CCS 09302016 Form 10-Q

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CENTURY COMMUNITIES, INC.

FORM 10-Q

For the three and nine months ended September 30, 2016

Index


	Page No.
PART I
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2015	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015	5
Notes to Unaudited Condensed Consolidated Financial Statements – September 30, 2016	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31
PART II
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	32
Item 4. Mine Safety Disclosures	32
Item 5. Other Information	32
Item 6. Exhibits	33
Signatures	34

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PART I

ITEM 1. FINANCIAL STATEMENTS.

Century Communities, Inc.

Unaudited Condensed Consolidated Balance Sheets

As of September 30, 2016 and December 31, 2015

(in thousands, except share amounts)



	September 30,		December 31,
	2016		2015
Assets
Cash and cash equivalents	$	17,354	$	29,287
Cash held in escrow		27,749		11,817
Accounts receivable		4,852		5,241
Inventories		873,613		810,137
Prepaid expenses and other assets		38,421		26,735
Property and equipment, net		11,228		8,375
Deferred tax asset, net		3,533		—
Amortizable intangible assets, net		3,256		4,784
Goodwill		21,365		21,365
Total assets	$	1,001,371	$	917,741
Liabilities and stockholders' equity
Liabilities:
Accounts payable	$	18,139	$	10,967
Accrued expenses and other liabilities		87,305		106,777
Deferred tax liability, net		—		275
Notes payable and revolving line of credit		450,331		390,243
Total liabilities		555,775		508,262
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, 21,043,563 and 21,303,702 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		210		213
Additional paid-in capital		342,606		340,953
Retained earnings		102,780		68,313
Total stockholders' equity		445,596		409,479
Total liabilities and stockholders' equity	$	1,001,371	$	917,741

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, 2016 and 2015

(in thousands, except share and per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenue
Home sales revenues	$	248,075	$	179,775	$	686,335	$	520,918
Land sales revenues		4,651		2,257		7,909		2,627
Golf course and other revenue		687		700		2,907		4,679
Total revenue		253,413		182,732		697,151		528,224
Costs and expenses
Cost of home sales revenues		197,650		141,452		549,886		416,483
Cost of land sales revenues		4,255		2,250		6,668		2,615
Cost of golf course and other revenue		1,165		1,046		2,765		4,214
Selling, general, and administrative		30,944		22,175		87,512		65,919
Total operating costs and expenses		234,014		166,923		646,831		489,231
Operating income		19,399		15,809		50,320		38,993
Other income (expense):
Interest income		61		51		142		88
Interest expense		—		(2)		(4)		(8)
Acquisition expense		(53)		(323)		(466)		(338)
Other income		179		434		797		1,059
Gain (loss) on disposition of assets		145		(24)		468		106
Income before income tax expense		19,731		15,945		51,257		39,900
Income tax expense		6,389		5,362		16,790		13,168
Net income	$	13,342	$	10,583	$	34,467	$	26,732

Earnings per share:
Basic	$	0.63	$	0.50	$	1.63	$	1.26
Diluted	$	0.63	$	0.50	$	1.62	$	1.26
Weighted average common shares outstanding:
Basic		20,673,521		20,601,218		20,643,682		20,556,146
Diluted		20,822,066		20,601,218		20,731,930		20,556,146

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, 2016 and 2015

(in thousands)



	Nine Months Ended
	September 30,
	2016		2015
Operating activities
Net income	$	34,467	$	26,732
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		4,215		3,512
Stock-based compensation expense		5,058		3,865
Deferred income taxes		(3,807)		(4,004)
Gain on disposition of assets		(468)		(106)
Changes in assets and liabilities:
Cash held in escrow		(15,932)		(13,667)
Accounts receivable		389		(2,095)
Inventories		(85,560)		(156,544)
Prepaid expenses and other assets		(11,189)		1,668
Accounts payable		7,172		(8,766)
Accrued expenses and other liabilities		4,255		2,502
Net cash used in operating activities		(61,400)		(146,903)
Investing activities
Purchases of property and equipment		(6,375)		(4,204)
Proceeds from sale of assets		1,302		1,441
Proceeds from secured note receivable		73		76
Net cash used in investing activities		(5,000)		(2,687)
Financing activities
Borrowings under revolving credit facilities		145,000		135,000
Payments on revolving credit facilities		(90,000)		(55,000)
Proceeds from issuance of senior notes		—		58,956
Proceeds from issuance of insurance premium notes		11,612		448
Principal payments on notes payable		(7,582)		(6,815)
Debt issuance costs		(1,156)		(2,817)
Repurchases of common stock upon vesting of restricted stock awards		(1,014)		(859)
Repurchases of common stock under our stock repurchase program		(2,393)		—
Net cash provided by financing activities		54,467		128,913
Net decrease in cash and cash equivalents	$	(11,933)	$	(20,677)
Cash and cash equivalents
Beginning of period		29,287		33,462
End of period	$	17,354	$	12,785
Non-cash investing and financing information
Note receivable from sale of Tuscany golf course	$	—	$	3,000
Supplemental cash flow disclosure
Cash paid for income taxes	$	20,557	$	18,439

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

1. Basis of Presentation

Century Communities, Inc. (which we refer to as “we,” “CCS” 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, Salt Lake City, Utah and Atlanta, Georgia. Our homebuilding operations are organized into the following six operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston, Nevada, and Utah. 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 U.S. 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, 2015, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that was filed with the SEC on February 19, 2016.

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 for which the Company is deemed to be 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.

Accounts Receivable

Accounts receivable primarily consist of contract receivables related to certain contracts in our Central Texas and Houston operating segments accounted for under the percentage-of-completion method.

We periodically review the collectability of our accounts receivables, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. As of September 30, 2016 and December 31, 2015, no allowance was recorded related to accounts receivable.

Cash Held in Escrow

Cash held in escrow consists of amounts related to the proceeds from home closings held for our benefit in escrow, which are typically held for less than a few days.

