CCS 09302015 Form 10-Q

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CENTURY COMMUNITIES, INC.

FORM 10-Q

For the three and nine months ended September 30, 2015

Index


	Page No.
PART I
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2015 and 2014	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2015 and 2014	5
Notes to Unaudited Condensed Consolidated Financial Statements - September 30, 2015	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	34
Item 4. Controls and Procedures	34
PART II
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Mine Safety Disclosures	36
Item 5. Other Information	36
Item 6. Exhibits	37
Signatures	38

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PART I

ITEM 1. FINANCIAL STATEMENTS.

Century Communities, Inc.

Unaudited Condensed Consolidated Balance Sheets

As of September 30, 2015 and December 31, 2014

(in thousands, except share amounts)



	September 30,		December 31,
	2015		2014
Assets
Cash and cash equivalents	$	12,785	$	33,462
Accounts receivable		29,561		13,799
Inventories		741,554		556,323
Prepaid expenses and other assets		36,634		28,796
Property and equipment, net		7,365		12,471
Deferred tax asset, net		5,363		1,359
Amortizable intangible assets, net		5,428		8,632
Goodwill		21,365		21,137
Total assets	$	860,055	$	675,979
Liabilities and stockholders' equity
Liabilities:
Accounts payable	$	8,303	$	17,135
Accrued expenses and other liabilities		94,484		64,029
Notes payable and revolving line of credit		362,326		229,610
Total liabilities		465,113		310,774
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, 21,306,722 and 20,875,547 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		213		209
Additional paid-in capital		339,574		336,573
Retained earnings		55,155		28,423
Total stockholders' equity		394,942		365,205
Total liabilities and stockholders' equity	$	860,055	$	675,979

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2015 and 2014

(in thousands, except share and per share amounts)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Revenue
Home sales revenues	$	179,775	$	90,735	$	520,918	$	217,734
Land sales revenues		2,257		—		2,627		—
Golf course and other revenue		700		1,226		4,679		3,750
Total revenue		182,732		91,961		528,224		221,484
Costs and expenses
Cost of home sales revenues		141,452		70,896		416,483		166,367
Cost of land sales revenues		2,250		—		2,615		—
Cost of golf course and other revenue		1,046		2,175		4,214		4,329
Selling, general, and administrative		22,175		12,584		65,919		30,906
Total operating costs and expenses		166,923		85,655		489,231		201,602
Operating income		15,809		6,306		38,993		19,882
Other income (expense):
Interest income		51		130		88		267
Interest expense		(2)		(2)		(8)		(13)
Acquisition expense		(323)		(119)		(338)		(923)
Other income		434		327		1,059		585
Gain (loss) on disposition of assets		(24)		55		106		145
Income before income tax expense		15,945		6,697		39,900		19,943
Income tax expense		5,362		2,570		13,168		7,109
Net income	$	10,583	$	4,127	$	26,732	$	12,834

Earnings per share:
Basic and diluted	$	0.50	$	0.19	$	1.26	$	0.68
Weighted average common shares outstanding:
Basic and diluted		20,601,218		21,133,708		20,556,146		18,635,986

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(in thousands)



