Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2013 |
Basis of Presentation and Consolidation | ' |
Basis of Presentation and Consolidation — In the Reorganization Transactions, the Company became the sole owner of the general partner of New TMM. As the general partner of New TMM, the Company exercises exclusive and complete control over New TMM. Consequently: |
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| • | | For periods subsequent to April 9, 2013, the Company consolidates New TMM and records a non-controlling interest in its Consolidated and Combined Balance Sheet for the economic interests in New TMM, that are directly or indirectly held by the Principal Equityholders or by members of management and the Board of Directors. The Consolidated and Combined Financial Statements fore these periods include the accounts of TMHC, TMM Holdings, New TMM, TMC, Monarch and the Company’s consolidated subsidiaries, partnerships and other entities in which the Company has a controlling financial interest, and of variable interest entities in which the Company is deemed the primary beneficiary; | | | | | | | | | | | | | | | |
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| • | | The Consolidated and Combined Financial Statements as of and for the year ended December 31, 2012 and the period from July 13, 2011 to December 31, 2011 reflect the consolidated operations of TMM Holdings only as there were no operating activities or equity transactions in TMHC during those periods; and | | | | | | | | | | | | | | | |
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| • | | The statements of operations, comprehensive income and changes in stockholders’ equity for the periods prior to July 13, 2011 reflect the historical financial statements of the North American Business of Taylor Wimpy plc., the Predecessor Parent Company, whose financial statements have been prepared using the historical cost basis of accounting that existed prior to the Acquisition. | | | | | | | | | | | | | | | |
On July 13, 2011, TMM Holdings and its subsidiaries acquired 100.0% of the issued share capital of TMC and Monarch for aggregate cash consideration of approximately $1.2 billion. The Company’s financial statements for periods from and after the July 13, 2011 Acquisition are derived from the financial statements of TMM Holdings, which reflect adjustments made as a result of the application of purchase accounting in connection with the Acquisition. Therefore, the financial information for the predecessor periods is not comparable with that for the period after July 13, 2011. |
The Predecessor’s financial statements include the accounts of TMC and Monarch, their consolidated subsidiaries and other entities in which the companies have controlling financial interests, and have been combined given the common ownership and control by the Predecessor Parent Company. The Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and intercompany balances and transactions have been eliminated in consolidation. Unless the context requires otherwise, references in these financial statements to “the Company” are to the Company and its consolidated subsidiaries. |
Unless otherwise stated, amounts are shown in U.S. dollars. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded to accumulated other comprehensive income (loss) in the accompanying Consolidated and Combined Balance Sheets and Statements of Stockholders’ Equity. |
Transaction Expenses | ' |
Transaction Expenses — In 2012, these costs relate to a $7.9 million loss on the early extinguishment of debt related to a portion of the Sponsor Loan that was repaid (see Note 9 — Debt — Sponsor Loan) and $0.1 million of transaction costs directly related to the Acquisition. In 2011, these costs include transaction and integration costs directly related to the Acquisition, excluding the impact of restructuring costs and acquisition accounting adjustments, totaling $39.4 million, which were incurred by TMM Holdings and the Sponsors and are recorded in the Consolidated and Combined Statements of Operations as indemnification and transaction expenses. |
Unaudited supplemental pro-forma information | ' |
Unaudited supplemental pro-forma information — The unaudited supplemental pro forma information presented below includes the effects of the acquisition of the TMC and Monarch businesses as if it had been completed as of January 1, 2011. The pro forma results include (i) the impact of certain estimated fair value adjustments and (ii) interest expense associated with debt used to fund the acquisition. The pro forma results for the period from January 1, 2011 through July 12, 2011 include adjustments for the financial impact of certain acquisition related items incurred during the period from July 13, 2011 through December 31, 2011. Accordingly, the following unaudited pro forma financial information should not be considered indicative of either future results or results that might have occurred had the acquisition been consummated as of January 1, 2011 (in thousands): |
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| | For the | | | | | | | | | | | | | | | |
Period from | | | | | | | | | | | | | | |
January 1 through | | | | | | | | | | | | | | |
July 12, 2011 | | | | | | | | | | | | | | |
Total revenues | | $ | 619,735 | | | | | | | | | | | | | | | |
Net income | | $ | 57,603 | | | | | | | | | | | | | | | |
Reclassifications | ' |
Reclassifications — Certain reclassifications have been made to the prior period cash flows to show additional detail of financing activities in the Consolidated and Combined Statements of Cash Flows to conform to the current period presentation. Additionally, certain December 31, 2012 balances affected by purchase price accounting in the accompanying Consolidated and Combined Financial Statements were reclassified in accordance with ASC 805. The reclassifications have no effect on the previously reported net income. Reclassifications related to the Darling Acquisition are described in more detail previously in this footnote in Summary of Significant Accounting Policies — Acquisition Accounting — Darling Acquisition. |
Use of Estimates | ' |
Use of Estimates — The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated and Combined Financial Statements and accompanying notes. Significant estimates include the purchase price allocations, valuation of certain real estate, valuations of equity awards, valuation allowance on deferred tax assets and reserves for warranty and self-insured risks. Actual results could differ from those estimates. |
Cash and Cash Equivalents | ' |
Cash and Cash Equivalents — Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, and investments with original maturities of 90 days or less. At December 31, 2013, the majority of the Company’s cash and cash equivalents were invested in high-quality money market funds or on deposit with major banks. |
Restricted Cash | ' |
Restricted Cash — Restricted cash consists of $2.0 million pledged to collateralize mortgage credit lines through certificates of deposit known as Certificate of Deposit Account Registry Service (CDARS) and $22.8 million of funds used to collateralize our Canadian lines of credit. |
