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, 20172020
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 | New York Stock Exchange |
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 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 ☒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.
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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 25, 2017, 27,573,18327, 2020, 33,350,633 shares of common stock, par value 0.01$0.01 per share, were outstanding.
CENTURY COMMUNITIES, INC.
FORM 10-Q
For the threeThree and nine months endedNine Months Ended September 30, 20172020
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Century Communities, Inc.
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 20172020 and December 31, 20162019
(in thousands, except share amounts)
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
Assets |
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| (unaudited) | (audited) | ||||
Cash and cash equivalents |
| $ | 58,522 |
| $ | 29,450 | $ | 288,341 | $ | 55,436 | ||
Cash held in escrow |
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| 42,262 |
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| 20,044 | 26,275 | 35,308 | ||||
Accounts receivable |
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| 20,810 |
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| 5,729 | 28,855 | 27,438 | ||||
Inventories |
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| 1,352,989 |
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| 857,885 | 1,872,337 | 1,995,549 | ||||
Mortgage loans held for sale |
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| 30,071 |
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| — | 187,494 | 185,246 | ||||
Prepaid expenses and other assets |
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| 62,362 |
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| 40,457 | 113,339 | 124,008 | ||||
Property and equipment, net |
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| 13,658 |
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| 11,412 | 31,550 | 35,998 | ||||
Investment in unconsolidated subsidiaries |
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| 20,677 |
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| 18,275 | ||||||
Deferred tax asset, net |
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| 6,403 |
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| — | ||||||
Amortizable intangible assets, net |
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| 1,889 |
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| 2,911 | ||||||
Deferred tax assets, net | 12,775 | 10,589 | ||||||||||
Goodwill |
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| 21,365 |
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| 21,365 | 30,395 | 30,395 | ||||
Total assets |
| $ | 1,631,008 |
| $ | 1,007,528 | $ | 2,591,361 | $ | 2,499,967 | ||
Liabilities and stockholders' equity |
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Liabilities: |
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Accounts payable |
| $ | 16,810 |
| $ | 15,708 | $ | 48,448 | $ | 84,794 | ||
Accrued expenses and other liabilities |
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| 157,705 |
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| 62,314 | 288,674 | 213,975 | ||||
Deferred tax liability, net |
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| — |
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| 1,782 | ||||||
Senior notes payable |
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| 776,016 |
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| 259,088 | ||||||
Notes payable | 895,867 | 896,704 | ||||||||||
Revolving line of credit |
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| — |
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| 195,000 | — | 68,700 | ||||
Mortgage repurchase facility |
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| 27,465 |
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| — | ||||||
Mortgage repurchase facilities | 173,415 | 174,095 | ||||||||||
Total liabilities |
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| 977,996 |
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| 533,892 | 1,406,404 | 1,438,268 | ||||
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, 27,259,199 and 21,620,544 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
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| 273 |
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| 216 | ||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized, NaN outstanding | — | — | ||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 33,350,633 and 33,067,375 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 334 | 331 | ||||||||||
Additional paid-in capital |
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| 501,786 |
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| 355,567 | 693,269 | 684,354 | ||||
Retained earnings |
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| 150,953 |
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| 117,853 | 491,354 | 377,014 | ||||
Total stockholders' equity |
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| 653,012 |
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| 473,636 | 1,184,957 | 1,061,699 | ||||
Total liabilities and stockholders' equity |
| $ | 1,631,008 |
| $ | 1,007,528 | $ | 2,591,361 | $ | 2,499,967 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 20172020 and 20162019
(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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| 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Revenues |
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Homebuilding revenues |
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Home sales revenues |
| $ | 374,935 |
| $ | 248,075 |
| $ | 888,942 |
| $ | 686,335 | $ | 760,239 | $ | 573,860 | $ | 2,080,364 | $ | 1,705,798 | ||||
Land sales and other revenues |
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| 1,826 |
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| 5,338 |
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| 6,216 |
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| 10,816 | 2,105 | 6,083 | 25,516 | 8,837 | ||||||||
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| 376,761 |
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| 253,413 |
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| 895,158 |
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| 697,151 | ||||||||||||
Financial services revenue |
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| 2,955 |
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| — |
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| 4,697 |
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| — | ||||||||||||
Total homebuilding revenues | 762,344 | 579,943 | 2,105,880 | 1,714,635 | ||||||||||||||||||||
Financial services revenues | 32,017 | 10,419 | 67,534 | 28,734 | ||||||||||||||||||||
Total revenues |
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| 379,716 |
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| 253,413 |
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| 899,855 |
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| 697,151 | 794,361 | 590,362 | 2,173,414 | 1,743,369 | ||||||||
Homebuilding Cost of Revenues |
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Homebuilding cost of revenues | ||||||||||||||||||||||||
Cost of home sales revenues |
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| (311,365) |
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| (197,650) |
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| (727,577) |
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| (549,886) | (627,364) | (469,834) | (1,718,545) | (1,407,519) | ||||||||
Cost of land sales and other revenues |
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| (2,104) |
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| (5,420) |
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| (4,994) |
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| (9,433) | (2,046) | (4,624) | (18,597) | (6,115) | ||||||||
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| (313,469) |
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| (203,070) |
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| (732,571) |
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| (559,319) | ||||||||||||
Total homebuilding cost of revenues | (629,410) | (474,458) | (1,737,142) | (1,413,634) | ||||||||||||||||||||
Financial services costs |
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| (2,450) |
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| — |
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| (4,648) |
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| — | (14,511) | (8,174) | (36,841) | (22,750) | ||||||||
Selling, general, and administrative |
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| (46,165) |
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| (30,944) |
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| (113,597) |
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| (87,512) | ||||||||||||
Acquisition expense |
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| (7,205) |
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| (53) |
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| (8,645) |
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| (466) | ||||||||||||
Equity in income of unconsolidated subsidiaries |
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| 3,716 |
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| — |
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| 7,648 |
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| — | ||||||||||||
Other income |
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| 1,013 |
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| 385 |
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| 2,274 |
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| 1,403 | ||||||||||||
Selling, general and administrative | (85,806) | (72,834) | (246,131) | (216,987) | ||||||||||||||||||||
Loss on debt extinguishment | — | — | — | (10,832) | ||||||||||||||||||||
Inventory impairment and other | — | — | (1,691) | — | ||||||||||||||||||||
Other income (expense) | 251 | (56) | (2,533) | (499) | ||||||||||||||||||||
Income before income tax expense |
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| 15,156 |
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| 19,731 |
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| 50,316 |
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| 51,257 | 64,885 | 34,840 | 149,076 | 78,667 | ||||||||
Income tax expense |
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| (5,686) |
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| (6,389) |
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| (17,216) |
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| (16,790) | (15,121) | (7,816) | (34,736) | (19,031) | ||||||||
Net income |
| $ | 9,470 |
| $ | 13,342 |
| $ | 33,100 |
| $ | 34,467 | $ | 49,764 | $ | 27,024 | $ | 114,340 | $ | 59,636 | ||||
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Earnings per share: |
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Basic |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.42 |
| $ | 1.63 | $ | 1.49 | $ | 0.88 | $ | 3.43 | $ | 1.96 | ||||
Diluted |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.41 |
| $ | 1.62 | $ | 1.48 | $ | 0.87 | $ | 3.41 | $ | 1.95 | ||||
Weighted average common shares outstanding: |
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Basic |
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| 25,445,552 |
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| 20,673,521 |
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| 23,038,390 |
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| 20,643,682 | 33,350,633 | 30,587,487 | 33,299,768 | 30,378,860 | ||||||||
Diluted |
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| 25,726,137 |
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| 20,822,066 |
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| 23,275,320 |
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| 20,731,930 | 33,731,252 | 30,906,235 | 33,556,650 | 30,641,194 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 20172020 and 20162019
(in thousands)
Nine Months Ended September 30, | ||||||
2020 | 2019 | |||||
Operating activities | ||||||
Net income | $ | 114,340 | $ | 59,636 | ||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||
Depreciation and amortization | 10,088 | 9,793 | ||||
Stock-based compensation expense | 14,374 | 11,391 | ||||
Fair value of loans held for sale and other | (9,346) | (87) | ||||
Loss on debt extinguishment | — | 10,832 | ||||
Inventory impairment and other | 1,691 | — | ||||
Deferred income taxes | (2,186) | (514) | ||||
Loss on disposition of assets | 1,213 | 846 | ||||
Changes in assets and liabilities: | ||||||
Cash held in escrow | 9,033 | (6,018) | ||||
Accounts receivable | (1,417) | (4,465) | ||||
Inventories | 160,877 | (215,771) | ||||
Mortgage loans held for sale | (594) | 17,073 | ||||
Prepaid expenses and other assets | 18,090 | 32,386 | ||||
Accounts payable | (36,346) | (11,212) | ||||
Accrued expenses and other liabilities | 35,989 | (52,854) | ||||
Net cash provided by (used in) operating activities | 315,806 | (148,964) | ||||
Investing activities | ||||||
Purchases of property and equipment | (6,706) | (11,633) | ||||
Other investing activities | 79 | 78 | ||||
Net cash used in investing activities | (6,627) | (11,555) | ||||
Financing activities | ||||||
Borrowings under revolving credit facilities | 678,000 | 1,184,800 | ||||
Payments on revolving credit facilities | (746,700) | (1,108,500) | ||||
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 | 5,469 | 12,629 | ||||
Principal payments on insurance notes payable | (7,259) | (19,275) | ||||
Debt issuance costs | — | (6,075) | ||||
Net payments on mortgage repurchase facilities | (680) | (26,757) | ||||
Net proceeds from issuances of common stock | — | 25,817 | ||||
Withholding of common stock upon vesting of restricted stock units | (5,145) | (3,588) | ||||
Repurchases of common stock under stock repurchase program | — | (1,439) | ||||
Other | (495) | — | ||||
Net cash (used in) provided by financing activities | (76,810) | 165,670 | ||||
Net increase | $ | 232,369 | $ | 5,151 | ||
Cash and cash equivalents and Restricted cash | ||||||
Beginning of period | 58,521 | 36,441 | ||||
End of period | $ | 290,890 | $ | 41,592 | ||
Supplemental cash flow disclosure | ||||||
Cash paid for income taxes | $ | 30,998 | $ | 20,722 | ||
Cash and cash equivalents and Restricted cash | ||||||
Cash and cash equivalents | $ | 288,341 | $ | 38,508 | ||
Restricted cash (Note 5) | 2,549 | 3,084 | ||||
Cash and cash equivalents and Restricted cash | $ | 290,890 | $ | 41,592 |
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| Nine Months Ended September 30, | ||||
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| 2017 |
| 2016 | ||
Operating activities |
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Net income |
| $ | 33,100 |
| $ | 34,467 |
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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| 5,073 |
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| 4,215 |
Stock-based compensation expense |
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| 6,521 |
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| 5,058 |
Deferred income taxes |
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| (2,766) |
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| (3,807) |
Distribution of income from unconsolidated subsidiaries |
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| 5,246 |
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| — |
Equity in income of unconsolidated subsidiaries |
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| (7,648) |
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| — |
(Gain) loss on disposition of assets |
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| 202 |
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| (468) |
Changes in assets and liabilities: |
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Cash held in escrow |
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| (22,218) |
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| (15,932) |
Accounts receivable |
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| (7,493) |
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| 389 |
Inventories |
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| (95,065) |
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| (85,560) |
Prepaid expenses and other assets |
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| (16,637) |
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| (11,189) |
Accounts payable |
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| (8,026) |
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| 7,172 |
Accrued expenses and other liabilities |
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| 9,027 |
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| 4,255 |
Mortgage loans held for sale |
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| (30,071) |
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| — |
Net cash used in operating activities |
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| (130,755) |
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| (61,400) |
Investing activities |
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Purchases of property and equipment |
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| (5,867) |
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| (6,375) |
Business combination net of acquired cash |
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| (77,457) |
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| — |
Proceeds from sale of assets |
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| 52 |
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| 1,302 |
Proceeds from sale of South Carolina operations |
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| 17,074 |
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| — |
Proceeds from secured note receivable |
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| 76 |
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| 73 |
Net cash used in investing activities |
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| (66,122) |
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| (5,000) |
Financing activities |
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Borrowings under revolving credit facilities |
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| 75,000 |
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| 145,000 |
Payments on revolving credit facilities |
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| (270,000) |
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| (90,000) |
Proceeds from issuance of senior notes |
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| 523,000 |
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| — |
Proceeds from issuance of insurance premium notes |
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| — |
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| 11,612 |
Principal payments on notes payable |
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| (4,735) |
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| (7,582) |
Repayment of debt assumed in business combination |
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| (151,919) |
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| — |
Debt issuance costs |
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| (3,731) |
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| (1,156) |
Net proceeds from mortgage credit facility |
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| 27,465 |
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| — |
Net proceeds from issuances of common stock |
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| 35,010 |
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| — |
Repurchases of common stock upon vesting of restricted stock awards |
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| (4,141) |
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| (1,014) |
Repurchases of common stock under our stock repurchase program |
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| — |
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| (2,393) |
Net cash provided by financing activities |
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| 225,949 |
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| 54,467 |
Net decrease in cash and cash equivalents |
| $ | 29,072 |
| $ | (11,933) |
Cash and cash equivalents |
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Beginning of period |
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| 29,450 |
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| 29,287 |
End of period |
| $ | 58,522 |
| $ | 17,354 |
Supplemental cash flow disclosure |
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Cash paid for income taxes |
| $ | 21,657 |
| $ | 20,557 |
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, 2020 and 2019
(in thousands)
Three Months Ended September 30, 2020 and 2019
Common Stock | ||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total Stockholders' Equity | ||||||||||
Balance at June 30, 2020 | 33,351 | $ | 334 | $ | 687,564 | $ | 441,590 | $ | 1,129,488 | |||||
Other | — | — | (81) | — | (81) | |||||||||
Stock-based compensation expense | — | — | 5,786 | — | 5,786 | |||||||||
Net income | — | — | — | 49,764 | 49,764 | |||||||||
Balance at September 30, 2020 | 33,351 | $ | 334 | $ | 693,269 | $ | 491,354 | $ | 1,184,957 | |||||
Balance at June 30, 2019 | 30,439 | $ | 304 | $ | 600,293 | $ | 296,632 | $ | 897,229 | |||||
Issuance of common stock | 799 | 8 | 23,146 | — | 23,154 | |||||||||
Vesting of restricted stock units | 17 | — | — | — | — | |||||||||
Withholding of common stock upon vesting of restricted stock units | (6) | — | (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 |
Nine Months Ended September 30, 2020 and 2019
Common Stock | ||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings | Total Stockholders' Equity | ||||||||||
Balance at December 31, 2019 | 33,067 | $ | 331 | $ | 684,354 | $ | 377,014 | $ | 1,061,699 | |||||
Other | — | — | (311) | — | (311) | |||||||||
Vesting of restricted stock units | 454 | 5 | (5) | — | — | |||||||||
Withholding of common stock upon vesting of restricted stock units | (170) | (2) | (5,143) | — | (5,145) | |||||||||
Stock-based compensation expense | — | — | 14,374 | — | 14,374 | |||||||||
Net income | — | — | — | 114,340 | 114,340 | |||||||||
Balance at September 30, 2020 | 33,351 | $ | 334 | $ | 693,269 | $ | 491,354 | $ | 1,184,957 | |||||
Balance at December 31, 2018 | 30,155 | $ | 302 | $ | 595,037 | $ | 264,020 | $ | 859,359 | |||||
Issuance of common stock | 899 | 9 | 25,808 | — | 25,817 | |||||||||
Repurchase of common stock | (83) | (1) | (1,438) | — | (1,439) | |||||||||
Vesting of restricted stock units | 430 | 4 | (4) | — | — | |||||||||
Withholding of common stock upon vesting of restricted stock units | (152) | (2) | (3,583) | — | (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 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Century Communities, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 20172020
1. Basis of Presentation
Century Communities, Inc. (which we refer to as “we,” “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 California, Colorado, Georgia, Nevada, North Carolina, South Carolina, Tennessee, Texas, Utah, and Washington.17 states. 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 Century Complete brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our homebuilding operations are organized into the following four5 reportable segments based on the geographic regions in which we operate:segments: West, Mountain, Texas, Southeast, and Southeast.Century Complete. Additionally, our indirect wholly-ownedwholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and Parkway Title,IHL Home Insurance Agency, LLC, which provide mortgage, title, and titleinsurance services, respectively, to our home buyers, respectively,homebuyers, have been identified as our Financial Services operating segment.
On August 4, 2017, we acquired UCP, Inc. (which we refer to as “UCP”). UCP is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, 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. Approximately 4.2 million shares of our common stock were issued in connection with the merger and $97.7 million was paid in cash. Our operating results presented herein include the operations of UCP from the period beginning on August 4, 2017 through September 30, 2017.
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 itsour financial position and results of operations.operations for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year.year, particularly in light of the novel coronavirus (COVID-19) pandemic and measures intended to mitigate the spread. 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, 2016,2019, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 that was filed with the SEC on February 15, 2017.7, 2020.
The COVID-19 pandemic has led to adverse impacts on the U.S. and global economies and initially created uncertainty regarding potential impacts to our operations and customer demand. Commencing in March 2020, numerous state and local municipalities issued public health orders with varying expiration dates requiring the closure of nonessential businesses, as well as ordering individuals to stay at home and/or shelter in place whenever possible. These public health orders generally exempted the sale and construction of new homes, other than a small portion of our operations, which had to cease operations in early April. During the latter half of the second quarter of 2020, state and local municipalities in the majority of our markets began to lift the most stringent of the public health restrictions and numerous nonessential businesses were allowed to reopen. As of the date of this filing and throughout the third quarter of 2020, we are and were able to build and sell homes in all of our markets.
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.
Mortgage Loans Held for Sale
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 September 30, 2017. 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.
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 September 30, 2017, mortgage loans available-for-sale had an aggregate fair value of $30.1 million and an aggregate outstanding principal balance of $28.7 million. The net gain resulting from changes in fair value of the best efforts commitments and mortgage loans held in inventory totaled $0.8 million and $1.4 million for the three and nine months ended September 30, 2017, respectively. Realized net gains from the sale of mortgages during the three and nine months ended September 30, 2017 were $0.5 million and $0.6 million, respectively, and have been included in Financial Services revenues.
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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.estimates, particularly given the uncertainties associated with the ongoing COVID-19 pandemic.
Reclassification
Certain items on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016 have been reclassified to conform to our current presentation. We have included “Golf course and other revenue” with “Land sales and other revenues”; we have included “Cost of golf course and other revenue” with “Cost of land sales and other revenues”; and we have combined “Interest income,” “Interest expense,” and “Gain on disposition of assets” into “Other income (expense)” in our current presentation. We have also adjusted prior period segment information to conform to the current period presentation, see detail in “2. Reporting Segments.”
Recently IssuedAdopted Accounting Standards
Financial Instruments - Credit Losses
In August 2015,June 2016, the Financial Accounting Standards Board (which we refer to as “FASB”(“FASB”) issued ASU 2015-14, “Revenue from Contracts with CustomersAccounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 606)326).” ASU 2015-14 defers The standard changes the effective dateaccounting for credit losses for most financial assets and certain other instruments. Credit losses that have historically been accounted for on an incurred loss basis are now accounted for using an
estimate of lifetime expected credit losses. This generally results in earlier recognition of allowances for the Company beginningcredit losses. We adopted this standard on January 1, 2018, including interim reporting periods within that period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. We plan to adopt ASU 2015-142020 with no material effect on January 1, 2018 under the modified retrospective approach. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements and disclosures, and have been involved in industry specific discussions on the treatment of certain items. We have evaluated our home sales contracts in each of our regions and have determined that there will not be a material impact on the amount or timing in recording home sales revenues as a result of adopting ASU 2015-14. We are continuing to evaluate the accounting treatment of other aspects of our business that may be affected by our adoption of ASU 2015-14.related disclosures.
Internal-Use Software
In February 2016,August 2018, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the recognition of lease assets and lease liabilitiesFASB Emerging Issues Task Force). This update is intended to help entities evaluate the accounting for fees paid by lesseesa customer in a cloud computing arrangement by providing guidance for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective fordetermining when the Company beginningarrangement includes a software license. We adopted this standard on January 1, 2019 and interim periods within2020 with no material effect on the annual periods. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.statements and related disclosures.
Recently Issued Accounting Standards
In March 2016,December 2019, the FASB issued ASU 2016-09, “Compensation – Stock CompensationNo. 2019-12, “Income Taxes (Topic 718)740): Improvements to Employee Share-Based Payment Accounting.” Simplifying the Accounting for Income Taxes” (“ASU 2016-092019-12”). The standard simplifies several aspects of the accounting for share-based payment transactions including income tax consequences, classificationtaxes, eliminates certain exceptions, and clarifies certain aspects of awards as either equity or liabilities, and classification on the statement of cash flows.ASC 740 to promote consistency among reporting entities. ASU 2016-092019-12 is effective for the Companyus beginning January 1, 2017 and interim periods within the annual periods. We have adopted this standard and as a result have realized excess tax benefits of $1.1 million, which is included as a reduction to “Income tax expense” in our Condensed Consolidated Statements of Operations. Our calculation of earnings per share was also modified to reflect a change to exclude excess tax benefits from assumed proceeds in our computation of diluted shares outstanding under the treasury method. We have elected to continue to estimate forfeitures in recognizing the expense for our equity awards. Employee taxes paid by withholding shares on vesting of stock compensation are classified as a financing activity in our Condensed Consolidated Statements of 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. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.2021. We do not believe that ASU 2016-15 willexpect this standard to have a material effect on ourthe consolidated financial statements.statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value. It eliminates Step 2 of the current two-step goodwill impairment test. ASU 2017-04 is effective for annual reporting periods in fiscal years beginning after December 15, 2019 and early adoption is permitted. We elected to early adopt ASU 2017-04 for the reporting period beginning January 1, 2017. Our adoption of ASU 2017-04 has not had a material effect on our condensed consolidated financial statements.