	Nine Months Ended
	September 30,
	2015		2014
Operating activities
Net income	$	26,732	$	12,834
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,512		1,790
Stock-based compensation expense		3,865		1,453
Deferred income tax benefit		(4,004)		(1,631)
Excess tax benefit on stock-based compensation		—		(37)
Gain on disposition of assets		(106)		(145)
Changes in assets and liabilities:
Accounts receivable		(15,762)		(11,094)
Inventories		(156,544)		(116,078)
Prepaid expenses and other assets		1,668		(10,894)
Accounts payable		(8,766)		(285)
Accrued expenses and other liabilities		2,502		14,816
Net cash used in operating activities		(146,903)		(109,271)
Investing activities
Purchases of property and equipment		(4,204)		(393)
Proceeds on sale of assets		1,441		—
Proceeds from secured note receivable		76		—
Acquisitions of businesses		—		(178,235)
Net cash used in investing activities		(2,687)		(178,628)
Financing activities
Borrowings under revolving credit facilities		135,000		99,000
Payments on revolving credit facilities		(55,000)		(99,000)
Proceeds from issuance of senior notes		58,956		198,478
Proceeds from issuances of notes payable		448		5,894
Principal payments on notes payable		(6,815)		(1,562)
Debt issuance costs		(2,817)		(5,132)
Net proceeds from issuances of common stock		—		81,890
Repurchases of common stock upon vesting of restricted stock awards		(859)		—
Excess tax benefit on stock-based compensation		—		37
Net cash provided by financing activities		128,913		279,605
Net decrease in cash and cash equivalents	$	(20,677)	$	(8,294)
Cash and cash equivalents
Beginning of period		33,462		109,998
End of period	$	12,785	$	101,704
Non-cash investing and financing information
Secured note receivable from sale of Tuscany golf course	$	3,000	$	—
Supplemental cash flow disclosure
Cash paid for income taxes	$	18,439	$	13,289
Cash paid for interest, net of amounts capitalized	$	8	$	13

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2015

1. Basis of Presentation

Century Communities, Inc. (“we” or the “Company”) is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in Colorado, Austin and San Antonio, Texas (which we refer to as “Central Texas”), Houston, Texas, Las Vegas, Nevada, and Atlanta, Georgia. Our homebuilding operations are organized into the following five operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston and Nevada. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of 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, 2014, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 that was filed with the SEC on March 6, 2015.

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, and variable interest entities (which we refer to as “VIE’s”) for which the Company is deemed the primary beneficiary. 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 January 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-01, “Income Statement — Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates the concept of extraordinary items from GAAP, but the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply ASU 2015-01 prospectively. A reporting entity may also apply ASU 2015-01 retrospectively to all periods presented in the financial statements. Our adoption of ASU 2015-01 is not expected to have a material effect on our consolidated financial statements and related disclosures.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 updates the analysis that a reporting entity must perform to determine whether to consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We do not intend to adopt ASU 2015-02 early, and the adoption thereof is not expected to have a material effect on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Interest — Imputation of Interest (Subtopic 835-30).” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued and the guidance should be applied retrospectively to each period presented. The adoption of ASU 2015-03 will require us to adjust our current presentation of debt issuance costs related to our Senior Notes on our consolidated balance sheets from prepaid expenses and other assets to a reduction of the related liability. We do not intend to adopt ASU 2015-03 early.

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In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606).” ASU 2015-14 defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” for public entities by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact ASU 2015-14 will have on our consolidated financial statements. We do not intend to adopt ASU 2015-14 early.

In August 2015, the FASB issued ASU No. 2015-15, “Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting.” ASU 2015-15 clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU 2015-03. Specifically, ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of ASU 2015-15 will not have a material effect on our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805).” ASU 2015-16 requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 eliminates the requirement to retrospectively account for measurement period adjustments. The update is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. ASU 2015-14 should be applied prospectively to adjustments to provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. We do not intend to adopt ASU 2015-16 early, and the adoption thereof is not expected to have a material effect on our consolidated financial statements.

2. Reporting Segments

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

The following tables summarize total revenue and income before income tax expense by operating segment (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014

Revenue:
Atlanta	$	61,175	$	—	$	188,075	$	—
Central Texas		19,186		16,460		52,759		42,746
Colorado		60,566		40,291		191,694		124,490
Houston		9,354		7,365		26,844		7,365
Nevada		32,451		27,845		68,852		46,883
Total revenue	$	182,732	$	91,961	$	528,224	$	221,484

Income before income tax expense:
Atlanta	$	4,195	$	—	$	13,999	$	—
Central Texas		463		2,172		3,713		4,287
Colorado		9,806		5,620		27,325		19,856
Houston		(59)		(87)		(713)		(87)
Nevada		5,108		2,731		9,878		5,412
Corporate		(3,568)		(3,739)		(14,302)		(9,525)
Total income before income tax expense	$	15,945	$	6,697	$	39,900	$	19,943