Concentration of Credit Risk | ' |
Concentration of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents. Cash and cash equivalents include amounts on deposit with financial institutions in the U.S. that are in excess of the Federal Deposit Insurance Corporation (“FDIC”) federally insured limits of up to $250,000 and amounts on deposit with financial institutions in Canada that are in excess of the Canadian Deposit Insurance Corporation (“CDIC”) federally insured limits of up to $100,000. No losses have been experienced to date. |
In addition, the Company is exposed to credit risk to the extent that mortgage and loan borrowers may fail to meet their contractual obligations. This risk is mitigated by collateralizing the mortgaged property or land that was sold to the buyer. |
Loans Receivable | ' |
Loans Receivable — Loans receivable, which consist of amounts due from land buyers and certain of the Company’s joint ventures, are generally secured by the underlying land, bear interest at average interest rates of 5.0% and 5.5% as of December 31, 2013 and 2012, respectively, and mature at various dates through 2017. The Company imputes interest based on relevant market data for loans with no stated interest rate. The Company assesses the need for an allowance on in individual loan basis based on historical experience, the value of the underlying collateral, communications with the counterparty, knowledge of the counterparty’s financial condition and plans, present economic conditions, and other factors considered relevant by the Company. Allowances are generally recorded in other expense (income), net when it becomes likely that some amount will not be collectible. Loans receivable are written off when it is determined that collection efforts will no longer be pursued. |
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The following represents our loans receivable and related allowance for credit losses (in thousands): |
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| | As of December 31, | | | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | | | |
Loans receivable, gross | | $ | 37,588 | | | $ | 50,937 | | | | | | | | | | | |
Allowance for credit losses | | | (4,193 | ) | | | (2,358 | ) | | | | | | | | | | |
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Loans receivable, net | | $ | 33,395 | | | $ | 48,579 | | | | | | | | | | | |
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Mortgages Receivable | ' |
Mortgages Receivable — Mortgages receivable consists of mortgages due from buyers of Taylor Morrison homes that are financed through Taylor Morrison’s mortgage brokerage subsidiary, TMHF. Mortgages receivable are held for sale and are carried at fair value, which is calculated using observable market information, including pricing from actual market transactions, investor commitment prices, or broker quotations (see Note 10 — Fair Value Disclosures). Due to the short term nature of mortgages receivable, an allowance for potential credit losses is not deemed necessary. |
Other Receivables | ' |
Other Receivables — Other receivables primarily consist of amounts due from buyers of condominiums, as well as other amounts expected to be recovered from various community development districts and utility deposits. Allowances of $0.6 and $1.1 million at December 31, 2013 and 2012, respectively, are maintained for potential credit losses based on historical experience, present economic conditions, and other factors considered relevant by the Company. Allowances are generally recorded in other expense (income), net when it becomes likely that some amount will not be collectible. Other receivables are written off when it is determined that collection efforts will no longer be pursued. |
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| | Year Ended December 31, | | | | | | | | | | | |
(Dollars in thousands) | | 2013 | | | 2012 | | | | | | | | | | | |
Allowance — beginning of period | | $ | 1,104 | | | $ | 3,956 | | | | | | | | | | | |
Additions to allowance | | | — | | | | — | | | | | | | | | | | |
Amounts written off | | | — | | | | — | | | | | | | | | | | |
Change in estimates to preexisting allowance | | | (546 | ) | | | (2,852 | ) | | | | | | | | | | |
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Allowance — end of period | | $ | 558 | | | $ | 1,104 | | | | | | | | | | | |
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Property and Equipment, net | ' |
Property and Equipment, net — Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is generally computed using the straight-line basis over the estimated useful lives of the assets as follows: |
Buildings: 20 – 40 years |
Building and leasehold improvements: 10 years or remaining life of building/lease term if less than 10 years |
Information systems : over the term of the license |
Furniture, fixtures and computer and equipment: 5 – 7 years |
Model and sales office improvements: lesser of 3 years or the life of the community |
Maintenance and repair costs are expensed as incurred. |
Tax Indemnification Receivable | ' |
Tax Indemnification Receivable — The Predecessor Parent Company has indemnified TMM Holdings for specific uncertain tax positions existing as of the date of the transaction. An indemnification receivable was recorded at $129.7 million at the time of the Acquisition. The indemnification receivable also includes a periodic increase for accrued interest, penalties, and additional identified tax issues covered by the indemnity, offset by periodic decreases as uncertain tax matters and related tax obligations are resolved. The receivable due from the Predecessor Parent Company for the indemnification is valued at the same amount as the estimated income tax liability, which is included as an offset to income taxes payable in the Consolidated and Combined Balance Sheets. The balance of the tax indemnification receivable was $5.2 million and $107.6 million at December 31, 2013 and 2012, respectively. |
Real Estate Inventory | ' |
Real Estate Inventory — Inventory consists of land, land under development, homes under construction, completed homes, and model homes. Inventory is carried at cost. In addition to direct carrying costs, the Company also capitalizes interest, real estate taxes, and related development costs that benefit the entire community, such as field construction supervision and related direct overhead. Home construction costs are accumulated and charged to cost of sales at home closing using the specific identification method. Land acquisition, development, interest, taxes, overhead, and condominium construction costs are allocated to homes and units using methods that approximate the relative sales value method. These costs are capitalized to inventory from the point development begins to the point construction is completed. Changes in estimated costs to be incurred in a community are generally allocated to the remaining homes on a prospective basis. For those communities that have been temporarily closed or where development has been discontinued, the Company does not allocate interest or other costs to the community’s inventory until activity resumes. |
In accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment, (“ASC 360”) the Company reviews its real estate inventory for indicators of impairment by community during each reporting period. In conducting the review for indicators of impairment at the community level, the Company evaluates, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. Closeout communities (those communities with fewer than 15 remaining homes) and communities in which the actual or projected home margin is less than 10 percent are excluded from the analysis. If indicators of impairment are present for a community, the Company performs an additional analysis to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows estimated to be generated by those assets. If the carrying value of the assets does exceed their estimated undiscounted cash flows, the assets are deemed to be impaired and are recorded at fair value as of the assessment date. |
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The Company estimates the fair value of a community using a discounted cash flow model. The key assumptions related to the projected cash flows for each community are significantly impacted by local market and economic conditions; these include, but are not limited to product type by community, home-site sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, competitive conditions, labor costs, and costs of materials, all of which are inherently uncertain. Critical assumptions in the Company’s cash flow model include: (i) the projected absorption pace for home sales in the community, based on general economic conditions that will have an impact on the market in which the community is located and competition within the market; (ii) the expected sales prices and sales incentives to be offered; (iii) costs to build and deliver homes in the community, including, but not limited to, land and land development costs, home construction costs, interest costs and overhead costs; and (iv) alternative uses for the property, such as the possibility of a sale of the entire community to another builder or the sale of individual home sites. Assumptions are based on current development budgets and there are no assumptions in increases in either pace or price. Discount rates are determined using a base rate, which may be increased depending on the total remaining lots in a community, the development status of the land, the market in which it is located and if the product is higher-priced with potentially lower demand. Historically, our discount rates have generally been in the range of 12.0% to 18.0%. |
Since the estimates and assumptions included in the Company’s cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead the Company to incur additional impairment charges in the future. Using available information, the Company calculates its best estimate of projected cash flows for each community. The determination of fair value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. |
Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. For the years ended December 31, 2013, 2012 and 2011, no impairment charges were recorded. In certain cases, the Company may elect to stop development and/or marketing of an existing community if it believes the economic performance of the community would be maximized by deferring development for a period of time to allow for temporary market conditions to improve. The decision may be based on financial and/or operational metrics as determined by the Company. If the Company decides to stop developing a project, it will impair such project if necessary to its fair value as discussed above and then cease future development and/or marketing activity until such a time when the Company believes that market conditions have improved and economic performance can be maximized. |
The Company’s assessment of the carrying value of it’s assets typically includes subjective estimates of future performance, including the timing of when development will recommence, the type of product to be offered, and the margin to be realized. In the future, some of these inactive communities may be re-opened while others may be sold. As of December 31, 2013, there were 19 inactive projects with a carrying value of $28.0 million of which $4.6 million and $23.4 million is in the East and West segments, respectively. During the year ended December 31, 2013, the Company placed one community into inactive status and moved two communities into active status. |
The life cycle of a community generally ranges from three to five years, commencing with the acquisition of unentitled or entitled land, continuing through the land development phase, and concluding with the sale, construction, and delivery of homes. Actual community lives will vary based on the size of the community, the sales absorption rate, and whether the Company purchased the property as raw land or finished lots. As of December 31, 2013 and 2012 the Company was actively selling in 197 and 120 communities, respectively. |
As discussed in this note under Investments in Consolidated and Unconsolidated Entities, in the ordinary course of business, the Company acquires various specific performance lots through existing lot option agreements. Real estate not owned under these contracts is consolidated into real estate inventory with a corresponding liability in loans payable and other borrowings in the Consolidated and Combined Balance Sheets. |
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Inventory consists of the following (in thousands): |
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| | As of December 31, | | | | | | | | | | | |
| | 2013 | | | 2012(1) | | | | | | | | | | | |
Operating communities | | $ | 1,862,649 | | | $ | 1,267,900 | | | | | | | | | | | |
Real estate held for development or sale | | | 381,095 | | | | 336,287 | | | | | | | | | | | |
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Total owned inventory | | | 2,243,744 | | | | 1,604,187 | | | | | | | | | | | |
Real estate not owned | | | 18,595 | | | | — | | | | | | | | | | | |
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Total real estate inventory | | $ | 2,262,339 | | | $ | 1,604,187 | | | | | | | | | | | |
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(1) | Changes in the amounts recorded at December 31, 2012 relate to adjustments made to the purchase price allocation of the Darling Acquisition. Inventory adjustments reflect the effect of adjustments to the joint venture interests and the underlying real estate assets after consolidation. | | | | | | | | | | | | | | | | | |
Capitalized Interest | ' |
Capitalized Interest — The Company capitalizes certain interest costs to real estate inventory during the development and construction periods. Capitalized interest is charged to cost of home closings when the related inventory is delivered. Interest capitalized, incurred, and expensed is as follows (in thousands): |
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| | | | | | | | | | | | | Predecessor | |
| | Year Ended | | | July 13, 2011 | | | | | January 1 | |
December 31, | Through | Through |