2. Reporting Segments
Our homebuilding operations are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 10 states, which are aggreated into four regions, each of which17 states. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand is managed by onegeographic location, and each of our regional presidents.4 geographic regions targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Each of our homebuilding divisionsfour geographic regions is considered ana separate operating segment, butsegment. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our Century Complete brand currently has been aggregated into reportable segments defined byoperations in 11 states and is managed separately from our four geographic regions. Accordingly, it is considered a separate operating segment.
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regional structure as each region has similar economic characteristicsour four geographic regions and housing products. After our acquisition of UCP, Inc. management was reorganized to report to regional managers, who in turn report directlyCentury Complete 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 at the regional level.and to allocate resources. Accordingly, we have brokenpresented our homebuilding operations intoas the following 5 reportable segments based on the geographic markets in which we operate:segments:
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West (California and Washington)
Mountain (Arizona, Colorado, Nevada, and Utah)
Texas
Southeast (Georgia, North Carolina, South Carolina and Tennessee)
Century Complete (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 titleinsurance services to our homebuyers, as a fifthsixth reportable segment. Our Corporate operations are a nonoperatingnon-operating segment, as it servesthey serve 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. We have adjusted prior period segment information to conform to the current period presentation.
The following table summarizes total revenue and income before income tax expense by operating segment (in thousands)thousands):
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, | ||||||||
| 2017 |
| 2016 |
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| 2017 |
| 2016 | ||||
Revenue: |
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West | $ | 73,684 |
| $ | — |
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| $ | 73,684 |
| $ | — |
Mountain |
| 157,224 |
|
| 141,043 |
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|
| 443,526 |
|
| 353,649 |
Texas |
| 36,757 |
|
| 30,036 |
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| 111,997 |
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| 106,179 |
Southeast |
| 109,096 |
|
| 82,334 |
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| 265,951 |
|
| 237,323 |
Financial Services |
| 2,955 |
|
| — |
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| 4,697 |
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| — |
Corporate |
| — |
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| — |
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| — |
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| — |
Total revenue | $ | 379,716 |
| $ | 253,413 |
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| $ | 899,855 |
| $ | 697,151 |
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Income (loss) before income tax expense: |
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West | $ | 5,259 |
| $ | — |
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| $ | 5,259 |
| $ | — |
Mountain |
| 19,101 |
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| 18,995 |
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| 56,137 |
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| 47,234 |
Texas |
| 2,166 |
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| (288) |
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| 6,407 |
|
| 2,138 |
Southeast |
| 6,001 |
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| 7,848 |
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| 16,609 |
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| 21,827 |
Financial Services |
| 505 |
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| — |
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| (192) |
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| — |
Corporate |
| (17,876) |
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| (6,824) |
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| (33,904) |
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| (19,942) |
Total income before income tax expense | $ | 15,156 |
| $ | 19,731 |
|
| $ | 50,316 |
| $ | 51,257 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Revenue: | ||||||||||||
West | $ | 188,495 | $ | 116,874 | $ | 486,507 | $ | 364,220 | ||||
Mountain | 222,262 | 171,617 | 570,983 | 510,693 | ||||||||
Texas | 76,776 | 68,812 | 235,618 | 180,820 | ||||||||
Southeast | 152,858 | 118,610 | 458,986 | 356,236 | ||||||||
Century Complete | 121,953 | 104,030 | 353,786 | 302,666 | ||||||||
Financial Services | 32,017 | 10,419 | 67,534 | 28,734 | ||||||||
Corporate | — | — | — | — | ||||||||
Total revenue | $ | 794,361 | $ | 590,362 | $ | 2,173,414 | $ | 1,743,369 | ||||
Income (loss) before income tax expense: | ||||||||||||
West | $ | 13,627 | $ | 9,013 | $ | 42,716 | $ | 27,634 | ||||
Mountain | 28,695 | 20,552 | 67,789 | 62,386 | ||||||||
Texas | 6,904 | 8,290 | 22,012 | 17,626 | ||||||||
Southeast | 13,414 | 7,079 | 33,743 | 17,467 | ||||||||
Century Complete | 7,826 | 6,032 | 17,159 | 18,323 | ||||||||
Financial Services | 17,506 | 2,245 | 30,693 | 5,984 | ||||||||
Corporate | (23,087) | (18,371) | (65,036) | (70,753) | ||||||||
Total income before income tax expense | $ | 64,885 | $ | 34,840 | $ | 149,076 | $ | 78,667 |
The following table summarizes total assets by operating segment (in thousands):
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
West |
| $ | 302,816 |
| $ | — | $ | 542,622 | $ | 610,248 | ||
Mountain |
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| 571,124 |
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| 541,657 | 708,076 | 635,201 | ||||
Texas |
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| 186,840 |
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| 138,392 | 202,177 | 232,887 | ||||
Southeast |
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| 394,918 |
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| 262,448 | 360,424 | 441,818 | ||||
Century Complete | 170,126 | 244,827 | ||||||||||
Financial Services |
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| 38,010 |
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| — | 299,887 | 254,282 | ||||
Corporate |
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| 137,300 |
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| 65,031 | 308,049 | 80,704 | ||||
Total assets |
| $ | 1,631,008 |
| $ | 1,007,528 | $ | 2,591,361 | $ | 2,499,967 |
Corporate assets primarily include certain cash and cash equivalents, our investment in unconsolidated subsidiaries,certain property and equipment, prepaid insurance, and deferred financing costs on our revolving line of credit.
3. Business CombinationsInventories
On August 4, 2017, we acquired UCP, Inc. UCP is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, 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
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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 $97.7 million was paid in cash. 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. During the three and nine months ended September 30, 2017, we incurred $7.2 million and $8.6 million, respectively, in acquisition related expenses, presented as “Acquisition expense” on the Unaudited Condensed Consolidated Statement of Operations. Total consideration of $206.6 million inclusive of cash acquired of $20.2 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 initial estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):
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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
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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 3% 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). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities.
On August 17, 2017, we sold BMCH South Carolina, LLC, a subsidiary of UCP, Inc. that was recently 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 $77.6 million and net income of $5.6 million, are included in the accompanying consolidated statements of operations for the period from August 4, 2017 through September 30, 2017. Net income includes adjustments for inventory and acquisition expenses.
Unaudited pro forma income before tax expense for the three and nine months ended September 30, 2017 and 2016 gives effect to including the results of the acquisition of UCP as of January 1, 2017 and 2016, respectively. Unaudited pro forma income before tax expense adjusts the operating results of UCP 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 transaction (in thousands, except share and per share information):
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues | $ | 416,223 |
| $ | 347,153 |
| $ | 1,142,371 |
| $ | 941,953 |
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Income before tax expense | $ | 24,604 |
| $ | 22,303 |
| $ | 69,950 |
| $ | 55,052 |
Tax expense |
| (10,731) |
|
| (6,270) |
|
| (23,878) |
|
| (16,476) |
Net income | $ | 13,873 |
| $ | 16,033 |
| $ | 46,072 |
| $ | 38,576 |
Less: Undistributed earnings allocated to participating securities |
| (72) |
|
| (242) |
|
| (352) |
|
| (734) |
Numerator for basic and diluted pro forma EPS | $ | 13,801 |
| $ | 15,791 |
| $ | 45,720 |
| $ | 37,842 |
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Pro forma weighted average shares-basic |
| 27,034,192 |
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| 24,849,375 |
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| 26,342,362 |
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| 24,819,536 |
Pro forma weighted average shares-diluted |
| 27,314,776 |
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| 24,997,920 |
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| 26,579,292 |
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| 24,907,783 |
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Pro forma basic EPS | $ | 0.51 |
| $ | 0.64 |
| $ | 1.74 |
| $ | 1.52 |
Pro forma diluted EPS | $ | 0.51 |
| $ | 0.63 |
| $ | 1.72 |
| $ | 1.52 |
4. Inventories
Inventories included the following (in thousands):
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| September 30, |
| December 31, | September 30, | December 31, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
Homes under construction |
| $ | 897,402 |
| $ | 455,454 | $ | 980,232 | $ | 1,091,576 | ||
Land and land development |
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| 415,375 |
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| 373,496 | 825,779 | 836,904 | ||||
Capitalized interest |
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| 40,212 |
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| 28,935 | 66,326 | 67,069 | ||||
Total inventories |
| $ | 1,352,989 |
| $ | 857,885 | $ | 1,872,337 | $ | 1,995,549 |
4. 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 either as whole loans, or with servicing retained, in the secondary mortgage market within a short period of time after origination, generally within 30 days. Inspire primarily finances these loans using its mortgage repurchase facilities. Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $193.1 million and $37.6 million at September 30, 2020 and December 31, 2019, respectively, and carried a weighted average interest rate of approximately
2.9% and 3.9%, respectively. As of September 30, 2020 and December 31, 2019, Inspire had mortgage loans held for sale with an aggregate fair value of $187.5 million and $185.2 million, respectively, and an aggregate outstanding principal balance of $179.9 million and $179.3 million, respectively.
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 revenue on the condensed consolidated statements of operations. Management believes carrying loans held-for-sale and the derivative instruments used to economically hedge them at fair value improves financial reporting by more accurately reflecting the underlying transaction. Refer to Note 11 – Fair Value Disclosures for further information regarding our derivative instruments.
5. Prepaid Expenses and Other Assets
Prepaid expenses and other assets included the following (in thousands):
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| September 30, |
| December 31, | ||
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| 2017 |
| 2016 | ||
Prepaid insurance |
| $ | 8,327 |
| $ | 12,236 |
Lot option and escrow deposits |
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| 26,873 |
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| 12,320 |
Performance deposits |
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| 5,732 |
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| 1,544 |
Deferred financing costs revolving line of credit, net |
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| 2,030 |
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| 2,637 |
Restricted cash |
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| 6,850 |
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| 1,505 |
Secured note receivable |
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| 2,772 |
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| 2,850 |
Golf course, net |
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| 5,294 |
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| 5,857 |
Other |
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| 4,484 |
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| 1,508 |
Total prepaid expenses and other assets |
| $ | 62,362 |
| $ | 40,457 |
September 30, | December 31, | |||||
2020 | 2019 | |||||
Prepaid insurance | $ | 21,537 | $ | 26,175 | ||
Lot option and escrow deposits | 36,828 | 48,810 | ||||
Deferred financing costs on revolving line of credit, net | 3,550 | 4,574 | ||||
Restricted cash (1) | 2,549 | 3,085 | ||||
Secured note receivable | 2,460 | 2,602 | ||||
Right of use assets | 16,697 | 18,854 | ||||
Other assets and prepaid expenses | 22,308 | 18,525 | ||||
Derivative assets | 7,410 | 1,383 | ||||
Total prepaid expenses and other assets | $ | 113,339 | $ | 124,008 |
6. Investment in Unconsolidated Subsidiaries
On November 1, 2016, we acquired a 50% ownership(1)Restricted cash consists of WJH LLC (which we refer to as “WJH”), which is the successor to Wade Jurney Homes, Inc. and Wade Jurney of Florida, Inc.,earnest money deposits for $15.0 million, of which $1.0 million ishome sale contracts held by the Company for potential indemnification claims for a period of 18 months following the closing. WJH primarily targets first-time homebuyers in the Southeastern United States. As a result of the transaction, we own 50% of WJHthird parties as required by various jurisdictions, and Wade Jurney Jr., an individual, owns the other 50% interest. Each party contributed an additional $3.0 million in capital to WJH upon its formation and we incurred $0.1 million in related acquisition costs. The Company and Wade Jurney Jr. share responsibility for all of WJH’s strategic decisions,certain pledge balances associated with Wade Jurney Jr. continuing to manage the day-to-day operations under the existing operating model. Our investment in WJH is treated as an unconsolidated investment under the equity method of accounting. our mortgage repurchase facilities.
As of September 30, 2017, our investment in WJH was $20.7 million and we recognized $3.7 million and $7.6 million of equity in income of unconsolidated subsidiaries during the three and nine months ended September 30, 2017, respectively. During the three and nine months ended September 30, 2017, we received operating distributions from WJH of $1.4 million and $5.2 million, respectively.
7.
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities included the following (in thousands):
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
|
| September 30, |
| December 31, | September 30, | December 31, | ||||||
|
| 2017 |
| 2016 | 2020 | 2019 | ||||||
Earnest money deposits |
| $ | 15,086 |
| $ | 7,304 | $ | 25,721 | $ | 10,592 | ||
Warranty reserve |
|
| 8,850 |
|
| 2,479 | 12,890 | 9,731 | ||||
Accrued compensation costs |
|
| 13,949 |
|
| 12,603 | 39,713 | 30,888 | ||||
Land development and home construction accruals |
|
| 66,119 |
|
| 31,486 | 149,842 | 110,284 | ||||
Liability for product financing arrangement |
|
| 21,893 |
|
| — | ||||||
Accrued interest |
|
| 14,936 |
|
| 3,039 | 16,211 | 19,306 | ||||
Lease liabilities - operating leases | 17,155 | 14,562 | ||||||||||
Income taxes payable |
|
| — |
|
| 783 | — | 329 | ||||
Other |
|
| 16,872 |
|
| 4,620 | ||||||
Other accrued liabilities | 27,142 | 18,283 | ||||||||||
Total accrued expenses and other liabilities |
| $ | 157,705 |
| $ | 62,314 | $ | 288,674 | $ | 213,975 |
11
Table of Contents7. Warranties
8. Warranties
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 the 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 did not reduce our warranty reserve during the three months ended September 30, 2020, and reduced our warranty reserve by $0.9$0.6 million during the three months ended September 30, 2019. We reduced our warranty reserve by $1.3 million and $1.2$0.4 million during the nine months ended September 30, 2020 and 2019, respectively.
These adjustments are included in cost of home sales revenues on our consolidated statements of operations. Changes in our warranty accrual for the three and nine months ended September 30, 2017, respectively, which is2020 and 2019 are detailed in the table below (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Beginning balance | $ | 11,221 | $ | 9,768 | $ | 9,731 | $ | 7,970 | ||||
Warranty expense provisions | 2,293 | 1,665 | 6,345 | 5,433 | ||||||||
Payments | (624) | (870) | (1,925) | (3,063) | ||||||||
Warranty adjustment | — | (573) | (1,261) | (350) | ||||||||
Ending balance | $ | 12,890 | $ | 9,990 | $ | 12,890 | $ | 9,990 |
8. Debt
Our outstanding debt obligations included the following as a reduction to cost of homes sales revenues on our consolidated statement of operations.
The following table summarizes the changes in our warranty accrualSeptember 30, 2020 and December 31, 2019 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Beginning balance |
| $ | 3,057 |
| $ | 2,754 |
| $ | 2,479 |
| $ | 2,622 |
Warranty reserve assumed in business combination |
|
| 6,202 |
|
| — |
|
| 6,202 |
|
| — |
Warranty expense provisions |
|
| 1,245 |
|
| 686 |
|
| 2,827 |
|
| 2,078 |
Payments |
|
| (710) |
|
| (554) |
|
| (1,458) |
|
| (1,194) |
Warranty adjustment |
|
| (944) |
|
| (291) |
|
| (1,200) |
|
| (911) |
Ending balance |
| $ | 8,850 |
| $ | 2,595 |
| $ | 8,850 |
| $ | 2,595 |
September 30, | December 31, | |||||
2020 | 2019 | |||||
6.750% senior notes, due May 2027(1) | $ | 494,736 | $ | 494,307 | ||
5.875% senior notes, due July 2025(1) | 396,644 | 396,120 | ||||
Other financing obligations | 4,487 | 6,277 | ||||
Notes payable | 895,867 | 896,704 | ||||
Revolving line of credit, due April 2023 | — | 68,700 | ||||
Mortgage repurchase facilities | 173,415 | 174,095 | ||||
Total debt | $ | 1,069,282 | $ | 1,139,499 |
(1)The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest expense over the respective terms of the senior notes.
9. Notes Payable and
Revolving Line of Credit
6.875% senior notes
In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 (which we referWe are party to as the “Initial Senior Notes”) in reliance on Rule 144Aan Amended and Regulation S under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”). The Initial Senior Notes were issued under the Indenture, dated as of May 5, 2014, among the Company, our subsidiary guarantors party thereto, and U.S Bank National Association, as trustee (which we refer to as the “May 2014 Indenture,” as it may be supplemented or amended from time to time). The Initial Senior Notes were issued at a price equal to 99.239% of their principal amount, and we received net proceeds of approximately $193.3 million. In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes. The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes.
In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “April 2015 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act. The April 2015 Senior Notes were issued at a price equal to 98.26% of their principal amount, and we received net proceeds of approximately $58.5 million. The April 2015 Senior Notes were additional notes issued under the May 2014 Indenture pursuant to which the Initial Exchange Notes were issued. In October 2015, we completed an offer to exchange $60.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “October 2015 Exchange Notes”), for all of the April 2015 Senior Notes. The terms of the October 2015 Exchange Notes are identical in all material respects to the April 2015 Senior Notes, except that the October 2015 Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the April 2015 Senior Notes do not apply to the October 2015 Exchange Notes.
In January 2017, we completed a private offering of an additional $125 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “January 2017 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act. The January 2017 Senior Notes were issued at a price equal to 102.00% of their principal amount, and we received net proceeds of approximately $125.4 million. The January 2017 Senior Notes were additional notes issued under the May 2014 Indenture pursuant to which the Initial Exchange Notes and the October 2015 Exchange Notes were issued. In April 2017, we completed an offer to exchange $125.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “April 2017 Exchange Notes”), for all of the January 2017 Senior Notes. The terms of the April 2017 Exchange Notes are identical in all material respects to the January 2017 Senior Notes, except that the April 2017 Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the January 2017 Senior Notes do not apply to the April 2017 Exchange Notes.
12
The Initial Exchange Notes, October 2015 Exchange Notes, and April 2017 Exchange Notes (which we refer to collectively, as the “Existing 6.875% Notes”) will be treated as a single series of notes under the May 2014 Indenture, and will vote as a single class of notes for all matters submitted to a vote of holders under the May 2014 Indenture.
The Existing 6.875% Notes are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The Existing 6.875% Notes contain certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the Existing 6.875% Notes is due May 2022, with interest only payments due semi-annually in May and November of each year.
As of September 30, 2017, the aggregate amount outstanding on the Existing 6.875% Notes was $378.9 million.
5.875% senior notes
In May 2017, we completed a private offering of $400 million in aggregate principal amount of our 5.875% Senior Notes due 2025 (which we refer to as the “May 2017 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act. The May 2017 Senior Notes were issued under the Indenture, dated as of May 12, 2017, among the Company, our subsidiary guarantors party thereto, and U.S Bank National Association, as trustee (which we refer to as the “May 2017 Indenture,” as it may be supplemented or amended from time to time). The May 2017 Senior Notes were issued at a price equal to 100.00% of their principal amount, and we received net proceeds of approximately $395.5 million.
As of September 30, 2017, we had $394.9 million outstanding on the May 2017 Senior Notes.
Other financing obligations
As of September 30, 2017, we had four insurance premium notes with an outstanding balance totaling $2.3 million. Two of these notes mature in December 2017 and the other two mature in February 2018. These insurance premium notes bear interest at a rate of 3.88%, 3.98%, 6.23%, and 6.23%, respectively. During the nine months ended September 30, 2017, we repaid one insurance premium note with an outstanding balance of $0.1 million. As of December 31, 2016, we had an aggregate of $6.0 million of outstanding insurance premium notes.
Revolving line of credit
On October 21, 2014, we entered into a credit agreementRestated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto and certain of our subsidiaries (which as modified as described below, we refer to as the “Credit“Amended and Restated Credit Agreement”). The Credit Agreement provided, which, as amended most recently on December 13, 2019, provides us with a revolving line of credit of up to $120$640.0 million, (which, as modified as described below, we refer to as the “Revolving Credit Facility”).
Under the terms of the Credit Agreement, we were entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 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 Credit Agreement, subject to the approval of the Administrative Agent and L/C Issuer. The Credit Agreement includes a letter of credit sublimit of $20 million. Theunless terminated earlier, will mature on April 30, 2023. Our obligations under the RevolvingAmended and Restated Credit Facility wereAgreement are guaranteed by certain of our subsidiaries.
On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, The Amended and our subsidiary guarantors party thereto, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and ( iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.
On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.
On August 19, 2016, we entered into a Third Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Third Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $300 million to $380 million through our exercise of $80 million of the accordion feature of the Credit Agreement, (ii) admitted Citibank, N.A. and Flagstar Bank, FSB as new
13
lenders under the Revolving Credit Facility, (iii) increased certain lenders’ respective commitments to the Revolving Credit Facility, and (iv) extended the term of the Revolving Credit Facility by one year to mature on October 21, 2019.
On February 24, 2017, we entered into a Commitment Increase Agreement with Texas Capital Bank, National Association, as Administrative Agent, Flagstar Bank, FSB (which we refer to as “Flagstar”), and our subsidiary guarantors party thereto. The Commitment Increase Agreement supplements the Credit Agreement, and (i) increased the Revolving Credit Facility from $380 million to $400 million through our exercise of the remaining $20 million of the accordion feature of the Credit Agreement, and (ii) increased Flagstar’s commitment to the Credit Facility.
Unless terminated earlier, the principal amount under the Revolving Credit Facility, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on October 21, 2019, the maturity date of the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate plus an applicable margin between 2.75% and 3.25% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.75% and 2.25% per annum. The “applicable margins” described above are determined by a schedule based on our leverage ratio, as defined in the Credit Agreement. The 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 Credit Facility.