Reclassifications

Prior period amounts related to the proceeds from home closings held for our benefit in escrow were previously classified in “Accounts receivable” on our Condensed Consolidated Balance Sheets and have been reclassified as “Cash held in escrow.” The amount reclassified as of December 31, 2015 was $11.8 million.

Recently Issued Accounting Standards

In August 2015, the Financial Accounting Standards Board (which we refer to as “FASB”) issued ASU 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

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Customers (Topic 606)” and will be effective for the Company beginning on January 1, 2018, including interim reporting periods within that 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 early adopt ASU 2015-14.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for the Company beginning January 1, 2019 and interim periods within the annual periods. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company beginning January 1, 2017 and interim periods within the annual periods. Early adoption is permitted in any interim or annual period. We do not expect the adoption of ASU 2016-09 to have a material effect on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. We are currently evaluating the impact ASU 2016-15 will have on our consolidated financial statements.

2. Reporting Segments

Our homebuilding operations are organized into the following six operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston, Nevada, and Utah. Our Corporate operations are 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. In addition, our Corporate operations include certain assets and income produced from residential rental property in Colorado. Our homebuilding reportable segments are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015

Revenue:
Atlanta	$	82,334	$	61,175	$	237,323	$	188,075
Central Texas		21,376		19,186		74,425		52,759
Colorado		95,278		60,566		262,148		191,694
Houston		8,660		9,354		31,754		26,844
Nevada		45,398		32,451		91,134		68,852
Utah		367		—		367		—
Corporate		—		—		—		—
Total revenue	$	253,413	$	182,732	$	697,151	$	528,224

Income before income tax expense:
Atlanta	$	7,848	$	4,195	$	21,827	$	13,999
Central Texas		429		463		4,541		3,713
Colorado		14,490		9,806		38,279		27,325
Houston		(717)		(59)		(2,403)		(713)
Nevada		4,872		5,108		9,479		9,878
Utah		(367)		—		(524)		—
Corporate		(6,824)		(3,568)		(19,942)		(14,302)
Total income before income tax expense	$	19,731	$	15,945	$	51,257	$	39,900

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



	September 30,		December 31,
	2016		2015
Atlanta	$	239,202	$	185,331
Central Texas		118,665		117,037
Colorado		317,495		313,653
Houston		29,151		51,534
Nevada		250,408		220,209
Utah		10,635		—
Corporate		35,815		29,977
Total assets	$	1,001,371	$	917,741

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,
	2016		2015
Homes under construction	$	466,682	$	374,274
Land and land development		378,803		414,330
Capitalized interest		28,128		21,533
Total inventories	$	873,613	$	810,137

4. Prepaid Expenses and Other Assets

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



	September 30,		December 31,
	2016		2015
Prepaid insurance	$	13,803	$	5,696
Lot option and escrow deposits		6,914		4,634
Performance deposits		1,407		1,404
Deferred financing costs revolving line of credit, net		2,840		2,318
Restricted cash		1,986		360
Secured note receivable		2,875		2,947
Assets held for sale		5,894		5,797
Other		2,702		3,579
Total prepaid expenses and other assets	$	38,421	$	26,735

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5. Accrued Expenses and Other Liabilities

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



	September 30,		December 31,
	2016		2015
Earnest money deposits	$	9,538	$	6,717
Warranty reserve		2,595		2,622
Accrued compensation costs		8,508		8,114
Land development and home construction accruals		55,567		83,322
Accrued interest		7,325		2,651
Income taxes payable		51		374
Liabilities related to assets held for sale		300		223
Other		3,421		2,754
Total accrued expenses and other liabilities	$	87,305	$	106,777

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 $0.3 million and $0.9 million during the three and nine months ended September 30, 2016, 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 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Beginning balance	$	2,754	$	2,432	$	2,622	$	2,194
Warranty expense provisions		686		668		2,078		2,097
Payments		(554)		(318)		(1,194)		(913)
Warranty adjustment		(291)		(112)		(911)		(708)
Ending balance	$	2,595	$	2,670	$	2,595	$	2,670

7. Notes Payable and Revolving Line of Credit

Notes payable and revolving line of credit included the following (in thousands):



	September 30,		December 31,
	2016		2015
6.875% senior notes	$	252,765	$	251,815
Revolving line of credit		190,000		135,000
Land development notes		—		2,677
Insurance premium notes		7,566		751
Total notes payable and revolving line of credit	$	450,331	$	390,243

6.875% senior notes

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured 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 (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

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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 October 2015, we completed an offer to exchange $60.0 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 “Additional Exchange Notes”), for all of the Additional Senior Notes. The terms of the Additional Exchange Notes are identical in all material respects to the Additional Senior Notes, except that the Additional Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Additional Senior Notes do not apply to the Additional Exchange Notes.

The Initial Exchange Notes and the Additional Exchange Notes bear the same CUSIP number, are fungible with each other, and are treated as a single series of notes under the indenture. We refer to the Initial Exchange Notes and the Additional Exchange 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

Under the terms of the Credit Agreement, we were entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, we 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 Revolving Credit Facility were guaranteed by certain of our subsidiaries.

On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and ( iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.

On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.

On August 19, 2016, we entered into a Third Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Third Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $300 million to $380 million, (ii) admitted Citibank, N.A. and Flagstar Bank, FSB as new lenders under the Revolving Credit Facility, (iii) increased certain lenders’ respective commitments to the Revolving Credit Facility, and (iv) extended the term of the Revolving Credit Facility by one year to mature in October 2019.

Unless terminated earlier, the principal amount under the Revolving Credit Facility, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on October 21, 2019, the maturity date of the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate plus

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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 our leverage ratio, 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 Revolving Credit Facility.

The Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our 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 us 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 our and our subsidiaries’ (on a consolidated basis) ratio of debt to tangible net worth, (ii) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon our and our subsidiaries’ (on a consolidated basis) ratio of EBITDA to cash interest expense, (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 by us and the guarantors of the Revolving Credit Facility, plus 50% of the amount of our and our subsidiaries’ consolidated net income, (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 us and our subsidiaries to our tangible net worth. As of September 30, 2016, we were in compliance with all covenants under the Credit Agreement.

As of September 30, 2016, we had $190.0 million outstanding under the Credit Agreement.

Other financing obligations

As of September 30, 2016, the Company had two insurance premium notes outstanding totaling $7.6 million in the aggregate which mature in March 2017 and December 2017, respectively. These notes bear interest at a rate of 3.89% and 3.88%, respectively. During the nine months ended September 30, 2016 we repaid three outstanding land development notes totaling $2.7 million in the aggregate. As of September 30, 2016 and December 31, 2015, we had $7.6 million and $3.4 million, respectively, of outstanding land development notes and insurance premium notes.

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, 2016 and 2015, 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,
	2016		2015		2016		2015
Interest capitalized beginning of period	$	26,577	$	15,741	$	21,533	$	11,302
Interest capitalized during period		6,743		5,189		19,772		14,079
Less: capitalized interest in cost of sales		(5,192)		(2,474)		(13,177)		(6,925)
Interest capitalized end of period	$	28,128	$	18,456	$	28,128	$	18,456

9. Income Taxes

At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2016 estimated annual effective tax rate is driven by our blended federal and state statutory rate of 37.5%, which is partially offset by estimated benefits of 3.5% from additional deductions for tax related to domestic production activities and estimated energy credits, resulting in an estimated annual effective tax rate of 34.0%.

For the three months ended September 30, 2016 and 2015, we recorded income tax expense of $6.4 million and $5.4 million, respectively. For the nine months ended September 30, 2016 and 2015, we recorded income tax expense of $16.8 million and $13.2 million, respectively. Our income tax expense for the three months ended September 30, 2016 is based on our estimated annual effective tax rate of 34.0% and a discrete item related to energy credits certified during the three months ended September 30, 2016 related to homes delivered in prior years which decreased our expense by $0.3 million.

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10. Fair Value Disclosures

Accounting Standards Codification Topic 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, 2016				December 31, 2015
	Hierarchy	Carrying		Fair Value		Carrying		Fair Value
Secured note receivable(1)	Level 2	$	2,875	$	2,968	$	2,947	$	2,926

6.875% senior notes(2)	Level 2	$	252,765	$	254,976	$	251,815	$	232,503
Revolving line of credit(3)	Level 2		190,000		190,000		135,000		135,000
Land development notes(4)	Level 2		—		—		2,677		2,672
Insurance premium notes(3)	Level 2		7,566		7,566		751		751
Total notes payable and revolving line of credit		$	450,331	$	452,542	$	390,243	$	370,926

⁽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, 2016 and December 31, 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 Senior Notes at September 30, 2016 and December 31, 2015 incorporated recent trading activity in inactive markets.

⁽³⁾

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

⁽⁴⁾

The estimated fair value of the land development notes at December 31, 2015 was based on cash flow models discounted at market interest rates that considered underlying risks of the debt.

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.

11. Stock-Based Compensation

Our authorized capital stock consists of 100.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of September 30, 2016 and December 31, 2015, there were 20.7 million and 20.6 million shares of common stock issued and outstanding, respectively, exclusive of the restricted common stock issued. During the nine months ended September 30, 2016, we repurchased 0.2 million shares of our common stock at a weighted average price of $15.03 per share.

We issued 13.0 thousand and 0.2 million shares of common stock related to the vesting of restricted stock awards during the three and nine months ended September 30, 2016, respectively. We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which, 0.6 million shares remain available for issuance as of September 30, 2016.

During the three months ended September 30, 2016, we did not grant any stock based compensation. During the nine months ended September 30, 2016, we granted 0.5 million shares of restricted stock units with a weighted average grant date fair value of $14.28 per share. Such restricted stock units vest over a three year period from the grant date. Previously, we had issued awards of restricted common stock under our First Amended & Restated 2013 Long-Term Inventive Plan.

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A summary of our outstanding awards of restricted common stock and restricted stock units are as follows (in thousands, except years):


		As of
		September 30, 2016
		Restricted Stock Awards		Restricted Stock Units		Total
Unvested awards/units		359		496		855
Unrecognized compensation cost	$	4,311	$	5,596	$	9,907
Period to recognize compensation cost		1.2 years		2.4 years		1.87 years (average)

During the three months ended September 30, 2016 and 2015, we recognized stock-based compensation expense of $1.6 million and $1.4 million, respectively. During the nine months ended September 30, 2016 and 2015, we recognized stock-based compensation expense of $5.1 million and $3.9 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our consolidated statements of operations.

12. 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. We use the treasury stock method to calculate the dilutive effect of our restricted stock units as the restricted stock units do not have participating rights.

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2016 and 2015 (in thousands, except share and per share information):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator
Net income	$	13,342	$	10,583	$	34,467	$	26,732
Less: Undistributed earnings allocated to participating securities		(241)		(358)		(785)		(890)
Net income allocable to common stockholders	$	13,101	$	10,225	$	33,682	$	25,842
Denominator
Weighted average common shares outstanding - basic		20,673,521		20,601,218		20,643,682		20,556,146
Dilutive effect of restricted stock units		148,545		—		88,248		—
Weighted average common shares outstanding - diluted		20,822,066		20,601,218		20,731,930		20,556,146
Earnings per share:
Basic	$	0.63	$	0.50	$	1.63	$	1.26
Diluted	$	0.63	$	0.50	$	1.62	$	1.26

13. 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, 2016 and December 31, 2015, we had $66.0 million and $63.6 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 our 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.

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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.

14. 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 $2.0 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.

