-vested RSAs haverestricted stock awards had non-forfeitable rights to dividends and, accordingly, represent a participating security. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. We use the treasury stock method to calculate the dilutive effect of our RSUs and PSUs as these awards do not have participating rights.
18
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 20182019 and 20172018 (in thousands, except share and per share information):
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| Three Months Ended |
| Nine months ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||
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| September 30, |
| September 30, | September 30, | September 30, | ||||||||||||||||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Numerator |
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Net income |
| $ | 17,048 |
| $ | 9,470 |
| $ | 70,261 |
| $ | 33,100 | $ | 27,024 | $ | 17,048 | $ | 59,636 | $ | 70,261 | ||||
Less: Undistributed earnings allocated to participating securities |
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| — |
|
| (52) |
|
| (58) |
|
| (289) | — | — | — | (58) | ||||||||
Net income allocable to common stockholders |
| $ | 17,048 |
| $ | 9,418 |
| $ | 70,203 |
| $ | 32,811 | $ | 27,024 | $ | 17,048 | $ | 59,636 | $ | 70,203 | ||||
Denominator |
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Weighted average common shares outstanding - basic |
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| 30,232,376 |
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| 25,445,552 |
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| 29,885,858 |
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| 23,038,390 | 30,587,487 | 30,232,376 | 30,378,860 | 29,885,858 | ||||||||
Dilutive effect of restricted stock units |
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| 322,505 |
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| 280,585 |
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| 303,200 |
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| 236,930 | 318,748 | 322,505 | 262,334 | 303,200 | ||||||||
Weighted average common shares outstanding - diluted |
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| 30,554,881 |
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| 25,726,137 |
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| 30,189,058 |
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| 23,275,320 | 30,906,235 | 30,554,881 | 30,641,194 | 30,189,058 | ||||||||
Earnings per share: |
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Basic |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.35 |
| $ | 1.42 | $ | 0.88 | $ | 0.56 | $ | 1.96 | $ | 2.35 | ||||
Diluted |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.33 |
| $ | 1.41 | $ | 0.87 | $ | 0.56 | $ | 1.95 | $ | 2.33 |
Stock-based awards are excluded from the calculation of diluted EPS in the event they are subject to unsatisfied performance conditions or are antidilutive. We excluded 0.6 million common unit equivalents from diluted earnings per share during the three and nine months ended September 30, 2019 related to the PSUs for which performance conditions remain unsatisfied. We excluded 0.3 million common unit equivalents from diluted earnings per share during the three and nine months ended September 30, 2018 related to the PSU’sPSUs granted during the periods. We did not have any common unit equivalents to exclude from diluted earnings per share during the three and nine months ended September 30, 2017.
16. Commitments and Contingencies
Letters of Credit and Performance Bonds
In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 20182019 and December 31, 2017,2018, we had $296.9$347.6 million and $158.6$289.8 million, respectively, in letters of credit and performance bonds issued and outstanding.
Litigation
We are subject to claims and lawsuits that arise primarily in the ordinary course of business, which consist primarily of construction defect claims. It is the opinion of our management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and the eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative expense on our Consolidated Statementscondensed consolidated statements of Operationsoperations for our estimated loss.
Under various insurance policies, we have the ability to recoup costs in excess of applicable self-insured retentions. Estimates of such amounts are recorded in other assets when recovery is probable. As of December 31, 2018, substantially all of the amounts reflected in Insurance receivable and other were related to construction claims, which were settled and amounts collected under the applicable insurance policies during the nine months ended September 30, 2019.
We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flows.
17. Leases
17.Under ASC 842, the Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
We primarily enter into operating leases for the right to use office space, and computer and office equipment, which have lease terms that generally range from 1 to 7 years and often include one or more options to renew. We include renewal terms in the lease term when it is reasonably certain that we will exercise the option. For leases entered into after January 1, 2019, we establish a right of use asset and a lease liability at the commencement date of the lease based on the present value of future minimum lease payments. As the rate implicit in each lease is not readily determinable, we utilize our incremental borrowing rate in determining the present value of future minimum payments. Our incremental borrowing rate is determined based on information available at the commencement date. We account for the lease components and non-lease components as a single lease component. As of September 30, 2019, the Company had $16.8 million and $17.4 million recognized as a right of use asset and lease liability, respectively, which are presented on the consolidated balance sheet within prepaid expenses and other assets and accrued expenses and other liabilities, respectively. The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less. These leases are not recorded on the Company's condensed consolidated balance sheet.
Under both ASC 840 and ASC 842, operating lease expense is recognized on a straight-line basis over the lease term and was $1.6 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively. Operating lease expense was $4.3 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Information related to the Company’s right of use asset and lease liability were as follows (in thousands):
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||
Cash paid for operating lease liabilities | $ | 1,460 | $ | 4,183 | |||
Right-of-use assets obtained in exchange for new operating lease obligations | $ | 1,275 | $ | 2,785 | |||
Weighted-average remaining lease term | 4.05 years | 4.05 years | |||||
Weighted-average discount rate | 6.38 | % | 6.38 | % |
Maturities of lease liabilities as of September 30, 2019 were as follows (in thousands):
Due in 12 month period ended September 30, | |||
2020 | $ | 5,136 | |
2021 | 5,191 | ||
2022 | 3,734 | ||
2023 | 3,083 | ||
2024 | 2,029 | ||
Thereafter | 622 | ||
Total | 19,795 | ||
Less: discount | (2,415) | ||
Total lease liabilities | $ | 17,380 |
18. Supplemental Guarantor Information
Our 6.875% senior notes due 2022 and 5.875% senior notes due 2025 and 6.750% senior notes due 2027 (which we collectively refer to as our “Senior Notes”) are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as “Guarantors”). In addition, our former 6.875% senior notes due 2022 which were extinguished during the second quarter of 2019, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.
Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective indentures) or is made in compliance with applicable provisions of the applicable indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the respective indentures); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the applicable indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the applicable Indenture, such Guarantor’s obligations
19
under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the applicable Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the respective Indentures), in accordance with the applicable indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture. The indenture governing our former 6.875% senior notes due 2022 contained a similar provision.
As the guarantees were made in connection with exchange offers effected in February 2015, October 2015 and April 2017 and the issuance of the 5.875% senior notes due 2025 and of the 6.750% senior notes due 2027, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively.
We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below:
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| Supplemental Condensed Consolidated Balance Sheet | |||||||||||||
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| As of September 30, 2018 (in thousands) | |||||||||||||
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| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| Century |
| Subsidiaries |
| Subsidiaries |
| Entries |
| Century | |||||
Assets |
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Cash and cash equivalents |
| $ | — |
| $ | 8,922 |
| $ | 23,585 |
| $ | (16,580) |
| $ | 15,927 |
Cash held in escrow |
|
| — |
|
| 31,906 |
|
| — |
|
| — |
|
| 31,906 |
Accounts receivable |
|
| 15,672 |
|
| 12,271 |
|
| 72 |
|
| — |
|
| 28,015 |
Investment in consolidated subsidiaries |
|
| 1,860,196 |
|
| — |
|
| — |
|
| (1,860,196) |
|
| — |
Inventories |
|
| — |
|
| 1,834,897 |
|
| — |
|
| — |
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| 1,834,897 |
Mortgage loans held for sale |
|
| — |
|
| — |
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| 62,440 |
|
| — |
|
| 62,440 |
Prepaid expenses and other assets |
|
| 6,835 |
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| 91,457 |
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| 1,953 |
|
| — |
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| 100,245 |
Deferred tax assets, net |
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| 10,412 |
|
| — |
|
| — |
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| — |
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| 10,412 |
Property and equipment, net |
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| 13,153 |
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| 18,982 |
|
| 692 |
|
| — |
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| 32,827 |
Amortizable intangible assets, net |
|
| — |
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| 5,205 |
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| — |
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| — |
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| 5,205 |
Goodwill |
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| — |
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| 30,620 |
|
| — |
|
| — |
|
| 30,620 |
Total assets |
| $ | 1,906,268 |
| $ | 2,034,260 |
| $ | 88,742 |
| $ | (1,876,776) |
| $ | 2,152,494 |
Liabilities and stockholders’ equity |
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Liabilities: |
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Accounts payable |
| $ | 17,084 |
| $ | 39,704 |
| $ | 406 |
| $ | (16,580) |
| $ | 40,614 |
Accrued expenses and other liabilities |
|
| 31,215 |
|
| 156,939 |
|
| 2,151 |
|
| — |
|
| 190,305 |
Notes payable |
|
| 775,462 |
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| 11,993 |
|
| — |
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| — |
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| 787,455 |
Revolving line of credit |
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| 236,000 |
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| — |
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| — |
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| — |
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| 236,000 |
Mortgage repurchase facilities |
|
| — |
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| — |
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| 57,327 |
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| — |
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| 57,327 |
Total liabilities |
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| 1,059,761 |
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| 208,636 |
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| 59,884 |
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| (16,580) |
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| 1,311,701 |
Stockholders’ equity: |
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| 846,507 |
|
| 1,825,624 |
|
| 28,858 |
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| (1,860,196) |
|
| 840,793 |
Total liabilities and stockholders’ equity |
| $ | 1,906,268 |
| $ | 2,034,260 |
| $ | 88,742 |
| $ | (1,876,776) |
| $ | 2,152,494 |
Supplemental Condensed Consolidated Balance Sheet | |||||||||||||||
As of September 30, 2019 (in thousands) | |||||||||||||||
Guarantor | Non Guarantor | Elimination | Consolidated | ||||||||||||