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| December 31, | July 12, |
| | 2013 | | | 2012 | | | 2011 | | | | 2011 |
Interest capitalized — beginning of period | | $ | 59,643 | | | $ | 27,491 | | | $ | — | | | | | $ | 68,202 | |
Interest incurred | | | 79,241 | | | | 62,468 | | | | 37,605 | | | | | | 23,091 | |
Interest expense not qualified for capitalization and included as interest expense | | | (812 | ) | | | — | | | | — | | | | | | — | |
Interest amortized to cost of home closings | | | (50,971 | ) | | | (30,316 | ) | | | (10,114 | ) | | | | | (19,422 | ) |
Foreign currency adjustment | | | — | | | | — | | | | — | | | | | | 51 | |
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Interest capitalized — end of period | | $ | 87,101 | | | $ | 59,643 | | | $ | 27,491 | | | | | $ | 71,922 | |
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Land Deposits | ' |
Land Deposits —The Company pays deposits related to land options and land purchase contracts, which are capitalized when paid and classified as land deposits until the associated property is purchased. To the extent the deposits are non-refundable, they are charged to expense if the land acquisition process is terminated or no longer determined probable. The Company reviews the likelihood of the acquisition of contracted lots in conjunction with its periodic real estate inventory impairment analysis. Non-refundable deposits are recorded as a component of real estate inventory in the accompanying Consolidated and Combined Balance Sheets at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements. Refundable deposits are recorded in prepaid expenses and other assets, net in the accompanying Consolidated and Combined Balance Sheets. |
The Company is subject to the usual obligations associated with entering into contracts, including option contracts, for the purchase, development, and sale of real estate inventory in the routine conduct of its business. The Company has acquired a number of land purchase option contracts, generally through cash deposits or letters of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The Company does not have title to the property and the creditors generally have no recourse against the Company, except in Canada where sellers have full recourse under statutory regulations. The Company’s obligations with respect to the option contracts are generally limited to the forfeiture of the related non-refundable cash deposits and/or letters of credit. As of December 31, 2013 and 2012, the Company had the right to purchase approximately 6,570 and 5,013 lots under land option and land purchase contracts, respectively, which represents an aggregate purchase price of $500.9 million and $268.0 million as of December 31, 2013 and 2012, respectively. As of December 31, 2013, the Company had $43.7 million in land deposits and had posted $14.9 million in letters of credit related to land options and land purchase contracts. As of December 31, 2012, the Company had $28.7 million in land deposits and had posted $0.2 million in letters of credit related to land options and land purchase contracts. |
For the years ended December 31, 2013, 2012 and 2011, no impairment of option deposits and capitalized pre-acquisition costs for abandoned projects were recorded. The Company continues to evaluate the terms of open land option and purchase contracts and may impair option deposits and capitalized pre-acquisition costs in the future, particularly in those instances where land sellers or third-party financial entities are unwilling to renegotiate significant contract terms. |
Investments in Consolidated and Unconsolidated Entities | ' |
Investments in Consolidated and Unconsolidated Entities — In the ordinary course of business, the Company enters into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable the Company to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. The Company is also involved in several joint ventures with independent third parties for homebuilding activities. The Company uses the equity method of accounting for entities it does not control or where it does not own a majority of the economic interest, but has the ability to exercise significant influence over the operating and financial policies of the investee. For those unconsolidated entities in which the Company functions as the managing member, the Company has evaluated the rights held by its joint venture partners and determined that they have substantive participating rights that preclude the presumption of control. For joint ventures accounted for using the equity method, the Company’s share of net earnings or losses is included in equity in income of unconsolidated entities when earned and distributions are credited against its investment in the joint venture when received. See Note 3 — Investments in Unconsolidated Entities for financial statement information related to unconsolidated entities. |
Consolidation | ' |
In accordance with ASC Topic 810, Consolidation, the Company has concluded that when it enters into an option or purchase agreement to acquire land or lots and pay a non-refundable deposit, a variable interest entity (“VIE”) may be created because the Company is deemed to have provided subordinated financial support that will absorb some or all of an entity’s expected losses if they occur. For each VIE, the Company assesses whether it is the primary beneficiary by first determining if the Company has the ability to control the activities of the VIE that most significantly affect its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with the Company; and the ability to change or amend the existing option contract with the VIE. If the Company is not able to control such activities, it is not considered the primary beneficiary of the VIE. If the Company does have the ability to control such activities, the Company will continue its analysis by determining if it is expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if the Company will potentially benefit from a significant amount of the VIE’s expected gains. If the Company is the primary beneficiary of the VIE, it will consolidate the VIE in its Consolidated and Combined Financial Statements and reflect such assets and liabilities as real estate not owned under option agreements within the Company’s inventory balance in the accompanying Consolidated and Combined Balance Sheets (see Real Estate Inventory above). The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consists of non-refundable option deposits totaling $43.7 million and $28.7 million, as of December 31, 2013 and 2012, respectively. Additionally, the Company posted $14.9 million and $0.2 million of letters of credit in lieu of cash deposits under certain option contracts as of December 31, 2013 and 2012, respectively. Creditors of these VIEs, if any, generally have no recourse against the Company (see Note 9 — Debt — Letters of Credit, Surety Bonds and Guarantees). |
