Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

CCS 06302018 Form 10-Q

 

 

UNITED STATES

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 June 30, 2018



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 of other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)



 

8390 East Crescent Parkway, Suite 650
Greenwood Village, Colorado

 

80111

(Address of principal executive offices)

 

(Zip code)



(Registrant’s telephone number, including area code): (303) 770-8300

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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 accelerated filer

 

 

Accelerated filer

 



 

 

 

Non-accelerated filer

 

   (Do not check if a smaller reporting company)

 

Smaller reporting company

 



 

 

 

Emerging growth company

 

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      No  

On July 26,  2018,  30,119,259  shares of common stock, par value 0.01 per share, were outstanding.   

 


 

Table of Contents

 

 

CENTURY COMMUNITIES, INC.

FORM 10-Q

For the Three and Six Months Ended June 30, 2018



Index



 



Page No.

PART I

Item 1. Unaudited Condensed Consolidated Financial Statements

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

3

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2018 and 2017

4

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2018 and 2017 

5

Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2018

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

Item 4. Controls and Procedures

40

PART II

Item 1. Legal Proceedings

41

Item 1A. Risk Factors

41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3. Defaults Upon Senior Securities

41

Item 4. Mine Safety Disclosures

41

Item 5. Other Information

41

Item 6. Exhibits

42

Signatures

44



 





2 

 


 

Table of Contents

 

 

PART I

ITEM 1.     FINANCIAL STATEMENTS.





Century Communities, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2018 and December 31, 2017

(in thousands, except share amounts)







 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Assets

 

(Unaudited)

 

 

 

Cash and cash equivalents

 

$

19,482 

 

$

88,832 

Cash held in escrow

 

 

43,880 

 

 

37,723 

Accounts receivable

 

 

20,890 

 

 

12,999 

Inventories

 

 

1,696,931 

 

 

1,390,354 

Mortgage loans held for sale

 

 

57,353 

 

 

52,327 

Prepaid expenses and other assets

 

 

71,106 

 

 

60,812 

Property and equipment, net

 

 

32,482 

 

 

27,911 

Investment in unconsolidated subsidiaries

 

 

 —

 

 

28,208 

Deferred tax assets, net

 

 

9,704 

 

 

5,555 

Amortizable intangible assets, net

 

 

5,573 

 

 

2,938 

Goodwill

 

 

28,272 

 

 

27,363 

Total assets

 

$

1,985,673 

 

$

1,735,022 

Liabilities and stockholders' equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

59,608 

 

$

24,831 

Accrued expenses and other liabilities

 

 

162,085 

 

 

150,356 

Senior notes payable

 

 

777,275 

 

 

776,283 

Revolving line of credit

 

 

130,000 

 

 

 —

Mortgage repurchase facilities

 

 

52,999 

 

 

48,319 

Total liabilities

 

 

1,181,967 

 

 

999,789 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value, 100,000,000 shares authorized, 30,119,259 and 29,502,624 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

301 

 

 

295 

Additional paid-in capital

 

 

582,627 

 

 

566,790 

Retained earnings

 

 

220,778 

 

 

168,148 

Total stockholders' equity

 

 

803,706 

 

 

735,233 

Total liabilities and stockholders' equity

 

$

1,985,673 

 

$

1,735,022 

See Notes to Unaudited Condensed Consolidated Financial Statements





3 

 


 

Table of Contents

 

 

Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2018 and 2017

(in thousands, except share and per share amounts)













 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

Six months ended June 30,



 

2018

 

2017

 

2018

 

2017

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Homebuilding revenues

 

 

 

 

 

 

 

 

 

 

 

 

Home sales revenues

 

$

522,164 

 

$

287,588 

 

$

916,995 

 

$

514,008 

Land sales and other revenues

 

 

1,714 

 

 

2,493 

 

 

3,174 

 

 

4,389 



 

 

523,878 

 

 

290,081 

 

 

920,169 

 

 

518,397 

Financial services revenue

 

 

8,014 

 

 

1,743 

 

 

13,571 

 

 

1,743 

Total revenues

 

 

531,892 

 

 

291,824 

 

 

933,740 

 

 

520,140 

Homebuilding cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

Cost of home sales revenues

 

 

(427,197)

 

 

(233,888)

 

 

(746,780)

 

 

(416,212)

Cost of land sales and other revenues

 

 

(1,040)

 

 

(1,746)

 

 

(1,917)

 

 

(2,890)



 

 

(428,237)

 

 

(235,634)

 

 

(748,697)

 

 