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



	September 30,		December 31,
	2015		2014
Atlanta	$	150,910	$	75,434
Central Texas		114,239		85,083
Colorado		306,642		280,361
Houston		47,787		28,875
Nevada		216,624		168,401
Corporate		23,853		37,825
Total assets	$	860,055	$	675,979

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

3. Inventories

Inventories included the following (in thousands):



	September 30,		December 31,
	2015		2014
Homes under construction	$	392,062	$	250,104
Land and land development		331,036		294,917
Capitalized interest		18,456		11,302
Total inventories	$	741,554	$	556,323

4. Prepaid Expenses and Other Assets

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



	September 30,		December 31,
	2015		2014
Prepaid insurance	$	5,886	$	8,481
Lot option and escrow deposits		6,318		4,716
Performance deposits		3,526		5,365
Deferred financing costs, net		8,112		6,378
Restricted cash		809		518
Secured note receivable		2,971		—
Assets held for sale		5,769		—
Other		3,243		3,338
Total prepaid expenses and other assets	$	36,634	$	28,796

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5. Accrued Expenses and Other Liabilities

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



	September 30,		December 31,
	2015		2014
Earnest money deposits	$	7,901	$	6,703
Warranty reserve		2,670		2,194
Accrued compensation costs		8,315		6,632
Land development and home construction accruals		64,228		34,994
Accrued interest		6,977		1,935
Income taxes payable		—		217
Real estate taxes payable		130		3,875
Earnout liability		504		2,426
Liabilities related to assets held for sale		338		—
Other		3,421		5,053
Total accrued expenses and other liabilities	$	94,484	$	64,029

6. Warranty Reserve

Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal model that incorporates historical payment trends and adjust the amounts recorded if necessary. Based on favorable warranty payment trends relative to our estimates at the time of home closing, we reduced our warranty reserve by $0.1 million and $0.7 million during the three and nine months ended September 30, 2015, respectively, which is included as a reduction to cost of homes sales revenues on our consolidated statement of operations. The following table summarizes the changes in our warranty accrual for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Beginning balance	$	2,432	$	1,546	$	2,194	$	1,150
Warranty reserves assumed in business combinations		—		200		—		341
Warranty expense provisions		668		715		2,097		1,354
Payments		(318)		(347)		(913)		(731)
Warranty adjustment		(112)		—		(708)		—
Ending balance	$	2,670	$	2,114	$	2,670	$	2,114

7. Notes Payable and Revolving Line of Credit

Notes payable and revolving line of credit included the following as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30,		December 31,
	2015		2014
6.875% senior notes	$	257,777	$	198,605
Revolving line of credit		100,000		20,000
Land development notes		3,528		5,737
Insurance premium notes		1,021		5,135
Capital lease obligations		—		133
Total notes payable and revolving line of credit	$	362,326	$	229,610

6.875% senior notes

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of 6.875% senior notes due 2022 (which we refer to as the “Initial Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended

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(which we refer to as the “Securities Act”). The Initial Senior Notes were issued at a price equal to 99.239% of their principal amount, and we received net proceeds of approximately $193.3 million. In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes. The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes.

In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Additional Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act. The Additional Senior Notes were issued at a price equal to 98.26% of their principal amount, and we received net proceeds of approximately $58.5 million. The Additional Senior Notes are additional notes issued under the indenture pursuant to which the initial $200 million in aggregate principal amount of Initial Senior Notes were issued. In connection with the sale and issuance of the Additional Senior Notes, we entered into a registration rights agreement pursuant to which we agreed to effect a registered offer to exchange the Additional Senior Notes for new senior notes (which we refer to as the “Additional Exchange Notes”) having terms substantially identical in all material respects to the Additional Senior Notes, except that the Additional Exchange Notes will be registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Additional Senior Notes will not apply to the Additional Exchange Notes.