The evaluation of the Company’s investment in unconsolidated entities includes certain critical assumptions made by management: (1) projected future distributions from the unconsolidated entities; (2) discount rates applied to the future distributions; and (3) various other factors. The Company’s assumptions on the projected future distributions from the unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The unconsolidated entities generally use a discount rate of approximately 12-18% in their reviews for impairment, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the equity in income from unconsolidated entities with a corresponding decrease to its investments in unconsolidated entities. |
The Company evaluates its investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in value of the Company’s investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, the Company considers various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, stage in its life cycle, intent and ability for the Company to recover its investment in the entity, financial condition and long-term prospects of the entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded. We did not record any impairment charges for the years ended December 31, 2013, 2012 or 2011. |
Non-controlling Interests - Joint Ventures | ' |
Non-controlling Interests — Joint Ventures — The Company consolidates joint ventures when it is the primary beneficiary. Therefore, those entities’ financial statements are consolidated in the Company’s Consolidated and Combined Financial Statements and the other partners’ equity is recorded as non-controlling interests – joint ventures. |
Non-controlling Interests - Principal Equityholders | ' |
Non-controlling Interests – Principal Equityholders — In the Reorganization Transactions (see Note 16 — Capital Structure — Reorganization Transactions), immediately prior to the Company’s IPO, the existing holders of TMM Holdings limited partnership interests (the Principal Equityholders, members of management and the Board of Directors), exchanged their limited partnership interests for limited partnership interests of a newly formed limited partnership, New TMM (the “New TMM Units”). For each New TMM Unit received in the exchange, the Principal Equityholders, members of management and the Board of Directors also received, directly or indirectly, a corresponding number of shares of the Company’s Class B common stock, par value $0.00001 per share (the “Class B Common Stock”). All of the Company’s Class B Common Stock is owned by the Principal Equityholders, members of management and the Board of Directors. The Company’s Class B Common Stock has voting rights but no economic rights. One share of Class B Common Stock, together with one New TMM Unit is exchangeable into one share of the Company’s Class A Common Stock. The Company sold Class A Common Stock to the investing public in its initial public offering. The proceeds received in the initial public offering were used by the Company to purchase New TMM Units, such that the Company owns an amount of New TMM Units equal to the amount of the Company’s outstanding shares of Class A Common Stock. The Company’s Class A Common Stock has voting rights and economic rights. Also, in the Reorganization Transactions, the Company became the sole owner of the general partner of New TMM. As the general partner of New TMM, the Company exercises exclusive and complete control over New TMM. Consequently, the Company consolidates New TMM and records a non-controlling interest in its Consolidated and Combined Balance Sheet for the economic interests in New TMM, directly or indirectly, held by the Principal Equityholders, members of management and the Board of Directors. |
The Non-controlling interests – Principal Equityholders percentages at December 31, 2013 are as follows: |
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| | Shares | | | Percentage | | | | | | | | | | | |
Outstanding | | | | | | | | | | |
Class A Common Stock | | | 32,857,800 | | | | 26.9 | % | | | | | | | | | | |
Class B Common Stock | | | 89,451,164 | | | | 73.1 | | | | | | | | | | | |
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Total | | | 122,308,964 | | | | 100 | % | | | | | | | | | | |
Activity in the Non-controlling interests – Principal Equityholders and former controlling interests net income (loss) amounts is as follows (in thousands): |
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| | Year Ended | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | |
Post-IPO Non-controlling Interests — Principal Equityholders | | $ | 123,532 | | | | | | | | | | | | | | | |
Pre-IPO Controlling Interest | | | (73,953 | ) | | | | | | | | | | | | | | |
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Non-controlling Interests — Principal Equityholders | | $ | 49,579 | | | | | | | | | | | | | | | |
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Pre-IPO activity is for the period prior to April 10, 2013 while post-IPO is activity subsequent to that date. |
Goodwill | ' |
Goodwill — The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC Topic 350, Intangibles — Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and intangible assets that do not have finite lives not be amortized, but instead be assessed for impairment at least annually or more frequently if certain impairment indicators are present. There was no goodwill recorded in connection with the Acquisition on July 13, 2011 (see Note 4 – Goodwill and Other Intangible Assets). The Company recorded $23.4 million of goodwill related to the purchase price allocation for the Darling Acquisition. We perform our annual impairment test during the fourth quarter or whenever impairment indicators are present. No goodwill impairment charges were recorded for the years ended December 31, 2013 and 2012. |
Income Taxes | ' |
Income Taxes — We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recorded based on future tax consequences of both temporary differences between the amounts reported for financial reporting purposes and the amounts deductible for income tax purposes, and are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. |
In accordance with the provisions of ASC 740, we periodically assess our deferred tax assets, including the benefit from net operating losses, to determine if a valuation allowance is required. A valuation allowance must be established when, based upon available evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Realization of the deferred tax assets is dependent upon, among other matters, taxable income in prior years available for carryback, estimates of future income, tax planning strategies, and reversal of existing temporary differences. |
Insurance Costs and Self-Insurance Reserves | ' |