As the put option we exercised on the golf course in our Rhodes Ranch golf community was not responded to by the counterparty, during the second quarter of 2016, we initiated a plan for the disposition of the golf course. We believe the disposition is probable within one year and, accordingly, the assets and liabilities have continued to be classified as held for sale and presented in prepaid expenses and other assets and accrued expenses and other liabilities on the condensed consolidated balance sheet as of September 30, 2016.

15. 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”). In October 2015, we completed an offer to exchange $60.0 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 “Additional Exchange Notes”), for all of the Additional Senior Notes. The terms of the Additional Exchange Notes are identical in all material respects to the Additional Senior Notes, except that the Additional Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Additional Senior Notes do not apply to the Additional Exchange Notes.

The Additional Senior Notes and the Additional Exchange 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 Exchange Notes bear the same CUSIP number, are fungible with each other, and are treated as a single series of notes under the indenture. We refer to the Initial Exchange Notes and the Additional Exchange Notes, collectively, as the “Senior Notes.”

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

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

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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 February 2015 exchange offer for the Initial Exchange Notes and the October 2015 exchange offer for the Additional Exchange 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:



	Supplemental Condensed Consolidated Balance Sheet
	As of September 30, 2016 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Assets
Cash and cash equivalents	$	11,679	$	5,675	$	—	$	—	$	17,354
Cash held in escrow		—		27,749						27,749
Accounts receivable		885		3,967		—		—		4,852
Investment in subsidiaries		867,424		—		—		(867,424)		—
Inventories		—		873,613		—		—		873,613
Prepaid expenses and other assets		16,912		21,509		—		—		38,421
Property and equipment, net		973		10,255		—		—		11,228
Deferred tax asset, net		3,533		—		—		—		3,533
Amortizable intangible assets, net		—		3,256		—		—		3,256
Goodwill		—		21,365		—		—		21,365
Total assets	$	901,406	$	967,389	$	—	$	(867,424)	$	1,001,371
Liabilities and stockholders’ equity
Liabilities:
Accounts payable	$	31	$	18,108	$	—	$	—	$	18,139
Accrued expenses and other liabilities		13,014		74,291		—		—		87,305
Notes payable and revolving line of credit		442,765		7,566		—		—		450,331
Total liabilities		455,810		99,965		—		—		555,775
Stockholders’ equity:		445,596		867,424		—		(867,424)		445,596
Total liabilities and stockholders’ equity	$	901,406	$	967,389	$	—	$	(867,424)	$	1,001,371

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	Supplemental Condensed Consolidated Balance Sheet
	As of December 31, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Assets
Cash and cash equivalents	$	22,002	$	7,285	$	—	$	—	$	29,287
Cash held in escrow		—		11,817		—		—		11,817
Accounts receivable		1,239		4,002		—		—		5,241
Investment in subsidiaries		777,898		—		—		(777,898)		—
Inventories		—		810,137		—		—		810,137
Prepaid expenses and other assets		3,727		23,008		—		—		26,735
Property and equipment, net		857		7,518		—		—		8,375
Amortizable intangible assets, net		—		4,784		—		—		4,784
Goodwill		—		21,365		—		—		21,365
Total assets	$	805,723	$	889,916	$	—	$	(777,898)	$	917,741
Liabilities and stockholders’ equity
Liabilities:
Accounts payable	$	—	$	10,967	$	—	$	—	$	10,967
Accrued expenses and other liabilities		9,154		97,623		—		—		106,777
Deferred tax liability, net		275		—		—		—		275
Notes payable and revolving line of credit		386,815		3,428		—		—		390,243
Total liabilities		396,244		112,018		—		—		508,262
Stockholders’ equity:		409,479		777,898		—		(777,898)		409,479
Total liabilities and stockholders’ equity	$	805,723	$	889,916	$	—	$	(777,898)	$	917,741



		Supplemental Condensed Consolidated Statement of Operations
	For the Three Months Ended September 30, 2016 (in thousands)
				Guarantor		Non Guarantor		Elimination		Consolidated
		CCS		Subsidiaries		Subsidiaries		Entries		CCS
Revenue
Home sales revenues		$	—	$	248,075	$	—	$	—	$	248,075
Land sales revenues			—		4,651		—		—		4,651
Golf course and other revenue			—		687		—		—		687
Total revenue			—		253,413		—		—		253,413
Costs and expenses
Cost of homes sales revenues			—		197,650		—		—		197,650
Cost of land sales revenues			—		4,255		—		—		4,255
Cost of golf course and other revenue			—		1,165		—		—		1,165
Selling, general and administrative			6,846		24,098		—		—		30,944
Total operating costs and expenses			6,846		227,168		—		—		234,014
Operating income (loss)			(6,846)		26,245		—		—		19,399
Other income (expense)
Equity in earnings from consolidated subsidiaries			17,303		—		—		(17,303)		—
Interest income			10		51		—		—		61
Interest expense			—		—		—		—		—
Acquisition expense			(53)		—		—		—		(53)
Other income			—		179		—		—		179
Gain on disposition of assets			—		145		—		—		145
Income before income tax expense			10,414		26,620		—		(17,303)		19,731
Income tax expense			(2,928)		9,317		—		—		6,389
Net income		$	13,342	$	17,303	$	—	$	(17,303)	$	13,342

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	Supplemental Condensed Consolidated Statement of Operations
	For the Three Months Ended September 30, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS

Revenue
Home sales revenues	$	—	$	179,775	$	—	$	—	$	179,775
Land sales revenue		—		2,257		—		—		2,257
Golf course and other revenue		—		700		—		—		700
Total revenue		—		182,732		—		—		182,732
Cost of home sale revenues
Cost of homes sales revenues		—		141,452		—		—		141,452
Cost of land sales revenues		—		2,250		—		—		2,250
Cost of golf course and other revenue		—		1,046		—		—		1,046
Selling, general and administrative		4,827		17,348		—		—		22,175
Total operating costs and expenses		4,827		162,096		—		—		166,923
Operating income		(4,827)		20,636		—		—		15,809
Other income (expense)
Equity in earnings from consolidated subsidiaries		13,707		—		—		(13,707)		—
Interest income		7		44		—		—		51
Interest expense		—		(2)		—		—		(2)
Acquisition expense		(323)		—		—		—		(323)
Other income		—		434		—		—		434
Loss on disposition of assets		—		(24)		—		—		(24)
Income before income tax expense		8,564		21,088		—		(13,707)		15,945
Income tax expense		(2,019)		7,381		—		—		5,362
Net income	$	10,583	$	13,707	$	—	$	(13,707)	$	10,583



		Supplemental Condensed Consolidated Statement of Operations
	For the Nine Months Ended September 30, 2016 (in thousands)
				Guarantor		Non Guarantor		Elimination		Consolidated
		CCS		Subsidiaries		Subsidiaries		Entries		CCS
Revenue
Home sales revenues		$	—	$	686,335	$	—	$	—	$	686,335
Land sales revenues			—		7,909		—		—		7,909
Golf course and other revenue			—		2,907		—		—		2,907
Total revenue			—		697,151		—		—		697,151
Costs and expenses
Cost of homes sales revenues			—		549,886		—		—		549,886
Cost of land sales revenues			—		6,668		—		—		6,668
Cost of golf course and other revenue			—		2,765		—		—		2,765
Selling, general and administrative			18,323		69,189		—		—		87,512
Total operating costs and expenses			18,323		628,508		—		—		646,831
Operating income			(18,323)		68,643		—		—		50,320
Other income (expense)
Equity in earnings from consolidated subsidiaries			45,514		—		—		(45,514)		—
Interest income			24		118		—		—		142
Interest expense			—		(4)		—		—		(4)
Acquisition expense			(466)		—		—		—		(466)
Other income			—		797		—		—		797
Gain on disposition of assets			—		468		—		—		468
Income before income tax expense			26,749		70,022		—		(45,514)		51,257
Income tax expense			(7,718)		24,508		—		—		16,790
Net income		$	34,467	$	45,514	$	—	$	(45,514)	$	34,467

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	Supplemental Condensed Consolidated Statement of Operations
	For the Nine Months Ended September 30, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS

Revenue
Home sales revenues	$	—	$	520,918	$	—	$	—	$	520,918
Land sales revenues		—		2,627		—		—		2,627
Golf course and other revenue		—		4,679		—		—		4,679
Total revenue		—		528,224		—		—		528,224
Cost of home sale revenues
Cost of homes sales revenues		—		416,483		—		—		416,483
Cost of land sales revenues		—		2,615		—		—		2,615
Cost of golf course and other revenue		—		4,214		—		—		4,214
Selling, general and administrative		15,267		50,652		—		—		65,919
Total operating costs and expenses		15,267		473,964		—		—		489,231
Operating income		(15,267)		54,260		—		—		38,993
Other income (expense)
Equity in earnings from consolidated subsidiaries		36,054		—		—		(36,054)		—
Interest income		37		51		—		—		88
Interest expense		—		(8)		—		—		(8)
Acquisition expense		(338)		—		—		—		(338)
Other income		—		1,059		—		—		1,059
Gain on disposition of assets		—		106		—		—		106
Income before income tax expense		20,486		55,468		—		(36,054)		39,900
Income tax expense		(6,246)		19,414		—		—		13,168
Net income	$	26,732	$	36,054	$	—	$	(36,054)	$	26,732



	Supplemental Condensed Consolidated Statement of Cash Flows
	For the Nine Months Ended September 30, 2016 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Net cash provided by/(used in) operating activities	$	(17,969)	$	(43,431)	$	—	$	—	$	(61,400)
Net cash used in investing activities	$	(42,791)	$	(4,685)	$	—	$	42,476	$	(5,000)
Financing activities
Borrowings under revolving credit facilities	$	145,000	$	—	$	—	$	—	$	145,000
Payments on revolving credit facilities		(90,000)		—		—		—		(90,000)
Proceeds from insurance notes payable		—		11,612		—		—		11,612
Principal payments on notes payable		—		(7,582)		—		—		(7,582)
Debt issuance costs		(1,156)		—		—		—		(1,156)
Repurchases of common stock under our stock repurchase program		(2,393)		—		—		—		(2,393)
Repurchases of common stock upon vesting of restricted stock awards		(1,014)		—		—		—		(1,014)
Payments from (and advances to) parent/subsidiary		—		42,476		—		(42,476)		—
Net cash provided by financing activities	$	50,437	$	46,506	$	—	$	(42,476)	$	54,467
Net decrease in cash and cash equivalents	$	(10,323)	$	(1,610)	$	—	$	—	$	(11,933)
Cash and cash equivalents
Beginning of period	$	22,002	$	7,285	$	—	$		$	29,287
End of period	$	11,679	$	5,675	$	—	$	—	$	17,354

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	Supplemental Condensed Consolidated Statement of Cash Flows
	For the Nine Months Ended September 30, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS

Net cash used in operating activities	$	(5,168)	$	(141,735)	$	—	$	—	$	(146,903)
Net cash used in investing activities	$	(148,667)	$	(2,398)	$	—	$	148,378	$	(2,687)
Financing activities
Borrowings under revolving credit facilities	$	135,000	$	—	$	—	$	—	$	135,000
Payments on revolving credit facilities		(55,000)		—		—		—		(55,000)
Proceeds from issuance of senior notes		58,956		—		—		—		58,956
Proceeds from issuance of insurance premium notes		—		448		—		—		448
Principal payments on notes payable		—		(6,815)		—		—		(6,815)
Debt issuance costs		(2,817)		—		—		—		(2,817)
Repurchases of common stock upon vesting of restricted stock awards		(859)		—		—		—		(859)
Payments from (and advances to) parent/subsidiary		—		148,378		—		(148,378)		—
Net cash provided by financing activities	$	135,280	$	142,011	$	—	$	(148,378)	$	128,913
Net increase (decrease) in cash and cash equivalents	$	(18,555)	$	(2,122)	$	—	$	—	$	(20,677)
Cash and cash equivalents
Beginning of period		22,710		10,752		—		—		33,462
End of period	$	4,155	$	8,630	$	—	$	—	$	12,785