(419,102)

Financial services costs

 

 

(5,385)

 

 

(1,445)

 

 

(9,781)

 

 

(2,199)

Selling, general and administrative

 

 

(63,634)

 

 

(34,220)

 

 

(120,156)

 

 

(67,432)

Acquisition expense

 

 

(165)

 

 

(916)

 

 

(338)

 

 

(1,439)

Equity in income of unconsolidated subsidiaries

 

 

11,681 

 

 

2,676 

 

 

14,849 

 

 

3,931 

Other income (expense)

 

 

350 

 

 

824 

 

 

(8)

 

 

1,261 

Income before income tax expense

 

 

46,502 

 

 

23,109 

 

 

69,609 

 

 

35,160 

Income tax expense

 

 

(13,309)

 

 

(8,278)

 

 

(16,397)

 

 

(11,530)

Net income

 

$

33,193 

 

$

14,831 

 

$

53,212 

 

$

23,630 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.11 

 

$

0.67 

 

$

1.79 

 

$

1.07 

Diluted

 

$

1.10 

 

$

0.66 

 

$

1.77 

 

$

1.06 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,901,791 

 

 

22,146,124 

 

 

29,709,728 

 

 

21,814,860 

Diluted

 

 

30,170,689 

 

 

22,366,077 

 

 

30,003,276 

 

 

22,029,962 



See Notes to Unaudited Condensed Consolidated Financial Statements





4 

 


 

Table of Contents

 

 

Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2018 and 2017

(in thousands)











 

 

 

 

 

 



 

Six months ended June 30,



 

2018

 

2017

Operating activities

 

 

 

 

 

 

Net income

 

$

53,212 

 

$

23,630 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

5,512 

 

 

2,818 

Stock-based compensation expense

 

 

6,323 

 

 

3,921 

Deferred income taxes

 

 

(989)

 

 

(1,658)

Distribution of income from unconsolidated subsidiaries

 

 

7,432 

 

 

3,852 

Equity in income of unconsolidated subsidiaries

 

 

(14,849)

 

 

(3,931)

(Gain) loss on disposition of assets

 

 

230 

 

 

27 

Changes in assets and liabilities:

 

 

 

 

 

 

Cash held in escrow

 

 

(5,897)

 

 

(5,936)

Accounts receivable

 

 

(6,199)

 

 

(2,480)

Inventories

 

 

(124,863)

 

 

(51,383)

Prepaid expenses and other assets

 

 

(2,404)

 

 

1,352 

Accounts payable

 

 

22,260 

 

 

(11,384)

Accrued expenses and other liabilities

 

 

(15,634)

 

 

13,102 

Mortgage loans held for sale

 

 

(5,026)

 

 

(11,235)

Net cash used in operating activities

 

 

(80,892)

 

 

(39,305)

Investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,534)

 

 

(2,885)

Business combinations, net of acquired cash

 

 

(28,036)

 

 

 —

Other investing activities

 

 

322 

 

 

(2,950)

Net cash used in investing activities

 

 

(35,248)

 

 

(5,835)

Financing activities

 

 

 

 

 

 

Borrowings under revolving credit facilities

 

 

305,000 

 

 

75,000 

Payments on revolving credit facilities

 

 

(175,000)

 

 

(270,000)

Proceeds from issuance of senior notes

 

 

 —

 

 

523,000 

Extinguishments of debt assumed in business combination

 

 

(94,231)

 

 

 —

Principal payments on notes payable

 

 

 —

 

 

(2,541)

Debt issuance costs

 

 

(3,521)

 

 

(3,593)

Net proceeds from mortgage repurchase facilities

 

 

4,679 

 

 

10,551 

Net proceeds from issuances of common stock

 

 

14,309 

 

 

24,333 

Repurchases of common stock upon vesting of stock based compensation

 

 

(4,788)

 

 

(3,693)

Net cash provided by (used in) financing activities

 

 

46,448 

 

 

353,057 

Net increase (decrease)

 

$

(69,692)

 

$

307,917 

Cash and cash equivalents and Restricted cash

 

 

 

 

 

 

Beginning of period

 

 

93,713 

 

 

30,954 

End of period

 

$

24,021 

 

$

338,871 

Supplemental cash flow disclosure

 

 

 

 

 

 

Cash paid for income taxes

 

$

26,323 

 

$

5,257 

Cash and cash equivalents and Restricted cash

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,482 

 

$

336,786 

Restricted cash (Note 6)

 

 

4,539 

 

 

2,085 

Cash and cash equivalents and Restricted cash

 

$

24,021 

 

$

338,871 

See Notes to Unaudited Condensed Consolidated Financial Statements

5 

 


 

Table of Contents

 

 

Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2018



1. Basis of Presentation



Century Communities, Inc. (which we refer to as “we,” “our,” 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, California, Colorado, Florida, Georgia, Nevada, North Carolina, 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 time move up, and active adult 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, sells homes through retail studios, and provides no option or upgrade selections.  Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes.   Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc. and Parkway Title, LLC, which provide mortgage services and title 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 buyersOn 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, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 that was filed with the SEC on March 1, 2018.