TheRestated 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. TheThese covenants are measured as defined in the Amended and Restated Credit Agreement also requires usand are reported to maintain (i)the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a leverage ratio of not more than 1.75floating rate equal to 1.0 as of the last day of any fiscal quarter, based upon ouradjusted Eurodollar Rate plus an applicable margin between 2.60% and our subsidiaries’ (on3.10% per annum, or, at the Administrative Agent’s discretion, a consolidated basis) ratio of debt to tangible net worth, (ii)base rate plus an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon ourapplicable margin between 1.60% and our subsidiaries’ (on a consolidated basis) ratio of EBITDA to cash interest expense, (iii) a consolidated tangible net worth of not less than the sum of $250 million, plus 50% of the net proceeds of any issuances of equity interests by us and the guarantors of the Revolving Credit Facility, plus 50% of the amount of our and our subsidiaries’ consolidated net income, (iv) liquidity of not less than $25 million, and (v) a risk asset ratio of not more than 1.25 to 1.0, based upon the ratio of the book value of all risk assets owned by us and our subsidiaries to our tangible net worth. 2.10% per annum.
As of September 30, 2017,2020 and December 31, 2019, we had 0 amounts and $68.7 million outstanding under the credit facility, respectively, and were in compliance with all covenants under the Credit Agreement.covenants.
As of September 30, 2017, we did not have any amounts outstanding under the Credit Agreement.
Mortgage Repurchase FacilityFacilities – Financial Services
On April 10, 2017,May 4, 2018, September 14, 2018, and August 1, 2019, Inspire Home Loans Inc. (which we refer to as “Inspire”), an indirect wholly-owned subsidiary of the Company, entered into a Master Repurchase Agreementmortgage warehouse facilities, with Comerica Bank, J.P. Morgan, and Wells Fargo, respectively. The mortgage warehouse lines of credit (which we refer to as the “Master Repurchase Agreement”“repurchase facilities”) with Branch Banking and Trust Company, as the buyer thereunder (which we refer to as the “Buyer”). The Master Repurchase Agreement providesprovide Inspire with a revolving mortgage loanuncommitted repurchase facilityfacilities of up to $25an aggregate of $275 million, (which we refer to as the “Repurchase Facility”). The primary purpose of the Repurchase Facility is to provide financing and liquidity to Inspire by facilitating purchase transactions in which Inspire transfers eligible loans to the Buyer, and the Buyer transfers funds, subject to a simultaneous agreementsecured by the Seller to repurchase from the Buyer such eligiblemortgage loans (i) upon written notice to the Buyer by Inspire, (ii) on a prescribed date in the future, (iii) upon the occurrence of prescribed events, or (iv) on the Termination Date (as defined below). The purchase transactions are based on and subject to the terms and conditions set forth in the Master Repurchase Agreement. The maximum aggregate amount of the Buyer’s commitment to fund purchase transactions under the Repurchase Facility is $25 million (which we refer to as the “Commitment”), subject to certain sublimits. The Repurchase Facility and the Buyer’s Commitment thereunder expires on the earlier of (i) April 9, 2018, and (ii) the date when the Buyer’s Commitment is terminated pursuant to the Master Repurchase Agreement or by operation of law (which we refer to as the “Termination Date”).
On September 15, 2017, Inspire entered into a second Master Repurchase Facility (which we refer to as the “Second Master Repurchase Agreement”) with J.P. Morgan Chase Bank, N.A. as the buyerfinanced thereunder. The Second Master Repurchase Agreement provides Inspire with a revolving mortgage loan repurchase facility of up to $35 million (which we refer to as the “Second Repurchase Facility”). The purpose of the Second Repurchase Facility is similar to the purpose outlined above for the Repurchase Facility. Amounts outstanding under the Repurchase Facility and Second Repurchase Facilityrepurchase facilities are not guaranteed by us or any of our subsidiaries. Each ofsubsidiaries and the Master Repurchase Agreement and Second Master Repurchase Agreement containsagreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2017,2020 and December 31, 2019, we had $173.4 million and $174.1 million outstanding under these repurchase facilities, respectively, and were in compliance with all covenants under each ofthereunder.
During the Repurchase Facility and Second Repurchase Facility.
As ofthree months ended September 30, 2017, there was an aggregate $27.52020 and 2019, we incurred interest expense on the repurchase facilities of $0.8 million outstanding under bothand $0.6 million, respectively, which are included in financial services costs on our condensed consolidated statements of operations. During the Master Repurchase Agreementnine months ended September 30, 2020 and Second Master Repurchase Agreement,2019, we incurred interest expense on the repurchase facilities of $2.0 million and such outstanding amount was collateralized by the mortgage loans held for sale.$2.1 million, respectively.
10. Interest
9. 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, 20172020 and 2016,2019, we capitalized all interest costs incurred during these periods, except for interest incurred on capital leases of equipment related to our golf course operations.mortgage repurchase facilities.
Our interest costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Interest capitalized beginning of period |
| $ | 35,668 |
|
| 26,577 |
| $ | 28,935 |
|
| 21,533 | $ | 70,311 | $ | 63,068 | $ | 67,069 | $ | 53,842 | ||||
Interest capitalized during period |
|
| 13,338 |
|
| 6,743 |
|
| 31,902 |
|
| 19,772 | 15,065 | 19,325 | 50,686 | 55,792 | ||||||||
Less: capitalized interest in cost of sales |
|
| (8,794) |
|
| (5,192) |
|
| (20,625) |
|
| (13,177) | (19,050) | (14,258) | (51,429) | (41,499) | ||||||||
Interest capitalized end of period |
| $ | 40,212 |
|
| 28,128 |
| $ | 40,212 |
|
| 28,128 | $ | 66,326 | $ | 68,135 | $ | 66,326 | $ | 68,135 |
11.
10. Income Taxes
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 20172020 estimated annual effective tax rate of 36.3%23.4% is driven by our blended federal and state statutory rate of 37.8%25.1%, and certain other permanent differences between GAAP and tax which is partially offset by net estimated benefits of 1.5% primarily from additional deductions for tax related to domestic production activities which benefited our rate by 3.2%. This benefit was partially offset by non-deductible acquisition costs associated with our acquisition of UCP, Inc., along with other items which increaseddecreased our rate by 1.7%. Our estimated annual rate of 36.3% was also benefited by discrete items for excess tax benefits related to share based awards that vested during
For the nine months ended September 30, 2017, resulting in a total tax2020, our estimated annual rate of 34.2%.23.4% was impacted by discrete items which had a net impact of decreasing our rate by 0.1%, including excess tax benefits for vested stock-based compensation.
For the three months ended September 30, 20172020 and 2016,2019, we recorded income tax expense of $5.7$15.1 million and $6.4$7.8 million, respectively. For the nine months ended September 30, 20172020 and 2016,2019, we recorded income tax expense of $17.2$34.7 million and $16.8$19.0 million, respectively.
12.11. 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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|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Hierarchy |
| Carrying |
| Fair Value |
| Carrying |
| Fair Value | ||||
Secured notes receivable(1) |
| Level 2 |
| $ | 2,772 |
| $ | 2,766 |
| $ | 2,850 |
| $ | 2,828 |
Mortgage loans held for sale(2) |
| Level 2 |
| $ | 30,071 |
| $ | 30,071 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.875% senior notes(3) |
| Level 2 |
| $ | 378,901 |
| $ | 398,512 |
| $ | 253,089 |
| $ | 260,090 |
5.875 % senior notes (3) |
| Level 2 |
| $ | 394,851 |
| $ | 395,850 |
| $ | — |
| $ | — |
Revolving line of credit(4) |
| Level 2 |
| $ | — |
| $ | — |
| $ | 195,000 |
| $ | 195,000 |
Insurance premium notes(4) |
| Level 2 |
| $ | 2,264 |
| $ | 2,264 |
| $ | 5,999 |
| $ | 5,999 |
Mortgage repurchase facilities(4) |
| Level 2 |
| $ | 27,465 |
| $ | 27,465 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
September 30, 2020 | December 31, 2019 | |||||||||||||
Hierarchy | Carrying | Fair Value | Carrying | Fair Value | ||||||||||
Secured notes receivable(1) | Level 2 | $ | 2,460 | $ | 2,491 | $ | 2,602 | $ | 2,545 | |||||
Mortgage loans held for sale(2) | Level 2 | $ | 187,494 | $ | 187,494 | $ | 185,246 | $ | 185,246 | |||||
Derivative assets(3) | Level 2 | $ | 7,410 | $ | 7,410 | $ | 1,382 | $ | 1,382 | |||||
5.875% senior notes(4)(5) | Level 2 | $ | 396,644 | $ | 411,000 | $ | 396,120 | $ | 415,680 | |||||
6.750% senior notes(4)(5) | Level 2 | $ | 494,736 | $ | 535,000 | $ | 494,307 | $ | 537,500 | |||||
Revolving line of credit(6) | Level 2 | $ | — | $ | — | $ | 68,700 | $ | 68,700 | |||||
Other financing obligations(6)(7) | Level 2 | $ | 4,487 | $ | 4,487 | $ | 6,277 | $ | 6,277 | |||||
Derivative liabilities(3) | Level 2 | $ | 282 | $ | 282 | $ | 147 | $ | 147 | |||||
Mortgage repurchase facilities(6) | Level 2 | $ | 173,415 | $ | 173,415 | $ | 174,095 | $ | 174,095 |
(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. In May 2020, the maturity of the secured note receivable was extended by one year to May of 2021.
(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 and are related to our financial services segment. Changes in fair value are reflected in financial services revenue on the condensed consolidated statements of operations. Derivative assets are presented within prepaid expenses and other assets on the condensed consolidated balance sheets. Derivative liabilities are presented within accrued expenses and other liabilities on the condensed consolidated balance sheets.
(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, 2020, these amounts totaled $5.3 million and $3.4 million for the 6.750% senior notes and 5.875% senior notes, respectively. As of December 31, 2019, these amounts totaled $5.7 million and $3.9 million for the 6.750% senior notes and 5.875% senior notes, respectively.
(6)Carrying amount approximates fair value due to short-term nature and interest rate terms.
(7)Insurance premium notes included in in other financing obligations bore interest rates ranging from 3.278% to 3.240% during the periods ending September 30, 2020 and December 31, 2019, respectively, which approximated prevailing market rates for similar obligations at each period.
During the nine months ended September 30, 2020, total impairment charges of $1.7 million were recorded, which includes $0.8 million of impairment charges related to one community in our Century Complete segment which was recorded during the three months ended March 31, 2020, and $0.9 million of impairment charges related to one community in our Texas segment which was recorded during the three months ended June 30, 2020. NaN impairment charges were recorded in the three months ended September 30, 2020. The estimated fair value of communities are determined through a discounted cash flow approach utilizing Level 3 inputs. Changes in our cash flow projections in future periods related to these communities may change our conclusions on the recoverability of inventory in the future.
The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities include items such as inventory and long-lived assetsproperty and equipment that are measured at fair value when acquired and resulting from impairment,as a result of impairments, if deemed necessary.
13.
12. Stock-Based Compensation
During the three months ended September 30, 2017,2020 and 2019, we granted 0.2 million shares ofdid 0t grant any restricted stock units with a weighted average grant date fair value of $20.36 per(which we refer to as “RSUs”) or performance share which vest over a two or five year period from the grant date. These awards were issued in connection with our acquisition of UCP Inc.,units (which we refer to UCP employees as replacement awards for the restricted stock units they held with UCP prior to the acquisition.“PSUs”). During the nine months ended September 30, 2017,2020 and 2019, we granted 0.5RSUs covering 0.4 million and 0.6 million shares of restrictedcommon stock, unitsrespectively, with a weighted average grant date fair value of $21.64$30.43 per share whichand $23.85 per share, respectively, that vest over a onethree year period. During the nine months ended September 30, 2020 and 2019, we also granted PSUs covering up to five0.3 million and 0.3 million shares of common stock, respectively, assuming maximum level of performance, with a grant date fair value of $26.38 per share and $22.01 per share, respectively. Granted PSUs are subject to both service and performance vesting conditions. The quantity of shares that will ultimately vest for the PSUs ranges 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 period from the grant date. pre-tax income performance goal.
A summary of our outstanding awardsRSUs and PSUs, assuming current estimated level of restricted common stock and restricted stock unitsperformance achievement, are as follows (in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2017 | ||||||
|
| Restricted Stock Awards |
| Restricted Stock Units |
| Total | |||
Unvested awards/units |
|
| 139 |
|
| 732 |
|
| 871 |
Unrecognized compensation cost |
| $ | 909 |
| $ | 9,323 |
| $ | 10,232 |
Period to recognize compensation cost |
|
| 0.4 years |
|
| 2.1 years |
|
| 1.9 years (average) |
As of September 30, 2020 | |||
Unvested units | 1,463 | ||
Unrecognized compensation cost | $ | 17,335 | |
Remaining period to recognize compensation cost | 1.81 years |
During the three months ended September 30, 20172020 and 2016,2019, we recognized stock-based compensation expense of $2.6$5.8 million and $1.6$3.9 million, respectively. During the nine months ended September 30, 20172020 and 2016,2019, we recognized stock-based compensation expense of $6.5$14.4 million and $5.1$11.4 million, respectively. Stock-based compensation expense is included in selling, general, and administrative expense on our condensed consolidated statements of operations.
14.During the three months ended September 30, 2020, we updated our recognition of stock-based compensation expense associated with previously granted PSU awards to reflect probable financial results as they relate to the performance goals of the awards. Accordingly, our estimate of the number of shares which will ultimately vest under our PSU awards increased by 30 thousand, and we recorded a cumulative catch-up adjustment to increase stock-based compensation expense of $0.6 million ($0.4 million net of tax), or $0.02 per basic share and $0.01 per diluted share for the three and nine months ended September 30, 2020, respectively.
13. 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, 20172020, and December 31, 2016,2019, there were 27.333.4 million and 21.633.1 million shares of common stock issued and outstanding, respectively, inclusive of the restricted common stock issued.respectively.
We issued 29.2 thousand and 0.2 million shares of common stock related to the vesting of restricted stock awards during the three and nine months ended September 30, 2017, respectively, under our First Amended & Restated 2013 Long-Term Incentive Plan. At our 2017 annual meeting of stockholders held onOn May 10, 2017, our stockholders approved the adoption of the 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
16
it became effective. AsOn May 8, 2019, our stockholders approved the Century Communities, Inc. Amended and Restated 2017 Omnibus Incentive Plan (which we refer to as our “Amended 2017 Incentive Plan”), which increased the number of September 30, 2017, approximately 1.2 million shares remain availableof our common stock authorized for issuance under the 2017 Incentive Plan.Plan by an additional 1.631 million shares. We also issued 4.20.5 million and 0.3 million shares of our common stock in connection with our acquisitionrelated to the vesting of UCP Inc., as discussed in Note 3.RSUs during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, approximately 1.0 million shares of common stock remained available for issuance under the Amended 2017 Incentive Plan.
On November 7, 2016,27, 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc. (which we refer to as the “Distribution Agreement”) with J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc. (which, as sales agents pursuant to which we refer to collectively as the “Sales Agents”), relating to our common stock. Under the Distribution Agreement, we are authorized tomay offer and sell shares of our common stock having an aggregate offering price of up to $50.0$100.0 million from time to time through any of our Sales Agentsthe sales agents party thereto in “at“at-the-market” offerings, in accordance with the market” offerings. On August 9, 2017, we entered into a secondterms and conditions set forth in the Distribution Agreement. This Distribution Agreement, (which we refer to as the “Second Distribution Agreement”) with the Sales Agents, pursuant to which we may offersuperseded and sell from time to time up toreplaced a prior similar distribution agreement, had all $100.0 million in “atavailable for sale as of September 30, 2020. We did 0t sell or issue any shares of our common stock during the market” offerings. three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2017,2019, we sold and issued an aggregate of 0.40.8 million and 1.40.9 million shares, respectively, of our common stock under the Distribution Agreement and Second Distribution Agreement, respectively,previous distribution agreement, which provided netgross proceeds of $10.0$23.7 million and $34.6$26.5 million, respectively, and in connection with such sales, paid total commissions and fees to the Sales Agentssales agents of $0.2$0.6 million and $0.7 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.
On November 6, 2018, we authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock. During the three and nine months ended September 30, 2020, we did not repurchase any shares of common stock. During the three and nine months ended September 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $1.4 million.
15.
14. Earnings Per Share
We use the two-class method of calculating earnings per share (which we refer to as “EPS”) as our non-vested restricted stock awards 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 ofearnings per share as our restricted stock units as the restricted stock unitscurrently issued non-vested RSUs and PSUs do not have participating rights.
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 20172020 and 20162019 (in thousands, except share and per share information):
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||
|
| September 30, |
| September 30, | September 30, | September 30, | ||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income |
| $ | 9,470 |
| $ | 13,342 |
| $ | 33,100 |
| $ | 34,467 | $ | 49,764 | $ | 27,024 | $ | 114,340 | $ | 59,636 | ||||
Less: Undistributed earnings allocated to participating securities |
|
| (52) |
|
| (241) |
|
| (289) |
|
| (785) | ||||||||||||
Net income allocable to common stockholders |
| $ | 9,418 |
| $ | 13,101 |
| $ | 32,811 |
| $ | 33,682 | ||||||||||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Weighted average common shares outstanding - basic |
|
| 25,445,552 |
|
| 20,673,521 |
| 23,038,390 |
| 20,643,682 | 33,350,633 | 30,587,487 | 33,299,768 | 30,378,860 | ||||||||||
Dilutive effect of restricted stock units |
|
| 280,585 |
|
| 148,545 |
|
| 236,930 |
|
| 88,248 | 380,619 | 318,748 | 256,882 | 262,334 | ||||||||
Weighted average common shares outstanding - diluted |
|
| 25,726,137 |
|
| 20,822,066 |
|
| 23,275,320 |
|
| 20,731,930 | 33,731,252 | 30,906,235 | 33,556,650 | 30,641,194 | ||||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.42 |
| $ | 1.63 | $ | 1.49 | $ | 0.88 | $ | 3.43 | $ | 1.96 | ||||
Diluted |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.41 |
| $ | 1.62 | $ | 1.48 | $ | 0.87 | $ | 3.41 | $ | 1.95 |
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 did not have anyexcluded 0.8 million and 0.6 million common unit equivalents to exclude from diluted earnings per share during the three and nine months ended September 30, 2017.2020 and 2019, respectively, related to the PSUs for which performance conditions remain unsatisfied.
16.
15. Commitments and Contingencies
Letters of Credit and Performance Bonds
In the normal course of business, the Company postswe post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 20172020, and December 31, 2016,2019, we had $70.1$360.1 million and $70.1$344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.
Litigation
The Company isWe 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 condensed consolidated statements of operations 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.
17
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 flow.flows.
17. Supplemental Guarantor Information
The Existing 6.875% Notes and the May 2017 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 as “Guarantors”).