Insurance Costs and Self-Insurance Reserves — We have certain deductible limits under our workers’ compensation, automobile, and general liability insurance policies, and we record expense and liabilities for the estimated costs of potential claims for construction defects. The excess liability limits are $50 million per occurrence in the annual aggregate and apply in excess of automobile liability, employer’s liability under workers compensation and general liability policies. We also generally require our sub-contractors and design professionals to indemnify us for liabilities arising from their work, subject to certain limitations. We are the parent of Beneva Indemnity Company (“Beneva”), which provides insurance coverage for construction defects discovered during a period of time up to 10 years following the sale of a home, coverage for premise operations risk, and property coverage. We accrue for the expected costs associated with the deductibles and self-insured amounts under our various insurance policies based on historical claims, estimates for claims incurred but not reported, and potential for recovery of costs from insurance and other sources. The estimates are subject to significant variability due to factors, such as claim settlement patterns, litigation trends, and the extended period of time in which a construction defect claim might be made after the closing of a home. |
Warranty Reserves | ' |
Warranty Reserves: |
U.S. Operations — The Company offers warranties on homes that generally provide for limited one-year warranties to cover various defects in workmanship or materials or to cover structural construction defects. The Company may also offer a longer structural warranty in certain markets or to comply with regulatory requirements. Warranty reserves are established as homes close in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The Company’s warranty reserves are based on factors that include an actuarial study for structural warranty, historical and anticipated warranty claims, trends related to similar product types, number of home closings, and geographical areas. The structural warranty is carried by Beneva Indemnity Company, a wholly owned subsidiary of TMC. The Company also provides third-party warranty coverage on homes where required by Federal Housing Administration or Veterans Administration lenders. |
Canadian Operations — The Company offers a limited warranty that generally provides for seven years of structural coverage; two years of coverage for water penetration, electrical, plumbing, heating, and exterior cladding defects; and one year of coverage for workmanship and materials. The Company is responsible for performing all of the work during the warranty period. As a result, warranty reserves are established as homes close in an amount estimated to be adequate to cover expected costs of materials and labor during warranty periods. The warranty reserves are determined using historical experience and trends related to similar product types, and number of home closings. |
The Company regularly reviews the reasonableness and adequacy of warranty reserves and makes adjustments to the balance of the preexisting reserves to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in accrued expenses and other liabilities in the accompanying Consolidated and Combined Balance Sheets. A summary of the changes in the Company’s warranty reserves is as follows (in thousands): |
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Predecessor | |
| | Year Ended December 31, | | | July 13, 2011 | | | | | January 1 | |
Through | Through |
December 31, | July 12, 2011 |
| | 2013 | | | 2012 | | | 2011 | | | |
Reserve — beginning of period | | $ | 39,760 | | | $ | 43,158 | | | $ | 45,929 | | | | | $ | 50,069 | |
Purchase price allocation adjustments | | | — | | | | — | | | | (2,731 | ) | | | | | — | |
Additions to reserves | | | 16,408 | | | | 3,096 | | | | 2,950 | | | | | | 9,634 | |
Costs and claims incurred | | | (13,159 | ) | | | (10,858 | ) | | | (15,428 | ) | | | | | (16,267 | ) |
Changes in estimates to pre-existing reserves | | | (1,102 | ) | | | 4,036 | | | | 13,036 | | | | | | 2,346 | |
Foreign currency adjustment | | | (504 | ) | | | 328 | | | | (598 | ) | | | | | 147 | |
| | | | | | | | | | | | | | | | | | |
Reserve — end of period | | $ | 41,403 | | | $ | 39,760 | | | $ | 43,158 | | | | | $ | 45,929 | |
| | | | | | | | | | | | | | | | | | |
Revenue Recognition | ' |
Revenue Recognition: |
Home Sales — Revenues from home sales are recorded at closing, using the completed contract method of accounting at the time each home is delivered, title and possession are transferred to the buyer, there is no significant continuing involvement with the home, and the buyer has demonstrated sufficient initial and continuing investment in the property. |
Condominium Sales — Revenues from the sale of condominium units is recognized when construction is beyond the preliminary stage, the buyer is committed to the extent of being unable to require a refund under applicable laws except for non-delivery of the unit, sufficient units in the project have been sold to ensure that the property will not be converted to a rental property, the sales proceeds are collectible, and the aggregate sales proceeds and the total cost of the project can be reasonably estimated. For the Company’s Canadian high-rise condominiums, these conditions are met when a certificate of occupancy has been received, all significant conditions of registration have been performed and the purchaser has the right to occupy the unit. |
Land Sales — Revenues from land sales are recognized when title is transferred to the buyer, there is no significant continuing involvement, and the buyer has demonstrated sufficient initial and continuing investment in the property sold. If the buyer has not made an adequate initial or continuing investment in the property, the profit on such sales is deferred until these conditions are met. |
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Mortgage Operations — Revenues from loan origination are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans Taylor Morrison Home Funding, LLC (“TMHF”) originates are sold within a short period of time, generally 20 days, on a nonrecourse basis as further described in Note 9 – Debt – Mortgage Company Loan Facilities. After the loans are sold, the Company retains potential liability for possible claims by purchasers of the loan that it breached certain limited industry-standard representations and warranties in the loan sale agreement. Gains or losses from the sale of mortgages are recognized based on the difference between the selling price and carrying value of the related loans upon sale. |
Deposits — Forfeited buyer deposits related to home, condominium, and land sales are recognized in other expense (income), net in the accompanying Consolidated and Combined Statements of Operations in the period in which the Company determines that the buyer will not complete the purchase of the property and the deposit is determined to be non-refundable to the buyer. |
Sales Discounts and Incentives — The Company grants home buyers sales discounts and incentives from time to time, including cash discounts, discounts on options included in the home, option upgrades and seller-paid financing or closing costs. Discounts are generally accounted for as a reduction in the sales price of the home. |
Advertising Costs | ' |
Advertising Costs — We expense advertising costs as incurred. Advertising costs were $24.5 million and $15.4 million for the years ended December 31, 2013 and 2012, $6.1 million for the period from July 13, 2011 through December 31, 2011, and $7.0 million for the period from January 1, 2011 through July 12, 2011. |