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 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

6 

 


 

Table of Contents

 

 

statements and the reported amounts of revenues and expenses during the reporting period.  Accordingly, actual results could differ from those estimates.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (which we refer to as “FASB”) issued ASU 2016-02, “Leases (Topic 842).”  ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  ASU 2016-02 is effective for the Company beginning January 1, 2019 and interim periods within the annual periods.  We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.

Recently Adopted Accounting Standards

Cash Flows

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued ASU 2016-18 “Statement of Cash Flows – Restricted Cash.”  ASU 2016-18 requires that a statement of cash flows explain the change during 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 on January 1, 2018.  Upon adoption of 2016-18, we have included restricted cash in the beginning and ending balances on our Statements of Cash Flows to present 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 investee 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 modified retrospective approach to contracts which were not completed as of January 1, 2018.     



While the adoption of ASC 606 did not result in a material impact to our consolidated financial statements, it did impact the following:



·

Certain immaterial costs incurred related to our model homes, which were previously capitalized to inventory, are now expensed as incurred.

·

Forfeited customer earnest money deposits, which were previously presented in other income within our Consolidated Statements of Operations, are presented as other revenue. During the three and six months ended June 30, 2018, we recognized $0.3 million and $0.4 million of forfeited deposits, respectively.

·

Land sales to third parties which do not meet the definition of a customer in ASC 606 are classified as other income in our Consolidated Statements of Operations.  During the three and six months ended June 30, 2018, we recorded $5.0 million and  $6.9 million from the disposition of land to third parties which were not considered customers, respectively.  The related cost of these land dispositions during the same periods totaled $5.0 million and $7.2 million, respectively

·

Deferral of an allocated amount of revenue and costs associated with unsatisfied performance obligations, primarily the installation of landscaping, at the time of home delivery.  We deferred $0.4 million and $1.8 million in revenue and $0.3 million and $1.4 million in costs related to unsatisfied performance obligations on homes that we delivered during the three and six months ended June 30, 2018, respectively

·

Reclassification of certain costs related to our model homes from inventory to property and equipment on our Consolidated Balance Sheets. Upon adoption, we reclassified $2.3 million from inventories to property and equipment.

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

7 

 


 

Table of Contents

 

 

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 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 $17.7 million and $14.1 million at June 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 12 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 four geographic targets a wide range of buyer profiles including: first time, first time move up, and active adult 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, sells homes through retail studios, and provides no option or upgrade selections.  Our Wade Jurney Homes brand currently has operations in five states and is managed separately from our four geographic regions and 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 into the following five reportable segments:

·

West (Southern California, Central Valley, Bay Area and Washington)

·

Mountain (Colorado, Nevada and Utah)

·

Texas (Houston, San Antonio and Austin)

·

Southeast (Georgia, North Carolina, South Carolina and Tennessee)

·

Wade Jurney Homes (Alabama, Georgia, North Carolina, South Carolina, and Florida)

We have also identified our Financial Services operations, which provide mortgage and title services to our homebuyers, as a sixth reportable segment.  Our Corporate operations are a non-operating segment, as it serves to support our homebuilding operations through functions, such as our executive, finance, treasury, human resources, and accounting departments. 

We have adjusted prior period segment information where applicable to conform to the current period presentation.