Each of the May 2014 Indenture governing the Existing 6.875% Notes, and the May 2017 Indenture governing the May 2017 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 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 the February 2015 exchange offer for the Initial Exchange Notes, the October 2015 exchange offer for the October 2015 Exchange Notes, the April 2017 exchange offer for the April 2017 Exchange Notes, and the issuance of the May 2017 Senior Notes, 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 September 30, 2017 (in thousands) | |||||||||||||
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 35,881 |
| $ | 16,278 |
| $ | 6,363 |
| $ | — |
| $ | 58,522 |
Cash held in escrow |
|
| — |
|
| 41,740 |
|
| 522 |
|
| — |
|
| 42,262 |
Accounts receivable |
|
| 11,306 |
|
| 9,312 |
|
| 192 |
|
| — |
|
| 20,810 |
Investment in consolidated subsidiaries |
|
| 1,382,958 |
|
| — |
|
| — |
|
| (1,382,958) |
|
| — |
Inventories |
|
| — |
|
| 1,352,989 |
|
| — |
|
| — |
|
| 1,352,989 |
Mortgage loans held for sale |
|
| — |
|
| — |
|
| 30,071 |
|
| — |
|
| 30,071 |
Prepaid expenses and other assets |
|
| 2,859 |
|
| 59,129 |
|
| 374 |
|
| — |
|
| 62,362 |
Deferred tax asset, net |
|
| 6,403 |
|
| — |
|
| — |
|
| — |
|
| 6,403 |
Property and equipment, net |
|
| 2,409 |
|
| 10,760 |
|
| 489 |
|
| — |
|
| 13,658 |
Investment in unconsolidated subsidiaries |
|
| 20,677 |
|
| — |
|
| — |
|
|
|
|
| 20,677 |
Amortizable intangible assets, net |
|
| — |
|
| 1,889 |
|
| — |
|
| — |
|
| 1,889 |
Goodwill |
|
| — |
|
| 21,365 |
|
| — |
|
| — |
|
| 21,365 |
Total assets |
| $ | 1,462,493 |
| $ | 1,513,462 |
| $ | 38,011 |
| $ | (1,382,958) |
| $ | 1,631,008 |
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | (17) |
| $ | 16,707 |
| $ | 120 |
| $ | — |
| $ | 16,810 |
Accrued expenses and other liabilities |
|
| 35,746 |
|
| 121,251 |
|
| 708 |
|
| — |
|
| 157,705 |
Notes payable |
|
| 773,752 |
|
| 2,264 |
|
| — |
|
| — |
|
| 776,016 |
Revolving line of credit |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Mortgage repurchase facility |
|
| — |
|
| — |
|
| 27,465 |
|
| — |
|
| 27,465 |
Total liabilities |
|
| 809,481 |
|
| 140,222 |
|
| 28,293 |
|
| — |
|
| 977,996 |
Stockholders’ equity: |
|
| 653,012 |
|
| 1,373,240 |
|
| 9,718 |
|
| (1,382,958) |
|
| 653,012 |
Total liabilities and stockholders’ equity |
| $ | 1,462,493 |
| $ | 1,513,462 |
| $ | 38,011 |
| $ | (1,382,958) |
| $ | 1,631,008 |
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Balance Sheet | ||||||||||||||
|
| As of December 31, 2016 (in thousands) | |||||||||||||
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 14,637 |
| $ | 8,646 |
| $ | 6,167 |
| $ | — |
| $ | 29,450 |
Cash held in escrow |
|
| — |
|
| 20,044 |
|
| — |
|
| — |
|
| 20,044 |
Accounts receivable |
|
| 2,980 |
|
| 2,749 |
|
| — |
|
| — |
|
| 5,729 |
Investment in consolidated subsidiaries |
|
| 884,665 |
|
| — |
|
| — |
|
| (884,665) |
|
| — |
Inventories |
|
| — |
|
| 857,885 |
|
| — |
|
| — |
|
| 857,885 |
Prepaid expenses and other assets |
|
| 14,628 |
|
| 25,662 |
|
| 167 |
|
| — |
|
| 40,457 |
Property and equipment, net |
|
| 1,166 |
|
| 10,224 |
|
| 22 |
|
| — |
|
| 11,412 |
Investment in unconsolidated subsidiaries |
|
| 18,275 |
|
| — |
|
|
|
|
|
|
|
| 18,275 |
Amortizable intangible assets, net |
|
| — |
|
| 2,911 |
|
| — |
|
| — |
|
| 2,911 |
Goodwill |
|
| — |
|
| 21,365 |
|
| — |
|
| — |
|
| 21,365 |
Total assets |
| $ | 936,351 |
| $ | 949,486 |
| $ | 6,356 |
| $ | (884,665) |
| $ | 1,007,528 |
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 257 |
| $ | 15,575 |
| $ | (124) |
| $ | — |
| $ | 15,708 |
Accrued expenses and other liabilities |
|
| 12,587 |
|
| 49,697 |
|
| 30 |
|
| — |
|
| 62,314 |
Deferred tax liability |
|
| 1,782 |
|
| — |
|
| — |
|
| — |
|
| 1,782 |
Senior and other notes payable |
|
| 253,089 |
|
| 5,999 |
|
| — |
|
| — |
|
| 259,088 |
Revolving line of credit |
|
| 195,000 |
|
| — |
|
| — |
|
| — |
|
| 195,000 |
Total liabilities |
|
| 462,715 |
|
| 71,271 |
|
| (94) |
|
| — |
|
| 533,892 |
Stockholders’ equity: |
|
| 473,636 |
|
| 878,215 |
|
| 6,450 |
|
| (884,665) |
|
| 473,636 |
Total liabilities and stockholders’ equity |
| $ | 936,351 |
| $ | 949,486 |
| $ | 6,356 |
| $ | (884,665) |
| $ | 1,007,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Operations | |||||||||||||
| For the Three Months Ended September 30, 2017 (in thousands) | ||||||||||||||
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales revenues |
| $ | — |
| $ | 374,935 |
| $ | — |
| $ | — |
| $ | 374,935 |
Land sales and other revenues |
|
| — |
|
| 1,826 |
|
| — |
|
| — |
|
| 1,826 |
|
|
| — |
|
| 376,761 |
|
| — |
|
| — |
|
| 376,761 |
Financial services revenue |
|
| — |
|
| — |
|
| 2,955 |
|
| — |
|
| 2,955 |
Total revenues |
|
| — |
|
| 376,761 |
|
| 2,955 |
|
| — |
|
| 379,716 |
Homebuilding cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of homes sales revenues |
|
| — |
|
| (311,365) |
|
| — |
|
| — |
|
| (311,365) |
Cost of land sales and other revenues |
|
| — |
|
| (2,104) |
|
| — |
|
| — |
|
| (2,104) |
|
|
| — |
|
| (313,469) |
|
| — |
|
| — |
|
| (313,469) |
Financial services costs |
|
| — |
|
| — |
|
| (2,450) |
|
| — |
|
| (2,450) |
Selling, general and administrative |
|
| (13,342) |
|
| (32,823) |
|
| — |
|
| — |
|
| (46,165) |
Acquisition expense |
|
| (7,205) |
|
| — |
|
| — |
|
| — |
|
| (7,205) |
Equity in earnings from consolidated subsidiaries |
|
| 20,470 |
|
| — |
|
| — |
|
| (20,470) |
|
| — |
Equity in income of unconsolidated subsidiaries |
|
| 3,716 |
|
| — |
|
| — |
|
| — |
|
| 3,716 |
Other income (expense) |
|
| 495 |
|
| 518 |
|
| — |
|
| — |
|
| 1,013 |
Income before income tax expense |
|
| 4,134 |
|
| 30,987 |
|
| 505 |
|
| (20,470) |
|
| 15,156 |
Income tax expense |
|
| 5,336 |
|
| (10,845) |
|
| (177) |
| �� | — |
|
| (5,686) |
Net income |
| $ | 9,470 |
| $ | 20,142 |
| $ | 328 |
| $ | (20,470) |
| $ | 9,470 |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Operations | |||||||||||||
| For the Three Months Ended September 30, 2016 (in thousands) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales revenues |
| $ | — |
| $ | 248,075 |
| $ | — |
| $ | — |
| $ | 248,075 |
Land sales and other revenues |
|
| — |
|
| 5,338 |
|
| — |
|
| — |
|
| 5,338 |
|
|
| — |
|
| 253,413 |
|
| — |
|
| — |
|
| 253,413 |
Financial services revenue |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Total revenues |
|
| — |
|
| 253,413 |
|
| — |
|
| — |
|
| 253,413 |
Homebuilding cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of homes sales revenues |
|
| — |
|
| (197,650) |
|
| — |
|
| — |
|
| (197,650) |
Cost of land sales and other revenues |
|
| — |
|
| (5,420) |
|
| — |
|
| — |
|
| (5,420) |
|
|
| — |
|
| (203,070) |
|
| — |
|
| — |
|
| (203,070) |
Financial services costs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Selling, general and administrative |
|
| (6,846) |
|
| (24,098) |
|
| — |
|
| — |
|
| (30,944) |
Acquisition expense |
|
| (53) |
|
| — |
|
| — |
|
| — |
|
| (53) |
Equity in earnings from consolidated subsidiaries |
|
| 17,303 |
|
| — |
|
| — |
|
| (17,303) |
|
| — |
Other income (expense) |
|
| 10 |
|
| 375 |
|
| — |
|
| — |
|
| 385 |
Income before income tax expense |
|
| 10,414 |
|
| 26,620 |
|
| — |
|
| (17,303) |
|
| 19,731 |
Income tax expense |
|
| 2,928 |
|
| (9,317) |
|
| — |
|
| — |
|
| (6,389) |
Net income |
| $ | 13,342 |
| $ | 17,303 |
| $ | — |
| $ | (17,303) |
| $ | 13,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Operations | |||||||||||||
| For the Nine Months Ended September 30, 2017 (in thousands) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales revenues |
| $ | — |
| $ | 888,942 |
| $ | — |
| $ | — |
| $ | 888,942 |
Land sales and other revenues |
|
| — |
|
| 6,216 |
|
| — |
|
| — |
|
| 6,216 |
|
|
| — |
|
| 895,158 |
|
| — |
|
| — |
|
| 895,158 |
Financial services revenue |
|
| — |
|
| — |
|
| 4,697 |
|
| — |
|
| 4,697 |
Total revenues |
|
| — |
|
| 895,158 |
|
| 4,697 |
|
| — |
|
| 899,855 |
Homebuilding cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of homes sales revenues |
|
| — |
|
| (727,577) |
|
| — |
|
| — |
|
| (727,577) |
Cost of land sales and other revenues |
|
| — |
|
| (4,994) |
|
| — |
|
| — |
|
| (4,994) |
|
|
| — |
|
| (732,571) |
|
| — |
|
| — |
|
| (732,571) |
Financial services costs |
|
| — |
|
| — |
|
| (4,648) |
|
| — |
|
| (4,648) |
Selling, general and administrative |
|
| (30,876) |
|
| (82,721) |
|
| — |
|
| — |
|
| (113,597) |
Acquisition expense |
|
| (8,645) |
|
| — |
|
| — |
|
| — |
|
| (8,645) |
Equity in earnings from consolidated subsidiaries |
|
| 52,869 |
|
| — |
|
| — |
|
| (52,869) |
|
| — |
Equity in income of unconsolidated subsidiaries |
|
| 7,648 |
|
| — |
|
| — |
|
| — |
|
| 7,648 |
Other income (expense) |
|
| 852 |
|
| 1,386 |
|
| 36 |
|
| — |
|
| 2,274 |
Income before income tax expense |
|
| 21,848 |
|
| 81,252 |
|
| 85 |
|
| (52,869) |
|
| 50,316 |
Income tax expense |
|
| 11,252 |
|
| (28,438) |
|
| (30) |
|
| — |
|
| (17,216) |
Net income |
| $ | 33,100 |
| $ | 52,814 |
| $ | 55 |
| $ | (52,869) |
| $ | 33,100 |
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Operations | |||||||||||||
| For the Nine Months Ended September 30, 2016 (in thousands) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales revenues |
| $ | — |
| $ | 686,335 |
| $ | — |
| $ | — |
| $ | 686,335 |
Land sales and other revenues |
|
| — |
|
| 10,816 |
|
| — |
|
| — |
|
| 10,816 |
|
|
| — |
|
| 697,151 |
|
| — |
|
| — |
|
| 697,151 |
Financial services revenue |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Total revenues |
|
| — |
|
| 697,151 |
|
| — |
|
| — |
|
| 697,151 |
Homebuilding cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of homes sales revenues |
|
| — |
|
| (549,886) |
|
| — |
|
| — |
|
| (549,886) |
Cost of land sales and other revenues |
|
| — |
|
| (9,433) |
|
| — |
|
| — |
|
| (9,433) |
|
|
| — |
|
| (559,319) |
|
| — |
|
| — |
|
| (559,319) |
Financial services costs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Selling, general and administrative |
|
| (18,323) |
|
| (69,189) |
|
| — |
|
| — |
|
| (87,512) |
Equity in earnings from consolidated subsidiaries |
|
| 45,514 |
|
| — |
|
| — |
|
| (45,514) |
|
| — |
Acquisition expense |
|
| (466) |
|
| — |
|
| — |
|
| — |
|
| (466) |
Other income (expense) |
|
| 24 |
|
| 1,379 |
|
| — |
|
| — |
|
| 1,403 |
Income before income tax expense |
|
| 26,749 |
|
| 70,022 |
|
| — |
|
| (45,514) |
|
| 51,257 |
Income tax expense |
|
| 7,718 |
|
| (24,508) |
|
| — |
|
| — |
|
| (16,790) |
Net income |
| $ | 34,467 |
| $ | 45,514 |
| $ | — |
| $ | (45,514) |
| $ | 34,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Cash Flows | |||||||||||||
|
| For the Nine Months Ended September 30, 2017 (in thousands) | |||||||||||||
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Net cash provided by/(used in) operating activities |
| $ | (8,164) |
| $ | (92,577) |
| $ | (30,014) |
| $ | — |
| $ | (130,755) |
Net cash used in investing activities |
| $ | (434,617) |
| $ | (63,905) |
| $ | (467) |
| $ | 432,867 |
| $ | (66,122) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facilities |
| $ | 75,000 |
| $ | — |
| $ | — |
| $ | — |
| $ | 75,000 |
Payments on revolving credit facilities |
|
| (270,000) |
|
| — |
|
| — |
|
| — |
|
| (270,000) |
Proceeds from issuance of senior notes |
|
| 523,000 |
|
| — |
|
| — |
|
| — |
|
| 523,000 |
Repyment of debt assumed in business combination |
|
| — |
|
| (151,919) |
|
| — |
|
| — |
|
| (151,919) |
Principal payments on notes payable |
|
| — |
|
| (4,735) |
|
| — |
|
| — |
|
| (4,735) |
Debt issuance costs |
|
| (3,731) |
|
| — |
|
| — |
|
| — |
|
| (3,731) |
Repurchases of common stock upon vesting of restricted stock awards |
|
| (4,141) |
|
| — |
|
| — |
|
| — |
|
| (4,141) |
Payments from (and advances to) parent/subsidiary |
|
| 108,887 |
|
| 320,768 |
|
| 3,212 |
|
| (432,867) |
|
| — |
Net proceeds from mortgage credit facility |
|
| — |
|
| — |
|
| 27,465 |
|
| — |
|
| 27,465 |
Net proceeds from issuances of common stock |
|
| 35,010 |
|
| — |
|
| — |
|
| — |
|
| 35,010 |
Net cash provided by financing activities |
| $ | 464,025 |
| $ | 164,114 |
| $ | 30,677 |
| $ | (432,867) |
| $ | 225,949 |
Net decrease in cash and cash equivalents |
| $ | 21,244 |
| $ | 7,632 |
| $ | 196 |
| $ | — |
| $ | 29,072 |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
| $ | 14,637 |
| $ | 8,646 |
| $ | 6,167 |
| $ | — |
| $ | 29,450 |
End of period |
| $ | 35,881 |
| $ | 16,278 |
| $ | 6,363 |
| $ | — |
| $ | 58,522 |
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Condensed Consolidated Statement of Cash Flows | |||||||||||||
|
| For the Nine Months Ended September 30, 2016 (in thousands) | |||||||||||||
|
|
|
|
| Guarantor |
| Non Guarantor |
| Elimination |
| Consolidated | ||||
|
| CCS |
| Subsidiaries |
| Subsidiaries |
| Entries |
| CCS | |||||
Net cash provided by/(used in) operating activities |
| $ | (17,969) |
| $ | (43,431) |
| $ | — |
| $ | — |
| $ | (61,400) |
Net cash used in investing activities |
| $ | (42,791) |
| $ | (4,685) |
| $ | — |
| $ | 42,476 |
| $ | (5,000) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facilities |
| $ | 145,000 |
| $ | — |
| $ | — |
| $ | — |
| $ | 145,000 |
Payments on revolving credit facilities |
|
| (90,000) |
|
| — |
|
| — |
|
| — |
|
| (90,000) |
Proceeds from insurance notes payable |
|
| — |
|
| 11,612 |
|
| — |
|
| — |
|
| 11,612 |
Principal payments on notes payable |
|
| — |
|
| (7,582) |
|
| — |
|
| — |
|
| (7,582) |
Debt issuance costs |
|
| (1,156) |
|
| — |
|
| — |
|
| — |
|
| (1,156) |
Repurchases of common stock under our stock repurchase program |
|
| (2,393) |
|
| — |
|
| — |
|
| — |
|
| (2,393) |
Repurchases of common stock upon vesting of restricted stock awards |
|
| (1,014) |
|
| — |
|
| — |
|
| — |
|
| (1,014) |
Payments from (and advances to) parent/subsidiary |
|
| — |
|
| 42,476 |
|
| — |
|
| (42,476) |
|
| — |
Net cash provided by financing activities |
| $ | 50,437 |
| $ | 46,506 |
| $ | — |
| $ | (42,476) |
| $ | 54,467 |
Net decrease in cash and cash equivalents |
| $ | (10,323) |
| $ | (1,610) |
| $ | — |
| $ | — |
| $ | (11,933) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
| $ | 22,002 |
| $ | 7,285 |
| $ | — |
| $ |
|
| $ | 29,287 |
End of period |
| $ | 11,679 |
| $ | 5,675 |
| $ | — |
| $ | — |
| $ | 17,354 |
18. Subsequent Events
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 greater Seattle, Washington for approximately $51.5 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 preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the acquisition date:
|
| |
| ||
| ||
|
| |
|
| |
| ||
| ||
|
|
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.
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as this “Form 10-Q”) constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or“potential,” the negative of such terms and other comparable terminology.terminology and the use of future dates. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors.
The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:
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|
|
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forward-looking and subject to risks and uncertainties including among others:
the impact of the COVID-19 pandemic on our business operations
The forward-lookinguncertainties related to and the impact, if any, of the U.S. presidential, congressional, and numerous state and local elections on our business, our industry and the economy in general;
economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
shortages of or increased prices for labor, land or raw materials, including lumber, used in housing construction;
a downturn in the homebuilding industry, including a reduction in demand or a decline in real estate values or market conditions resulting in impairment of our assets;
changes in assumptions used to make industry forecasts or trends affecting housing demand or prices;
continued volatility and uncertainty in the credit markets and broader financial markets;
our future operating results and financial condition;
our business operations;
changes in our business and investment strategy;
availability of land to acquire, and our ability to acquire such land on favorable terms or at all;
availability, terms and deployment of capital;
availability or cost of mortgage financing or an increase in the number of foreclosures in the market;
delays in land development or home construction resulting from adverse weather conditions or other events outside our control;
impact of construction defect, product liability, and/or home warranty claims, including the adequacy of accruals and the applicability and sufficiency of our insurance coverage;
changes in, or the failure or inability to comply with, governmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the impact and cost of compliance with evolving environmental laws and regulations and third-party challenges to required permits and other approvals;
the degree and nature of our competition;
our leverage, debt service obligations and exposure to changes in interest rates;
our ability to continue to fund and succeed in our mortgage lending business;
availability of qualified personnel and our ability to retain our key personnel;
taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance; and
changes in United States generally accepted accounting principles (which we refer to as “GAAP”).
Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II,I, Item 1A. Risk Factors” in thisour Annual Report on Form 10-Q,10-K, and other risks and uncertainties detailed in this report, including “Part II, Item 1A. Risk Factors”, and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.
As used in this Form 10-Q, references to “we,” “us,” “our”“our,” “Century” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.
24The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation.
Table of ContentsOverview
Overview
We areCentury is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in California, Colorado, Georgia, Nevada, North Carolina, South Carolina, Tennessee, Texas, Utah, and Washington.17 states. 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 Century Complete brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet and provides no option or upgrade selections. Our homebuilding operations are organized into the following fourfive reportable segments based on the geographic regions in which we operate:segments: West, Mountain, Texas, Southeast, and the Southeast.Century Complete. Additionally, our indirect wholly-ownedwholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and Parkway Title,IHL Home Insurance Agency, LLC, which provide mortgage, title, and titleinsurance services, respectively, to our home buyers, respectively,homebuyers have been identified as our Financial Services segment.
We build and sell an extensive range of home types across a variety of price points.
Impact of COVID-19 Pandemic
The outbreak of the novel coronavirus, (COVID-19), which was declared a pandemic by the World Health Organization on March 11, 2020, created significant volatility, disruption, and uncertainty across the nation and abroad. It resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and weakened economic conditions resulting in an economic slowdown and recession.
The homebuilding industry started to experience slowing sales trends in mid-March through April of 2020 at the outset of the widespread uncertainty concerning the pandemic. However, home sales sharply rebounded in May and June of 2020, aided by historically low interest rates, lack of supply, and potentially renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic. These positive trends continued throughout the third quarter of 2020.
In response to the pandemic and government restrictions, we shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols. Construction and sale of residential real estate were deemed essential businesses in almost all of our markets; and accordingly, our operations, other than in certain markets during the first weeks of April, were exempted from applicable health orders. While these circumstances did not materially adversely affect our second or third quarter 2020 financial results, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry have yet to be known. There is still uncertainty regarding the extent and duration of the COVID-19 pandemic as the situation has continued to evolve and associated government and consumer responses have remained in a state of flux. Recent increases in COVID-19 positive cases have resulted and could continue to result in the slowing or altering of the “re-opening” plans of numerous state and local municipalities. Despite overall strong demand and sales of our homes during the second and third quarters of 2020, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, which remain at historically high levels, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S. economy, unemployment levels, financial markets, credit and mortgage markets, consumer confidence, availability of mortgage loans to homebuyers, and other factors, including those described elsewhere in this report. A decrease in demand for our homes would adversely affect our operating segment.
On August 4, 2017, we acquired UCP, Inc. UCP is a homebuilder and land developer with expertiseresults in residential land acquisition, development and entitlement,future periods, as well as home design, constructionhave a direct effect on the origination volume of and sales, with operationsrevenues from our Financial Services segment. In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventories in the Statesfuture.
Given the significant uncertainty regarding the impact of COVID-19, and Tennessee. The merger was unanimously approvedin particular during the late March and April 2020 timeframe, we took significant steps to preserve cash and ensure we were positioned appropriately from a working capital perspective, including but not limited to initially extending the timing of certain land acquisitions, slowing or altering our land development activities, drawing additional amounts on our revolving line of credit, and implementing a reduction in our workforce, along with other cost savings measures. As a result, and aided by strong demand for our homes during the second and third quarters of 2020, we ended the third quarter of 2020 with no amounts outstanding on our revolving line of credit, $288.3 million of cash and cash equivalents, $26.3 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 32.9%. Driven by the boardstrong housing market, we increased our land acquisition and development activities during the third quarter of directors2020 to bolster our lot pipeline and support future community growth, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020. Although the trajectory and strength of bothour markets continues to remain strong, we experienced some building cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods. While the Companyimpact of the COVID-19 pandemic will continue to evolve and UCP,at any given time recovery could be slowed or reversed by a number of factors, we believe we are well positioned from a cash and wasliquidity standpoint not only to operate in an uncertain environment, but also approved by UCP stockholders on August 1, 2017. In connectioncontinue to grow with the merger, each sharemarket, pay down debt and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage 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 in connection with the merger and $97.7 million was paid in cash. 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,strategic opportunities as such, was included as consideration. Because the closing of the merger occurred during the quarter ended September 30, 2017, the discussion included under “Results of Operations” below includes results of UCP only for the period from August 4, 2017 through September 30, 2017. We have adjusted prior period consolidated and segment information, where applicable, to conform to the current period presentation.they arise.