Earnings Per Common Share | ' |
Earnings Per Common Share — Basic earnings per common share is computed by dividing net income available to TMHC by the weighted average number of Class A Common Stock outstanding during the period. Diluted earnings per share gives effect to the potential dilution that could occur if Class B Common Stock and New TMM Units were exchanged for Class A Common Stock and if equity awards to issue common stock that are dilutive were exercised (in thousands): |
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| | | | | | | | | | | | | | | | | | |
| | Year Ended | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | | | |
Net income available to TMHC — basic | | $ | 45,420 | | | | | | | | | | | | | | | |
Pre-IPO Principal Equityholders’ non-controlling interest | | | 123,532 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net income available to TMHC — diluted | | $ | 168,952 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | | | |
Weighted average shares — basic | | | 32,840 | | | | | | | | | | | | | | | |
Pre-IPO Principal Equityholders’ non-controlling interest | | | 89,469 | | | | | | | | | | | | | | | |
Restricted stock units | | | 9 | | | | | | | | | | | | | | | |
Stock options | | | 1 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Weighted average shares —diluted | | | 122,319 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.38 | | | | | | | | | | | | | | | |
Diluted | | $ | 1.38 | | | | | | | | | | | | | | | |
The Company excluded 1,439,645 stock options from the calculation of earnings per common share for the year ended December 31, 2013 as their inclusion is anti-dilutive. |
The shares of Class B Common Stock do not have economic rights (including no rights to dividends or distribution on liquidation), but only have voting rights and therefore are not participating securities. Accordingly, basic net income per share is not presented for these shares. |
Recently Issued Accounting Pronouncements | ' |
Recently Issued Accounting Pronouncements — In July 2013, the FASB issued Accounting Standards Update (“ASU 2013–11”) Income Taxes, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. ASU 2013-11 is effective for the Company beginning January 1, 2014. The Company does not anticipate the adoption of ASU 2013-11 will have a material effect on its Consolidated and Combined Financial Statements or disclosures. |
In April 2013, the FASB issued ASU 2013-04, Liabilities (“ASU 2013-04”), which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. ASU 2013-04 is effective for the Company beginning January 1, 2014. The Company does not anticipate the adoption of ASU 2013-04 will have a material effect on its Consolidated and Combined Financial Statements or disclosures. |
Taylor Morrison and Monarch [Member] | ' |
Acquisition Accounting | ' |
Acquisition Accounting |
2011 Acquisition — In connection with the Acquisition and in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, (“ASC 805”) the Acquisition was accounted for on July 13, 2011, under the acquisition method of accounting and all acquired assets and assumed liabilities were recorded at fair value. |
Cash and cash equivalents, restricted cash, other assets, accounts payable, and accrued and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Income tax receivables and liabilities were recorded at historical carrying values in accordance with ASC Topic 805. The Predecessor Parent Company has indemnified the Company for specific uncertain tax positions for which tax liabilities are included in income taxes payable in the accompanying Consolidated and Combined Balance Sheets. A receivable due from the Predecessor Parent Company for the indemnification is valued at the same amount as the estimated income tax liability. |
The Company determined the fair value of real estate inventory on a community-by-community basis primarily using the income and sales comparison approaches. The income approach derives a value indication for income-producing property by converting anticipated benefits, such as cash flow, into property value. This approach was used exclusively for finished lots. The sales comparison approach used recent land sales to provide a lot value for finished lots or an average value for raw land. In markets where there were no recent land sales, the third party appraiser conducted interviews with local market participants, including brokers and appraisers, to gain an understanding of local land and lot values. In instances where both the income and sales approaches were used, equal weightings were typically given to each approach. These estimated cash flows are significantly affected by estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. |
The fair value of acquired intangible assets was determined based on valuations performed by independent valuation specialists using the income approach. The intangibles were valued at $10.2 million with $4.1 million related to the Taylor Morrison trade name and $6.1 million related to the Monarch trade name. Both trade names are being amortized on a straight line basis over 10 years. Amortization of $1.0 million was recorded for both of the years ending December 31, 2013 and 2012 and $0.5 million for the period from July 13, 2011 through December 31, 2011. These amounts are included in general and administrative expenses in the accompanying Consolidated and Combined Statements of Operations. |
The Company completed its business combination accounting as of December 31, 2011. A summary of the fair value of assets acquired and liabilities assumed as of July 13, 2011, is as follows (in thousands): |
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| | | | | | | | | | | | | | | | | | |
Financial Statement Caption | | Total | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 295,426 | | | | | | | | | | | | | | | |
Restricted cash | | | 6,705 | | | | | | | | | | | | | | | |
Real estate inventory | | | 1,036,068 | | | | | | | | | | | | | | | |
Land deposits | | | 9,667 | | | | | | | | | | | | | | | |
Loan receivables, net | | | 76,386 | | | | | | | | | | | | | | | |
Mortgage receivables | | | 32,531 | | | | | | | | | | | | | | | |
Other receivables | | | 64,481 | | | | | | | | | | | | | | | |
Tax indemnity receivable | | | 129,686 | | | | | | | | | | | | | | | |
Prepaid expenses and other assets, net | | | 48,781 | | | | | | | | | | | | | | | |
Investment in unconsolidated entities | | | 38,488 | | | | | | | | | | | | | | | |
Property and equipment, net | | | 6,591 | | | | | | | | | | | | | | | |
Intangible assets | | | 10,200 | | | | | | | | | | | | | | | |
Deferred tax liabilities, net | | | (16,240 | ) | | | | | | | | | | | | | | |
Accounts payable | | | (44,763 | ) | | | | | | | | | | | | | | |
Accrued expenses and other liabilities | | | (199,235 | ) | | | | | | | | | | | | | | |
Income taxes payable | | | (120,878 | ) | | | | | | | | | | | | | | |
Customer deposits | | | (71,155 | ) | | | | | | | | | | | | | | |
Mortgage borrowings | | | (32,134 | ) | | | | | | | | | | | | | | |
Loans payable and other borrowings | | | (80,092 | ) | | | | | | | | | | | | | | |
