20140930 Q3

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Century Communities, Inc.

FORM 10-Q

For the three and nine months ended September 30, 2014

Index



Part I. Financial Information	Page
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet of Century Communities, Inc. as of September 30, 2014 and December 31, 2013	3
Unaudited Condensed Consolidated Statement of Operations of Century Communities, Inc. for the Three and Nine Months ended September 30, 2014 and 2013	4
Unaudited Condensed Consolidated Statement of Cash Flows of Century Communities, Inc. for the Three and Nine Months ended September 30, 2014 and 2013	5
Notes to Unaudited Condensed Consolidated Financial Statements (September 30, 2014)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
Part II. Other Information
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	27
Signatures

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Century Communities, Inc.

Unaudited Condensed Consolidated Balance Sheet

As of September 30, 2014 and December 31, 2013

(in thousands, except share amounts)



	September 30,		December 31,
	2014		2013
Assets
Cash and cash equivalents	$	101,704	$	109,998
Accounts receivable		16,105		4,438
Inventories		461,566		184,072
Prepaid expenses and other assets		27,502		8,415
Deferred tax asset, net		719		—
Property and equipment, net		11,848		3,360
Amortizable intangible assets, net		5,900		1,877
Goodwill		13,249		479
Total Assets	$	638,593	$	312,639
Liabilities and stockholders' equity
Liabilities:
Accounts payable	$	10,102	$	8,313
Accrued expenses and other liabilities		50,674		30,358
Deferred tax liability, net		—		912
Notes payable and revolving loan agreement		210,048		1,500
Total liabilities	$	270,824	$	41,083
Stockholders' Equity:
Preferred Stock, $0.01 par value, 50,000,000 shares authorized, none outstanding		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,485,257 and 17,257,774 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		213		173
Additional paid in capital		346,321		262,982
Retained Earnings		21,235		8,401
Total stockholders' equity	$	367,769	$	271,556
Total liabilities and stockholders' equity	$	638,593	$	312,639

See Notes to Unaudited Condensed Consolidated Financial Statements

Table of Contents

Century Communities, Inc.

Unaudited Condensed Consolidated Statement of Operations

For the Three And Nine Months Ended September 30, 2014 and 2013

(in thousands, except share and per share amounts)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Home sales revenues	$	90,735	$	41,494	$	217,734	$	107,502
Cost of home sales revenues		70,896		31,948		166,367		81,084
Gross margin from home sales		19,839		9,546		51,367		26,418
Golf course and other revenue		1,226		—		3,750		—
Cost of golf course and other revenue		2,175		—		4,329		—
Gross margin from golf course and other		(949)		—		(579)		—
Selling, general, and administrative (including related-party management fees of $0 and $200 for the three and nine months ended September 30, 2013, respectively)		12,584		5,682		30,906		13,244
Operating income		6,306		3,864		19,882		13,174
Other income (expense):
Interest income		130		98		267		152
Interest expense		(2)		—		(13)		—
Acquisition expense		(119)		(329)		(923)		(329)
Other income		327		151		585		332
Gain/(Loss) on disposition of assets		55		—		145		9
Income before tax expense		6,697		3,784		19,943		13,338
Income tax expense		2,570		1,346		7,109		3,330
Deferred taxes on conversion to a corporation		—		—		—		627
Consolidated net income of Century Communities, Inc.		4,127		2,438		12,834		9,381
Net income attributable to the noncontrolling interests		—		—		—		52
Income attributable to common stockholders	$	4,127	$	2,438	$	12,834	$	9,329
Earnings per share:
Basic and Diluted	$	0.19	$	0.14	$	0.68	$	0.81
Weighted average common shares outstanding:
Basic and Diluted		21,113,708		17,075,000		18,635,986		11,457,692
Unaudited pro-forma net income, income attributable to common stockholders, and earnings per share (Note 16):
Pro-forma consolidated net income of Century Communities, Inc.	$	4,142	$	5,467	$	14,548	$	14,487
Pro-forma income attributable to common stockholders		4,072		5,424		14,324		14,329
Pro-forma basic and diluted earnings per share	$	0.19	$	0.32	$	0.77	$	1.25
Unaudited pro-forma weighted average common shares (Note 16):
Pro-forma basic and diluted		21,113,708		17,075,000		18,635,986		11,457,692

See Notes to Unaudited Condensed Consolidated Financial Statements

Table of Contents

Century Communities, Inc.