Results of Operations
During the three and nine months ended September 30, 2017,2020, we delivered 9682,283 and 6,627 homes, respectively, with an average sales price of $387.3 thousand.$333.0 thousand and $313.9 thousand, respectively. These deliveries represent increases of 20.7% and 20.0%, respectively, as compared to the three and nine months ended September 30, 2019. During the same period,three and nine months ended September 30, 2020, we generated approximately $374.9$760.2 million and $2,080.4 million in home sales revenues, respectively, approximately $15.2$64.9 million and $149.1 million in income before income tax expense, respectively, and approximately $9.5$49.8 million and $114.3 million, respectively, in net income.income, in each case representing substantial increases over the respective prior year periods.
During the nine months ended September 30, 2017, we delivered 2,329 homes, with an average sales price of $381.7 thousand. During the same period, we generated approximately $888.9 million in home sales revenues, approximately $50.3 million in income before income tax expense, and approximately $33.1 million in net income.
For the three and nine months ended September 30, 2017,2020, our new home contracts, net of cancelations, totaled 9143,204 and 2,892,8,256, respectively, a 45.5%56.6% and 26.2%35.7% increase over the same respective periods in 2016, respectively.2019. As of September 30, 2017,2020, we had a backlog of 1,664 sold but unclosed3,699 homes, a 67.7%34.7% increase as compared to September 30, 2016,2019, representing approximately $689.3$1,309.4 million in sales value, an 81.0%a 53.2% increase as compared to September 30, 2016. 2019.
The following table summarizes our results of operationoperations for the three and nine months ended September 30, 20172020 and 2016. 2019.
(in thousands, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||
Consolidated Statements of Operations: | |||||||||||||||||
Revenue | |||||||||||||||||
Home sales revenues | $ | 760,239 | $ | 573,860 | $ | 2,080,364 | $ | 1,705,798 | |||||||||
Land sales revenues | 2,105 | 6,083 | 25,516 | 8,837 | |||||||||||||
762,344 | 579,943 | 2,105,880 | 1,714,635 | ||||||||||||||
Financial services revenues | 32,017 | 10,419 | 67,534 | 28,734 | |||||||||||||
Total revenues | 794,361 | 590,362 | 2,173,414 | 1,743,369 | |||||||||||||
Homebuilding cost of revenues | |||||||||||||||||
Cost of home sales revenues | (627,364) | (469,834) | (1,718,545) | (1,407,519) | |||||||||||||
Cost of land sales and other revenues | (2,046) | (4,624) | (18,597) | (6,115) | |||||||||||||
(629,410) | (474,458) | (1,737,142) | (1,413,634) | ||||||||||||||
Financial services costs | (14,511) | (8,174) | (36,841) | (22,750) | |||||||||||||
Selling, general, and administrative | (85,806) | (72,834) | (246,131) | (216,987) | |||||||||||||
Loss on debt extinguishment | — | — | — | (10,832) | |||||||||||||
Inventory impairment and other | — | — | (1,691) | — | |||||||||||||
Other income (expense) | 251 | (56) | (2,533) | (499) | |||||||||||||
Income before income tax expense | 64,885 | 34,840 | 149,076 | 78,667 | |||||||||||||
Income tax expense | (15,121) | (7,816) | (34,736) | (19,031) | |||||||||||||
Net income | $ | 49,764 | $ | 27,024 | $ | 114,340 | $ | 59,636 | |||||||||
Earnings per share: | |||||||||||||||||
Basic | $ | 1.49 | $ | 0.88 | $ | 3.43 | $ | 1.96 | |||||||||
Diluted | $ | 1.48 | $ | 0.87 | $ | 3.41 | $ | 1.95 | |||||||||
Adjusted diluted earnings per share(1) | $ | 1.48 | $ | 0.87 | $ | 3.48 | $ | 2.26 | |||||||||
Other Operating Information (dollars in thousands): | |||||||||||||||||
Number of homes delivered | 2,283 | 1,891 | 6,627 | 5,521 | |||||||||||||
Average sales price of homes delivered | $ | 333.0 | $ | 303.5 | $ | 313.9 | $ | 309.0 | |||||||||
Homebuilding gross margin percentage(2) | 17.5 | % | 18.1 | % | 17.3 | % | 17.5 | % | |||||||||
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1) | 20.0 | % | 20.6 | % | 19.9 | % | 20.0 | % | |||||||||
Backlog at end of period, number of homes | 3,699 | 2,746 | 3,699 | 2,746 | |||||||||||||
Backlog at end of period, aggregate sales value | $ | 1,309,449 | $ | 854,856 | $ | 1,309,449 | $ | 854,856 | |||||||||
Average sales price of homes in backlog | $ | 354.0 | $ | 311.3 | $ | 354.0 | $ | 311.3 | |||||||||
Net new home contracts | 3,204 | 2,046 | 8,256 | 6,086 | |||||||||||||
Selling communities at period end(3) | 110 | 129 | 110 | 129 | |||||||||||||
Average selling communities(3) | 113 | 127 | 122 | 127 | |||||||||||||
Total owned and controlled lot inventory | 44,963 | 39,315 | 44,963 | 39,315 | |||||||||||||
Adjusted EBITDA(1) | $ | 86,998 | $ | 52,695 | $ | 212,839 | $ | 142,530 | |||||||||
Adjusted income before income tax expense(1) | $ | 64,885 | $ | 34,840 | $ | 152,351 | $ | 91,223 | |||||||||
Adjusted net income(1) | $ | 49,764 | $ | 27,024 | $ | 116,852 | $ | 69,154 | |||||||||
Net homebuilding debt to net capital (1) | 32.9 | % | 53.8 | % | 32.9 | % | 53.8 | % |
(1) This is a non-GAAP financial measure and should not be used as a substitute for the Company’s operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.
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(in thousands, except per share amounts) |
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
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| (unaudited) |
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Consolidated Statements of Operations: |
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Revenue |
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Home sales revenues |
| $ | 374,935 |
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| $ | 248,075 |
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| $ | 888,942 |
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| $ | 686,335 |
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Land sales revenues |
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| 1,826 |
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| 5,338 |
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| 6,216 |
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| 10,816 |
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| 376,761 |
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| 253,413 |
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| 895,158 |
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| 697,151 |
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Financial services revenue |
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| 2,955 |
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| — |
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| 4,697 |
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| — |
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Total revenues |
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| 379,716 |
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| 253,413 |
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| 899,855 |
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| 697,151 |
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Homebuilding cost of revenues |
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Cost of home sales revenues |
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| (311,365) |
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| (197,650) |
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| (727,577) |
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| (549,886) |
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Cost of land sales and other revenues |
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| (2,104) |
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| (5,420) |
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| (4,994) |
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| (9,433) |
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| (313,469) |
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| (203,070) |
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| (732,571) |
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| (559,319) |
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Financial services costs |
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| (2,450) |
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| — |
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| (4,648) |
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| — |
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Selling, general, and administrative |
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| (46,165) |
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| (30,944) |
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| (113,597) |
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| (87,512) |
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Acquisition expense |
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| (7,205) |
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| (53) |
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| (8,645) |
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| (466) |
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Equity in income of unconsolidated subsidiaries |
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| 3,716 |
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| — |
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| 7,648 |
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| — |
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Other income (expense) |
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| 1,013 |
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| 385 |
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| 2,274 |
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| 1,403 |
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Income before income tax expense |
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| 15,156 |
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| 19,731 |
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| 50,316 |
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| 51,257 |
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Income tax expense |
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| (5,686) |
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| (6,389) |
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| (17,216) |
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| (16,790) |
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Net income |
| $ | 9,470 |
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| $ | 13,342 |
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| $ | 33,100 |
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| $ | 34,467 |
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Earnings per share: |
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Basic |
| $ | 0.37 |
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| $ | 0.63 |
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| $ | 1.42 |
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| $ | 1.63 |
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Diluted |
| $ | 0.37 |
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| $ | 0.63 |
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| $ | 1.41 |
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| $ | 1.62 |
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Adjusted diluted earnings per share(1) |
| $ | 0.73 |
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| $ | 0.63 |
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| $ | 1.87 |
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| $ | 1.65 |
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Other Operating Information (dollars in thousands): |
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Number of homes delivered |
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| 968 |
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| 706 |
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| 2,329 |
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| 2,013 |
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Average sales price of homes delivered |
| $ | 387.3 |
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| $ | 351.4 |
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| $ | 381.7 |
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| $ | 341.0 |
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Homebuilding gross margin percentage |
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| 17.0 | % |
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| 20.3 | % |
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| 18.2 | % |
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| 19.9 | % |
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1) |
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| 21.0 | % |
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| 22.5 | % |
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| 21.2 | % |
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| 21.8 | % |
Cancellation rate |
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| 24 | % |
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| 22 | % |
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| 19 | % |
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| 19 | % |
Backlog at end of period, number of homes |
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| 1,664 |
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| 992 |
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| 1,664 |
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| 992 |
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Backlog at end of period, aggregate sales value |
| $ | 689,338 |
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| $ | 380,926 |
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| $ | 689,338 |
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| $ | 380,926 |
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Average sales price of homes in backlog |
| $ | 414.3 |
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| $ | 384.0 |
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| $ | 414.3 |
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| $ | 384.0 |
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Net new home contracts |
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| 914 |
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| 628 |
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| 2,892 |
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| 2,291 |
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Selling communities at period end |
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| 107 |
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| 87 |
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| 107 |
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| 87 |
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Average selling communities |
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| 102 |
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| 90 |
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| 92 |
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| 91 |
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Total owned and controlled lot inventory |
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| 31,996 |
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| 17,203 |
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| 31,996 |
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| 17,203 |
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Adjusted EBITDA(1) |
| $ | 32,451 |
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| $ | 26,441 |
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| $ | 83,233 |
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| $ | 68,971 |
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Net debt to net capital(1) |
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| 51.8 | % |
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| 47.6 | % |
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| 51.8 | % |
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| 47.6 | % |
(1) Non-GAAP(2) Homebuilding gross margin percentage is inclusive of a $0 million and $1.7 million inventory impairment for the three and nine months ended September 30, 2020, respectively, included within inventory impairment and other on our consolidated financial measure.statements.
(3) As Century Complete does not sell homes by community, but through studios and online, that segment is excluded from the count of selling communities.
Results of Operations by Operating Segment
(dollars in thousands)
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| New Homes Delivered |
| Average Sales Price of Homes Delivered |
| Home Sales Revenues |
| Income before Income Tax | New Homes Delivered | Average Sales Price of Homes Delivered | Income before Income Tax | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Three Months Ended September 30, |
| Three Months Ended September 30, |
| Three Months Ended September 30, |
| Three Months Ended September 30, | Three Months Ended September 30, | Three Months Ended September 30, | Home Sales Revenues Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
West |
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| 151 |
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| — |
| $ | 488.0 |
| $ | — |
| $ | 73,684 |
| $ | — |
| $ | 5,259 |
| $ | — | 316 | 228 | $ | 596.5 | $ | 512.4 | $ | 188,484 | $ | 116,826 | $ | 13,627 | $ | 9,013 | ||||||||||||||||||||||||||
Mountain |
| 375 |
| 344 |
| $ | 417.3 |
| $ | 408.0 |
| 156,482 |
| 140,356 |
| 19,101 |
| 18,995 | 514 | 390 | $ | 429.3 | $ | 424.8 | 220,680 | 165,666 | 28,695 | 20,552 | ||||||||||||||||||||||||||||||||||||
Texas |
| 90 |
| 64 |
| $ | 397.5 |
| $ | 396.6 |
| 35,772 |
| 25,385 |
| 2,166 |
| (288) | 307 | 247 | $ | 249.0 | $ | 278.4 | 76,440 | 68,753 | 6,904 | 8,290 | ||||||||||||||||||||||||||||||||||||
Southeast |
| 352 |
| 298 |
| $ | 309.7 |
| $ | 276.3 |
| 108,997 |
| 82,334 |
| 6,001 |
| 7,848 | 421 | 341 | $ | 362.7 | $ | 347.8 | 152,683 | 118,584 | 13,414 | 7,079 | ||||||||||||||||||||||||||||||||||||
Century Complete | 725 | 685 | $ | 168.2 | $ | 151.9 | 121,952 | 104,031 | 7,826 | 6,032 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Services |
| — |
| — |
| $ | — |
| $ | — |
| — |
| — |
| 505 |
| — | — | — | $ | — | $ | — | — | — | 17,506 | 2,245 | ||||||||||||||||||||||||||||||||||||
Corporate |
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| — |
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| — |
| $ | — |
| $ | — |
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| — |
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| — |
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| (17,876) |
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| (6,824) | — | — | $ | — | $ | — | — | — | (23,087) | (18,371) | ||||||||||||||||||||||||||||||
Total |
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| 968 |
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| 706 |
| $ | 387.3 |
| $ | 351.4 |
| $ | 374,935 |
| $ | 248,075 |
| $ | 15,156 |
| $ | 19,731 | 2,283 | 1,891 | $ | 333.0 | $ | 303.5 | $ | 760,239 | $ | 573,860 | $ | 64,885 | $ | 34,840 | ||||||||||||||||||||||||||
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| New Homes Delivered |
| Average Sales Price of Homes Delivered |
| Home Sales Revenues |
| Income before Income Tax | New Homes Delivered | Average Sales Price of Homes Delivered | Income before Income Tax | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| Nine Months Ended September 30, |
| Nine Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | Home Sales Revenues Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
West |
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| 151 |
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| — |
| $ | 488.0 |
| $ | — |
| $ | 73,684 |
| $ | — |
| $ | 5,259 |
| $ | — | 862 | 683 | $ | 558.2 | $ | 533.0 | $ | 481,134 | $ | 364,005 | $ | 42,716 | $ | 27,634 | ||||||||||||||||||||||||||
Mountain |
| 1,046 |
| 854 |
| $ | 421.1 |
| $ | 410.7 |
| 440,451 |
| 350,742 |
| 56,137 |
| 47,234 | 1,327 | 1,168 | $ | 415.8 | $ | 430.3 | 551,771 | 502,648 | 67,789 | 62,386 | ||||||||||||||||||||||||||||||||||||
Texas |
| 266 |
| 252 |
| $ | 409.6 |
| $ | 390.0 |
| 108,955 |
| 98,270 |
| 6,407 |
| 2,138 | 951 | 626 | $ | 247.3 | $ | 288.6 | 235,137 | 180,661 | 22,012 | 17,626 | ||||||||||||||||||||||||||||||||||||
Southeast |
| 866 |
| 907 |
| $ | 307.0 |
| $ | 261.7 |
| 265,852 |
| 237,323 |
| 16,609 |
| 21,827 | 1,304 | 1,036 | $ | 351.7 | $ | 343.5 | 458,577 | 355,817 | 33,743 | 17,467 | ||||||||||||||||||||||||||||||||||||
Century Complete | 2,183 | 2,008 | $ | 162.0 | $ | 150.7 | 353,745 | 302,667 | 17,159 | 18,323 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Services |
| — |
| — |
| $ | — |
| $ | — |
| — |
| — |
| (192) |
| — | — | — | $ | — | $ | — | — | — | 30,693 | 5,984 | ||||||||||||||||||||||||||||||||||||
Corporate |
|
| — |
|
| — |
| $ | — |
| $ | — |
|
| — |
|
| — |
|
| (33,904) |
|
| (19,942) | — | — | $ | — | $ | — | — | — | (65,036) | (70,753) | ||||||||||||||||||||||||||||||
Total |
|
| 2,329 |
|
| 2,013 |
| $ | 381.7 |
| $ | 341.0 |
| $ | 888,942 |
| $ | 686,335 |
| $ | 50,316 |
| $ | 51,257 | 6,627 | 5,521 | $ | 313.9 | $ | 309.0 | $ | 2,080,364 | $ | 1,705,798 | $ | 149,076 | $ | 78,667 |
West
In our West segment, for the three and nine months ended September 30, 2017,2020, our income before income tax increased by $5.3$4.6 million and $15.1 million, respectively, to $13.6 million and $42.7 million, respectively, compared to the same periods in both2019. These increases were primarily due to increases in new home deliveries of 38.6% and 26.2%, respectively, compared to the same periods to $5.3 million. We acquiredin 2019, and the entiretybenefit of our operationsnon-recurring land sales in the West operating segment in conjunction with our acquisition of UCP, Inc. as discussed above.current year periods. During the period from August 4, 2017 throughthree and nine months ended September 30, 2017,2020, we delivered 151 new316 homes and 862 homes, respectively, with an average sales price of $488.0$596.5 thousand and $558.2 thousand, respectively, and generated $73.7$188.5 million and $481.1 million, respectively, in home sales revenues in the West. revenue.
Mountain
Mountain
In our Mountain segment, for the three and nine months ended September 30, 2017,2020, our income before income tax increased by $0.1$8.1 million and $8.9$5.4 million, respectively, to $19.1$28.7 million and $56.1$67.8 million, respectively, as compared to $19.0 million and $47.2 million, for the same periods in 2016, respectively. This increase is2019. These increases were primarily related to an increaseincreases in the numbernew home deliveries of homes delivered31.8% and an increase in the average selling price of those homes during the periods, year over year.
Texas
In our Texas segment,13.6%, respectively, for the three and nine months ended September 30, 2017,2020 compared to the same periods in 2019.
Texas
In our Texas segment, for the three months ended September 30, 2020, our income before income tax decreased by $1.4 million to $6.9 million compared to the same period in 2019, and for the nine months ended September 30, 2020 our income before tax increased by $2.5$4.4 million and $4.3to $22.0 million respectively, to $2.2 million and $6.4 million, respectively, as compared to $(0.3) million and $2.1 million,the same period in 2019. The decrease for the same periodsthree month comparison was primarily due to a 10.6% decrease in 2016, respectively. Thisaverage home sales prices as we continued to shift towards first time homebuyers, partially offset by a 24.3% increase isin number of homes delivered. The increase for the nine month comparison was primarily related to ana 51.9% increase in the number of homes delivered and an increaseduring the nine months ended September 30, 2020 as compared to the same period in 2019, which was
partially offset by the decrease in the average selling price of those homessales price. For the nine months ended September 30, 2020, the increase in income before income tax was partially offset by a $0.9 million impairment charge reflected during the periods, year over year. nine months ended September 30, 2020.
Southeast
Southeast
In our Southeast segment, for the three and nine months ended September 30, 2017,2020, our income before income tax decreasedincreased by $1.8$6.3 million and $5.2$16.3 million, respectively, to $6.0$13.4 million and $16.6$33.7 million, respectively, as compared to $7.8$7.1 million and $21.8$17.5 million for the same periods in 2016, respectively. The2019. These increases were primarily related to 23.5% and 25.9% increases in the number of homes delivered during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019.
Century Complete
In our Century Complete segment, for the three and nine months ended September 30, 2020, we delivered 725 homes and 2,183 homes, respectively, with an average price of $168.2 thousand and $162.0 thousand, respectively, and generated $122.0 million and $353.7 million in home sales revenue and average selling price all increased in our Southeast segment year over year. However, as we have recently started operations in North Carolina and Tennessee, our selling,
27
general and administrative expenses have increased in those states when operations commenced, and as such we have net loss in those states driving therevenues, respectively. Our income before income tax for the three and nine months ended September 30, 2020 was $7.8 million and $17.2 million, respectively, as compared to $6.0 million and $18.3 million for the same periods in 2019. The increase in income before income tax for the three month comparison is primarily attributable to a 5.8% increase in new home deliveries in conjunction with a 10.7% increase in average sales price. The decrease year over yearin income before income tax for our Southeast segment.the nine month comparison is primarily attributable to an increase in certain fixed costs and $0.8 million in inventory impairment charges.
Financial Services
Our indirect wholly-ownedwholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and Parkway Title,IHL Home Insurance Agency, LLC, which provide mortgage, title, and titleinsurance services, respectively, to our home buyers, respectively,homebuyers have been identified as our Financial Services operating segment. We began providing mortgage services to our customers during the second quarter of 2017. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. During the three and nine months ended September 30, 2017, we originated and closed 157 loans and 228 loans, respectively, with total principal of $51.02020, income before income tax for our Financial Services segment increased $15.3 million and $73.7$24.7 million, respectively. Asrespectively, to $17.5 million and $30.7 million, respectively, compared to the same periods in 2019. These increases were primarily the result of $21.6 million and $38.8 million overall increases in financial services revenue during the three and nine months ended September 30, 2017, we have 432020, respectively, compared to the same periods in 2019.
The increases in financial services revenue from the prior year periods were directly attributable to increases in the volume of loans sold during the three and nine month periods ended September 30, 2020 as compared to the same period in backlog with total principalthe previous year, of $13.6 million.116% and 97%, respectively. Our Financial Services segment primarily originates mortgages for our homebuyers, and as such, performance correlates to the increase in the number of homes delivered.