8 

 


 

Table of Contents

 

 

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):





 

 

 

 

 

 

 

 

 

 

 



Three months ended June 30,

 

Six months ended June 30,



2018

 

2017

 

2018

 

2017

Revenue:

 

 

 

 

 

 

 

 

 

 

 

West

$

129,218 

 

$

 —

 

$

248,139 

 

$

 —

Mountain

 

180,523 

 

 

164,265 

 

 

326,016 

 

 

286,301 

Texas

 

63,545 

 

 

44,350 

 

 

101,573 

 

 

75,240 

Southeast

 

125,346 

 

 

81,466 

 

 

219,195 

 

 

156,856 

Wade Jurney Homes

 

25,246 

 

 

 —

 

 

25,246 

 

 

 —

Financial Services

 

8,014 

 

 

1,743 

 

 

13,571 

 

 

1,743 

Corporate

 

 —

 

 

 —

 

 

 —

 

 

 —

Total revenue

$

531,892 

 

$

291,824 

 

$

933,740 

 

$

520,140 



 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax expense:

 

 

 

 

 

 

 

 

 

 

 

West

$

12,022 

 

$

 —

 

$

21,890 

 

$

 —

Mountain

 

25,319 

 

 

21,912 

 

 

43,242 

 

 

37,036 

Texas

 

4,972 

 

 

2,412 

 

 

6,780 

 

 

4,241 

Southeast

 

9,149 

 

 

4,792 

 

 

13,830 

 

 

10,608 

Wade Jurney Homes

 

(186)

 

 

 —

 

 

(186)

 

 

 —

Financial Services

 

2,629 

 

 

57 

 

 

3,790 

 

 

(697)

Corporate

 

(7,403)

 

 

(6,064)

 

 

(19,737)

 

 

(16,028)

Total income before income tax expense

$

46,502 

 

$

23,109 

 

$

69,609 

 

$

35,160 



The following table summarizes total assets by operating segment (in thousands):



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

West

 

$

408,167 

 

$

394,215 

Mountain

 

 

605,803 

 

 

571,880 

Texas

 

 

199,181 

 

 

192,078 

Southeast

 

 

458,645 

 

 

401,618 

Wade Jurney Homes

 

 

153,559 

 

 

Financial Services

 

 

79,001 

 

 

63,137 

Corporate

 

 

81,317 

 

 

112,094 

Total assets

 

$

1,985,673 

 

$

1,735,022 

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):

9 

 


 

Table of Contents

 

 



 

 

 

UCP shares (including noncontrolling interest) as of August 3, 2017

 

 

18,085 

Cash paid per share

 

$

5.32 

Cash consideration

 

$

96,213 

Cash consideration pertaining to stockholder exercising appraisal rights

 

$

3,937 

Total cash consideration

 

$

100,150 



 

 

 

UCP shares (including noncontrolling interest) as of August 3, 2017

 

 

18,085 

Exchange ratio

 

 

0.2309 

Number of CCS shares issued

 

 

4,176 

Closing price of Century Communities common stock on August 3, 2017

 

$

25.80 

Consideration attributable to common stock

 

$

107,737 

Total replacement award value

 

$

1,149 

Total equity consideration

 

$

108,886 



 

 

 

Total consideration in cash and equity

 

$

209,036 



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 estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):    

 





 

 

Cash and cash equivalents

$

20,264 

Accounts receivable

 

7,897 

Inventories

 

390,234 

Prepaid expenses and other assets

 

6,988 

Property and equipment, net

 

717 

Deferred tax asset, net

 

11,090 

Goodwill

 

6,607 

Total assets

$

443,797 



 

 

Accounts payable

$

10,712 

Accrued expenses and other liabilities

 

71,130 

Notes payable

 

152,919 

Total liabilities

 

234,761 

Purchase price/Net equity

$

209,036 



The purchase price accounting reflected above 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). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities including inventories and our deferred tax asset.   We have not yet finalized the allocation of goodwill to our reporting units.   During the six months ended June 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 estimate of 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 expect that $5.4 million of Goodwill will be deductible for tax purposes.



10 

 


 

Table of Contents

 

 

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. 

UCP’s results of operations, which include homebuilding revenues of $114.4 million and $217.8 million, respectively, and income before income tax of $7.4 million and $14.0 million, respectively, are included in our Consolidated Statements of Operations for the three and six months ended June 30, 2018.

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 our estimates of the fair value of the assets acquired and liabilities assumed as of the acquisition date of Sundquist Homes (in thousands):  





 

 

Accounts receivable

$

11 

Inventories

 

55,077 

Prepaid expenses and other assets

 

1,050 

Property and equipment, net

 

142 

Total assets

$

56,280 



 

 

Accounts payable

$

3,646 

Accrued expenses and other liabilities

 

2,431 

Total liabilities

 

6,077 

Purchase price/Net equity

$

50,203 

Acquired inventories consist of both acquired land and work in process inventories.  We determined the estimate of 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.  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). We expect that $4.8 million of Goodwill 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. 

Sundquist Homes’s results of operations, which include homebuilding revenues of $21.1 million and $42.6 million, respectively, and income before tax of $4.3 million and $8.4 million, respectively, are included in our accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2018.