Unaudited Condensed Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2014 and 2013

(in thousands)



	Nine Months Ended
	September 30,
	2014		2013
Operating activities:
Consolidated net income of Century Communities, Inc.	$	12,834	$	9,381
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,790		310
Stock compensation expense		1,453		437
Deferred income tax provision		(1,631)		386
Deferred provision upon conversion		—		627
Excess tax benefit on stock-based compensation		(37)		—
Gain on disposition of assets		145		9
Changes in assets and liabilities:
Cash held in trust		—		995
Accounts receivable		(11,094)		(3,888)
Inventories		(116,368)		(63,902)
Prepaid expenses and other assets		(10,894)		(4,353)
Accounts payable		(285)		(2,708)
Accrued expenses and other liabilities		14,816		10,232
Payable to affiliates		—		(95)
Net cash used in operating activities		(109,271)		(52,569)
Investing activities:
Purchases of property and equipment		(393)		(344)
Business combinations		(178,235)		(15,132)
Net cash used in investing activities		(178,628)		(15,476)
Financing activities:
Borrowings under revolving credit facilities		99,000		26,671
Payments on revolving credit facilities		(99,000)		(47,044)
Proceeds from issuance of senior notes		198,478		—
Proceeds from issuance of notes payable		5,894		1,500
Principal payments		(1,562)		(12,833)
Debt issuance costs		(5,132)		—
Net proceeds from issuances of common stock		81,890		223,729
Excess tax benefit on stock-based compensation		37		—
Contributions from members		—		1,500
Distributions to members		—		(3,830)
Distributions to noncontrolling interest		—		(257)
Net cash provided by financing activities		279,605		189,436
Net increase (decrease) in cash and cash equivalents	$	(8,294)	$	121,391
Cash and cash equivalents
Beginning of period		109,998		4,981
End of period	$	101,704	$	126,372
Non-cash investing and financing information
Seller financed acquisitions of land	$	4,329	$	—
Inventory contributed by members	$	—	$	3,708
Inventory distributed to noncontrolling interests	$	—	$	2,296
Conversion of subordinated debt obligation to equity	$	—	$	11,244

See Notes to Unaudited Condensed Consolidated Financial Statements

Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2014

1. Basis of Presentation

Century Communities, Inc. a Delaware corporation (“we” or the “Company”) is engaged in all aspects of homebuilding, including land acquisition and development, entitlements, and the acquisition, development, construction, marketing, and sale of various single-family detached and attached residential home projects primarily in major metropolitan markets in Colorado, Central Texas, Houston, and Nevada.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (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 its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013, which are included in our prospectus dated June 17, 2014 that was filed with the SEC on June 18, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest. All intercompany accounts and transactions have been eliminated.

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.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for GAAP. The pronouncement is effective for reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adoption of ASU 2014-09 on the Company’s consolidated financial position and results of operations.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern”, (ASU 2014-15), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. Our adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements and related disclosures.

2. Initial Public Offering and Issuance of Senior Unsecured Notes

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), where we received net proceeds of approximately $193.3 million. The notes carry a coupon of 6.875% per annum and were issued at a price equal to 99.239% of their principal amount. Concurrent with the issuance of the senior unsecured notes, we repaid the then outstanding balance including accrued interest of $99.2 million on our revolving loan agreement.

In June 2014, we completed our initial public offering of 4.0 million shares of common stock, $0.01 par value, at a per share price of $23.00, where we received net proceeds to the Company of approximately $81.9 million.

3. Reporting Segments

We have identified our Colorado, Central Texas, Houston, and Nevada divisions as reportable segments. Our Corporate operations are a nonoperating segment, as it serves to support our homebuilding operations through functions such as our executive, finance, treasury, human resources, and accounting departments.