The following table presents selected operational data for our Financial Services segment in relation to our loan origination activities (dollars in thousands):
Corporate
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Total originations: | |||||||||||||||
Number of loans | 1,873 | 880 | 4,530 | 2,254 | |||||||||||
Principal | $ | 560,135 | $ | 257,316 | $ | 1,325,461 | $ | 679,541 | |||||||
Average FICO score | 738 | 736 | 738 | 736 | |||||||||||
Loans sold to third parties: | |||||||||||||||
Number of loans sold | 2,000 | 926 | 4,499 | 2,278 | |||||||||||
Principal | $ | 588,592 | $ | 278,327 | $ | 1,317,619 | $ | 688,962 |
Corporate
During the three and nine months ended September 30, 2017,2020, our Corporate segment generated losses of $17.9$23.1 million and $33.9$65.0 million, respectively, as compared to losses of $6.8$18.4 million and $19.9$70.8 million, respectively, for the same periods in 2016, respectively.2019. The increase in expenses duringfor the three months ended September 30, 2017month comparison was primarily attributed to the following: (1) ana $7.3 million increase in acquisition expenses of $7.2 million,salaries and (2) an increase of $4.9 million in ourwages related to higher bonus and stock compensation related expenses, including non-cash expenses for share based payments and an increase in the number of employees after our acquisition of UCP, Inc.,expense, partially offset by net decreases(1) a decrease in legal costs of $0.4 million, (2) a decrease in IT expenses of $0.5
million, and (3) a decrease in other sellingtaxes and general administrative expenses and an increase in equity in income from unconsolidated subsidiaries.licenses of $0.5 million. The increase in expenses during thedecrease for nine months ended September 30, 2017month comparison was primarily attributed to the following: (1) an increaseloss on debt extinguishment of $10.8 million that occurred during the prior year period in acquisition expenses of $8.2 million, (2) an increase of $8.0 millionconjunction with decreases in our compensation related expenses, including non-cash expenses for share based paymentsother taxes and an increase in the number of employees after our acquisition of UCP, Inc., (3) an increase of $2.1 million in information technology related expenses, and (4) an increaselicenses of $0.9 million in legaland travel and entertainment costs of $0.8 million, partially offset by an $8.5 million increase in equity in income from unconsolidated subsidiaries. salaries and wages related to higher bonus and stock compensation expense.
Homebuilding Gross Margin
(dollars in thousands)
Homebuilding gross margin represents home sales revenues less cost of home sales revenues. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three andmonths ended September 30, 2020 to 17.5% as compared to 18.1% for the same period in 2019, which was primarily driven by 0.6% increase in cost of home sales revenues as a percentage of home sales revenues. Our homebuilding gross margin decreased for the nine months ended September 30, 20172020 to 17.0% and 18.2%, respectively, as17.3% compared to 20.3% and 19.9%,17.5% for the same periodsperiod in 2016, respectively. The decrease is primarily driven by higher interest expense in cost of sales as a result of higher average debt balances outstanding in 2017 as compared to 2016, and as a result of the increased costs recognized for home sales related to purchase accounting. 2019.
In the following table, we calculate our homebuilding gross margin, adjusting foras adjusted to exclude inventory impairment and other, interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory.
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| Three Months Ended September 30, | ||||||||||||||||||||||
|
| 2017 |
| % |
| 2016 |
| % | ||||||||||||||||
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| ||||||||||||
Home sales revenues |
| $ | 374,935 |
| 100.0 | % |
| $ | 248,075 |
| 100.0 | % | ||||||||||||
Cost of home sales revenues |
|
| (311,365) |
| (83.0) | % |
|
| (197,650) |
| (79.7) | % | ||||||||||||
Gross margin from home sales |
|
| 63,570 |
| 17.0 | % |
|
| 50,425 |
| 20.3 | % | ||||||||||||
Add: Interest in cost of home sales revenues |
|
| 8,794 |
| 2.3 | % |
|
| 5,192 |
| 2.1 | % | ||||||||||||
Adjusted homebuilding gross margin excluding interest |
|
| 72,364 |
| 19.3 | % |
|
| 55,617 |
| 22.4 | % | ||||||||||||
Add: Purchase price accounting for acquired work in process inventory(1) |
|
| 6,214 |
| 1.7 | % |
|
| 100 |
| 0.0 | % | ||||||||||||
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory |
| $ | 78,578 |
| 21.0 | % |
| $ | 55,717 |
| 22.5 | % | ||||||||||||
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| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||
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| 2017 |
| % |
| 2016 |
| % | 2020 | % | 2019 | % | ||||||||||||
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Home sales revenues |
| $ | 888,942 |
| 100.0 | % |
| $ | 686,335 |
| 100.0 | % | $ | 760,239 | 100.0 | % | $ | 573,860 | 100.0 | % | ||||
Cost of home sales revenues |
|
| (727,577) |
| (81.8) | % |
|
| (549,886) |
| (80.1) | % | (627,364) | (82.5) | % | (469,834) | (81.9) | % | ||||||
Gross margin from home sales |
|
| 161,365 |
| 18.2 | % |
|
| 136,449 |
| 19.9 | % | 132,875 | 17.5 | % | 104,026 | 18.1 | % | ||||||
Add: Interest in cost of home sales revenues |
|
| 20,625 |
| 2.3 | % |
|
| 13,177 |
| 1.9 | % | 19,050 | 2.5 | % | 14,258 | 2.5 | % | ||||||
Adjusted homebuilding gross margin excluding interest |
|
| 181,990 |
| 20.5 | % |
|
| 149,626 |
| 21.8 | % | ||||||||||||
Add: Purchase price accounting for acquired work in process inventory(1) |
|
| 6,331 |
| 0.7 | % |
|
| 318 |
| 0.0 | % | ||||||||||||
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory |
| $ | 188,321 |
| 21.2 | % |
| $ | 149,944 |
| 21.8 | % | ||||||||||||
Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) | 151,925 | 20.0 | % | 118,284 | 20.6 | % | ||||||||||||||||||
Add: Purchase price accounting for acquired work in process inventory | — | — | % | — | — | % | ||||||||||||||||||
Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1) | $ | 151,925 | 20.0 | % | $ | 118,284 | 20.6 | % | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2020 | % | 2019 | % | |||||||||||||||||||||
Home sales revenues | $ | 2,080,364 | 100.0 | % | $ | 1,705,798 | 100.0 | % | ||||||||||||||||
Cost of home sales revenues | (1,718,545) | (82.6) | % | (1,407,519) | (82.5) | % | ||||||||||||||||||
Inventory impairment and other | (1,691) | (0.1) | % | — | — | % | ||||||||||||||||||
Gross margin from home sales | 360,128 | 17.3 | % | 298,279 | 17.5 | % | ||||||||||||||||||
Add: Inventory impairment and other | 1,691 | 0.1 | % | — | — | % | ||||||||||||||||||
Add: Interest in cost of home sales revenues | 51,429 | 2.5 | % | 41,499 | 2.4 | % | ||||||||||||||||||
Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) | 413,248 | 19.9 | % | 339,778 | 19.9 | % | ||||||||||||||||||
Add: Purchase price accounting for acquired work in process inventory | — | — | % | 1,724 | 0.1 | % | ||||||||||||||||||
Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1) | $ | 413,248 | 19.9 | % | $ | 341,502 | 20.0 | % |
(1)This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “—Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure.measure should be used in conjunction with results presented in accordance with GAAP.
For the three and nine months ended September 30, 2017,2020, excluding impairment and other, interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 21.0%20.0% and 21.2%19.9%, respectively, as compared to 22.5%20.6% and 21.8%,20.0% for the same periods in 2016, respectively.2019. We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.
Selling, General and Administrative Expense
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(dollars in thousands) |
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| Three Months Ended September 30, |
| Increase | Three Months Ended September 30, | Increase | ||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| Amount |
| % | 2020 | 2019 | Amount | % | ||||||||||||||||||
Selling, general and administrative |
| $ | (46,165) |
|
| $ | (30,944) |
|
| $ | (15,221) |
|
| 49.2 | % | $ | (85,806) | $ | (72,834) | $ | (12,972) | 17.8 | % | |||||||
As a percentage of homes sales revenue |
| (12.3) | % |
|
| (12.5) | % |
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As a percentage of home sales revenue | 11.3 | % | 12.7 | % | ||||||||||||||||||||||||||
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| Nine Months Ended September 30, |
| Increase | Nine Months Ended September 30, | Increase | ||||||||||||||||||||||||
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| 2017 |
| 2016 |
| Amount |
| % | 2020 | 2019 | Amount | % | ||||||||||||||||||
Selling, general and administrative |
| $ | (113,597) |
|
| $ | (87,512) |
|
| $ | (26,085) |
|
| 29.8 | % | $ | (246,131) | $ | (216,987) | $ | (29,144) | 13.4 | % | |||||||
As a percentage of homes sales revenue |
| (12.8) | % |
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| (12.8) | % |
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| 11.8 | % | 12.7 | % |
Our selling, general and administrative costsexpense increased $15.2$13.0 million and $29.1 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase for the three months ended September 30, 2017 as compared to the same period in 2016. The increase2020 was primarily attributable to the following: (1) an increase of $3.4$6.0 million in commission expense resulting from a 51%due to the 32.5% increase in home sales revenues, and (2) an increase of $8.1$7.7 million in our compensation-related expenses, including incentive compensation associated withestimate of bonuses for 2020 as a result of our acquisition of UCP, Inc. (3) anthird quarter 2020 results. The increase of $1.6 million in advertising expenses, and (4) a net increase of $2.0 million related to individually insignificant changes in other corporate expenses, including rent, information technology, insurance and legal.
Our selling, general and administrative costs increased $26.1 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase2020 was primarily attributable to the following: (1) an increase of $5.7$16.5 million in commission expense
29
resulting from a 30% due to the 22.0% increase in home sales revenues, (2) an increase of $13.5$8.8 million in our compensation-related expenses, including incentive compensation associated withestimate of bonuses for 2020 as a result of our acquisition of UCP, Inc.year to date results, and (3) an increase of $1.6$3.0 million in advertising expenses, (4) an increaseour stock-based compensation expense.
Income Tax Expense
At the end of $1.0 million in information technology related costs, (5) an increase of $1.3 million in rent, insurance and office related costs, (6) an increase of $0.5 million in legal costs and (7) a net increase of $2.4 million relatedeach interim period we are required to individually insignificant changes in other corporate expenses.
Other Income (Expense)
For the three and nine months ended September 30, 2017, other income (expense) increased to $1.0 million and $2.3 million, respectively, from $0.4 million and $1.4 million,estimate our annual effective tax rate for the same periods in 2016, respectively. The increases were relatedfiscal year, and to increases in interest and otheruse that rate to provide for income partially offset by decreases in gain (loss) on disposition of assets.
Equity in Income from Unconsolidated Subsidiaries
As of September 30, 2017, our investment in WJH was $20.7 million and we recognized $3.7 million and $7.6 million of equity in income of unconsolidated subsidiaries duringtaxes for the three and nine months ended September 30, 2017, respectively. During the three and nine months ended September 30, 2017, we received operating distributions from WJH of $1.4 million and $5.2 million, respectively.
Income Tax Expense
current year-to-date reporting period. Our 20172020 estimated annual effective tax rate of 36.3%23.4% is driven by our blended federal and state statutory rate of 37.8%25.1%, and certain other permanent differences between GAAP and tax which is partially offset by net estimated benefits of 1.5% primarily from additional deductions for tax related to domestic production activities which benefited our rate by 3.2%. This benefit was partially offset by non-deductible acquisition costs associated with our acquisition of UCP, Inc., along with other items which increaseddecreased our rate by 1.7%. Our estimated annual rate of 36.3% was also benefited by discrete items for excess tax benefits related to share based awards that vested during
For the nine months ended September 30, 2017, resulting in a total tax2020, our estimated annual rate of 34.2%. 23.4% was impacted by discrete items which had a net impact of decreasing our rate by 0.1%, including excess tax benefits for vested stock-based compensation.
For the three months ended September 30, 20172020 and 2016,2019, we recorded income tax expense of $5.7$15.1 million and $6.4$7.8 million, respectively. For the nine months ended September 30, 20172020 and 2016,2019, we recorded income tax expense of $17.2$34.7 million and $16.8$19.0 million, respectivelyrespectively.
Segment Assets
(Dollars in thousands)
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| September 30, |
| December 31, |
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| Increase (Decrease) | September 30, | December 31, | Increase (Decrease) | ||||||||||||||
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| 2017 |
| 2016 |
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| Amount |
| Change | 2020 | 2019 | Amount | Change | |||||||||||
West |
| $ | 302,816 |
| $ | — |
| $ | 302,816 |
| NM |
| $ | 542,622 | $ | 610,248 | $ | (67,626) | (11.1) | % | ||||
Mountain |
|
| 571,124 |
|
| 541,657 |
|
| 29,467 |
| 5.4 | % | 708,076 | 635,201 | 72,875 | 11.5 | % | |||||||
Texas |
|
| 186,840 |
|
| 138,392 |
|
| 48,448 |
| 35.0 | % | 202,177 | 232,887 | (30,710) | (13.2) | % | |||||||
Southeast |
|
| 394,918 |
|
| 262,448 |
|
| 132,470 |
| 50.5 | % | 360,424 | 441,818 | (81,394) | (18.4) | % | |||||||
Century Complete | 170,126 | 244,827 | (74,701) | (30.5) | % | |||||||||||||||||||
Financial Services |
|
| 38,010 |
|
| — |
|
| 38,010 |
| NM |
| 299,887 | 254,282 | 45,605 | 17.9 | % | |||||||
Corporate |
|
| 137,300 |
|
| 65,031 |
|
| 72,269 |
| 111.1 | % | 308,049 | 80,704 | 227,345 | 281.7 | % | |||||||
Total assets |
| $ | 1,631,008 |
| $ | 1,007,528 |
| $ | 623,480 |
| 61.9 | % | $ | 2,591,361 | $ | 2,499,967 | $ | 91,394 | 3.7 | % |
Total assets increased by $91.4 million, or 3.7%, to $2.6 billion at September 30, 2020 as compared to December 31, 2019. The increase is driven by a 281.7% increase in corporate assets related to excess cash generated partially offset by a decrease in inventories across our markets, which are both attributable to our record home sales during the current year period.
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Lots owned and |
| September 30, 2017 |
| December 31, 2016 |
| % Change |
| September 30, 2020 | December 31, 2019 | % Change | ||||||||||||||||||||||||||||||||
controlled |
| Owned |
| Controlled |
| Total |
| Owned |
| Controlled |
| Total |
| Owned |
| Controlled |
| Total | Owned | Controlled | Total | Owned | Controlled | Total | Owned | Controlled | Total | |||||||||||||||
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West |
| 3,542 |
| 2,630 |
| 6,172 |
| — |
| — |
| — |
| NM |
|
| NM |
|
| NM |
| 3,299 | 2,287 | 5,586 | 3,133 | 1,413 | 4,546 | 5.3 | % | 61.9 | % | 22.9 | % | |||||||||
Mountain |
| 4,291 |
| 5,068 |
| 9,359 |
| 4,354 |
| 2,959 |
| 7,313 |
| (1.4) | % |
| 71.3 | % |
| 28.0 | % | 6,762 | 6,295 | 13,057 | 4,771 | 7,949 | 12,720 | 41.7 | % | (20.8) | % | 2.6 | % | |||||||||
Texas |
| 2,223 |
| 4,795 |
| 7,018 |
| 1,356 |
| 3,420 |
| 4,776 |
| 63.9 | % |
| 40.2 | % |
| 46.9 | % | 3,308 | 4,094 | 7,402 | 3,326 | 2,278 | 5,604 | (0.5) | % | 79.7 | % | 32.1 | % | |||||||||
Southeast |
| 4,790 |
| 4,657 |
| 9,447 |
| 2,953 |
| 3,254 |
| 6,207 |
| 62.2 | % |
| 43.1 | % |
| 52.2 | % | 3,571 | 5,046 | 8,617 | 4,160 | 3,827 | 7,987 | (14.2) | % | 31.9 | % | 7.9 | % | |||||||||
Century Complete | 3,027 | 7,274 | 10,301 | 3,324 | 4,761 | 8,085 | (8.9) | % | 52.8 | % | 27.4 | % | ||||||||||||||||||||||||||||||
Total |
| 14,846 |
| 17,150 |
| 31,996 |
| 8,663 |
| 9,633 |
| 18,296 |
| 71.4 | % |
| 78.0 | % |
| 74.9 | % | 19,967 | 24,996 | 44,963 | 18,714 | 20,228 | 38,942 | 6.7 | % | 23.6 | % | 15.5 | % |
NM – Not Meaningful
Of our total lots owned and controlled as of September 30, 2017, 46.4%2020, 44.4% were owned and 53.6%55.6% were controlled, as compared to 47.3%48.1% owned and 52.7%51.9% controlled as of December 31, 2016.2019.
Total assets increased by $623.5 million, or 61.9%, to $1.6 billion at September 30, 2017. The increase is related to the increase in assets from our acquisition of UCP, Inc., from increased cash balances from our debt offerings completed during 2017, as well as the increased investments in most of our operating segments.
30
Other Homebuilding Operating Data
Three Months Ended | Nine Months Ended | |||||||||||||||||
Net new home contracts | September 30, | Increase | September 30, | Increase (Decrease) | ||||||||||||||
2020 | 2019 | Amount | % Change | 2020 | 2019 | Amount | % Change | |||||||||||
West | 470 | 235 | 235 | 100.0 | % | 1,195 | 767 | 428 | 55.8 | % | ||||||||
Mountain | 653 | 419 | 234 | 55.8 | % | 1,741 | 1,290 | 451 | 35.0 | % | ||||||||
Texas | 411 | 260 | 151 | 58.1 | % | 1,135 | 733 | 402 | 54.8 | % | ||||||||
Southeast | 660 | 494 | 166 | 33.6 | % | 1,742 | 1,250 | 492 | 39.4 | % | ||||||||
Century Complete | 1,010 | 638 | 372 | 58.3 | % | 2,443 | 2,046 | 397 | 19.4 | % | ||||||||
Total | 3,204 | 2,046 | 1,158 | 56.6 | % | 8,256 | 6,086 | 2,170 | 35.7 | % |
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Net new home contracts |
| September 30, |
| Increase |
| September 30, |
| Increase | ||||||||||
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| 2017 |
| 2016 |
| Amount |
| % Change |
| 2017 |
| 2016 |
| Amount |
| % Change | ||
West |
| 114 |
| — |
| 114 |
| NM |
|
| 114 |
| — |
| 114 |
| NM |
|
Mountain |
| 373 |
| 266 |
| 107 |
| 40.2 | % |
| 1,290 |
| 984 |
| 306 |
| 31.1 | % |
Texas |
| 133 |
| 81 |
| 52 |
| 64.2 | % |
| 360 |
| 271 |
| 89 |
| 32.8 | % |
Southeast |
| 294 |
| 281 |
| 13 |
| 4.6 | % |
| 1,128 |
| 1,036 |
| 92 |
| 8.9 | % |
Total |
| 914 |
| 628 |
| 286 |
| 45.5 | % |
| 2,892 |
| 2,291 |
| 601 |
| 26.2 | % |
NM – Not Meaningful
Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 20172020 increased by 2861,158 homes, or 45.5%56.6%, to 914,3,204, compared to 6282,046 for the same period in 2016.2019. Net new home contracts for the nine months ended September 30, 20172020 increased by 6012,170 homes, or 26.2%35.7%, to 2,892,8,256, compared to 2,2916,086 for the same period in 2016.2019. The increaseincreases in our net new home contracts waswere primarily driven by stronger sales across all of our acquisition of UCP, Inc.segments as well as overallthe homebuilding industry continued to experience positive trends. Since market conditions in the markets in which we operate.and future impacts from COVID-19 remain uncertain, it is difficult to predict our future net new home contracts.
Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and nine months ended September 30, 2017 and 20162020 by segment are included in the tabletables below:
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| Three Months Ended September 30, |
| Increase | Three Months Ended September 30, | Increase (Decrease) | ||||||||||||
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| 2017 |
| 2016 |
| Amount |
| % Change | 2020 | 2019 | Amount | % Change | ||||||
West |
| 5.2 |
| - |
| 5.2 |
| NM |
| 8.7 | 3.7 | 5.0 | 135.1 | % | ||||
Mountain |
| 3.8 |
| 2.3 |
| 1.5 |
| 65.2 | % | 5.6 | 3.0 | 2.6 | 86.7 | % | ||||
Texas |
| 1.8 |
| 1.1 |
| 0.7 |
| 63.6 | % | 7.6 | 4.6 | 3.0 | 65.2 | % | ||||
Southeast |
| 2.6 |
| 3.2 |
| (0.6) |
| (18.8) | % | 6.3 | 3.8 | 2.5 | 65.8 | % | ||||
Century Complete | N/A | N/A | N/A | N/A | ||||||||||||||
Total |
| 3.2 |
| 2.3 |
| 0.9 |
| 39.1 | % | 6.6 | 3.6 | 3.0 | 83.3 | % | ||||
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| Nine Months Ended September 30, |
| Increase | Nine Months Ended September 30, | Increase | ||||||||||||
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| 2017 |
| 2016 |
| Amount |
| % Change | 2020 | 2019 | Amount | % Change | ||||||
West |
| 5.2 |
| - |
| 5.2 |
| NM |
| 7.4 | 4.1 | 3.3 | 80.5 | % | ||||
Mountain |
| 4.3 |
| 4.1 |
| 0.2 |
| 4.9 | % | 5.0 | 3.1 | 1.9 | 61.3 | % | ||||
Texas |
| 1.8 |
| 1.7 |
| 0.1 |
| 5.9 | % | 7.0 | 4.3 | 2.7 | 62.8 | % | ||||
Southeast |
| 3.6 |
| 3.9 |
| (0.3) |
| (7.7) | % | 5.5 | 3.2 | 2.3 | 71.9 | % | ||||
Century Complete | N/A | N/A | N/A | N/A | ||||||||||||||
Total |
| 3.5 |
| 3.6 |
| (0.1) |
| (2.8) | % | 5.9 | 3.5 | 2.4 | 68.6 | % |
During the three and nine months ended September 30, 2017,2020, our absorption rates increased by 83.3% and 68.6%, respectively, to 6.6 and 5.9 per month, respectively, as compared to 2.3 per month and 3.6 per month for the same periods in 2016, respectively. The increase in absorption rate is2019. These increases are attributable to historically low interest rates and strong demand for new homes during current year periods, in particular during the strong homebuilding environment as a result of positive economic trends across our markets. three months ended September 30, 2020.