Non-controlling interests | | | (13,193 | ) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net assets acquired at fair value | | $ | 1,177,320 | | | | | | | | | | | | | | | |
Less amounts financed through debt | | | (612,500 | ) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Equity infusion paid to seller | | $ | 564,820 | | | | | | | | | | | | | | | |
Cash contributed by the Sponsors | | | 55,500 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net Sponsors equity | | $ | 620,320 | | | | | | | | | | | | | | | |
Less carrying basis of Predecessors’ equity | | | (527,045 | ) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Initial capital contribution and purchase price allocation adjustments | | $ | 93,275 | | | | | | | | | | | | | | | |
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2011 Acquisition [Member] | ' |
Acquisition Accounting | ' |
Darling Acquisition — On December 31, 2012, the Company acquired certain assets and liabilities of Darling Interests, Inc. and certain affiliated entities, a Texas-based homebuilder (the “Darling Acquisition”). Darling builds homes under the Darling Homes brand for move-up and luxury buyers in the Dallas-Fort Worth Metroplex and in the Greater Houston Area markets. Darling is a well-established builder whose products complement our existing product lines in Texas. The Company believes the Darling Acquisition has given it a strong presence in the Dallas homebuilding market and has expanded its existing operations in Houston. |
The consideration for the acquisition of the Darling assets was $114.8 million as well as a contingent payment of $50.0 million, plus 5% of any cumulative earnings before interest and taxes above $229.5 million over the four year period following December 31, 2012. A portion of this amount was financed by $50.0 million of borrowings under the Company’s Revolving Credit Facility (as defined in Note 9 — Debt — Revolving Credit Facility). Approximately $27.6 million of the price for the acquisition was financed by the sellers. In connection with the purchase price allocation for the acquisition, the Company recorded $23.4 million of goodwill and $9.9 million of intangible assets with finite useful lives. Darling operates as part of the Company’s East segment, and the goodwill recorded as part of the Darling Acquisition has been recorded in the balance sheet for the East segment included in the accompanying Consolidated and Combined Balance Sheets. The purchase price, as allocated to the assets and liabilities acquired, is as follows (in thousands): |
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| | | | | | | | | | | | | | | | | | |
| | Amount | | | | | | | | | | | | | | | |
Initial consideration | | $ | 114,845 | | | | | | | | | | | | | | | |
Contingent consideration | | | 8,300 | | | | | | | | | | | | | | | |
Seller financing | | | 27,605 | | | | | | | | | | | | | | | |
Liabilities assumed | | | 19,021 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | 169,771 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
The Company has completed its business combination accounting as of December 31, 2013. In connection with the purchase price allocation for the acquisition, the Company recorded (in thousands): |
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| | | | | | | | | | | | | | | | | | |
| | Preliminary | | | Final | | | Change | | | | | | | |
Amount | Amount | | | | | | |
Real estate inventory | | $ | 111,814 | | | $ | 110,508 | | | $ | (1,306 | ) | | | | | | |
Land deposits | | | 12,500 | | | | 12,500 | | | | — | | | | | | | |
Joint Venture interests before consolidation | | | 18,999 | | | | 10,200 | | | | (8,799 | ) | | | | | | |
Other assets | | | 1,971 | | | | 3,264 | | | | 1,293 | | | | | | | |
Intangibles with finite lives | | | 9,121 | | | | 9,924 | | | | 803 | | | | | | | |
Goodwill | | | 15,526 | | | | 23,375 | | | | 7,849 | | | | | | | |
Contingent consideration | | | (8,300 | ) | | | (8,300 | ) | | | — | | | | | | | |
Seller financing | | | (27,605 | ) | | | (27,605 | ) | | | — | | | | | | | |
Liabilities assumed | | | (19,021 | ) | | | (19,021 | ) | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net assets required | | $ | 115,005 | | | $ | 114,845 | | | $ | (160 | ) | | | | | | |
| | | | | | | | | | | | | | | | | | |
The $9.9 million of intangible assets with finite useful lives consist of $1.1 million of trade name, $6.0 million of lot option contracts and supplier relationships, $2.6 million of non-compete covenants and $0.2 million of favorable leases. |
The Company valued the $50.0 million of contingent purchase price using probability weightings of the anticipated liability under four different scenarios: (1) business enterprise forecast of liability; (2) the contribution margin and earnings before income and tax estimates from a valuation income forecast; (3) alternative estimates of contribution margin and earnings before interest and taxes; and (4) as if the full buy out obligation was paid to Darling. The mid point of the range of the results of these probability weighted valuations was discounted, resulting in a $8.3 million liability that is included within loans payable and other borrowings at December 31, 2013 and December 31, 2012 in the Consolidated and Combined Balance Sheets. |
The Company expects the entire $23.4 million of goodwill recorded from the acquisition to be deductible for tax purposes. |
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In the course of finalizing the purchase price allocation, the Company consolidated one joint venture resulting from the Darling Acquisition that yielded a preliminary $18.9 million adjustment to the non-controlling interests to account for joint venture partner debts in the Consolidated and Combined Statement of Stockholders’ Equity at December 31, 2012. This adjustment was finalized at $10.2 million with the adjustment recorded against investments in unconsolidated entities in the balance sheet prior to consolidation of the joint venture in 2013. During the year ended December 31, 2013, the Company also reclassified intangible assets totaling $8.5 million into goodwill; decreased the basis assigned to one of the joint ventures by $1.8 million and increased the value assigned for lot options by $1.5 million, both of which were recorded against goodwill. |
Additionally, the Company incurred $1.8 million of transaction costs which were recorded in 2012 as other expense (income), net in the Consolidated and Combined Statements of Operations. Darling’s Dallas and Houston operations were integrated into the Company’s East segment for segment reporting purposes in 2013. |
The December 31, 2012 comparative information has been retrospectively adjusted for the above in accordance with ASC 805. Amortization of approximately $1.1 million related to the reclassified intangible assets has been reversed and is included in general and administrative expenses for the year ended December 31, 2013 as a reduction in amortization expense. Additional amortization of $0.4 million taken on the increase in lot options has been included in cost of home closings for the year ended December 31, 2013. |