The following tables summarize home sales, golf and other revenues and income before tax expense by segment (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Home sales, golf and other revenues
Colorado	$	40,291	$	37,963	$	124,490	$	103,971
Central Texas		16,460		3,531		42,746		3,531
Houston		7,365		—		7,365		—
Nevada		27,845		—		46,883		—
Total	$	91,961	$	41,494	$	221,484	$	107,502

Income before tax expense
Colorado	$	5,620	$	6,217	$	19,856	$	18,383
Central Texas		2,172		232		4,287		232
Houston		(87)		—		(87)		—
Nevada		2,731		—		5,412		—
Corporate		(3,739)		(2,665)		(9,525)		(5,277)
Total	$	6,697	$	3,784	$	19,943	$	13,338

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



	September 30,		December 31,
	2014		2013
Colorado	$	251,733	$	167,948
Central Texas		74,055		27,386
Houston		25,540		—
Nevada		176,982		—
Corporate		110,283		117,305
Total	$	638,593	$	312,639

Corporate assets include certain cash and cash equivalents, prepaid insurance, deferred financing costs and certain property and equipment.

4. Inventories

A summary of our inventories is as follows (in thousands):



	September 30,		December 31,
	2014		2013
Homes under construction	$	180,539	$	89,202
Land and land development		272,038		92,050
Capitalized interest		8,989		2,820
Total	$	461,566	$	184,072

5. Prepaid Expenses and Other Assets

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



	September 30,		December 31,
	2014		2013
Prepaid insurance	$	8,605	$	1,260
Lot option and escrow deposits		4,546		3,218
Performance deposits		6,001		1,899
Deferred financing costs, net		5,118		—
Other		3,232		2,038
Total	$	27,502	$	8,415

6. Accrued Expenses and Other Liabilities

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



	September 30,		December 31,
	2014		2013
Customer and escrow deposits	$	4,622	$	3,327
Warranty reserve		2,114		1,150
Accrued compensation costs		6,400		5,511
Land development and home construction accruals		25,256		12,286
Accrued interest		5,653		9
Income tax payable		—		4,731
Billings in excess of collections		85		1,199
Earnout liability		2,768		—
Other		3,776		2,145
Total	$	50,674	$	30,358

7. Warranty Reserve

Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheet, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal lag development model that incorporates historical payment trends and adjust the amounts recorded if necessary. Additional reserves may be established, and an expense recorded, for unusual warranty-related expenditures at the time the expenditure becomes probable and estimable. Changes in our warranty accrual for the three and nine months ended September 30, 2014 and 2013 are detailed in the table below (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Accrued warranty reserve, beginning of period	$	1,546	$	845	$	1,150	$	679
Warranty reserves assumed in business combinations		200		—		341		—
Warranty expense provisions		715		195		1,354		582
Payments		(347)		(204)		(731)		(425)
Accrued warranty reserve, end of period	$	2,114	$	836	$	2,114	$	836

8. Notes Payable and Revolving Loan Agreement

Notes payable and revolving loan agreement included the following as of September 30, 2014 and December 31, 2013 (in thousands):



	September 30,		December 31,
	2014		2013
6.875% senior notes(A)	$	198,557	$	—
Land development notes(B)		5,740		1,500
Insurance premium notes (C)		5,682		—
Capital lease obligations (D)		69		—
Revolving loan agreement(E)		—		—
Total	$	210,048	$	1,500

(A)

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended. We received net proceeds of approximately $193.3 million. The notes carry a coupon of 6.875% per annum and were issued at a price equal to 99.239% of their principal amount. The senior notes are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The senior notes contain certain restrictions on issuing future secured debt and other transactions but do not contain financial covenants. The principal balance is due in May 2022, with interest only payments due semi-annually in November and May.

(B)

Four notes with maturity dates ranging from March 2015 to April 2016 with interest only payments ranging from 0.5% to 5.0%.

(C)

Two notes due October 2015 and November 2015, respectively, and monthly interest and principal payments at 2.65% and 3.89%, respectively.

(D)

Various equipment leases with maturities ranging from 2 to 4 years.

(E)

On October 18, 2013 we entered into a three-year revolving loan agreement with a maximum borrowings of $100.0 million. Borrowings on the revolving loan agreement bear interest at a daily rate of LIBOR plus 2.50%. The revolving loan agreement was terminated on July 1, 2014, however letters of credit of $0.8 million issued prior to termination remain outstanding as of September 30, 2014.

9. Interest

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. The capitalized interest is subsequently included in cost of sales at the time the home is closed. As our qualifying assets exceeded our outstanding debt during the three and nine months ended September 30, 2014 and 2013, we capitalized all interest costs incurred during these periods, other than interest incurred on capital leases associated with golf course equipment.