Century | Subsidiaries | Subsidiaries | Entries | Century | |||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 1,894 | 2,125 | 34,489 | — | $ | 38,508 | ||||||||
Cash held in escrow | — | 30,362 | — | — | 30,362 | ||||||||||
Accounts receivable | 4,043 | 13,989 | (103) | — | 17,929 | ||||||||||
Investment in consolidated subsidiaries | 2,107,232 | — | — | (2,107,232) | — | ||||||||||
Inventories | — | 2,093,493 | — | — | 2,093,493 | ||||||||||
Mortgage loans held for sale | — | — | 95,321 | — | 95,321 | ||||||||||
Prepaid expenses and other assets | 8,451 | 108,265 | 13,209 | — | 129,925 | ||||||||||
Deferred tax assets, net | 14,277 | — | — | — | 14,277 | ||||||||||
Property and equipment, net | 15,179 | 19,247 | 832 | — | 35,258 | ||||||||||
Amortizable intangible assets, net | — | 4,094 | — | — | 4,094 | ||||||||||
Goodwill | — | 30,395 | — | — | 30,395 | ||||||||||
Total assets | $ | 2,151,076 | $ | 2,301,970 | $ | 143,748 | $ | (2,107,232) | $ | 2,489,562 | |||||
Liabilities and stockholders’ equity | |||||||||||||||
Liabilities: | |||||||||||||||
Accounts payable | $ | 190 | 77,882 | 623 | — | $ | 78,695 | ||||||||
Accrued expenses and other liabilities | 30,785 | 166,443 | 9,590 | — | 206,818 | ||||||||||
Notes payable | 890,122 | 6,150 | — | — | 896,272 | ||||||||||
Revolving line of credit | 278,800 | — | — | — | 278,800 | ||||||||||
Mortgage repurchase facilities | — | — | 77,798 | — | 77,798 | ||||||||||
Total liabilities | 1,199,897 | 250,475 | 88,011 | — | 1,538,383 | ||||||||||
Stockholders’ equity: | 951,179 | 2,051,495 | 55,737 | (2,107,232) | 951,179 | ||||||||||
Total liabilities and stockholders’ equity | $ | 2,151,076 | $ | 2,301,970 | $ | 143,748 | $ | (2,107,232) | $ | 2,489,562 |
Supplemental Condensed Consolidated Balance Sheet | |||||||||||||||
As of December 31, 2018 (in thousands) | |||||||||||||||
Guarantor | Non Guarantor | Elimination | Consolidated | ||||||||||||
Century | Subsidiaries | Subsidiaries | Entries | Century | |||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 2,183 | 2,101 | 28,618 | — | $ | 32,902 | ||||||||
Cash held in escrow | — | 24,344 | — | — | 24,344 | ||||||||||
Accounts receivable | 6,117 | 7,424 | (77) | — | 13,464 | ||||||||||
Investment in consolidated subsidiaries | 1,827,456 | — | — | (1,827,456) | — | ||||||||||
Inventories | — | 1,848,243 | — | — | 1,848,243 | ||||||||||
Mortgage loans held for sale | — | — | 112,394 | — | 112,394 | ||||||||||
Prepaid expenses and other assets | 51,177 | 85,224 | 3,996 | — | 140,397 | ||||||||||
Deferred tax assets, net | 13,763 | — | — | — | 13,763 | ||||||||||
Property and equipment, net | 13,274 | 18,989 | 995 | — | 33,258 | ||||||||||
Amortizable intangible assets, net | — | 5,095 | — | — | 5,095 | ||||||||||
Goodwill | — | 30,395 | — | — | 30,395 | ||||||||||
Total assets | $ | 1,913,970 | $ | 2,021,815 | $ | 145,926 | $ | (1,827,456) | $ | 2,254,255 | |||||
Liabilities and stockholders’ equity | |||||||||||||||
Liabilities: | |||||||||||||||
Accounts payable | $ | 623 | 88,627 | 657 | — | $ | 89,907 | ||||||||
Accrued expenses and other liabilities | 75,506 | 131,548 | 6,103 | — | 213,157 | ||||||||||
Notes payable | 775,982 | 8,795 | — | — | 784,777 | ||||||||||
Revolving line of credit | 202,500 | — | — | — | 202,500 | ||||||||||
Mortgage repurchase facilities | — | — | 104,555 | — | 104,555 | ||||||||||
Total liabilities | 1,054,611 | 228,970 | 111,315 | — | 1,394,896 | ||||||||||
Stockholders’ equity: | 859,359 | 1,792,845 | 34,611 | (1,827,456) | 859,359 | ||||||||||
Total liabilities and stockholders’ equity | $ | 1,913,970 | $ | 2,021,815 | $ | 145,926 | $ | (1,827,456) | $ | 2,254,255 |
N/A – Not Applicable
Our absorption rates increased by 24.1% to 3.6 per month during the three months ended September 30, 2019, as compared to the same period in 2018. Our absorptions increased primarily due to the timing of community openings in our Texas and Southeast region.
Our absorption rates decreased by 9.4% and 2.9% to 2.9 per month and 3.43.5 per month during the three and nine months ended September 30, 2018, respectively,2019, as compared to the same periods the same periodsperiod in 2017.2018. Our absorptions formoderated primarily due to the timing of community openings in our Century Communities brand moderated slightly during the three and nine months ended September 30, 2018 as compared to 2017. The moderation we experienced was consistent with the overall housing market.Mountain region.
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Selling communities at period end |
| As of September 30, |
| Increase/(Decrease) | As of September 30, | Increase/(Decrease) | ||||||||||||||
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| 2018 |
| 2017 |
| Amount |
| % Change | 2019 | 2018 | Amount | % Change | ||||||||
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West |
| 17 |
| 10 |
| 7 |
| 70.0 | % | 21 | 17 | 4 | 23.5 | % | ||||||
Mountain |
| 34 |
| 33 |
| 1 |
| 3.0 | % | 46 | 34 | 12 | 35.3 | % | ||||||
Texas |
| 23 |
| 24 |
| (1) |
| (4.2) | % | 19 | 23 | (4) | (17.4) | % | ||||||
Southeast |
| 51 |
| 40 |
| 11 |
| 27.5 | % | 43 | 51 | (8) | (15.7) | % | ||||||
Wade Jurney Homes |
| N/A |
| N/A |
| N/A |
| N/A |
| N/A | N/A | N/A | N/A | |||||||
Total |
| 125 |
| 107 |
| 18 |
| 16.8 | % | 129 | 125 | 4 | 3.2 | % |
N/A – Not Applicable
Our selling communities increased 16.8% to 125129 communities at September 30, 20182019 as compared to 107 communities125 at September 30, 2017.2018. As WJH does not sell homes by community, but through studios and other methods, there isare no communitycommunities or absorptions presented for that segment.