16. Subsequent Events

On November 1, 2016, we acquired a 50% ownership of WJH LLC (which we refer to as “WJH”), which is a successor to Wade Jurney Homes, Inc. and Wade Jurney of Florida, Inc. (which we refer to together as “Wade Jurney”) for $15.0 million. WJH primarily targets first-time homebuyers in the Southeastern United States. As a result of the transaction, we now own 50% of WJH and Wade Jurney owns the other 50% interest. Each party contributed an additional $3.0 million in capital to WJH upon its formation. The Company and Wade Jurney will share responsibility for all of WJH’s strategic decisions, with Wade Jurney continuing to manage the day-to-day operations under the existing operating model.

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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 (which we refer to as this “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 to a number of factors.

The forward-looking statements included in this 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 Form 10-Q, and other risks and uncertainties detailed in this and our other reports and filings with 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. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.

As used in this Form 10-Q, references to “we,” “us,” “our” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.

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Overview

We are 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, Atlanta, Georgia, and Salt Lake City, Utah. Our homebuilding operations are organized into the following six operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston, Nevada and Utah. 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.

Results of Operations

During the three months ended September 30, 2016, we delivered 706 homes, with an average sales price of $351.4 thousand. During the same period, we generated approximately $248.1 million in home sales revenues, approximately $19.7 million in income before income tax expense, and approximately $13.3 million in net income.

During the nine months ended September 30, 2016, we delivered 2,013 homes, with an average sales price of $341.0 thousand. During the same period, we generated approximately $686.3 million in home sales revenues, approximately $51.3 million in income before income tax expense, and approximately $34.5 million in net income.

For the three and nine months ended September 30, 2016, our net new home contracts totaled 628 and 2,291, respectively, a 31.7% and a 20.5% increase over the same periods in 2015, respectively. As of September 30, 2016, we had a backlog of 992 sold but unclosed homes, a 9.7% increase as compared to September 30, 2015, consisting of approximately $380.9 million in sales value, a 17.2% increase as compared to September 30, 2015.

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The following table summarizes our results of operation for the three and nine months ended September 30, 2016 and 2015.


	Three Months Ended						Nine Months Ended
(in thousands, except per share amounts)	September 30,						September 30,
	2016			2015			2016			2015
	(unaudited)
Consolidated Statements of Operations:
Revenue
Home sales revenues	$	248,075		$	179,775		$	686,335		$	520,918
Land sales revenues		4,651			2,257			7,909			2,627
Golf course and other revenue		687			700			2,907			4,679
Total revenue		253,413			182,732			697,151			528,224
Costs and expenses
Cost of home sales revenues		197,650			141,452			549,886			416,483
Cost of land sales revenues		4,255			2,250			6,668			2,615
Cost of golf course and other revenue		1,165			1,046			2,765			4,214
Selling, general, and administrative		30,944			22,175			87,512			65,919
Total operating costs and expenses		234,014			166,923			646,831			489,231
Operating income		19,399			15,809			50,320			38,993
Other income (expense)		332			136			937			907
Income before income tax expense		19,731			15,945			51,257			39,900
Income tax expense		6,389			5,362			16,790			13,168
Net income	$	13,342		$	10,583		$	34,467		$	26,732
Earnings per share:
Basic	$	0.63		$	0.50		$	1.63		$	1.26
Diluted	$	0.63		$	0.50		$	1.62		$	1.26
Other Operating Information (dollars in thousands):
Number of homes delivered		706			578			2,013			1,756
Average sales price of homes delivered	$	351.4		$	311.0		$	341.0		$	296.7
Homebuilding gross margin percentage		20.3	%		21.3	%		19.9	%		20.0	%
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1)		22.5	%		22.8	%		21.8	%		21.9	%
Cancellation rate		22	%		23	%		19	%		21	%
Backlog at end of period, number of homes		992			904			992			904
Backlog at end of period, aggregate sales value	$	380,926		$	325,131		$	380,926		$	325,131
Average sales price of homes in backlog	$	384.0		$	359.7		$	384.0		$	359.7
Net new home contracts		628			477			2,291			1,901
Selling communities at period end		87			88			87			88
Average selling communities		90			81			90			79
Total owned and controlled lot inventory		17,203			13,797			17,203			13,797

(1) Non-GAAP financial measure.

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Home Sales Revenues and Homes Delivered

The following tables summarize our home deliveries and average sales price for each of our operating segments for the three and nine months ended September 30, 2016 and 2015:


New homes delivered
	Three Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2016		2015		Amount		%		2016		2015		Amount		%
Atlanta		298		269		29	10.8	%		907		843		64	7.6	%
Central Texas		40		34		6	17.6	%		154		109		45	41.3	%
Colorado		213		143		70	49.0	%		590		473		117	24.7	%
Houston		24		35		(11)	(31.4)	%		98		127		(29)	(22.8)	%
Nevada		130		97		33	34.0	%		263		204		59	28.9	%
Utah		1		—		1	NM			1		—		1	NM
Total		706		578		128	22.1	%		2,013		1,756		257	14.6	%