Our interest costs are as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Interest capitalized beginning of period	$	5,850	$	3,312	$	2,820	$	3,243
Interest capitalized during period		3,894		86		7,452		976
Less: capitalized interest in cost of sales		(755)		(530)		(1,283)		(1,351)
Interest capitalized end of period	$	8,989	$	2,868	$	8,989	$	2,868

10. Business Combinations

Acquisition of Las Vegas Land Holdings, LLC

On April 1, 2014, we purchased substantially all of the assets and operations of Las Vegas Land Holdings, LLC (“LVLH”), a homebuilder with operations in Las Vegas, Nevada, for a purchase price of approximately $165 million. The acquired assets consisted of 1,761 lots within five single-family communities in the greater Las Vegas, Nevada metropolitan area. The 1,761 lots included 57 homes in backlog, 17 model homes and three custom lots. In addition, we acquired two fully operational golf courses, three custom home lots, and two one-acre commercial plots. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination. We incurred $0.8 million in acquisition-related costs, which are included in other income (expense) on the consolidated statement of operations.

The following table summarizes the preliminary amounts recognized as of the acquisition date:



Assets acquired and liabilities assumed
Accounts receivable	$	347
Inventories		144,531
Prepaid expenses and other assets		2,910
Property and equipment		8,619
Amortizable intangible assets		3,076
Goodwill		11,282
Total assets	$	170,765

Accounts payable	$	2,074
Accrued expenses and other liabilities		1,816
Notes payable and capital lease obligations		1,497
Total liabilities	$	5,387

We determined the preliminary estimate of fair value for acquired inventories 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 determined the preliminary estimate of fair value for amortizable intangible assets, which includes a non-solicitation agreement, cell phone tower leases, and home plans, with the assistance of a third party valuation firm based primarily on a replacement cost approach. Our preliminary estimates of the fair value of the non-solicitation agreement, cell phone tower leases, and homes plans was $1.4 million, $1.4 million and $0.3 million, respectively, which will be amortized over 2 years, 17 years, and 7 years, respectively. In total, amortizable intangible assets will be amortized over a weighted average life of 9.3 years.

We determined that LVLH’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.

Goodwill includes the anticipated economic value of the acquired workforce. Approximately $10.0 million of goodwill is expected to be deductible for tax purposes.

During the third quarter we recorded measurement period adjustments which decreased the estimated value of prepaid expenses and other assets and goodwill by $0.6 million and $2.2 million, respectively, and increased the estimated value of inventory by $2.8 million. The measurement period adjustments resulted in an increase to cost of sales for the three months ended September 30, 2014 of $0.5 million. As we have not completed our estimate of the fair value of the assets acquired and liabilities assumed, the final determinations of the values may result in adjustments to the amounts presented above and a corresponding adjustment to goodwill.

Acquisition of Grand View Builders

On August 12, 2014, we purchased substantially all of the assets and operations of Grand View Builders (“Grand View”) in Houston, Texas for a purchase price of approximately $13 million and annual earnout payments based on a percentage of adjusted pre-tax income over the next two years. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination. We incurred $0.1 million in acquisition-related costs, which are included in other income (expense) on the consolidated statement of operations.



Assets acquired and liabilities assumed
Accounts receivable	$	188
Inventories		12,356
Prepaid expenses and other assets		295
Property and equipment		185
Amortizable intangible assets		2,028
Goodwill		1,489
Total assets	$	16,541

Accrued expenses and other liabilities (inclusive of earnout liability)	$	3,684
Total liabilities	$	3,684

We determined the preliminary estimate of fair value for acquired inventories on a lot by lot basis primarily using a forecasted cash flow approach for the development, marketing, and sale of each lot acquired. Significant assumptions included in our estimate include future construction and overhead costs, sales price, and absorption rates.

We determined the preliminary estimate of fair value for amortizable intangible assets, which includes a non-compete agreement, trade names, home plans, and backlog associated with certain custom home contracts, with the assistance of a third party valuation firm. Our preliminary estimate of the fair value of the non-compete agreement, trade names, home plans and backlog were $0.3 million, $1.4 million, $0.1 million, and $0.2 million respectively, which will be amortized over 2 years, 2.3 years, 7 years, and 1.5 years, respectively. In total, amortizable intangible assets will be amortized over a weighted average life of 2.4 years.