Backlog
Backlog
(Dollars in thousands)
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| 2017 |
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| 2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||||||||
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| Homes |
| Dollar Value |
| Average Sales Price |
| Homes |
| Dollar Value |
| Average Sales Price |
| Homes |
| Dollar Value |
| Average Sales Price | Homes | Dollar Value | Average Sales Price | Homes | Dollar Value | Average Sales Price | Homes | Dollar Value | Average Sales Price | |||||||||||||||||||||||
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West |
| 280 |
| $ | 153,121 |
| $ | 546.9 |
| 290 |
| $ | 161,013 |
| $ | 555.2 |
| (3.4) | % |
| (4.9) | % |
| (1.5) | % | 302 | $ | 153,626 | $ | 508.7 | 280 | $ | 153,121 | $ | 546.9 | 7.9 | % | 0.3 | % | (7.0) | % | |||||||||
Mountain |
| 627 |
| 283,534 |
|
| 452.0 |
| 573 |
| 247,876 |
| 432.3 |
| 9.4 | % |
| 14.4 | % |
| 4.6 | % | 523 | 230,203 | 440.2 | 627 | 283,534 | 452.0 | (16.6) | % | (18.8) | % | (2.6) | % | ||||||||||||||||
Texas |
| 217 |
| 75,129 |
|
| 346.2 |
| 245 |
| 101,125 |
| 412.8 |
| (11.4) | % |
| (25.7) | % |
| (16.1) | % | 288 | 79,536 | 276.2 | 217 | 75,129 | 346.2 | 32.7 | % | 5.9 | % | (20.2) | % | ||||||||||||||||
Southeast |
| 736 |
| 241,943 |
|
| 328.7 |
| 556 |
| 179,324 |
| 322.5 |
| 32.4 | % |
| 34.9 | % |
| 1.9 | % | 684 | 243,712 | 356.3 | 736 | 241,943 | 328.7 | (7.1) | % | 0.7 | % | 8.4 | % | ||||||||||||||||
Wade Jurney Homes |
| 1,128 |
|
| 177,224 |
|
| 157.1 |
| — |
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| — |
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| — |
| NM |
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| NM |
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| NM |
| 949 | 147,779 | 155.7 | 1,128 | 177,224 | 157.1 | (15.9) | % | (16.6) | % | (0.9) | % | |||||||||||||
Total / Weighted Average |
| 2,988 |
| $ | 930,951 |
| $ | 311.5 |
| 1,664 |
| $ | 689,338 |
| $ | 414.3 |
| 79.6 | % |
| 35.1 | % |
| (24.8) | % | 2,746 | $ | 854,856 | $ | 311.3 | 2,988 | $ | 930,951 | $ | 311.5 | (8.1) | % | (8.2) | % | (0.1) | % |
NM – Not Meaningful
Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At September 30, 2018,2019, we had 2,9882,746 homes in backlog with a total value of $931.0$854.9 million, which represents an increasea decrease of 79.6%8.1% and 35.1%8.2%, respectively, as compared to September 30, 2017.2018. The increasedecrease in backlog and backlogdollar value is primarily attributable to our acquisition of WJH LLC, as well as the increasesa decrease in the Southeast and Mountain segments, partially offset by decreases in the West and Texas segments. The decrease in average sales pricenumber of homes in backlog is driven by an increase in homes sold by WJH, which are sold at lower average sales prices. backlog.
Supplemental Pro Forma Information
As we completed significant acquisitions in 2017 and 2018 that are not included in our results of operations for the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, and to aid readers with 2018 over 2017 comparability for the entire merged business, we are including limited supplemental pro forma information below for those periods. The supplemental pro forma information below presents pro forma combined financial and operating data reflecting the UCP, Sundquist Homes and WJH acquisitionsacquisition as if theyit had occurred on January 1, 2017.2018. The selected condensed combined pro forma data combines the historical home sales revenues, net new home contracts, new homes delivered and average sales price of homes delivered of Century UCP, Sundquist Homes and WJH, giving effect to the UCP, Sundquist Homes and WJH acquisitions as if they had been consummated on January 1, 2017.WJH. The pro forma information is for informational purposes only and supplements our Condensed Consolidated Financial Statementscondensed consolidated financial statements prepared in accordance with US GAAP. We believe that the pro forma information is useful as it provides additional information given the significant impact of these acquisitions, the acquisition, and a reflection of how the combined business performed year over year that is not readily discernible from the actual year over year comparison. The pro forma information below does not purport to reflect the results of operations that would have occurred if the UCP, Sundquist Homes and WJH acquisitions had been consummatedacquired on January 1, 20172018, nor does the pro forma information purport to represent the results of operations of the Company for any future dates or periods.
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| Three months ended September 30, |
| Nine months ended September 30, | |||||
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| 2017 |
| 2018 |
| 2017 | |||
Pro forma home sales revenues |
| $ | 502,227 |
| $ | 1,620,262 |
| $ | 1,362,280 |
Pro forma net new home contracts |
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| 1,498 |
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| 5,850 |
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| 5,175 |
Pro forma deliveries |
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| 1,553 |
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| 5,064 |
|
| 4,109 |
Pro forma average sales price |
| $ | 323.4 |
| $ | 320.0 |
| $ | 331.6 |
(dollars in thousands) | Nine Months Ended September 30, 2018 | ||||||||
Pro Forma Home Sales Revenues | Pro Forma Net New Home Contracts | Pro Forma Deliveries | Pro Forma Average Sales Price | ||||||
Pro forma Century Communities | $ | 1,620,262 | 5,850 | 5,064 | $ | 320.0 |
Critical Accounting Policies
Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on March 1, 2018,February 13, 2019, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—SignificantCritical Accounting Policies.” Other than the adoption of ASC 606, as described in Note 1 in the
34
accompanying unaudited consolidated financial statements, there have been no significant changes to our critical accounting policies during the three and nine months ended September 30, 2018.
Liquidity and Capital Resources
Overview
Our principal uses of capital for the three and nine months ended September 30, 20182019 were our land purchases, land development, home construction, acquisition of the remaining 50% ownership interest in WJH, including the extinguishment of assumed debt, and the payment of routine liabilities. We use funds generated by operations, available borrowings under our revolving credit facility, and from time to time proceeds from sales of common stock, including our current at-the-market facility, and debt
securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.
Cash flows for each of our communities depend on the stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities. As we continue to expand our business, we expect that our cash outlays for land purchases and land development to grow our lot inventory will continue to exceed our cash generated by operations.
Our Financial Services operations usesuse funds generated from operations, and availability under our mortgage repurchase facilities to finance its operations including originations of mortgage loans to our homebuyers.