Average sales price of homes
delivered (in thousands)	Three Months Ended								Nine Months Ended
	September 30,				Increase (Decrease)				September 30,				Increase (Decrease)
	2016		2015		Amount		%		2016		2015		Amount		%
Atlanta	$	276.3	$	227.4	$	48.9	21.5	%	$	261.7		223.1	$	38.6	17.3	%
Central Texas	$	446.9	$	497.9	$	(51.0)	(10.2)	%	$	439.4	$	459.9	$	(20.5)	(4.5)	%
Colorado	$	447.3	$	423.5	$	23.8	5.6	%	$	444.3	$	405.3	$	39.0	9.6	%
Houston	$	312.9	$	267.3	$	45.6	17.1	%	$	312.3	$	211.4	$	100.9	47.7	%
Nevada	$	343.9	$	327.3	$	16.6	5.1	%	$	335.5	$	314.6	$	20.9	6.6	%
Utah	$	366.5	$	—	$	366.5	—		$	366.5	$	—	$	366.5	—
Total	$	351.4	$	311.0	$	40.4	13.0	%	$	341.0	$	296.7	$	44.3	14.9	%

We generated $248.1 million and $686.3 million in home sales revenues during the three and nine months ended September 30, 2016, respectively. This represents a 38.0% and a 31.8% increase as compared to the three and nine months ended September 30, 2015, respectively, where we generated $179.8 million and $520.9 million in home sales revenues, respectively. The increase in home sales revenues is a result of increased deliveries as well as an increase in our average sales price, period over period.

Our average sales price increased 13.0% to $351.4 thousand for the three months ended September 30, 2016, and increased 14.9% to $341.0 for the nine months ended September 30, 2016, as compared to the same periods in 2015. These increases are primarily a result of changes in our product mix and price appreciation in most of our markets, in particular our Atlanta and Colorado operating segments. The increase in our Houston average sales price is related to additional deliveries in higher priced communities as compared to prior periods.

Cost of Home Sales Revenues

Cost of home sales revenues increased $56.2 million and $133.4 million, or 39.7% and 32.0%, for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015. The increase in cost of home sales revenues correlates with the increase in home sales revenues.

Homebuilding Gross Margin

Homebuilding gross margin represents home sales revenues less cost of home sales revenues. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three months ended September 30, 2016 from 21.3% to 20.3% and decreased during the nine months ended September 30, 2016 from 20.0% to 19.9%, as compared to same periods in 2015. The decrease in homebuilding gross margin percentage is primarily a result of higher interest in cost of home sales revenues.

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In the following table, we calculate our homebuilding gross margin adjusting for interest in cost of sales, and purchase price accounting for acquired work in process inventory.


	Three Months Ended September 30,
	2016		%		2015		%

Home sales revenues	$	248,075	100.0	%	$	179,775	100.0	%
Cost of home sales revenues		197,650	79.7	%		141,452	78.7	%
Gross margin from home sales		50,425	20.3	%		38,323	21.3	%
Add: Interest in cost of home sales revenues		5,192	2.1	%		2,474	1.4	%
Adjusted homebuilding gross margin excluding interest (1)		55,617	22.4	%		40,797	22.7	%
Add: Purchase price accounting for acquired work in process inventory		100	0.1	%		204	0.1	%
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1)	$	55,717	22.5	%	$	41,001	22.8	%


	Nine Months Ended September 30,
	2016		%		2015		%

Home sales revenues	$	686,335	100.0	%	$	520,918	100.0	%
Cost of home sales revenues		549,886	80.1	%		416,483	80.0	%
Gross margin from home sales		136,449	19.9	%		104,435	20.0	%
Add: Interest in cost of home sales revenues		13,177	1.9	%		6,925	1.3	%
Adjusted homebuilding gross margin excluding interest (1)		149,626	21.8	%		111,360	21.4	%
Add: Purchase price accounting for acquired work in process inventory		318	0.0	%		2,645	0.5	%
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1)	$	149,944	21.8	%	$	114,005	21.9	%

(1)Non-GAAP financial measure.

Excluding interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 22.5% and 21.8% for the three and nine months ended September 30, 2016, respectively, as compared to 22.8% and 21.9% for same periods in 2015, respectively. Our adjusted homebuilding gross margin percentages remained consistent period over period. We believe the above information is meaningful as it isolates the impact that indebtedness and acquisitions have on homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

Gross Margin on Land Sales

During the three and nine months ended September 30, 2016, we disposed of land for $4.7 million and $7.9 million, respectively, which had carrying basis of $4.3 million and $6.7 million, respectively. Land sales were driven by communities in our Central Texas and Houston operating segments.

Gross Margin on Golf Course and Other

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 of $2.0 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.

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We generated approximately $0.7 million and $0.7 million in golf course and other revenue during the three months ended September 30, 2016 and 2015, respectively, which were partially offset by costs associated with the golf courses of $1.2 million and $1.0 million, respectively. We generated approximately $2.9 million and $4.7 million in revenue during the nine months ended September 30, 2016 and 2015, respectively, which were partially offset by costs associated with the golf courses of $2.8 million and $4.2 million, respectively. The decrease in golf course revenues and costs are a result of operating one golf course in 2016 as compared to two golf courses in 2015.

Selling, General and Administrative Expense


	Three Months Ended
	September 30,						Increase
	2016			2015			Amount		%
Selling, general and administrative	$	30,944		$	22,175		$	8,769	39.5	%
As a percentage of homes sales revenue		12.5	%		12.3	%

	Nine Months Ended
	September 30,						Increase
	2016			2015			Amount		%
Selling, general and administrative	$	87,512		$	65,919		$	21,593	32.8	%
As a percentage of homes sales revenue		12.8	%		12.7	%

Our selling, general and administrative costs increased $8.8 million for the three months ended September 30, 2016 as compared to the same period in 2015. The dollar increase was primarily attributable to the following: (1) an increase of $2.7 million in commission expense resulting from a 38.0% increase in home sales revenues, (2) an increase of $1.0 million in our compensation-related expenses, including incentive compensation, resulting largely from a 12.4% increase in our headcount to 545 employees as of September 30, 2016, as compared to 485 employees as of September 30, 2015, (3) an increase of $1.4 million in legal expenses, (4) an increase of $0.3 million in advertising expenses, and (5) an increase of $3.3 million related to moderate increases in rent, model expenses, depreciation, IT expenses and other corporate expenses.