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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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| 2017 |
| 2016 |
| Amount |
| % Change | 2020 | 2019 | Amount | % Change | ||||||||
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West |
| 10 |
| — |
| 10 |
| NM |
| 18 | 21 | (3) | (14.3) | % | ||||||
Mountain |
| 33 |
| 35 |
| (2) |
| (5.7) | % | 39 | 46 | (7) | (15.2) | % | ||||||
Texas |
| 24 |
| 23 |
| 1 |
| 4.3 | % | 18 | 19 | (1) | (5.3) | % | ||||||
Southeast |
| 40 |
| 29 |
| 11 |
| 37.9 | % | 35 | 43 | (8) | (18.6) | % | ||||||
Century Complete | N/A | N/A | N/A | N/A | ||||||||||||||||
Total |
| 107 |
| 87 |
| 20 |
| 23.0 | % | 110 | 129 | (19) | (14.7) | % |
NMN/A – Not MeaningfulApplicable
Our selling communities increaseddecreased to 107110 communities at September 30, 20172020 as compared to 87 communities129 at September 30, 2016. The increase is attributable to our acquisition of UCP, Inc. 2019. As Century Complete does not sell homes by community, but through studios and online, there are no communities or absorptions presented for that segment.
Backlog
(Dollars in thousands)
As of September 30, | |||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||
Homes | Dollar Value | Average Sales Price | Homes | Dollar Value | Average Sales Price | Homes | Dollar Value | Average Sales Price | |||||||||||||||||
West | 535 | $ | 291,905 | $ | 545.6 | 302 | $ | 153,626 | $ | 508.7 | 77.2 | % | 90.0 | % | 7.3 | % | |||||||||
Mountain | 787 | 348,908 | 443.3 | 523 | 230,203 | 440.2 | 50.5 | % | 51.6 | % | 0.7 | % | |||||||||||||
Texas | 459 | 141,044 | 307.3 | 288 | 79,536 | 276.2 | 59.4 | % | 77.3 | % | 11.3 | % | |||||||||||||
Southeast | 951 | 346,323 | 364.2 | 684 | 243,712 | 356.3 | 39.0 | % | 42.1 | % | 2.2 | % | |||||||||||||
Century Complete | 967 | 181,269 | 187.5 | 949 | 147,779 | 155.7 | 1.9 | % | 22.7 | % | 20.4 | % | |||||||||||||
Total / Weighted Average | 3,699 | $ | 1,309,449 | $ | 354.0 | 2,746 | $ | 854,856 | $ | 311.3 | 34.7 | % | 53.2 | % | 13.7 | % |
31
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| As of September 30, | |||||||||||||||||||||||
Backlog |
| 2017 |
| 2016 |
| % Change |
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| Homes |
| Dollar Value |
| Average Sales Price |
| Homes |
| Dollar Value |
| Average Sales Price |
| Homes |
| Dollar Value |
| Average Sales Price | |||||||
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West |
| 290 |
| $ | 161,013 |
| $ | 555.2 |
| — |
| $ | — |
| $ | — |
| NM |
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| NM |
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| NM |
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Mountain |
| 573 |
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| 247,876 |
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| 432.6 |
| 421 |
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| 183,605 |
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| 436.1 |
| 36.1 | % |
| 35.0 | % |
| (0.8) | % |
Texas |
| 245 |
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| 101,125 |
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| 412.8 |
| 159 |
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| 74,098 |
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| 466.0 |
| 54.1 | % |
| 36.5 | % |
| (11.4) | % |
Southeast |
| 556 |
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| 179,324 |
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| 322.5 |
| 412 |
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| 123,224 |
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| 299.1 |
| 35.0 | % |
| 45.5 | % |
| 7.8 | % |
Total / Weighted Average |
| 1,664 |
| $ | 689,338 |
| $ | 414.3 |
| 992 |
| $ | 380,927 |
| $ | 384.0 |
| 67.7 | % |
| 81.0 | % |
| 7.9 | % |
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, 2017,2020, we had 1,6643,699 homes in backlog with a total value of $689.4$1,309.4 million, which represents an increase of 67.7%34.7% and 81.0%53.2%, respectively, as compared to September 30, 2016.2019. The increase in backlog and backlogdollar value is primarily attributable to the increases in backlog units and a 13.7% increase in the backlog average sales price.
Supplemental Guarantor Information
Our 5.875% senior notes due 2025 and 6.750% senior notes due 2027 (which we collectively refer to as our acquisition“Senior Notes”) are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of UCP,our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as “Guarantors”). Our subsidiaries associated with our financial services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the 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. As of September 30, 2020, Century Communities, Inc. had outstanding $900.0 million in total principal amount of Senior Notes.
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 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.
If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes. This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee. On the basis of historical financial information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
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.
On March 2, 2020, the SEC adopted amendments to Rules 3-10 and 3-16 of Regulation S-X, under Rule Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (“Rule 33-10762”), that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities (which we previously included within the notes to our financial statements in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q). The amendments under Rule 33-10762 are effective January 4, 2021, but voluntary compliance is permitted in advance of the effective date. We adopted the new disclosure requirements permitted under Rule 33-10762, beginning with the three and six month period ending June 30, 2020.
The following summarized financial information is presented for Century Communities, Inc. and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc. and the Guarantor Subsidiaries, as well as the increasetheir investment in, the demand for new homesand equity in the communities in which we have historically operated. The increase in average sales priceearnings from Non-Guarantor Subsidiaries.
Century Communities, Inc. and Guarantor Subsidiaries
Summarized Balance Sheet Data (in thousands) | September 30, 2020 | December 31, 2019 | ||||
Assets | ||||||
Cash and cash equivalents | $ | 222,230 | $ | 1,577 | ||
Cash held in escrow | 26,275 | 35,308 | ||||
Accounts receivable | 26,763 | 27,690 | ||||
Inventories | 1,872,337 | 1,995,549 | ||||
Prepaid expenses and other assets | 88,756 | 110,860 | ||||
Property and equipment, net | 30,557 | 34,870 | ||||
Deferred tax assets, net | 12,775 | 10,589 | ||||
Goodwill | 30,395 | 30,395 | ||||
Total assets | $ | 2,310,088 | $ | 2,246,838 | ||
Liabilities and stockholders’ equity | ||||||
Liabilities: | ||||||
Accounts payable | $ | 47,687 | $ | 83,840 | ||
Accrued expenses and other liabilities | 274,819 | 201,617 | ||||
Intercompany loan payable | 17,600 | — | ||||
Notes payable | 895,867 | 896,704 | ||||
Revolving line of credit | — | 68,700 | ||||
Total liabilities | 1,235,973 | 1,250,861 | ||||
Stockholders’ equity: | 1,074,115 | 995,977 | ||||
Total liabilities and stockholders’ equity | $ | 2,310,088 | $ | 2,246,838 |
Summarized Statement of Operations Data (in thousands) | Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 | |||||
Total homebuilding revenues | 2,105,880 | 2,492,649 | |||||
Total homebuilding cost of revenues | (1,737,142) | (2,048,371) | |||||
Selling, general and administrative | (246,131) | (301,525) | |||||
Loss on debt extinguishment | — | (10,832) | |||||
Inventory impairment and other | (1,691) | (4,783) | |||||
Other income (expense) | (3,113) | (5,353) | |||||
Income before income tax expense | 117,803 | 121,785 | |||||
Income tax expense | (27,449) | (16,929) | |||||
Net income | 90,354 | 104,856 |
Supplemental Pro Forma Information
To aid readers with 2017 over 2016 comparability for the entire merged business, we are also including limited supplemental pro forma information below.
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| Three Months Ended September 30, | ||||||||||||||||||
(dollars in thousands) |
| 2017 |
| 2016 | ||||||||||||||||
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| Pro Forma Home sales revenues |
| Pro Forma Net new home contracts |
| Pro Forma Deliveries |
| Pro Forma Average sales price |
| Pro Forma Home sales revenues |
| Pro Forma Net new home contracts |
| Pro Forma Deliveries |
| Pro Forma Average sales price | ||||
West |
| $ | 106,547 |
| 150 |
| 201 |
| $ | 530.1 |
| $ | 79,500 |
| 161 |
| 155 |
| $ | 512.9 |
Mountain |
|
| 156,482 |
| 373 |
| 375 |
| $ | 417.3 |
|
| 140,356 |
| 266 |
| 344 |
| $ | 408.0 |
Texas |
|
| 35,772 |
| 133 |
| 90 |
| $ | 397.5 |
|
| 25,385 |
| 81 |
| 64 |
| $ | 396.6 |
Southeast |
|
| 115,596 |
| 309 |
| 370 |
| $ | 312.4 |
|
| 92,674 |
| 367 |
| 342 |
| $ | 271.0 |
Total |
| $ | 414,397 |
| 965 |
| 1,036 |
| $ | 400.0 |
| $ | 337,915 |
| 875 |
| 905 | - | $ | 373.4 |
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| Nine Months Ended September 30, | ||||||||||||||||||
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| 2017 |
| 2016 | ||||||||||||||||
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| Pro Forma Home sales revenues |
| Pro Forma Net new home contracts |
| Pro Forma Deliveries |
| Pro Forma Average sales price |
| Pro Forma Home sales revenues |
| Pro Forma Net new home contracts |
| Pro Forma Deliveries |
| Pro Forma Average sales price | ||||
West |
| $ | 279,315 |
| 587 |
| 560 |
| $ | 498.8 |
| $ | 204,273 |
| 502 |
| 413 |
| $ | 494.6 |
Mountain |
|
| 440,451 |
| 1403 |
| 1046 |
| $ | 421.1 |
|
| 350,742 |
| 984 |
| 854 |
| $ | 410.7 |
Texas |
|
| 108,955 |
| 360 |
| 266 |
| $ | 409.6 |
|
| 98,270 |
| 271 |
| 252 |
| $ | 390.0 |
Southeast |
|
| 306,938 |
| 1128 |
| 1010 |
| $ | 303.9 |
|
| 272,530 |
| 1235 |
| 1057 |
| $ | 257.8 |
Total |
| $ | 1,135,659 |
| 3,478 |
| 2,882 |
| $ | 394.1 |
| $ | 925,815 |
| 2,992 |
| 2,576 |
| $ | 359.4 |
Critical Accounting Policies
Critical accounting estimates are those that we believe are both significant and that 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, 2016,2019, filed with the SEC on February 15, 2017,7, 2020, in the section entitled “Management’s Discussion and Analysis of Financial Condition
32
and Results of Operations—SignificantCritical Accounting Policies.” We have had no significant changes in our critical accounting policies from those described therein, other than those related to our Mortgage loans held for sale, as discussed in “Note 1. Basis of Presentation.”
Liquidity and Capital Resources
Overview
Our principal uses of capital for the three and nine months ended September 30, 20172020 were the acquisition of UCP, Inc.,our land purchases, land development, home construction, and the payment of routine liabilities. We useduse funds generated by operations, bond offerings, and available borrowings under our Credit Agreementrevolving line of credit, and from time to meettime proceeds from sales of our short-termcommon stock, including under our current at-the-market facility, and debt securities to fund our short term working capital requirements.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 statementstatements 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,
In response to the COVID-19 pandemic, we took certain measures to ensure we are currently actively acquiringpositioned with cash flow and developing lotsliquidity to endure an extended period of lower demand for our homes, should it arise. Specifically commencing in mid-March of 2020, we slowed our marketsland development activities and instituted a variety of actions designed to maintainreduce our operating expenses, including a reduction in the size of our workforce through a targeted layoff in April 2020. In addition, given the uncertainty surrounding the COVID-19 pandemic, we initially increased our borrowings under our revolving line of credit during the end of the first quarter of 2020 and grow our lot supply and active selling communities. As we continueinto the beginning of the second quarter of 2020 as a proactive measure in order to expand our business,financial flexibility at that time. We repaid these borrowings during the second quarter of 2020 in light of our second quarter 2020 operating results and to decrease our interest expense. As of September 30, 2020, we expectcontinued to have no amounts outstanding under our revolving line of credit.
We increased our land acquisition and development activities during the third quarter, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020
Our Financial Services operations use funds generated from operations and availability under our mortgage repurchase facilities to finance 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 registered transactions from time to time and as needed as part of our ongoing financing strategy and subject to market conditions. In November 2019, we filed a prospectus supplement to offer up to $100.0 million under the shelf registration statement under our at-the-market facility described below.
We believe that we will be able to fund our current and foreseeable liquidity needs with our cash outlays for land purchaseson hand, cash generated from operations, and land developmentcash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic, its impact on the macro-economy, and market conditions at the time. While the impact of the COVID-19 pandemic will continue to evolve, we believe we are well positioned from a cash and liquidity standpoint to not only operate in an uncertain environment, but also continue to grow our lot inventory could exceed our cash generated by operations. with the market, pay down debt and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.
Covenant ComplianceRevolving Line of Credit
On October 21, 2014, we entered into a credit agreement
We 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 and certain of our subsidiaries (which as modified as described below, we refer to as the “Credit “Amended and Restated Credit
Agreement”). The Credit Agreement, which, as amended most recently on December 13, 2019, provides the Companyus with a revolving line of credit (which, as modified as described below, we refer to as the “Revolving Credit Facility”) of up to $120 million. Under the terms of the Credit Agreement, we are entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 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 Credit Agreement, subject to the approval of the Administrative Agent$640.0 million, and L/C Issuer. The Credit Agreement includes a letter of credit sublimit of $20 million. Theunless terminated earlier, will mature on April 30, 2023. Our obligations under the RevolvingAmended and Restated Credit FacilityAgreement are guaranteed by certain of our subsidiaries.
On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, The Amended and our subsidiary guarantors party thereto, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and (iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.
On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.
On August 19, 2016, we entered into a Third Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Third Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $300 million to $380 million, (ii) admitted Citibank, N.A. and Flagstar Bank, FSB as new lenders under the Revolving Credit Facility, (iii) increased certain lenders’ respective commitments to the Revolving Credit Facility, and (iv) extended the term of the Revolving Credit Facility by one year to mature in October 2019.
On February 24, 2017, we entered into a Commitment Increase Agreement with Texas Capital Bank, National Association, as Administrative Agent, Flagstar Bank, FSB (which we refer to as “Flagstar”), and our subsidiary guarantors party thereto. The Commitment Increase Agreement supplements the Credit Agreement, and (i) increased the Credit Facility from $380 million to $400
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million through our exercise of the remaining $20 million of the accordion feature of the Credit Agreement, and (ii) increased Flagstar’s commitment to the Credit Facility.
TheRestated Credit Agreement contains customary affirmative and negative covenants (including limitations on the Company’sour ability to grant liens, incur additional debt, pay dividends, redeem itsour common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. TheThese covenants are measured as defined in the Amended and Restated Credit Agreement also requires the Company to maintain (i) a leverage ratio of not more than 1.75 to 1.0 as of the last day of any fiscal quarter, based upon the ratio of debt to tangible net worth of the Company and its subsidiaries on a consolidated basis, (ii) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon the ratio of EBITDA to cash interest expense of the Company and its subsidiaries on a consolidated basis, (iii) a consolidated tangible net worth of not less than the sum of $250 million, plus 50% of the net proceeds of any issuances of equity interests of the Company and the guarantors of the Revolving Credit Facility, plus 50% of the amount of consolidated net income of the Company and its subsidiaries, (iv) liquidity of not less than $25 million, and (v) a risk asset ratio of not more than 1.25 to 1.0, based upon the ratio of the book value of all risk assets owned by the Company and its subsidiaries on a consolidated basisare reported to the Company’s tangible net worth.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.
As of September 30, 2017,2020, we had no amounts outstanding under the credit facility and were in compliance with all covenants under the Credit Agreement.covenants.
ATM Program
Mortgage Repurchase Facilities – Financial Services
On November 7, 2016, weMay 4, 2018, September 14, 2018, and August 1, 2019, Inspire entered into a Distribution Agreementmortgage warehouse facilities, with Comerica Bank, J.P. Morgan, and Wells Fargo, respectively. The mortgage warehouse lines of credit (which we refer to as the “Distribution Agreement”“repurchase facilities”) provide Inspire 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 Distribution Agreement, we are authorized to offer and sell shares of our common stock having an aggregate offering priceuncommitted repurchase facilities of up to $50.0 million from time to time through any of our 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, pursuant to which we may offer and sell from time to time up to $100.0 million in “at the market” offerings. During the three months ended September 30, 2017, we sold and issued an aggregate of 0.4$275 million, shares of our common stock under the Distribution Agreement, which provided net proceeds of $8.9 million, and, in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million. During the three months ended September 30, 2017, we sold and issued an aggregate of 47.4 thousand shares of our common stock under the Second Distribution Agreement, which provided net proceeds of $1.1 million, and, in connection with such sales, paid total commissions and fees to the Sales Agents of $23.5 thousand.
Mortgage Repurchase Facility – Financial Services
On April 10, 2017, Inspire Home Loans Inc. (which we refer to as “Inspire”), an indirect wholly-owned subsidiary of the Company, entered into a Master Repurchase Agreement (which we refer to as the “Master Repurchase Agreement”) with Branch Banking and Trust Company, as the buyer thereunder (which we refer to as the “Buyer”). The Master Repurchase Agreement provides Inspire with a revolving mortgage loan repurchase facility of up to $25 million (which we refer to as the “Repurchase Facility”). The primary purpose of the Repurchase Facility is to provide financing and liquidity to Inspire by facilitating purchase transactions in which Inspire transfers eligible loans to the Buyer, against the transfer of fundssecured by the Buyer, subject to a simultaneous agreement by the Seller to repurchase from the Buyer such eligiblemortgage loans (i) upon written notice to the Buyer by Inspire, (ii) on a prescribed date in the future, (iii) upon the occurrence of prescribed events, or (iv) on the Termination Date (as defined below). The purchase transactions are based on and subject to the terms and conditions set forth in the Master Repurchase Agreement. The maximum aggregate amount of the Buyer’s commitment to fund purchase transactions under the Repurchase Facility is $25 million (which we refer to as the “Commitment”), subject to certain sublimits. The Repurchase Facility and the Buyer’s Commitment thereunder expires on the earlier of (i) April 9, 2018, and (ii) the date when the Buyer’s Commitment is terminated pursuant to the Master Repurchase Agreement or by operation of law (which we refer to as the “Termination Date”).
On September 15, 2017, Inspire entered into a second Master Repurchase Facility (which we refer to as the “Second Master Repurchase Agreement”) with J.P. Morgan Chase Bank, N.A. as the buyerfinanced thereunder. The Second Master Repurchase Agreement provides Inspire with a revolving mortgage loan repurchase facility of up to $35 million (which we refer to as the “Second Repurchase Facility”). The purpose of the Second Repurchase Facility is similar to the purpose outlined above for the Repurchase Facility. Amounts outstanding under the Repurchase Facility and Second Repurchase Facilityrepurchase facilities are not guaranteed by us or any of our subsidiaries. Each ofsubsidiaries and the Master Repurchase Agreement and Second Master Repurchase Agreement containsagreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2017,2020, we had $173.4 million outstanding under these repurchase facilities and were in compliance with all covenants under eachthereunder.
During the three and nine months ended September 30, 2020, we incurred interest expense on the repurchase facilities of $0.8 million and $2.0 million, respectively. During the same periods in 2019, we incurred interest expense on the repurchase facilities of $0.6 million and $2.1 million, respectively. Interest expense on mortgage repurchase facilities is included in financial services costs on our condensed consolidated statements of operations.
At-the-Market Offerings
On November 27, 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc. (which we refer to as 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 Master Repurchasesales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement. This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, had all $100 million available for sale as of September 30, 2020. We did not sell or issue any shares of our common stock during the Second Repurchase Agreement.three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million and 0.9 million, respectively, shares of our common stock under the previous distribution agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total commissions and fees to the sales agents of $0.6 million and $0.7 million, 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.
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, 2017, there was an aggregate2020, and December 31, 2019, we had $360.1
million and $344.1 million, respectively, in letters of $27.5 millioncredit 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, 2020 and December 31, 2019 (in thousands):
September 30, | December 31, | |||||
2020 | 2019 | |||||
6.750% senior notes, due May 2027(1) | $ | 494,736 | $ | 494,307 | ||
5.875% senior notes, due July 2025(1) | 396,644 | 396,120 | ||||
Other financing obligations | 4,487 | 6,277 | ||||
Notes payable | 895,867 | 896,704 | ||||
Revolving line of credit, due April 2023 | — | 68,700 | ||||
Mortgage repurchase facilities | 173,415 | 174,095 | ||||
Total debt | $ | 1,069,282 | $ | 1,139,499 |
(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 11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 7, 2020. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may or may not be material during any particular reporting period.
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 Master Repurchase Agreementstock repurchase program will be determined by management at its discretion and Second Master Repurchase Agreement, which is presented as Mortgage Repurchase Facility inwill depend on a number of factors, including the market price of our Condensed Consolidated Balance Sheets. The amount outstandingcommon 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 Master Repurchase AgreementSecurities 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. The stock repurchase program has no expiration date and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the Second Master Repurchase Agreement was collateralized by $30.1program will be cancelled and returned to the status of authorized but unissued shares of common stock.
During the three and nine months ended September 30, 2020, we did not repurchase any shares of common stock. During the three months ended September 30, 2019, we did not repurchase any shares of common stock while during the nine months ended September 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $1.4 million. The maximum number of mortgage loans held for sale.shares available to be purchased under the stock repurchase program as of September 30, 2020 is 3,812,939.