Under our shelf registration statement, which we filed with the SEC in July 2018 and was automatically effective upon filing, we have the ability to access the debt and equity capital markets in an aggregate offering amount of up to $869 million, as needed as part of our ongoing financing strategy and subject to market conditions. Of this amount, up to $100 million may be offered under our at-the-market distribution agreement referred to below.
We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving credit facility or through accessing debt or equity capital, as needed.
Issuance of 6.750% Senior Notes Due 2027
In May 2019, the Company completed a private offering of $500.0 million aggregate principal amount of the Company’s 6.750% Senior Notes due 2027 (the “2027 Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933. The 2027 Notes were issued under the Indenture, dated as of May 23, 2019, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2019 Indenture,” as it may be supplemented or amended from time to time). The 2027 Notes were issued at 100% of their principal amount and we received net proceeds of $493.9 million. The aggregate principal balance of the 2027 Notes is due June 2027, with interest only payments due semi-annually in June and December of each year, beginning on December 1, 2019.
In connection with this issuance, the Company deferred $6.1 million of issuance costs, which is presented in the notes payable line item of the condensed consolidated balance sheet.
Extinguishment of 6.875% Senior Notes Due 2022
During the nine months ended September 30, 2019, the Company extinguished $385.0 million in outstanding principal of our 6.875% Senior Notes due 2022 (the “2022 Notes”). The extinguishment was the result of two separate transactions whereby a tender offer validly tendered $189.3 million of the 2022 Notes on March 23, 2019 and the remaining $195.7 million was redeemed in accordance with the Indenture agreement on June 10, 2019. The transaction resulted in a loss of $10.8 million, which is presented in loss on debt extinguishment in the condensed consolidated statement of operations.
Revolving Credit Facility
On October 21, 2014, we entered into aWe are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto. On June 5, 2018, we entered into an Amendedthereto and Restated Credit Agreementcertain of our subsidiaries, which, as amended and restated the Credit Agreement. The Amended and Restated Credit Agreementmost recently on February 12, 2019, provides us with a revolving line of credit of up to $540.0$640.0 million, and unless terminated earlier, will mature on April 30, 2022. Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date and are entitled to request an increase in the size of the credit facility by an amount not exceeding $100.0 million. If the existing lenders elect not to provide the full amount of a requested increase, we may invite one or more other lender(s) to become a party to the Amended and Restated Credit Agreement, subject to the approval of the Administrative Agent.date. Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the
Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. On June 28, 2018, we entered into a Joinder Agreement which increased the credit facility to $590.0 million by exercising $50.0 million of the $100.0 million accordion feature and added a new lender. As of September 30, 2018,2019, we had $236.0$278.8 million outstanding under the credit facility leaving $354.0 million in availability, and were in compliance with all covenants.
At the Market Offerings
On July 3, 2018, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings. This Distribution Agreement supersededDuring the three and replaced a prior similarnine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million shares and 0.9 million shares, respectively, of our common stock under the Distribution Agreement, which had provided gross proceeds of $72.723.7 million available for sale asand $26.5 million, respectively, and in connection with such sales, paid total offering costs of September 30, 2018. $0.6 million and $0.7 million, respectively.During the three and nine months ended September 30, 2018, we sold and issued an
35
aggregate of 0.6 million and 1.1 million shares of our common stock under this and the a prior Distribution Agreement, which provided us netgross proceeds of $17.1$17.4 million and $31.7$32.4 million, respectively, and, in connection with such sales, paid total commissions and fees to the sales agentsoffering costs of $0.3$0.5 million and $0.6$1.1 million, respectively. respectively. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. This Distribution Agreement had $56.1 million remaining as of September 30, 2019.
Mortgage Repurchase Facility and Mortgage Warehouse Line of Credit – Financial Services
On May 4, 2018 and September 14, 2018 Inspire Home Loans Inc. (which we refer to as “Inspire”), an indirect wholly-owned subsidiary of the Company, entered into a Mortgage Warehouse Line of Credit,mortgage warehouse facilities, with Comerica Bank upon the expirationand J.P. Morgan, respectively. The mortgage warehouse lines of our first Master Repurchase Agreement. The Mortgage Warehouse Line of Creditcredit (which we refer to as the “Third Master Repurchase Agreement”“Repurchase Facilities”) providesprovide Inspire with an uncommitted Mortgage Warehouse Line of Creditrepurchase facilities of up to $40$140 million, secured by the mortgage loans financed thereunder. Our existing Second Master Repurchase Agreements provided Inspire with revolving mortgage loan repurchase facilities of up to $35 million, providing Inspire a total potential lending capacity of up to $75 million. Amounts outstanding under the Repurchase Facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2018,2019, we had $57.3$77.8 million outstanding under thethese Repurchase Facilities and were in compliance with all covenants underthereunder. No assurance can be provided, however, that we will remain in compliance with the agreements.covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business.
Letters of Credit and Performance Bonds
In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 20182019 and December 31, 2017,2018, we had $296.9$347.6 million and $158.6$289.8 million, respectively, in letters of credit and performance bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance bonds are not generally released until all development and construction activities are completed.