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, sells homes through retail studios, and provides no option or upgrade selections.  The acquired assets primarily include homes under construction.  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. We incurred $0.2 million in acquisition costs which are reflected in acquisition expenses in our Consolidated Statements of Operations.



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 $35.6 million, which is inclusive of an estimated discount for lack of control of $1.9 million, and

11 

 


 

Table of Contents

 

 

recognized a gain of $7.2 million during the three months ended June 30, 2018.  The gain is included in “Equity in income of unconsolidated subsidiaries” on our Consolidated Statements of Operations.



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 



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

 

160,070 

Prepaid expenses and other assets

 

7,710 

Amortizable intangible assets

 

3,375 

Goodwill

 

300 



$

182,221 



 

 

Accounts payable

$

12,516 

Accrued expenses and other liabilities

 

2,349 

Senior notes and revolving line of credit

 

94,231 

Total liabilities

 

109,096 

Net assets acquired

$

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 million and $0.4 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).

We 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 $25.2 million, and loss before tax of $0.2 million, are included in our accompanying Consolidated Statement of Operations for the three months ended June 30, 2018.



Unaudited Pro Forma Financial Information

Unaudited pro forma revenues and income before tax expense for the three and six months ended June 30, 2018 gives effect to including the results of the acquisition of WJH 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 presented and excludes acquisition expense incurred related to the transactions (in thousands, except share and per share information):

12 

 


 

Table of Contents

 

 







 

 

 

 

 



Three months ended June 30,

 

Six months ended June 30,



2018

 

2018

Total revenues

$

604,120 

 

$

1,084,131 



 

 

 

 

 

Income before tax expense

$

43,912 

 

$

63,184 

Tax expense

 

(10,978)

 

 

(15,795)

Net income

$

32,934 

 

$

47,389 

Less: Undistributed earnings allocated to participating securities

 

(3)

 

 

(59)

Numerator for basic and diluted pro forma EPS

$

32,931 

 

$

47,330 



 

 

 

 

 

Pro forma weighted average shares-basic

 

29,901,791 

 

 

29,709,728 

Pro forma weighted average shares-diluted

 

30,170,689 

 

 

30,003,276 



 

 

 

 

 

Pro forma basic EPS

$

1.10 

 

$

1.59 

Pro forma diluted EPS

$

1.09 

 

$

1.58 

Unaudited pro forma revenues and income before tax expense for the three and six months ended June 30, 2017 gives effect to including the results of the acquisitions of UCP, Sundquist Homes, and WJH as of January 1, 2017.    Unaudited pro forma income before tax expense adjusts the operating results of UCP, Sundquist Homes, and 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 presented and excludes acquisition expense incurred related to the transactions.  Pro forma basic and diluted earnings per share (which we refer to as “Pro forma EPS”) gives effect to the issuance of approximately 4.2 million shares of common stock as consideration for the acquisition of UCP as though the acquisition had occurred on January 1, 2017 (in thousands, except share and per share information):









 

 

 

 

 



Three months ended June 30,

 

Six months ended June 30,



2017

 

2017

Total revenues

$

477,599 

 

$

862,615 



 

 

 

 

 

Income before tax expense

$

34,245 

 

$

57,051 

Tax expense

 

(8,294)

 

 

(12,204)

Net income

$

25,951 

 

$

44,847 

Less: Undistributed earnings allocated to participating securities

 

(149)

 

 

(401)

Numerator for basic and diluted pro forma EPS

$

25,802 

 

$

44,446 



 

 

 

 

 

Pro forma weighted average shares-basic

 

26,321,978 

 

 

25,990,714 

Pro forma weighted average shares-diluted

 

26,541,931 

 

 

26,205,816 



 

 

 

 

 

Pro forma basic EPS

$

0.98 

 

$

1.71 

Pro forma diluted EPS

$

0.97 

 

$

1.70 











4. Inventories

Inventories included the following (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Homes under construction

 

$

1,069,594 

 

$

869,554 

Land and land development

 

 

579,541 

 

 

479,038 

Capitalized interest

 

 

47,796 

 

 

41,762 

Total inventories

 

$

1,696,931 

 

$

1,390,354 

  





13 

 


 

Table of Contents

 

 

5. Financial Services

 

We use best efforts commitments with various investors to mitigate the risk associated with mortgage loans held for sale.  Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate our interest rate and price risks.  These best effort commitments are considered derivative instruments under ASC 815, “Derivatives and Hedging,” however, we do not have any derivative instruments designated as hedging instruments as of June 30, 2018. Substantially all of the loans originated by us and their related servicing rights are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. In accordance with ASC 825, “Financial Instruments,” we use the fair value option to record residential mortgage loans available-for-sale at the price they are committed to be sold under the best efforts commitments.  Gains and losses from the sale of mortgage loans are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in Financial services revenues.  Loan origination fees generally represent flat per-loan fee amounts based on a percentage of the principal balance and are recognized as Financial services revenue at the time the loans are closed.



