Reconciliation ofNon-GAAP Financial Measures
The following tables set forth reconciliations of: (i) adjusted income before income taxes, (ii) EBITDA and adjusted EBITDA to net income before allocation tonon-controlling interests, (iii) adjusted net income and adjusted earnings per share, (iv) net homebuilding debt to total capitalization ratio, (v) home closings gross margin and adjusted home closings gross margin, (vi) adjusted SG&A, and (vii) income before income taxes margin and adjusted income before income taxes margin.
Adjusted income before income taxes is anon-GAAP financial measure that reflects our income before income taxes excluding the impact of significant and unusual transactions, which for the three and twelve months ended December 31, 2019 included impairments, warranty expense, litigation expenses for such warranty expense, loss on extinguishment of debt, and write-off of expenses related to the divestiture of certain assets, and for the three and twelve months ended December 31, 2018 included impairments and warranty expenses, as well as, in each period, transaction and corporate reorganization expenses. EBITDA and Adjusted EBITDA arenon-GAAP financial measures that measure performance by adjusting net income before allocation tonon-controlling interests to exclude interest amortized to cost of sales and interest income, net, income taxes, depreciation and amortization (EBITDA), andnon-cash compensation expense, if any, significant and unusual transactions, as well as, in each period, transaction and corporate reorganization expenses and loss on extinguishment of debt (Adjusted EBITDA). Adjusted net income and adjusted earnings per share arenon-GAAP financial measures that reflect the net income available to the Company excluding the impact of significant and unusual transactions, which for the three and twelve months ended December 31, 2019 included impairments, warranty expense, litigation expenses for such warranty expense, loss on extinguishment of debt, and write-off of expenses related to the divestiture of certain assets, and for the three and twelve months ended December 31, 2018 included impairments and warranty expenses, as well as, in each period, transaction and corporate reorganization expenses and the tax impact due to such items. Net homebuilding debt to capitalization is anon-GAAP financial measure we calculate by dividing (i) total debt, less unamortized debt issuance costs and mortgage warehouse borrowings, net of unrestricted cash and cash equivalents, by (ii) total capitalization (the sum of net homebuilding debt and total stockholders’ equity). Adjusted home closings gross margin is anon-GAAP financial measure calculated based on GAAP home closings gross margin (which is inclusive of capitalized interest), excluding impairments and warranty charges. Adjusted SG&A is anon-GAAP measure that reflects our GAAP SG&A excluding the impact of significant and unusual transactions, which for the three and twelve months ended December 31, 2019 included litigation expenses for the warranty expense andwrite-off expenses related to the divestiture of certain assets, and for the three and twelve months ended December 31, 2018 included litigation expenses for the warranty expense.
Management uses thesenon-GAAP financial measures to evaluate our performance on a consolidated basis, as well as the performance of our regions, and to set targets for performance-based compensation. We also use the ratio of net homebuilding debt to total capitalization as an indicator of overall leverage and to evaluate our performance against other companies in the homebuilding industry. In the future, we may include additional adjustments in the above describednon-GAAP financial measures to the extent we deem them appropriate and useful to management and investors.
We believe that adjusted income before income taxes, adjusted net income and adjusted earnings per share, adjusted SG&A, as well as EBITDA and adjusted EBITDA, are useful for investors in order to allow them to evaluate our operations without the effects of various items we do not believe are characteristic of our ongoing operations or performance and also because such metrics assist both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted EBITDA also 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, or unusual items. Because we use the ratio of net homebuilding debt to total capitalization to evaluate our performance against other companies in the homebuilding industry, we believe this measure is also relevant and useful to investors for that reason. We believe that adjusted home closings gross margin is useful to investors because it allows investors to evaluate the performance of our homebuilding operations without the varying effects of inventory impairment charges and warranty charges.