The Initial Exchange Notes and the Additional Senior Notes have substantially identical terms and are treated as a single series of notes under the indenture. Following consummation of the exchange offer contemplated under the registration rights agreement, the Additional Exchange Notes will bear the same CUSIP number as the Initial Exchange Notes and will be fungible with the Initial Exchange Notes. We refer to the Initial Exchange Notes and the Additional Senior Notes, collectively, as the “Senior Notes.” The Senior Notes carry a coupon of 6.875% per annum. 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 restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the Senior Notes is due May 2022, with interest only payments due semi-annually in May and November of each year.

Revolving line of credit

On October 21, 2014, we entered into a credit agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto (which we refer to as the “Credit Agreement”). The Credit Agreement provides us with a revolving line of credit of up to $120 million (which we refer to as the “Revolving Credit Facility”). The Credit Agreement includes a letter of credit sublimit of $20 million. The obligations under the Revolving Credit Facility are guaranteed by substantially all of our operating subsidiaries.

On July 31, 2015, we entered into a First Modification Agreement, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increases the Credit Facility from $120 million to $200 million, (ii) extends the maturity date of the Credit Facility from October 21, 2017 to October 21, 2018, (iii) admits Bank of America, N.A. as a new lender under the Credit Facility, and (iv) provides an option for the Company to request, from time to time, an additional increase in the amount of the Credit Facility of up to $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.

Unless terminated earlier, on October 21, 2018, the maturity date of the Revolving Credit Facility, 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. Borrowings under the Revolving Credit Facility bear interest at a floating rate equal to LIBOR 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.

At September 30, 2015, we had $100 million outstanding under the Credit Agreement, which accrued interest at 2.95%.

Other financing obligations

The Company has four land development notes with maturity dates ranging from October 2015 to April 2016, with interest only payments ranging from 0.5% to 5.0%, and four insurance premium notes which accrue interest at 3.89% and have maturity dates ranging from November 2015 to March 2016.

As of September 30, 2015, we had $3.5 million and $1.0 million of outstanding land development notes and insurance premium notes, respectively.

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8. Interest

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. As our qualifying assets exceeded our outstanding debt during the three and nine months ended September 30, 2015 and 2014, we capitalized all interest costs incurred during these periods, except for interest incurred on capital leases of equipment related to our golf course operations.

Our interest costs are as follows (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Interest capitalized beginning of period	$	15,741	$	5,850	$	11,302	$	2,820
Interest capitalized during period		5,189		3,894		14,079		7,452
Less: capitalized interest in cost of sales		(2,474)		(755)		(6,925)		(1,283)
Interest capitalized end of period	$	18,456	$	8,989	$	18,456	$	8,989

9. 2014 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 (which we refer to as “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 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 in connection with the purchase of LVLH.

The following table summarizes the final estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):



Assets acquired and liabilities assumed
Accounts receivable	$	347
Inventories		145,599
Prepaid expenses and other assets		1,876
Property and equipment		8,619
Amortizable intangible assets		3,042
Goodwill		11,283
Total assets	$	170,766

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

Acquired inventories consist of both acquired land and work in process inventories. We determined the estimate of fair value for acquired land inventory with the assistance of a third party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community as well as average sales price, and absorption rates. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from finished lots to fully completed single family residences. We

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estimated a market participant would require a gross margin ranging from 7% to 24% based upon the stage of production of the individual lot.

We determined the 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. Our estimate 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, 16.6 years, and 7 years, respectively. In total, amortizable intangible assets will be amortized over a weighted average life of 9.1 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.

Acquisition of Grand View Builders

On August 12, 2014, we purchased substantially all of the assets and operations of Grand View Builders (which we refer to as “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 in connection with the purchase of Grand View.