Debt
Our outstanding debt obligations included the following as of September 30, 20182019 and December 31, 20172018 (in thousands):
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| September 30, |
| December 31, | September 30, | December 31, | |||||||
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| 2018 |
| 2017 | 2019 | 2018 | |||||||
6.750% senior notes, due May 2027(1) | $ | 494,178 | $ | — | |||||||||
5.875% senior notes, due July 2025(1) | 395,944 | 395,415 | |||||||||||
6.875% senior notes, due May 2022(1) |
| $ | 380,224 |
| $ | 379,238 | — | 380,567 | |||||
5.875% senior notes, due July 2025(1) |
| 395,238 |
|
| 394,725 | ||||||||
3.278% insurance premium notes, due June 2019 |
| 9,673 |
|
| — | ||||||||
Other financing obligations |
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| 2,320 |
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| 2,320 | |||||||
Notes payable |
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| 787,455 |
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| 776,283 | |||||||
Insurance premium notes and other financing obligations | 6,150 | 8,795 | |||||||||||
Senior notes payable | 896,272 | 784,777 | |||||||||||
Revolving line of credit, due April 2022 |
| 236,000 |
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| — | 278,800 | 202,500 | ||||||
Mortgage repurchase facilities |
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| 57,327 |
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| 48,319 | |||||||
Mortgage repurchase facility | 77,798 | 104,555 | |||||||||||
Total debt |
| $ | 1,080,782 |
| $ | 824,602 | $ | 1,252,870 | $ | 1,091,832 |
(1)The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.
A summary of our debt obligations is included in Note 1112 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on MarchFebruary 13, 2019. For further information regarding our 2019 issuance of the 6.750% Senior Notes due 2027 and extinguishment of our 6.875% Senior Notes due 2022, refer to Note 9 - Debt in Part I, Item 1 2018. of this report.
Stock Repurchase Program
On November 6, 2018, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, and general market and economic conditions.
We intend to finance any stock repurchases through available cash and our revolving credit facility. Repurchases also may be made under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. There
36
is no guarantee as to the number of shares that will be repurchased, and the stock repurchase program may be extended, suspended or discontinued at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock.
Cash Flows—NineDuring the nine months ended September 30, 2018 Compared to2019, an aggregate of 83,000 shares were repurchased for a total purchase price of approximately $1.4 million or an average of $17.14 per share. No shares were repurchased during the Ninethree months ended September 30, 2017
For2019 and the three and nine months ended September 30, 2018.
Cash Flows—Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
For the nine months ended September 30, 2019 and 2017,2018, the comparison of cash flows is as follows:
Our primary sources of cash flows from operations are from the sale of single family attached and detached homes and mortgages. Our primary uses of cash flows from operations is the acquisition of land and expenditures associated with the construction of our single family attached and detached homes and the origination of mortgages held for sale. During the nine months ended September 30, 2019 and 2018, we used $149.0 million and $217.0 million in cash from operations, respectively. The decrease in cash used from operations is primarily a result of a comparatively favorable decrease in |
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changes in assets and liabilities for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.
Net cash used in investing activities decreased to $11.6 million during the nine months ended September 30, 2019, compared to $39.7 million used during the same period in 2018. The decrease was primarily related to our purchase of the remaining 50% ownership interest in WJH during 2018.
Net cash provided by financing activities was $165.7 million during the nine months ended September 30, 2019, compared to $182.7 million during the same period in 2018. The decrease was primarily attributable to a decrease in net borrowings on our revolving credit facility, partially offset by an increase in proceeds from the issuance of the 2027 Notes and a portion of those proceeds used to extinguish the 2022 Notes.
As of September 30, 2018,2019, our cash and cash equivalents and restricted cash balance was $19.7$41.6 million.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Option contracts generally require payment by ususe of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of September 30, 2018,2019, we had outstanding purchase contracts and option contracts for 17,01919,567 lots totaling $760.4with a total purchase price of approximately $726.1 million and had $45.0$42.3 million of non-refundable cash deposits pertaining to land option contracts. While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contactscontracts occurring in future periods, if at all.
Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities. As of September 30, 2019 and December 31, 2018, we had $347.6 million and $289.8 million, respectively, in letters of credit and performance bonds issued and outstanding. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.
Non-GAAP Financial Measures
In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net debt to net capital, and adjusted net earnings per diluted common shares. These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations. We believe these non-GAAP financial measures provide useful information to investors because they are used to evaluate our performance on a comparable year-over-year basis. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. These measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures. Accordingly, we qualify our use of non-GAAP financial information in a statement when non-GAAP financial information is presented.