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Cash Flows—Nine Monthsmonths Ended September 30, 20172020 Compared to the Nine Monthsmonths Ended September 30, 20162019
For the nine months ended September 30, 20172020 and 2016,2019, 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, 2020 and 2019, we generated $315.8 million and used $149.0 million in cash from operations, respectively. The increase in cash provided by operations is primarily a result of a $54.7 million increase in |
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net income and comparatively favorable changes in assets and liabilities for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.
Net cash used in investing activities decreased to $6.6 million during the nine months ended September 30, 2020, compared to $11.6 million used during the same period in 2019. The decrease was primarily related to less purchases of property and equipment.
Net cash used in financing activities was $76.8 million during the nine months ended September 30, 2020, compared to $165.7 million provided by financing activities during the same period in 2019. The change for the nine months ended September 30, 2020 was primarily attributable to a $145.0 million increase in net payments under our revolving line of credit and a $108.1 million decrease in proceeds from issuance and extinguishments of senior notes.
As of September 30, 2017,2020, our cash and cash equivalents and restricted cash balance was $58.5$290.9 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 landproperties 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. TheseOption contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time or in bulk at a point in time, at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and these contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. Our obligations with respect to thepurchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of September 30, 2017,2020, we had outstanding purchase contracts and option contracts for 17,15024,996 lots totaling $754.1with a total purchase price of approximately $999.4 million and had $11.2$31.3 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 60%50% to 70%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. periods, if at all.
Our utilization of land option contracts is dependent on, among other things, the availability of land sellers and others 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, 2017,2020, and December 31, 2016,2019, we had $70.1$360.1 million and $70.1$344.1 million, respectively, in letters of credit and
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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.
Contractual Obligations
For the three and nine months ended September 30, 2020, there were no material changes to the contractual obligations we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that was filed with the SEC on February 7, 2020.
Non-GAAP Financial Measures
In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding 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 adjustedEBITDA and Adjusted EBITDA for the three and nine months ended September 30, 20172020, and 2016.2019. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define adjustedAdjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) loss on debt extinguishment, (v) inventory impairment and other, (vi) depreciation and amortization expense, and (v)(vii) adjustments resulting from the application of purchase accounting for acquired work in process inventory related to business combinations. We believe adjustedAdjusted EBITDA provides an indicator of general economic performance that is not affected by 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 adjustedAdjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our adjustedAdjusted 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.GAAP.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
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| 2016 |
| % Change |
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| 2016 |
| % Change | 2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||
Net income |
| $ | 9,470 |
| $ | 13,342 |
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| (29.0) | % |
| $ | 33,100 |
| $ | 34,467 |
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| (4.0) | % | $ | 49,764 | $ | 27,024 | 84.1 | % | $ | 114,340 | $ | 59,636 | 91.7 | % | |||||||||||||||||||||
Income tax expense |
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| 5,686 |
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| 6,389 |
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| (11.0) | % |
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| 17,216 |
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| 16,790 |
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| 2.5 | % | 15,121 | 7,816 | 93.5 | % | 34,736 | 19,031 | 82.5 | % | |||||||||||||||||||||||||
Interest in cost of home sales revenues |
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| 8,794 |
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| 5,192 |
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| 69.4 | % |
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| 20,625 |
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| 13,177 |
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| 56.5 | % | 19,050 | 14,258 | 33.6 | % | 51,429 | 41,499 | 23.9 | % | |||||||||||||||||||||||||
Interest expense |
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Interest expense (income) | (182) | — | NM | (1,029) | 15 | (6,960.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization expense |
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| 2,256 |
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| 1,418 |
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| 59.1 | % |
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| 5,073 |
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| 4,215 |
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| 20.4 | % | 3,245 | 3,597 | (9.8) | % | 10,088 | 9,793 | 3.0 | % | |||||||||||||||||||||||||
EBITDA |
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| 26,207 |
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| 26,341 |
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| (0.5) | % |
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| 76,017 |
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| 68,653 |
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| 10.7 | % | 86,998 | 52,695 | 65.1 | % | 209,564 | 129,974 | 61.2 | % | |||||||||||||||||||||||||
Loss on debt extinguishment | — | — | NM | — | 10,832 | NM | |||||||||||||||||||||||||||||||||||||||||||||||
Inventory impairment and other | — | — | NM | 1,691 | — | NM | |||||||||||||||||||||||||||||||||||||||||||||||
Restructuring costs | — | — | NM | 1,584 | — | NM | |||||||||||||||||||||||||||||||||||||||||||||||
Purchase price accounting for acquired work in process inventory |
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| 6,214 |
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| 6,113.8 | % |
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| 6,331 |
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| 318 |
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| 1,890.9 | % | — | — | NM | — | 1,724 | NM | |||||||||||||||||||||||||||
Purchase price accounting for investment in unconsolidated subsidiaries outside basis |
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Adjusted EBITDA |
| $ | 32,451 |
| $ | 26,441 |
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| 22.7 | % |
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| 20.7 | % | $ | 86,998 | $ | 52,695 | 65.1 | % | $ | 212,839 | $ | 142,530 | 49.3 | % |
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 debt (notes payable and borrowings under our revolving line of credit less cash held in escrow and cash and cash equivalents) by net capital (net 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.financing.
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Total debt |
| $ | 803,481 |
| $ | 454,088 | ||||||
Total homebuilding debt | $ | 895,867 | $ | 965,404 | ||||||||
Total stockholders' equity |
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| 653,012 |
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| 473,636 | 1,184,957 | 1,061,699 | ||||
Total capital |
| $ | 1,456,493 |
| $ | 927,724 | $ | 2,080,824 | $ | 2,027,103 | ||
Debt to capital |
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| 55.2% |
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| 48.9% | ||||||
Homebuilding debt to capital | 43.1% | 47.6% | ||||||||||
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Total debt |
| $ | 803,481 |
| $ | 454,088 | ||||||
Total homebuilding debt | $ | 895,867 | $ | 965,404 | ||||||||
Cash and cash equivalents |
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| (29,450) | (288,341) | (55,436) | ||||
Cash held in escrow |
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| (20,044) | (26,275) | (35,308) | ||||
Net debt |
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| 702,697 |
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Net homebuilding debt | 581,251 | 874,660 | ||||||||||
Total stockholders' equity |
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| 653,012 |
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| 473,636 | 1,184,957 | 1,061,699 | ||||
Net capital |
| $ | 1,355,709 |
| $ | 878,230 | $ | 1,766,208 | $ | 1,936,359 | ||
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Net debt to net capital |
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| 51.8% |
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| 46.1% | ||||||
Net homebuilding debt to net capital | 32.9% | 45.2% |
Adjusted Diluted Earnings per Common Share
Adjusted Diluted Earnings per Common 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 the effect of acquisition costs and purchase price accounting for acquired work in process from the calculation of reported EPS.EPS.
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Net income |
| $ | 9,470 |
| $ | 13,342 |
| $ | 33,100 |
| $ | 34,467 | $ | 49,764 | $ | 27,024 | $ | 114,340 | $ | 59,636 | ||||
Less: Undistributed earnings allocated to participating securities |
|
| (52) |
|
| (241) |
|
| (289) |
|
| (785) | ||||||||||||
Net income allocable to common stockholders |
| $ | 9,418 |
| $ | 13,101 |
| $ | 32,811 |
| $ | 33,682 | ||||||||||||
Denominator |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Weighted average common shares outstanding - basic |
|
| 25,445,552 |
|
| 20,673,521 |
|
| 23,038,390 |
|
| 20,643,682 | 33,350,633 | 30,587,487 | 33,299,768 | 30,378,860 | ||||||||
Dilutive effect of restricted stock units |
|
| 280,585 |
|
| 148,545 |
|
| 236,930 |
|
| 88,248 | 380,619 | 318,748 | 256,882 | 262,334 | ||||||||
Weighted average common shares outstanding - diluted |
|
| 25,726,137 |
|
| 20,822,066 |
|
| 23,275,320 |
|
| 20,731,930 | 33,731,252 | 30,906,235 | 33,556,650 | 30,641,194 | ||||||||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.42 |
| $ | 1.63 | $ | 1.49 | $ | 0.88 | $ | 3.43 | $ | 1.96 | ||||
Diluted |
| $ | 0.37 |
| $ | 0.63 |
| $ | 1.41 |
| $ | 1.62 | $ | 1.48 | $ | 0.87 | $ | 3.41 | $ | 1.95 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Adjusted Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Adjusted earnings per share | ||||||||||||||||||||||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income before income tax expense |
| $ | 15,156 |
| $ | 19,731 |
| $ | 50,316 |
| $ | 51,257 | $ | 64,885 | $ | 34,840 | $ | 149,076 | $ | 78,667 | ||||
Inventory impairment and other | — | — | 1,691 | — | ||||||||||||||||||||
Restructuring costs | — | — | 1,584 | — | ||||||||||||||||||||
Loss on debt extinguishment | — | — | — | 10,832 | ||||||||||||||||||||
Purchase price accounting for acquired work in process inventory |
|
| 6,214 |
|
| 100 |
|
| 6,331 |
|
| 318 | — | — | — | 1,724 | ||||||||
Acquisition expense |
|
| 7,205 |
|
| 53 |
|
| 8,645 |
|
| 466 | ||||||||||||
Adjusted income before income tax expense |
|
| 28,575 |
|
| 19,884 |
|
| 65,292 |
|
| 52,041 | 64,885 | 34,840 | 152,351 | 91,223 | ||||||||
Income tax expense(1) |
|
| (9,801) |
|
| (6,439) |
|
| (21,350) |
|
| (17,047) | ||||||||||||
Adjusted income tax expense(1) | (15,121) | (7,816) | (35,499) | (22,069) | ||||||||||||||||||||
Adjusted net income |
|
| 18,774 |
|
| 13,445 |
|
| 43,942 |
|
| 34,994 | 49,764 | 27,024 | 116,852 | 69,154 | ||||||||
Less: Undistributed earnings allocated to participating securities |
|
| (104) |
|
| (243) |
|
| (384) |
|
| (797) | ||||||||||||
Adjusted net income allocable to common stockholders |
| $ | 18,670 |
| $ | 13,202 |
| $ | 43,558 |
| $ | 34,197 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Denominator - Diluted |
|
| 25,726,137 |
|
| 20,822,066 |
|
| 23,275,320 |
|
| 20,731,930 | 33,731,252 | 30,906,235 | 33,556,650 | 30,641,194 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Adjusted diluted earnings per share |
| $ | 0.73 |
| $ | 0.63 |
| $ | 1.87 |
| $ | 1.65 | $ | 1.48 | $ | 0.87 | $ | 3.48 | $ | 2.26 |
|
|
(1)The tax rate used in calculating adjusted net income for the three and nine months ended September 30, 2020 was 23.3%, which is reflective of the Company’s GAAP tax rate for the applicable period, as adjusted for certain discrete items. For the three and nine months ended September 30, 2019 the tax rate utilized was 22.4% and 24.2%, respectively, representing our GAAP tax rate adjusted for certain discrete items.
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. Borrowings under the Amended and Restated Credit Agreement, which was entered into on October 21, 2014. Future borrowings under the Credit Agreement bearbears interest at a floating rate equal to the London Interbank Offeredadjusted Eurodollar Rate plus an applicable margin between 2.75%2.60% and 3.25%3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.75%1.60% and 2.25%2.10% per annum. 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 Credit Facility. Underrevolving 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.
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity during the spring, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to eight months to construct a new home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding industry and the COVID-19 pandemic.
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, 2017,2020, 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, 20172020 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
During the nine monthsfinancial statement close for the quarter ended September 30, 2017, we completed our acquisition of UCP, Inc.2020, certain accounting and we are infinance employees worked remotely due to the process of integrating UCP, Inc. into our overallCOVID-19 pandemic. All internal control over financial reporting process.continued as in the past, but with certain necessary documentation changes in light of the remote working environment for certain personnel. There were no changes during the third quarter of 2020 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.
PART II – OTHER INFORMATION
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, 20162019 that was filed with the SEC on February 15, 2017.7, 2020, other than one new risk factor and the four revised risk factors below.
The global novel strain of coronavirus (COVID-19) pandemic could adversely impact our business, operating results and financial condition.
The global COVID-19 pandemic has created significant volatility, disruption and uncertainty. It has resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and causing weakened economic conditions and resulting in an economic slowdown and recession.
In response to the pandemic and these government restrictions, Century has shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols. As of the date of this filing, construction and sale of residential real estate has been determined to be an essential business, and accordingly our operations have been exempted from the applicable health orders. We are uncertain as to how long these restrictions will remain in place and whether the COVID-19 public health effort will be intensified to further restrict our business. While these circumstances did not materially adversely affect our second or third quarter 2020 financial results, we recognize that the long term macro-economic effects could ultimately impact the homebuilding industry and our business and future operating results.
The adverse effect of the COVID-19 pandemic on the broader economy could negatively impact demand for new homes. Despite strong demand and sales during the second and third quarter of 2020, continued demand for our homes is uncertain in light of higher unemployment rates, decreased consumer confidence, decreased availability of credit, and other factors. This impact on demand for our homes could adversely affect our operating results in future periods. In addition, a decline in our home building operations would have a direct effect on the origination volume of and revenues from our Financial Services segment.
The COVID-19 pandemic may have other adverse effects on our business, operating results and financial condition, including:
costs incurred as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including remote working accommodations, enhanced cleaning processes, and protocols designed to implement appropriate social distancing practices;
availability of employees, their ability to conduct work away from normal working locations and/or under revised work environment protocols, as well as the general willingness of employees to come to and perform work;
an increase in our use of sales incentives and concessions, which could adversely affect our margins;
an increase in customer cancellations of home purchase contracts;
deteriorating individual credit quality and an increase in default rates on mortgage loans we originated which may expose us to repurchase obligations or other liabilities, reduce our ability to sell or finance the loans we originate or on less favorable terms, lead us to impose stricter loan qualification standards, or result in us no longer being able to offer financing terms that are attractive to potential buyers;
an increase in the costs or decrease in the supply of building materials or the availability of subcontractors and other talent, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts;
one or more of our suppliers or subcontractors may experience financial distress, cancel, postpone or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business or we may need to offer special payment terms or relief to our suppliers and subcontractors, subjecting us heightened credit risk;
increased costs and delays in the completion of our development projects;
decreased land acquisitions and the termination or modification of option contracts to conserve our cash resources;
potential future restructuring, impairment and other charges, which may be material, for inventory impairments or land option contract abandonments, or both;
potential disruption and volatility in the global capital and credit markets, which could adversely affect our ability to access lending, capital markets, and other sources of liquidity when needed and on reasonable terms and costs, or the ability of potential homebuyers to obtain suitable financing, especially if mortgage loan underwriting criteria tighten or default rates increase; and
our ability to comply with the financial covenants in our debt agreements if a material or extended economic downturn occurs.
We are uncertain of the potential full magnitude or duration of the business and economic impacts from the COVID-19 pandemic. This inherent uncertainty, due in part to rapidly changing governmental directives, public health challenges and progress, and market reactions thereto, makes it challenging for our management to estimate the future performance of our business and plan accordingly. The full extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact. Should the potential adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our homes delivered, average selling prices, net new home contracts, revenues and profitability.
Finally, the impacts from the COVID-19 pandemic and efforts to contain it have heightened the risks in certain of the other risk factors described in our Annual Report Form 10-K for the year ended December 31, 2019.
We are subject to demand fluctuations in the housing industry. Reductions in demand for our homes will adversely affect our business, results of operations, and financial condition.
Demand for our homes is subject to fluctuations, often due to factors outside of our control. In a housing market downturn when demand for our homes decreases, our revenues and results of operations are typically adversely affected; we may have significant inventory impairments and other write-offs; our gross margins may decline significantly from historical levels; and we may incur substantial losses from operations. At any particular time, we cannot predict whether housing market conditions existing at that time will continue. For example, while rising interest rates and tightening affordability created an industry-wide deceleration in housing growth during the second half of 2018 and into 2019, this deceleration reversed during the remainder of 2019 due in part to reduced mortgage rates. More recently, as a result of the COVID-19 pandemic, beginning in mid-March 2020, we began to experience a decrease in demand for our homes which reversed course in May and June of 2020. Despite overall strong demand and sales during the second and third quarter of 2020, continued demand for our homes is uncertain in light of higher unemployment rates, decreased consumer confidence, decreased availability of credit, and other factors, including those described elsewhere in this report.
Adverse changes in general economic conditions typically reduce the demand for our homes which may result in a material adverse effect on our business, results of operations and financial condition.
The residential homebuilding industry is cyclical and is highly sensitive to changes in local and general economic conditions that are outside our control, including:
consumer confidence, levels of employment, job growth, spending levels, wage and personal income growth, personal indebtedness levels, and household debt-to-income levels of potential homebuyers;
the availability and cost of financing for homebuyers or restrictive mortgage standards, including private and federal mortgage financing programs and federal, state, and provincial regulation of lending practices;
real estate taxes and federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;
U.S. and global financial system and credit markets, including short- and long-term interest rates and inflation;
housing demand from population growth, household formations, new home buying catalysts (such as marriage and children), second home buying catalysts (such as retirement), home sale catalysts (such as an aging population), demographic changes (including immigration levels and trends in urban and suburban migration), generational shifts, or otherwise, or perceptions regarding the strength of the housing market, and home price appreciation and depreciation resulting therefrom;
competition from other real estate investors with significant capital, including other real estate operating companies and developers, institutional investment funds and companies solely focused on single family rentals; and
the supply of new or existing homes, including foreclosures, and other housing alternatives, such as apartments and other residential rental property, and the aging of existing housing inventory.
In the event these economic and business factors occur, we could experience a decline in the demand and pricing for our homes, an increase in customer cancellations, an increase in selling concessions and downward pressure on the market value of our inventory, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations and increase the risk for asset impairments. The current COVID-19 pandemic has led to weakened economic conditions that have resulted in an economic slowdown and recession. A significant or sustained downturn in the homebuilding market would likely have an adverse effect on our business and results of operations for multiple years.
In addition, an important segment of our customer base consists of first- and second-time move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. If these potential buyers face difficulties in selling their homes, whether due to periods of weak economic conditions, oversupply, high interest rates, restrictive mortgage standards or otherwise, our sales may be adversely affected. Moreover, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.
Furthermore, deployments of U.S. military personnel to foreign regions, terrorist attacks, other acts of violence or threats to national security and any corresponding response by the United States or others, related domestic or international instability or civil unrest may cause an economic slowdown in the markets where we operate, which could adversely affect our business.
Increases in unemployment or underemployment typically lead to reduced demand for our homes and an increase in the number of loan delinquencies and property repossessions, which could have an adverse impact on our business and results of operations.
In the United States, the unemployment rate was 3.5% as of the end of December 2019, according to the U.S. Bureau of Labor Statistics. As a result of impacts from the COVID-19 pandemic and efforts to contain it, the unemployment rate increased to 7.9% as of the end of September 2020 and it is uncertain how quickly the unemployment rate will improve or if it will further deteriorate. People who are not employed, are underemployed or are concerned about the loss of their jobs are less likely to purchase new homes, may be forced to try to sell the homes they own and may face difficulties in making required mortgage payments. Therefore, an increase in unemployment or underemployment may lead to an increase in the number of loan delinquencies and property repossessions and have an adverse impact on our business by both reducing the demand for the homes we build and increasing the supply of homes for sale, which would also likely adversely affect our Financial Services business, which is dependent upon the sale of our homes. In addition, an increase in unemployment or underemployment may result in increased default rates on mortgage loans we originated, which could expose us to repurchase obligations or other liabilities, reduce our ability to sell or finance the loans we originate or require us to sell or finance the loans we originate on less favorable terms, lead us to impose stricter loan qualification standards, or result in us no longer being able to offer financing terms that are attractive to potential buyers, all of which would adversely affect our Financial Services business.
Our Financial Services segment could be adversely affected by reduced demand for our homes or by a slowdown in mortgage refinancing.
Approximately 98.3% and 81.5% of the mortgage loans made by our Financial Services segment in 2019 and for the nine months ended September 30, 2020, respectively, were made to buyers of homes we built. Therefore, a decrease in the demand for our homes would adversely affect the revenues of this segment of our business. As a result of the COVID-19 pandemic, beginning in mid-March 2020, we began to experience a decrease in demand for our homes which reversed course in May and June of 2020. Despite overall strong demand and sales during the second and third quarter of 2020, continued demand for our homes is uncertain in light of higher unemployment rates, decreased consumer confidence, decreased availability of credit, and other factors, including those described elsewhere in this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2017, certain of our employees surrendered approximately 44,220 shares of our common stock owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our First Amended & Restated 2013 Long-Term Incentive Plan. The following table summarizes the repurchases that occurred during the three months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
| Total number of shares purchased |
| Average price paid per share |
| Total number of shares purchased as part of publicly announced plans or programs |
| Maximum number of shares that may yet be purchased under the plans or programs | ||
July |
|
|
|
|
|
|
|
|
|
|
Purchased 7/1 through 7/31 |
| 29,022 |
| $ | 25.90 |
| N/A |
|
| N/A |
August |
|
|
|
|
|
|
|
|
|
|
Purchased 7/1 through 7/31 |
| - |
|
| - |
| N/A |
|
| N/A |
September |
|
|
|
|
|
|
|
|
|
|
Purchased 9/1 through 9/30 |
| 15,198 |
|
| 24.00 |
| N/A |
|
| N/A |
Total |
| 44,220 |
| $ | 25.25 |
|
|
|
|
|
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
ITEM 6. EXHIBITS.
The following exhibits are either filed herewith or incorporated herein by reference:
| |||
| Description | ||
3.1 | |||
3.2 | |||
3.3 | |||
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| |||
| |||
| |||
| |||
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31.2 | |||
31.3 | |||
32.1 | |||
32.2 | |||
32.3 | |||
101.INS | Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) |
40
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) | |
*Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any of the omitted schedules upon request by the SEC.
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) |