The following table summarizes the final estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):


Assets acquired and liabilities assumed
Accounts receivable	$	188
Inventories		12,070
Prepaid expenses and other assets		295
Property and equipment		185
Amortizable intangible assets		1,748
Goodwill		1,746
Total assets	$	16,232

Accrued expenses and other liabilities (inclusive of earnout liability)		3,376
Total liabilities	$	3,376

Acquired inventories consist of both acquired land, work in process and model inventories. We determined the 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 estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from finished lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 18% based upon the stage of production of the individual lot.

We determined the estimate of fair value for amortizable intangible assets, which includes a non-compete agreement, a trade name, home plans, and a backlog associated with certain custom home contracts, with the assistance of a third party valuation firm. Our estimate of the fair value of the non-compete agreement, trade name, home plans and backlog was $0.5 million, $1.0 million, $0.1 million, and $0.2 million respectively, which will be amortized over 4 years, 2 years, 7 years, and 1.5 years, respectively. In total, amortizable intangible assets will be amortized over a weighted average life of 2.8 years.

The fair value of the earnout on the acquisition date of $2.5 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 sheets.

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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. Approximately $1.2 million of goodwill is expected to be deductible for tax purposes.

During the nine months ended September 30, 2015, we recorded measurement period adjustments, which decreased the estimated value of amortizable intangible assets by $0.5 million and decreased the estimated value of inventories by $0.2 million, resulting in an increase in goodwill of $0.7 million. The measurement period adjustments also resulted in a decrease of $0.1 million for the nine months ended September 30, 2015 to selling, general, and administrative expenses and a reduction of $0.2 million to cost of home sales revenues on the consolidated statements of operations.

Acquisition of Peachtree

On November 13, 2014, we acquired substantially all the assets and operations of Peachtree Communities Group, Inc. and its affiliates and subsidiaries (which we refer to as “Peachtree”), a leading homebuilder in Atlanta, Georgia, for approximately $57 million in cash. The acquired assets include land, homes under construction, model homes and lot option contacts in 36 communities in the greater Atlanta area. As a result of the acquisition, we obtained ownership or control of 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. We incurred $0.5 million in acquisition-related costs in connection with the purchase of Peachtree.

The following table summarizes the final estimate of the fair value of the assets acquired and liabilities assumed as of the acquisition date (in thousands):



Assets acquired and liabilities assumed
Accounts receivable	$	11
Inventories		48,034
Prepaid expenses and other assets		762
Property and equipment		54
Amortizable intangible assets		4,044
Goodwill		7,857
Total assets	$	60,762

Accounts payable		3,304
Accrued expenses and other liabilities		3,108
Total liabilities	$	6,412

Acquired inventories primarily consist of work in process homebuilding inventory in various stages of construction and do not include significant amounts of land held for future development. Accordingly, we estimated the fair value based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from finished lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 18% based upon the stage of production of the individual lot. Due to the nature of these estimates combined with uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates.

Intangible assets consist of a non-compete agreement with the former owner of Peachtree, acquired home plans and acquired lot option agreements. The non-compete agreement was valued using a with and with-out approach which estimates the impact on future cash flows with and with-out the non-compete agreement. The difference between the projected cash flows is then discounted in order to estimate the fair value of the non-compete agreement. We estimated a fair value of $3.2 million for the non-compete agreement. Acquired home plans were valued using a replacement cost approach, which resulted in an estimated fair value of $0.2 million. The fair value of the acquired lot option agreements of $0.6 million was estimated based upon the difference between the contractual lot option purchase prices and the estimated fair value of similar lots on the acquisition date. The non-compete agreement, home plans and lot option agreements will be amortized over 5, 7 and 3 years, respectively. In total, amortizable intangible assets will be amortized over a weighted average life of 4.8 years.

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

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Goodwill includes the anticipated economic value of the acquired workforce. Approximately $15.4 million of goodwill is expected to be deductible for tax purposes.