EBITDA and Adjusted EBITDA
The following table presents EBITDA and adjusted EBITDA for the three and nine months ended September 30, 20182019 and 2017.2018. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, (v) loss on debt extinguishment, and (v)(vi) adjustments resulting from the
application of purchase accounting for acquired work in process inventory related to business combinations and purchase price accounting for investment in unconsolidated subsidiaries, and (vi)(vii) acquisition expense. We believe adjusted EBITDA provides an indicator of general economic performance that is not affected by
37
fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our adjusted EBITDA is limited as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
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| Nine months ended September 30, |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||
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| 2018 |
| 2017 |
| % Change |
| 2018 |
| 2017 |
| % Change | 2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||||||||||||||
Net income |
| $ | 17,048 |
| $ | 9,470 |
|
| 80.0 | % |
| $ | 70,261 |
| $ | 33,100 |
|
| 112.3 | % | $ | 27,024 | $ | 17,048 | 58.5 | % | $ | 59,636 | $ | 70,261 | (15.1) | % | |||||||||||||||
Income tax expense |
|
| 5,810 |
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| 5,686 |
|
| 2.2 | % |
|
| 22,207 |
|
| 17,216 |
|
| 29.0 | % | 7,816 | 5,810 | 34.5 | % | 19,031 | 22,207 | (14.3) | % | |||||||||||||||||||
Interest in cost of home sales revenues |
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| 12,334 |
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| 8,794 |
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| 40.3 | % |
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| 33,577 |
|
| 20,625 |
|
| 62.8 | % | 14,258 | 12,334 | 15.6 | % | 41,499 | 33,577 | 23.6 | % | |||||||||||||||||||
Interest expense (income) |
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| (205) |
|
| (778) |
|
| (73.7) | % |
|
| (579) |
|
| (1,323) |
|
| (56.2) | % | — | (205) | N/M | 15 | (579) | N/M | |||||||||||||||||||||
Depreciation and amortization expense |
|
| 3,291 |
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| 2,256 |
|
| 45.9 | % |
|
| 8,803 |
|
| 5,073 |
|
| 73.5 | % | 3,597 | 3,291 | 9.3 | % | 9,793 | 8,803 | 11.2 | % | |||||||||||||||||||
EBITDA |
|
| 38,278 |
|
| 25,428 |
|
| 50.5 | % |
|
| 134,269 |
|
| 74,691 |
|
| 79.8 | % | 52,695 | 38,278 | 37.7 | % | 129,974 | 134,269 | (3.2) | % | |||||||||||||||||||
Loss on debt extinguishment | — | — | N/M | 10,832 | — | N/M | |||||||||||||||||||||||||||||||||||||||||
Purchase price accounting for acquired work in process inventory |
|
| 11,934 |
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| 6,214 |
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| 92.1 | % |
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| 28,367 |
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| 6,331 |
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| 348.1 | % | — | 11,934 | (100.0) | % | 1,724 | 28,367 | (93.9) | % | |||||||||||||||||||
Purchase price accounting for investment in unconsolidated subsidiaries outside basis |
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| — |
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| 30 |
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| (100.0) | % |
|
| 60 |
|
| 885 |
|
| (93.2) | % | — | — | N/M | — | 60 | N/M | |||||||||||||||||||||
Acquisition expense |
|
| 58 |
|
| 7,205 |
|
| (99.2) | % |
|
| 395 |
|
| 8,645 |
|
| (95.4) | % | — | 58 | N/M | — | 395 | N/M | |||||||||||||||||||||
Adjusted EBITDA |
| $ | 50,270 |
| $ | 38,877 |
|
| 29.3 | % |
| $ | 163,091 |
| $ | 90,552 |
|
| 80.1 | % | $ | 52,695 | $ | 50,270 | 4.8 | % | $ | 142,530 | $ | 163,091 | (12.6) | % |
NM – Not Meaningful
Net Homebuilding Debt to Net Capital
The following table presents our ratio of net homebuilding debt to net capital, which is a non-GAAP financial measure. We calculate this by dividing net homebuilding debt (senior notes payable and borrowing under our revolving line of credit less cash and cash equivalents and cash held in escrow) by net capital (net homebuilding debt plus total stockholders’ equity). The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing.
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2018 |
| 2017 | 2019 | 2018 | ||||||
Total homebuilding debt |
| $ | 1,023,455 |
| $ | 776,283 | $ | 1,175,072 | $ | 987,277 | ||
Total stockholders' equity |
|
| 840,793 |
|
| 735,233 | 951,179 | 859,359 | ||||
Total capital |
| $ | 1,864,248 |
| $ | 1,511,516 | $ | 2,126,251 | $ | 1,846,636 | ||
Debt to capital |
|
| 54.9% |
|
| 51.4% | 55.3% | 53.5% | ||||
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Total homebuilding debt |
| $ | 1,023,455 |
| $ | 776,283 | $ | 1,175,072 | $ | 987,277 | ||
Cash and cash equivalents |
|
| (15,927) |
|
| (88,832) | (38,508) | (32,902) | ||||
Cash held in escrow |
|
| (31,906) |
|
| (37,723) | (30,362) | (24,344) | ||||
Net homebuilding debt |
|
| 975,622 |
|
| 649,728 | 1,106,202 | 930,031 | ||||
Total stockholders' equity |
|
| 840,793 |
|
| 735,233 | 951,179 | 859,359 | ||||
Net capital |
| $ | 1,816,415 |
| $ | 1,384,961 | $ | 2,057,381 | $ | 1,789,390 | ||
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Net homebuilding debt to net capital |
|
| 53.7% |
|
| 46.9% | 53.8% | 52.0% |
Adjusted Diluted Earnings per Share
Adjusted diluted earnings per share (which we refer to as “Adjusted Diluted EPS”) is a non-GAAP financial measure that we believe is useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating trends without the effect of certain non-recurring items. We believe excluding certain non-recurring items provides more
comparable assessment of our financial results from period to period. Adjusted Diluted EPS is calculated by excluding loss on debt extinguishment, gain on previously held interest in WJH and the effect of acquisition costs and purchase price accounting for acquired work in process from the calculation of reported earnings per share.