Expected gains and losses from the sale of our loans held for sale are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment.  As of June 30, 2018, mortgage loans available-for-sale had an aggregate fair value of $57.4 million and an aggregate outstanding principal balance of $55.0 million. The net gain resulting from changes in fair value of the best efforts commitments and mortgage loans held in inventory totaled $0.5 million and $0.5 million for the three and six months ended June 30, 2018, respectively, and $0.5 million and $0.5 million for the three and six months ended June 30, 2017, respectively, and are included in Financial services revenues. Realized net gains from the sale of mortgages during the three and six months ended June 30, 2018 were $5.0 million and $8.7 million, respectively, and were $0.4 million and $0.4 million for the three and six months ended June 30, 2017, respectively.



6. Prepaid Expenses and Other Assets

Prepaid expenses and other assets included the following (in thousands):







 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Prepaid insurance

 

$

5,706 

 

$

6,549 

Lot option and escrow deposits

 

 

37,952 

 

 

35,700 

Performance deposits

 

 

3,944 

 

 

3,295 

Deferred financing costs revolving line of credit, net

 

 

4,652 

 

 

1,795 

Restricted cash

 

 

4,539 

 

 

4,881 

Secured notes receivable

 

 

4,894 

 

 

2,753 

Other

 

 

9,419 

 

 

5,839 

Total prepaid expenses and other assets

 

$

71,106 

 

$

60,812 

 

Restricted cash is comprised of customer deposits held in escrow pursuant to certain state laws and pledge accounts related to our mortgage repurchase facilities

 

7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

Earnest money deposits

 

$

17,744 

 

$

14,077 

Warranty reserve

 

 

10,269 

 

 

8,531 

Accrued compensation costs

 

 

19,572 

 

 

22,129 

Land development and home construction accruals

 

 

74,502 

 

 

61,918 

Liability for product financing arrangement

 

 

15,468 

 

 

19,751 

Accrued interest

 

 

14,577 

 

 

14,435 

Income taxes payable

 

 

 —

 

 

851 

Other

 

 

9,953 

 

 

8,664 

Total accrued expenses and other liabilities

 

$

162,085 

 

$

150,356 



 



14 

 


 

Table of Contents

 

 

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, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal 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 reduced our warranty reserve by $0.1 million and $0.2 million during the three and six months ended June 30, 2018, respectively, which is included as a reduction to cost of homes sales revenues on our Consolidated Statements of Operations.

The following table summarizes the changes in our warranty accrual (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2018

 

2017

 

2018

 

2017

Beginning balance

 

$

8,961 

 

$

2,731 

 

$

8,531 

 

$

2,479 

Warranty reserve assumed in business combination

 

 

397 

 

 

 

 

397 

 

 

Warranty expense provisions

 

 

1,787 

 

 

705 

 

 

3,221 

 

 

1,582 

Payments

 

 

(761)

 

 

(379)

 

 

(1,720)

 

 

(748)

Warranty adjustment

 

 

(115)

 

 

 —

 

 

(160)

 

 

(256)

Ending balance

 

$

10,269 

 

$

3,057 

 

$

10,269 

 

$

3,057 

 



9. Debt



Our outstanding debt obligations included the following as of June 30, 2018 and December 31, 2017 (in thousands):  











 

 

 

 

 

 



 

June 30,

 

December 31,



 

2018

 

2017

6.875% senior notes, due May 2022(1)

 

$

379,891 

 

$

379,238 

5.875% senior notes, due July 2025(1)

 

 

395,064 

 

 

394,725 

Other financing obligations

 

 

2,320 

 

 

2,320 

Senior notes payable

 

 

777,275 

 

 

776,283 

Revolving line of credit, due April 2022

 

 

130,000 

 

 

 —

Mortgage repurchase facilities

 

 

52,999 

 

 

48,319 

Total debt

 

$

960,274 

 

$

824,602 

(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.