The fair value of the earnout on the acquisition date of $2.8 million was determined with the assistance of a third party valuation firm based on probability weighting scenarios and discounting the potential payments which range from $0 to a maximum of $5.3 million. The maximum earnout amount is subject to downward reductions of up to $1.5 million based on the number of future lots acquired over the next two years in our Houston division. The earnout liability is included in accrued expenses and other liabilities on the consolidated balance sheet.

We determined that Grand View’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.

Goodwill includes the anticipated economic value of the acquired workforce. We have not finalized the amount of goodwill that will be deductible for tax purposes.

As we have not completed our estimate of the fair value of the assets acquired and liabilities assumed, the final determinations of the values may result in adjustments to the amounts presented above and a corresponding adjustment to goodwill.

11. Income Taxes

On April 30, 2013, the Company reorganized from a Colorado limited liability company into a Delaware corporation, and accordingly, we are subject to federal and state income taxes subsequent to April 30, 2013. On the date of conversion, we recorded a net deferred tax liability of $0.6 million on our consolidated balance sheet, the effect of which was recorded as a deferred tax on conversion to a corporation in our consolidated statement of operations.

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Accordingly, we recorded income tax expense of $2.6 million and $7.1 million for the three and nine months ended September 30, 2014. Our income tax expense for the three and nine months ended September 30, 2014 is based on our estimated annual effective tax rate of approximately 34% and certain discreet items recorded in the third quarter of 2014. The discreet items related to the filing of our prior year federal income tax returns, and impacted our effective tax rate by approximately 3.4% and 1.6% for the three and nine month periods ended September 30, 2014, respectively.

12. Fair Value Disclosures

ASC 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 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):



		September 30, 2014				December 31, 2013
				Fair				Fair
	Hierarchy	Carrying		Value		Carrying		Value
6.875% senior notes (1)	Level 2	$	198,557	$	203,571	$	—	$	—
Land development notes (1)	Level 2	$	5,740	$	5,723	$	1,500	$	1,490
Insurance premium notes (1)	Level 2	$	5,682	$	5,682	$	—	$	—
Capital lease obligations (1)	Level 2	$	69	$	69	$	—	$	—
Earnout liability(2)	Level 3	$	2,768	$	2,768	$	—	$	—

(1)

Estimated fair values as of September 30, 2014 and December 31, 2013 were based on cash flow models discounted at market interest rates that considered underlying risks of the debt.

(2)

Recognized in connection with the acquisition of Grand View on August 12, 2014. A Monte Carlo model was used to value the earnout by simulating earnings, applying the terms of the earnout in each simulated path, determining the average payment in each year across all the trials of the simulation, and calculating the sum of the present values of the payments in each year. The primary inputs and key assumptions of this Monte Carlo model included a range of forecasted revenue and gross margin scenarios which increased and decreased by 10.1% from our base case and discount rates ranging from 5.1% to 6.3%.

The carrying amount of cash and cash equivalents approximates fair value. Nonfinancial assets and liabilities include items such as inventory and long-lived assets that are measured at fair value when acquired and resulting from impairment, if deemed necessary.

13. Stock Based Compensation

The Company’s authorized capital stock consists of 100.0 million shares of common stock, $0.01 par value per share and 50.0 million shares of preferred stock, $0.01 par value. As of September 30, 2014 and December 31, 2013, there were 21.1 million and 17.1 million shares of common stock issued and outstanding, exclusive of the restricted common stock issued, respectively. The Company also has reserved a total of 1.8 million shares of common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, including outstanding awards. During the three months ended September 30, 2014, the Company issued 53 thousand shares of restricted common stock awards with a grant date fair value of $21.13 per share.

As of September 30, 2014, 0.4 million shares of restricted common stock were unvested, and $6.7 million of unrecognized compensation costs is expected to be recognized over a weighted average period of 2.4 years.

During the three and nine months ended September 30, 2014 and 2013, the Company recognized stock-based compensation expense of $0.7 million, $1.5 million, $0.3 million and $0.4 million, respectively, which is included in selling, general, and administrative on the consolidated statement of operations.

14. Earnings Per Share

We use the two-class method of calculating earnings per share (“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.