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| Three months ended |
| Nine months ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||
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| September 30, |
| September 30, | September 30, | September 30, | ||||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Numerator |
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Net income |
| $ | 17,048 |
| $ | 9,470 |
| $ | 70,261 |
| $ | 33,100 | $ | 27,024 | $ | 17,048 | $ | 59,636 | $ | 70,261 | ||||
Less: Undistributed earnings allocated to participating securities |
|
| — |
|
| (52) |
|
| (58) |
|
| (289) | — | — | — | (58) | ||||||||
Net income allocable to common stockholders |
| $ | 17,048 |
| $ | 9,418 |
| $ | 70,203 |
| $ | 32,811 | $ | 27,024 | $ | 17,048 | $ | 59,636 | $ | 70,203 | ||||
Denominator |
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Weighted average common shares outstanding - basic |
|
| 30,232,376 |
|
| 25,445,552 |
|
| 29,885,858 |
|
| 23,038,390 | 30,587,487 | 30,232,376 | 30,378,860 | 29,885,858 | ||||||||
Dilutive effect of restricted stock units |
|
| 322,505 |
|
| 280,585 |
|
| 303,200 |
|
| 236,930 | 318,748 | 322,505 | 262,334 | 303,200 | ||||||||
Weighted average common shares outstanding - diluted |
|
| 30,554,881 |
|
| 25,726,137 |
|
| 30,189,058 |
|
| 23,275,320 | 30,906,235 | 30,554,881 | 30,641,194 | 30,189,058 | ||||||||
Earnings per share: |
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Basic |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.35 |
| $ | 1.42 | $ | 0.88 | $ | 0.56 | $ | 1.96 | $ | 2.35 | ||||
Diluted |
| $ | 0.56 |
| $ | 0.37 |
| $ | 2.33 |
| $ | 1.41 | $ | 0.87 | $ | 0.56 | $ | 1.95 | $ | 2.33 | ||||
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Adjusted earnings per share |
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Adjusted Earnings per share | ||||||||||||||||||||||||
Numerator |
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Income before income tax expense |
| $ | 22,858 |
| $ | 15,156 |
| $ | 92,468 |
| $ | 50,316 | $ | 34,840 | $ | 22,858 | $ | 78,667 | $ | 92,468 | ||||
Loss on debt extinguishment | — | — | 10,832 | — | ||||||||||||||||||||
Purchase price accounting for acquired work in process inventory |
|
| 11,934 |
|
| 6,214 |
|
| 28,367 |
|
| 6,331 | — | 11,934 | 1,724 | 28,367 | ||||||||
Gain on previously held interest in WJH |
|
| - |
|
| - |
|
| (7,219) |
|
| - | — | — | — | (7,219) | ||||||||
Acquisition expense |
|
| 58 |
|
| 7,205 |
|
| 395 |
|
| 8,645 | — | 58 | — | 395 | ||||||||
Adjusted income before income tax expense |
|
| 34,850 |
|
| 28,575 |
|
| 114,011 |
|
| 65,292 | 34,840 | 34,850 | 91,223 | 114,011 | ||||||||
Adjusted income tax expense(1) |
|
| (8,713) |
|
| (10,720) |
|
| (28,503) |
|
| (22,340) | (7,816) | (8,713) | (22,069) | (28,503) | ||||||||
Adjusted net income |
|
| 26,137 |
|
| 17,855 |
|
| 85,508 |
|
| 42,952 | 27,024 | 26,137 | 69,154 | 85,508 | ||||||||
Less: Adjusted undistributed earnings allocated to participating securities |
|
| — |
|
| (99) |
|
| (71) |
|
| (375) | — | — | — | (71) | ||||||||
Adjusted net income allocable to common stockholders |
| $ | 26,137 |
| $ | 17,756 |
| $ | 85,437 |
| $ | 42,577 | $ | 27,024 | $ | 26,137 | $ | 69,154 | $ | 85,437 | ||||
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Denominator - Diluted |
|
| 30,554,881 |
|
| 25,726,137 |
|
| 30,189,058 |
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| 23,275,320 | 30,906,235 | 30,554,881 | 30,641,194 | 30,189,058 | ||||||||
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Adjusted diluted earnings per share |
| $ | 0.86 |
| $ | 0.69 |
| $ | 2.83 |
| $ | 1.83 | $ | 0.87 | $ | 0.86 | $ | 2.26 | $ | 2.83 |
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(1)The tax rate used in calculating adjusted net income for the three and nine months ended September 30, 2019 and 2018 was the estimated annual rate offset by the benefit associated with federal energy credits related to homes delivered in prior years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rates
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our Amended and Restated Credit Agreement. BorrowingAgreement Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. Under The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the revolving line of credit.
For fixed rate debt, such as our current policies,senior notes, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows.
In our Financial Services business, we do notutilize mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates. To mitigate interest risk associated with loans held-for-sale, we use interest rate derivative financial instruments to managehedge our exposure to changes inrisk from the time a borrower locks a loan until the time the loan is securitized. We also hedge our interest rates.rate exposure through entering into interest rate swap futures.
Inflation
Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our co-principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) as of September 30, 2018,2019, the end of the period covered by this Form 10-Q. Based on this evaluation, our co-principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 20182019 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes during the third quarter of 20182019 in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 that was filed with the SEC on March 1, 2018, other than the new risk factor below.February 13, 2019.
While we believe our recent acquisition of the remaining 50% ownership interest in WJH will produce several benefits, it involves risk and we may be unable to realize the anticipated benefits of this acquisition.
In June 2018, we acquired the remaining 50% ownership interest in WJH. While we believe the acquisition of WJH will produce many benefits, such as expanding our investment into a proven and profitable operation, enhancing our geographic and product diversification through additional exposure to new markets and first-time buyers, driving additional growth avenues for ancillary revenue streams, including our mortgage and title operations and improving access to capital to accelerate WJH’s expansion efforts into additional markets, these benefits may not come to fruition or materialize to the extent we anticipate. In addition, we still need to integrate the business to some extent which can be challenging and involves risk. These issues could adversely affect our business and financial results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
The following exhibits are either filed herewith or incorporated herein by reference:
Item No. | Description | |
3.1 | ||
3.2 | ||
3.3 | ||
| ||
| ||
31.2 | ||
31.3 | ||
32.1 | ||
32.2 | ||
32.3 | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document (filed herewith) | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) | |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document (filed herewith) | |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document (filed herewith) | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Qreport to be signed on its behalf by the undersigned thereunto duly authorized.
Century Communities, Inc. | |||||
Date: | By: | /s/ Dale Francescon | |||
Dale Francescon | |||||
Chairman of the Board and Co-Chief Executive Officer (Co-Principal Executive Officer) | |||||
Date: | By: | /s/ Robert J. Francescon | |||
Robert J. Francescon | |||||
Co-Chief Executive Officer and President (Co-Principal Executive Officer) | |||||
Date: | By: | /s/ David Messenger | |||
David Messenger | |||||
Chief Financial Officer (Principal Financial Officer) | |||||
Date: | By: | /s/ J. Scott Dixon | |||
J. Scott Dixon | |||||
Chief Accounting Officer (Principal Accounting Officer) |