Revolving line of credit 

On October 21, 2014, we entered into a 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 Amended and Restated Credit Agreement which amends and restates the Credit Agreement.  The Amended and Restated Credit Agreement provides us with a revolving line of credit of up to $540.0 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. 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 June 30, 2018, we had $130.0 million outstanding under the credit facility leaving $460.0 million in availability and were in compliance with all covenants.

15 

 


 

Table of Contents

 

 

Mortgage Repurchase Facilities – Financial Services

On May 4, 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, with Comerica Bank, upon the expiration of our first Master Repurchase Agreement.  The Mortgage Warehouse Line of Credit (which we refer to as the “Third Master Repurchase Agreement”) provides Inspire with an uncommitted Mortgage Warehouse Line of Credit of up to $40 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 contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type.  As of June 30, 2018, we had $53.0 million outstanding under the Repurchase Facilities and were in compliance with all covenants. 



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 six months ended June 30, 2018 and 2017, we capitalized all interest costs incurred during these periods, except for interest incurred on capital leases of equipment related to our golf course operations.

Our interest costs are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended June 30,

 

Six months ended June 30,



 

2018

 

2017

 

2018

 

2017

Interest capitalized beginning of period

 

$

46,160 

 

$

31,713 

 

$

41,762 

 

$

28,935 

Interest capitalized during period

 

 

13,920 

 

 

10,830 

 

 

27,277 

 

 

18,564 

Less: capitalized interest in cost of sales

 

 

(12,284)

 

 

(6,875)

 

 

(21,243)

 

 

(11,831)

Interest capitalized end of period

 

$

47,796 

 

$

35,668 

 

$

47,796 

 

$

35,668 













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 six months ended June 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 June 30, 2018 by $0.6 million and benefiting our income tax provision for the six months ended June 30, 2018 by $1.1 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 2018 estimated annual effective tax rate of 26.5% is driven by our blended federal and state statutory rate of 24.9%, and certain permanent differences between GAAP and tax which increased our rate by 1.6%. 



For the three months ended June 30, 2018 our estimated annual rate of 26.5% was impacted by discrete items which had a net impact of increasing our rate by 2.1%.  The discrete items recognized during the three months ended June 30, 2018 included federal energy

16 

 


 

Table of Contents

 

 

credits for homes delivered in 2017 which benefited our rate by 3.3%, deferred taxes related to our step acquisition of WJH which increased our rate by 4.1%, and measurement period adjustments under SAB 118 described above, which increased our rate by 1.3%. 



For the six months ended June 30, 2018, our estimated annual rate of 26.5% was impacted by discrete items which had a net impact of decreasing our rate by 2.9%.  The discrete items recognized during the six months ended June 30, 2018 included federal energy credits for homes delivered in 2017 which benefited our rate by 2.2%, excess tax benefits for vested stock-based compensation which benefited our rate by 2.0%, and measurement period adjustments under SAB 118 described above, which decreased our rate by 1.5%.  These items were partially offset by a discrete item for deferred taxes related to our step acquisition of WJH which increased our rate by 2.8%.



For the three and six months ended June 30, 2018 and 2017, we recorded income tax expense of $13.3 million $16.4 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):





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

June 30, 2018

 

December 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Hierarchy 

 

Carrying 

 

Fair Value

 

Carrying 

 

Fair Value

Secured notes receivable(1)

 

Level 2

 

$

4,894 

 

$

4,861 

 

$

2,753 

 

$

2,727 

Mortgage loans held for sale(2)

 

Level 2

 

$

57,353 

 

$

57,353 

 

$

52,327 

 

$

52,327 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.875% senior notes(3)

 

Level 2

 

$

379,891 

 

$

387,089 

 

$

379,238 

 

$

397,044 

5.875 % senior notes (3)

 

Level 2

 

$

395,064 

 

$

371,064 

 

$

394,725 

 

$

400,225 

Revolving line of credit(4)

 

Level 2

 

$

130,000 

 

$

130,000 

 

$

 —

 

$

 —

Other(4)

 

Level 2

 

$

2,320 

 

$

2,320 

 

$

2,320 

 

$

2,320 

Mortgage repurchase facilities(4)

 

Level 2

 

$

52,999 

 

$

52,999 

 

$

48,319 

 

$

48,319 

(1)

Estimated fair value of the secured notes receivable was based on cash flow models discounted at market interest rates that considered the underlying risks of the note.

(2)

The mortgage loans held for sale are carried at fair value, which was based on quoted market prices for those committed mortgage loans.

(3)

Estimated fair value of the senior notes incorporated recent trading activity in inactive markets.