During the nine months ended September 30, 2015, we recorded a measurement period adjustment, which increased the estimated value of amortizable intangible assets and decreased the fair value of goodwill by $0.6 million. The measurement period adjustment also resulted in an increase of $0.1 million for the nine months ended September 30, 2015 to cost of home sales revenues on our consolidated statements of operations.

Pro forma Financial Information

No pro forma financial information is required for the three and nine months ended September 30, 2015, as our acquisitions of LVLH, Grand View, and Peachtree occurred during 2014.

Pro forma financial information for the three and nine months ended September 30, 2014 gives effect to and includes the results of our acquisitions of LVLH, Grand View, and Peachtree as if the acquisitions occurred at January 1, 2014. Pro forma income before income tax expense adjusts the operating results of LVLH, Grand View, and Peachtree 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.

The following summarizes pro forma financial information for the three and nine months ended September 30, 2014 (in thousands):



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014		2014
Pro forma revenue	$	166,876	$	416,288
Pro forma income before income tax expense		12,349		32,317
Pro forma income tax expense		4,322		11,311
Pro forma net income	$	8,027	$	21,006

10. Income Taxes

At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and use that rate to provide for income taxes for the current year-to-date reporting period. Accordingly, we recorded income tax expense of $5.4 million, and $2.6 million for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, we recorded $13.2 million and $7.1 million of income tax expense, respectively. Our income tax expense for the three and nine months ended September 30, 2015 is based on our estimated annual effective tax rate of approximately 34.4% and certain discreet items, which benefited our effective tax rate by approximately 0.8% and 1.4% for the three and nine ended September 30, 2015, respectively.

11. 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.

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The following table presents carrying values and estimated fair values of financial instruments (in thousands):



		September 30, 2015				December 31, 2014
	Hierarchy	Carrying		Fair Value		Carrying		Fair Value
Secured note receivable(1)	Level 2	$	2,971	$	2,984	$	—	$	—

6.875% senior notes(2)	Level 2	$	257,777	$	247,000	$	198,605	$	203,013
Revolving line of credit(3)	Level 2		100,000		100,000		20,000		20,000
Land development notes(4)	Level 2		3,528		3,536		5,737		5,724
Insurance premium notes(3)	Level 2		1,021		1,021		5,135		5,135
Capital lease obligations(3)	Level 2		—		—		133		133
Total notes payable and revolving line of credit		$	362,326	$	351,557	$	229,610	$	234,005

Earnout liability(5)	Level 3	$	504	$	504	$	2,426	$	2,426

⁽¹⁾

The estimated fair value of the secured note received in connection with the disposition of the golf course in our Tuscany community in our Nevada operating segment as of September 30, 2015 was based on a cash flow model discounted at market interest rates that considered the underlying risks of the note.

⁽²⁾

Estimated fair value of the Initial Senior Notes at December 31, 2014 was based on a cash flow model discounted at market interest rates that considered underlying risks of the debt. At September 30, 2015, the fair values of the Senior Notes also incorporated recent trading activity of the Exchange Notes and Additional Senior Notes in inactive markets.

⁽³⁾

Carrying amount approximates fair value due to short-term nature and interest rate terms.

⁽⁴⁾

The estimated fair values of the land development notes at September 30, 2015 and December 31, 2014 were based on cash flow models discounted at market interest rates that considered underlying risks of the debt.

⁽⁵⁾

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%. We decreased the liability by $1.3 million and $1.9 million during the three and nine months ended September 30, 2015, respectively, to adjust the carrying value of the earnout to fair value. The decrease is included as a reduction to selling, general and administrative expense on our consolidated statement of operations.

The carrying amount of cash and cash equivalents approximates fair value. Non-financial 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.

12. Stock-Based Compensation

Our 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, 2015 and December 31, 2014, there were 20.6 and 20.5 million shares of common stock issued and outstanding, respectively, exclusive of the restricted common stock issued. We also have reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, including outstanding awards.

During the nine months ended September 30, 2015, we issued 0.5 million shares of restricted common stock awards with a weighted average grant date fair value of $16.92 per share. The awards vest over a three year period from the grant date.