For purposes of determining weighted average shares outstanding for the three and nine months ended September 30, 2013, the 5.0 million shares that were issued to our outstanding membership interests upon conversion of the Company from a Colorado limited liability company to a Delaware corporation, are reflected as outstanding at the beginning of the period presented.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (in thousands, except share and per share information):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Numerator
Net income	$	4,127	$	2,438	$	12,834	$	9,381
Less: Net income attributable to the noncontrolling interests		—		—		—		(52)
Less: Undistributed earnings allocated to participating securities		(70)		(23)		(179)		(69)
Numerator for basic and diluted EPS	$	4,057	$	2,415	$	12,655	$	9,260
Denominator
Basic and diluted earnings per share—weighted average shares		21,113,708		17,075,000		18,635,986		11,457,692
Basic and diluted EPS	$	0.19	$	0.14	$	0.68	$	0.81

15. Commitments and Contingencies

Letters of Credit and Performance Bonds

In the normal course of business, the Company posts letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 2014 and December 31, 2013, we had $31.0 million and $3.0 million, respectively, in letters of credit and performance bonds issued and outstanding.

Litigation

The Company is 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 management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative on our consolidated statement of operations for our estimated loss.

16. Pro forma Financial Information

Unaudited pro forma income before tax expense for the three and nine months ended September 30, 2014 and 2013, gives effect to including the results of acquisitions of Jimmy Jacobs, L.P. (“Jimmy Jacobs”), LVLH and Grand View as of January 1, 2014 and 2013 respectively. Unaudited pro forma income before tax expense adjusts the operating results of Jimmy Jacobs, LVLH, and Grand View 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.

Pro forma basic and diluted net income per share for the three and nine months ended September 30, 2013 gives effect to the conversion of the Company’s members’ equity into common stock as though the conversion had occurred as of the beginning of 2013. In addition, the pro forma amounts give effect to reflect income tax adjustments as if the Company were a taxable entity as of the beginning of 2013. The pro forma income tax adjustment reflects that the Company would have filed a consolidated tax return as a corporation reflecting a consolidated net income for the periods presented (in thousands, except share and per share information):



		Three Months Ended			Nine Months Ended
		September 30,			September 30,
		2014	2013		2014		2013
Revenues	$	97,440	$	94,200	$	266,092	$	238,646
Income before tax expense		6,722		8,411		22,607		22,288
Tax expense		2,580		2,944		8,059		7,801
Consolidated net income of Century Communities, Inc.		4,142		5,467		14,548		14,487
Less: Net income attributable to the noncontrolling interest		—		—		—		(52)
Less: Undistributed earnings allocated to participating securities		(70)		(43)		(224)		(106)
Numerator for basic and diluted pro forma EPS	$	4,072	$	5,424	$	14,324	$	14,329
Pro forma weighted average shares		21,113,708		17,075,000		18,635,986		11,457,692
Pro forma basic and diluted EPS	$	0.19	$	0.32	$	0.77	$	1.25

17. Subsequent Events

Revolving Credit Agreement

On October 21, 2014, we entered into a credit agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto (the “Credit Agreement”). The Credit Agreement provides the Company with a revolving line of credit (the “Credit Facility”) of up to $120 million.

Unless terminated earlier, the Credit Facility will mature on October 21, 2017, and the principal amount thereunder, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on such date. The Company may request a twelve-month extension of the maturity date subject to the approval of the lenders and the Administrative Agent.

Under the terms of the Credit Agreement, the Company is entitled to request an increase in the size of the Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, the Company 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. The obligations under the Credit Agreement are guaranteed by certain of the Company’s subsidiaries.

Borrowings under the Credit Agreement 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 the leverage ratio of the Company, 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 Credit Facility.

The Credit Agreement contains customary affirmative and negative covenants (including limitations on the Company’s ability to grant liens, incur additional debt, pay dividends, redeem its common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. The Credit Agreement also requires the Company to maintain (i) a leverage ratio of not more than 1.50 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 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 to the Company’s tangible net worth.

Acquisition of Peachtree Communities, LLC

On November 13, 2014, we acquired substantially all the assets and operations of Peachtree Communities a leading homebuilder in Atlanta, Georgia for approximately $55 million in cash. The acquired assets include land, homes under construction and model homes in 36 communities in the greater Atlanta area. As a result of this transaction, we now own or control 2,120 lots in the greater Atlanta market.

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:


Assets acquired and liabilities assumed
Inventories	$	56,059
Prepaid expenses and other assets		689
Amortizable intangible assets		2,500
Goodwill		7,919
Total assets	$	67,167

Accounts payable	$	14,811
Total liabilities	$	14,811

Stock Repurchase Program

On November 5, 2014, our Board of Directors authorized a stock repurchase program under which the Company may repurchase up to 2,000,000 shares of its outstanding common stock, $0.01 par value per share. The shares may be repurchased from time to time in open market transactions at prevailing market prices, or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of share repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock and general market and economic conditions.