(4)

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 three months ended June 30, 2018, 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 per share that are subject to both service and performance vesting conditions.  The quantity of shares that will vest under the PSUs range from 0% to 250% of a targeted number of shares for each participant and will be determined based on an achievement of a three-year pre-tax income performance goal.   During the three months ended June 30, 2018, we also granted restricted stock units (which we refer to as “RSUs”) covering 0.1 million shares of common stock with a grant date fair value of $30.21 per share that vest on the one-year anniversary.  During the six months ended June 30, 2018, we granted the PSUs covering 0.3 million shares of common stock, assuming maximum level of performance, referred to above, and RSUs covering a total of 0.3 million shares of common stock, together with a weighted

17 

 


 

Table of Contents

 

 

average grant date fair value of $30.43 per share.  As of June 30, 2018, we had no remaining unvested restricted stock awards (which we refer to as “RSAs”) outstanding. 

A summary of our outstanding RSUs and PSUs, assuming maximum level of performance, are as follows (in thousands, except years):





 

 

 



 

As of June 30, 2018

Unvested awards/units

 

 

955 

Unrecognized compensation cost

 

$

17,488 

Period to recognize compensation cost

 

 

1.8 years

During the three months ended June 30, 2018 and 2017, we recognized stock-based compensation expense of $3.8 million and $2.0 million, respectively. During the six months ended June 30, 2018 and 2017, we recognized stock-based compensation expense of $6.3 million and $3.9 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our Consolidated Statements of 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 June 30, 2018 and December 31, 2017, there were 30.1 million and 29.4 million shares of common stock issued and outstanding, respectively, inclusive of the RSAs then outstanding.

We issued 0.3 million shares of common stock related to the vesting of restricted RSUs during the three and six months ended June 30, 2018As of June 30, 2018, approximately 1.0 million shares remained available for issuance under the Century Communities, Inc. 2017 Omnibus Incentive Plan.

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, 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 Agents in at-the-market offerings.   During the three and six months ended June 30, 2018, we sold and issued an aggregate of 0.3 million and 0.5 million shares of our common stock under the Second Distribution Agreement, which provided net proceeds of $9.6 million and $14.6 million, respectively, and, in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million and $0.3 million respectively.  During the three and six months ended June 30, 2017, we sold and issued an aggregate of 0.4 million and 1.2 million, respectively, shares of our common stock under the First Distribution Agreement, which provided net proceeds of $9.6 million and $24.6 million, respectively, and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million and $0.5 million, respectively.



15Earnings Per Share

We use the two-class method of calculating EPS as our non-vested RSAs have 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 

 


 

Table of Contents

 

 

The following table sets forth the computation of basic and diluted EPS for the three and six months ended June 30, 2018 and 2017 (in thousands, except share and per share information):



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Six months ended



 

June 30,

 

June 30,



 

2018

 

2017

 

2018

 

2017

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

33,193 

 

$

14,831 

 

$

53,212 

 

$

23,630 

Less: Undistributed earnings allocated to participating securities

 

 

(3)

 

 

(101)

 

 

(67)

 

 

(251)

Net income allocable to common stockholders

 

$

33,190 

 

$

14,730 

 

$

53,145 

 

$

23,379 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

29,901,791 

 

 

22,146,124 

 

 

29,709,728 

 

 

21,814,860 

Dilutive effect of restricted stock units

 

 

268,898 

 

 

219,953 

 

 

293,548 

 

 

215,102 

Weighted average common shares outstanding - diluted

 

 

30,170,689 

 

 

22,366,077 

 

 

30,003,276 

 

 

22,029,962 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.11 

 

$

0.67 

 

$

1.79 

 

$

1.07 

Diluted

 

$

1.10 

 

$

0.66 

 

$

1.77 

 

$

1.06 



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 from diluted earnings per share the common unit equivalents related to 113 RSUs for the six months ended June 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 June 30, 2018 and December 31, 2017, we had $191.1 million and $158.6 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 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 on our Consolidated Statements of Operations for our estimated loss.

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. Supplemental Guarantor Information

Our 6.875% senior notes due 2022 and 5.875% senior notes due 2025 (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”).

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 

 


 

Table of Contents

 

 

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.  

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, 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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Supplemental Condensed Consolidated Balance Sheet



 

As of June 30, 2018  (in thousands)  



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Guarantor

 

Non Guarantor

 

Elimination

 

Consolidated



 

Century

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Century

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

8,343 

 

$

18,258 

 

$

(7,119)

 

$

19,482 

Cash held in escrow

 

 

 —