As of September 30, 2015, 0.7 million shares of restricted common stock were unvested, and $10.1 million of unrecognized compensation costs is expected to be recognized over a weighted average period of 2.1 years.

During the three months ended September 30, 2015 and 2014, we recognized stock-based compensation expense of $1.4 million and $0.7 million, respectively. During the nine months ended September 30, 2015 and 2014, we recognized stock-based compensation expense of $3.9 million and $1.5 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our consolidated statements of operations.

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13. Earnings Per Share

We use the two-class method of calculating earnings per share (which we refer to as “EPS”) as our non-vested restricted stock awards have non-forfeitable rights to dividends and, accordingly, represent a participating security. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period.

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2015 and 2014 (in thousands, except share and per share information):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Numerator
Net income	$	10,583	$	4,127	$	26,732	$	12,834
Less: Undistributed earnings allocated to participating securities		(358)		(70)		(890)		(179)
Net income allocable to common stockholders	$	10,225	$	4,057	$	25,842	$	12,655
Denominator
Weighted average common shares outstanding - basic and diluted:		20,601,218		21,133,708		20,556,146		18,635,986
Earnings per share:
Basic and diluted	$	0.50	$	0.19	$	1.26	$	0.68

14. 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, 2015 and December 31, 2014, we had $53.7 million and $34.0 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 statements of operations for our estimated loss.

We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flow.

15. Disposition of Golf Courses

On May 26, 2015, we disposed of the operations of the golf course in our Tuscany community in our Nevada operating segment for total consideration of $4.0 million, which included $1.0 million in cash and a $3.0 million secured note, and resulted in a gain on sale of $2 thousand. The secured note accrues interest at rates ranging from 4.5% to 5.5% per annum and requires monthly payments of principal and interest with a balloon payment of $2.5 million of principal in May of 2020.

On May 19, 2015, we initiated our rights under a fixed price put option to dispose of the golf course in our Rhodes Ranch community in our Nevada operating segment for $5.9 million. The fixed price put option requires closing to occur on or before June 1, 2016. Accordingly, the assets and liabilities of the Rhodes Ranch golf course have been classified as held for sale and presented in prepaid expenses and other assets and accrued expenses and other liabilities on the consolidated balance sheet as of September 30, 2015.

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16. Supplemental Guarantor Information

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Initial Senior Notes”). In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% Senior Notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes sold and issued in the May 2014 private offering. The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes.

In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Additional Senior Notes”). The Additional Senior Notes are additional notes issued under the indenture pursuant to which the Initial Senior Notes and Initial Exchange Notes were issued. The Initial Exchange Notes and the Additional Senior Notes have substantially identical terms and are treated as a single series of notes under the indenture. We refer to the Initial Exchange Notes and the Additional Senior Notes, collectively, as the “Senior Notes.”

The Senior Notes are unsecured senior obligations of the Company (which we refer to as “CCS”), which are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our operating subsidiaries (which we refer to as “Guarantors”), which are wholly owned subsidiaries of the Company.

The Indenture governing the Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the Indenture), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the Indenture) or is made in compliance with applicable provisions of the Indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the Indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the Indenture); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the Indenture), in accordance with the Indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the Indenture.

As the guarantees were made in connection with the May 2014 private offering of the Initial Senior Notes and April 2015 private offering of the Additional Senior Notes, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively.

We have determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information is presented below:

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	Supplemental Condensed Consolidated Balance Sheet
	As of September 30, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Assets
Cash and cash equivalents	$	4,155	$	8,630	$	—	$	—	$	12,785
Accounts receivable		2,260		27,301		—		—		29,561
Investment in subsidiaries		743,534		—		—		(743,534)		—
Inventories		—		741,554		—		—		741,554
Prepaid expenses and other assets		9,348		27,286		—		—		36,634
Property and equipment, net		802		6,563		—		—


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