3. Business Combinations

On August 4, 2017, we acquired UCP, Inc. UCP is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, with operations in the States of California, Washington, North Carolina, South Carolina and Tennessee. The merger was unanimously approved by the board of directors of both the Company and UCP and was also approved by UCP stockholders on August 1, 2017. In connection with the merger, each share of UCP Class A common stock outstanding immediately prior to the closing was converted into $5.32 in cash and 0.2309 of a newly issued share of our common stock. No fractional shares were issued in connection with the merger, and UCP stockholders received cash in lieu of any fractional shares. Approximately 4.2 million shares of our common stock were issued in connection with the merger and $97.7 million was paid in cash. Outstanding UCP restricted stock units were also converted into an aggregate of 0.2 million of Century Communities restricted stock units pursuant to the merger. We determined that the total fair value of these awards was $6.2 million, of which $1.1 million was attributable to services performed by UCP employees prior to the merger and, as such, was included as consideration. During the three and nine months ended September 30, 2017, we incurred $7.2 million and $8.6 million, respectively, in acquisition related expenses, presented as “Acquisition expense” on the Unaudited Condensed Consolidated Statement of Operations. Total consideration of $206.6 million inclusive of cash acquired of $20.2 million for this merger is summarized as follows (in thousands, except per share amount):


UCP Shares (including noncontrolling interest) as of August 4, 2017		18,085
Cash paid per share	$	5.32
Cash consideration	$	96,213
UCP Shares (including noncontrolling interest) as of August 4, 2017		18,085
Exchange ratio		0.2309
Number of CCS shares issued		4,176
Closing price of Century Communities Stock on August 4, 2017	$	25.80
Consideration attributable to common stock	$	107,737
Cash paid for fractional shares	$	1,508
Total replacement award value	$	1,149
Total consideration in cash and equity	$	206,607

The acquired assets consisted of approximately 4,199 owned lots within 43 total communities in California, Washington, North Carolina, South Carolina and Tennessee. The 4,199 lots included 346 homes in backlog and 59 model homes. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination.

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


Cash and cash equivalents	$	20,264
Accounts receivable		7,671
Inventories		400,011
Prepaid expenses and other assets		6,988
Property and equipment, net		717
Deferred tax asset, net		5,419
Total assets	$	441,070

Accounts payable	$	10,712
Accrued expenses and other liabilities		70,832
Notes payable and revolving loan agreement		152,919
Total liabilities		234,463
Purchase price/Net equity	$	206,607

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 recently started lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 3% to 20% based upon the stage of production of the individual lot. The purchase price accounting reflected in the accompanying financial statements is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities.

On August 17, 2017, we sold BMCH South Carolina, LLC, a subsidiary of UCP, Inc. that was recently acquired as part of our acquisition of UCP, Inc., to a third party for approximately $17.1 million. Accordingly, the estimated fair value of the acquired assets of BMCH South Carolina, LLC was determined to be equal to the disposal price given the proximity of the two transactions.

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

UCP’s results of operations, which include homebuilding revenues of $77.6 million and net income of $5.6 million, are included in the accompanying consolidated statements of operations for the period from August 4, 2017 through September 30, 2017. Net income includes adjustments for inventory and acquisition expenses.

Unaudited pro forma income before tax expense for the three and nine months ended September 30, 2017 and 2016 gives effect to including the results of the acquisition of UCP as of January 1, 2017 and 2016, respectively. Unaudited pro forma income before tax expense adjusts the operating results of UCP to reflect the additional costs that would have been recorded assuming the fair value adjustments had been applied as of the beginning of the period presented and excludes acquisition expense incurred related to the transaction (in thousands, except share and per share information):


		Three Months Ended September 30,			Nine Months Ended September 30,
	2017		2016		2017		2016
Revenues	$	416,223	$	347,153	$	1,142,371	$	941,953

Income before tax expense	$	24,604	$	22,303	$	69,950	$	55,052
Tax expense		(10,731)		(6,270)		(23,878)		(16,476)
Net income	$	13,873	$	16,033	$	46,072	$	38,576
Less: Undistributed earnings allocated to participating securities		(72)		(242)		(352)		(734)
Numerator for basic and diluted pro forma EPS	$	13,801	$	15,791	$	45,720	$	37,842

Pro forma weighted average shares-basic		27,034,192		24,849,375		26,342,362		24,819,536
Pro forma weighted average shares-diluted		27,314,776		24,997,920		26,579,292		24,907,783

Pro forma basic EPS	$	0.51	$	0.64	$	1.74	$	1.52
Pro forma diluted EPS	$	0.51	$	0.63	$	1.72	$	1.52