Table of Contents

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 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 the negative of such terms and other comparable terminology. 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 a number of factors, including our acquisition of Jimmy Jacobs in September 2013, LVLH in April 2014, Grand View in August of 2014, and Peachtree Communities in November of 2014.

The forward-looking statements included in this Quarterly Report on 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:

economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;

continued or increased downturn in the homebuilding industry;

changes in assumptions used to make industry forecasts;

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;

continued or increased disruption in the availability of mortgage financing or the number of foreclosures in the market;

shortages of or increased prices for labor, land or raw materials used in housing construction;

delays in land development or home construction resulting from adverse weather conditions or other events outside our control;

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 degree and nature of our competition;

our leverage and debt service obligations; and

availability of qualified personnel and our ability to retain our key personnel.

The 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 in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II, Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the U.S. Securities and Exchange Commission, or 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. You should, therefore, not rely on these forward-looking statements as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in Denver, Colorado, Austin, San Antonio Texas, and more recently, in the greater Houston, Texas, Las Vegas, Nevada and Atlanta, Georgia metropolitan areas. 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 an extensive range of home types across a variety of price points. Our emphasis is on acquiring well located land positions and offering quality homes with innovative design elements. We are one of the top 50 largest homebuilders in the United States (as ranked among public and private companies by Builder Magazine based on total revenue in 2013).

On April 1, 2014, we purchased substantially all of the assets of LVLH, a homebuilder with operations in Las Vegas, Nevada, for a purchase price of approximately $165 million. The acquired assets consisted of 1,761 lots within five single-family communities in the greater Las Vegas, Nevada metropolitan area. The 1,761 lots include 57 homes in backlog, 17 model homes and three custom lots. In addition, we acquired two fully operational golf courses, three custom home lots, and two one acre commercial plots.

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 (the “Notes”) in reliance on Rule 144A and Regulation S under the Securities Act, where we received net proceeds of approximately $193.3 million. The Notes carry a coupon of 6.875% per annum and were issued at a price equal to 99.239% of their principal amount.

In August of 2014, we acquired substantially all the assets and operations of Grand View Builders in Houston, Texas for a purchase price of approximately $13 million and earn out payments based on performance over the next two years.

In November of 2014, we acquired substantially all the assets and operations of Peachtree Communities in Atlanta, Georgia for a purchase price of approximately $55 million. The acquired assets consisted of 2,120 owned and controlled lots within 36 active selling communities.

Results of Operations

During the three months ended September 30, 2014, we delivered 258 homes, with an average sales price of $351,686. During the same period, we generated approximately $90.7 million in home sales revenue, approximately $6.7 million in income before tax expense, and approximately $4.1 million in net income. For the three months ended September 30, 2014, our net sales orders totaled 247 homes, a 208% increase over the same period in 2013. On September 30, 2014, we had a backlog of 472 sold but unclosed homes, a 74% increase over the same period in 2013, consisting of approximately $191.5 million in sales value, a 49% increase over the same period in 2013.

The following table summarizes our results of operation for the three and nine month periods ended September 30, 2014 and 2013.



	Three Months Ended				Nine Months Ended
(dollars in thousands, except as noted	September 30,				September 30,
under Other Operating Information)	2014		2013		2014		2013
	(unaudited)
Consolidated Statement of Operations:
Home sales revenues	$	90,735	$	41,494	$	217,734	$	107,502
Cost of home sales revenues		70,896		31,948		166,367		81,084
Gross margin from home sales		19,839		9,546		51,367		26,418
Gross margin from golf course and other		(949)		—		(579)		—
Selling, general and administrative		12,584		5,682		30,906		13,244
Operating income		6,306		3,864		19,882		13,174
Other income (expense)		391		(80)		61		164
Income before tax expense		6,697		3,784		19,943		13,338
Income tax expense		2,570		1,346		7,109		3,330
Deferred taxes on conversion to a corporation


Delaware		68-0521411
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)

8390 East Crescent Parkway, Suite 650 Greenwood Village, Colorado		80111
(Address of principal executive offices)		(Zip code)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934