Our selling, general and administrative costs increased $21.6 million for the nine months ended September 30, 2016 as compared to the same period in 2015. The dollar increase was primarily attributable to the following: (1) an increase of $6.6 million in commission expense resulting from a 31.8% increase in home sales revenues, (2) an increase of $5.1 million in our compensation-related expenses, including incentive compensation, resulting largely from a 12.4% increase in our headcount to 545 employees as of September 30, 2016, as compared to 485 employees as of September 30, 2015, (3) an increase of $2.4 million related to advertising costs associated with an increased number of active communities, (4) an increase of $1.0 million related to depreciation expense as a result of an increased number of open communities and associated model home furnishings, (5) an increase of $1.9 million in legal expenses, and (6) an increase of $4.6 million related to increases in feasibility related costs, rent, model expenses, IT expenses and other corporate expenses.

Other Income (Expense)

For the three and nine months ended September 30, 2016, other income (expense) increased to income of $0.3 million and $0.9 million, respectively, from income of $0.1 million and $0.9 million for same periods in 2015, respectively.

Income Tax Expense

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2016 estimated annual effective tax rate is driven by our blended federal and state statutory rate of 37.5%, which is partially offset by estimated benefits of 3.5% from additional deductions for tax related to domestic production activities and estimated energy credits, resulting in an estimated annual effective tax rate of 34.0%.

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Segment Assets


	September 30,		December 31,			Increase (Decrease)
	2016		2015			Amount	Change
Atlanta	$	239,202	$	185,331	$	53,871	29.1	%
Central Texas		118,665		117,037		1,628	1.4	%
Colorado		317,495		313,653		3,842	1.2	%
Houston		29,151		51,534		(22,383)	(43.4)	%
Nevada		250,408		220,209		30,199	13.7	%
Utah		10,635		—		10,635	—
Corporate		35,815		29,977		5,838	19.5	%
Total assets	$	1,001,371	$	917,741	$	83,630	9.1	%


Lots owned and	September 30, 2016			December 31, 2015			% Change
controlled	Owned	Controlled	Total	Owned	Controlled	Total	Owned		Controlled		Total

Atlanta	2,964	2,695	5,659	2,667	2,575	5,242	11.1	%	4.7	%	8.0	%
Central Texas	1,275	1,427	2,702	1,222	348	1,570	4.3	%	310.1	%	72.1	%
Colorado	2,861	1,684	4,545	2,931	1,022	3,953	(2.4)	%	64.8	%	15.0	%
Houston	160	1,140	1,300	271	220	491	(41.0)	%	418.2	%	164.8	%
Nevada	1,696	89	1,785	1,904	—	1,904	(10.9)	%	—		(6.3)	%
Utah	84	1,128	1,212	—	—	—	NM		NM		NM
Total	9,040	8,163	17,203	8,995	4,165	13,160	0.5	%	96.0	%	30.7	%

NM – Not Meaningful

Of our total lots owned and controlled as of September 30, 2016, 52.5% were owned and 47.5% were controlled, as compared to 68.4% owned and 31.6% controlled as of December 31, 2015.

Total assets increased by $83.6 million, or 9.1%, to $1.0 billion at September 30, 2016. The increase is primarily driven by an increased investment in our Atlanta and Nevada operating segments as well as our entrance into Utah.

Other Homebuilding Operating Data


	Three Months Ended					Nine Months Ended
Net new home contracts	September 30,		Increase			September 30,		Increase
	2016	2015	Amount	% Change		2016	2015	Amount	% Change
Atlanta	281	246	35	14.2	%	1,036	906	130	14.3	%
Central Texas	62	30	32	106.7	%	181	142	39	27.5	%
Colorado	136	125	11	8.8	%	596	555	41	7.4	%
Houston	19	21	(2)	(9.5)	%	90	85	5	5.9	%
Nevada	122	55	67	121.8	%	378	213	165	77.5	%
Utah	8	—	8	NM		10	—	10	NM
Total	628	477	151	31.7	%	2,291	1,901	390	20.5	%

NM – Not Meaningful

Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2016 increased by 151 homes, or 31.7%, to 628, compared to 477 for the same period in 2015. For the nine months ended September 30, 2015, net new home contracts increased by 390 homes, or 20.5%, to 2,291, compared to 1,901 for the same period in 2015. The increase in net new home orders is a result of increased demand in the majority of our markets.

Our overall “absorption rate” (the rate at which home orders are contracted, net of cancellations) for the three and nine months ended September 30, 2016 was an average of 7.0 and 25.5 per selling community (2.3 and 2.8 monthly), respectively, compared to an average of 5.9 and 24.2 per selling community (2.0 and 2.7 monthly) for the same periods in 2015, respectively. Our cancellation rate of buyers who contracted to buy a home but did not close escrow (as a percentage of overall orders) was approximately 21.6% and 18.7% for the three and nine months ended September 30, 2016, respectively, compared to 23.0% and 21.0% for the same periods in 2015, respectively.

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The change in our cancellation rate was not due to any one significant factor but was the result of general market activity during this period.



Selling communities at period end	September 30,		Increase/(Decrease)
	2016	2015	Amount	% Change

Atlanta	29	33	(4)	(12.1)	%
Central Texas	15	12	3	25.0	%
Colorado	24	29	(5)	(17.2)	%
Houston	8	9	(1)	(11.1)	%
Nevada	10	5	5	100.0	%
Utah	1	—	1	NM
Total	87	88	(1)	(1.1)	%

NM – Not Meaningful

Our selling communities decreased by one community to 87 communities at September 30, 2016, as compared to 88 communities at September 30, 2015.



	September 30,
Backlog	2016					2015					% Change

	Homes	Dollar Value		Average Sales Price		Homes	Dollar Value		Average Sales Price		Homes		Dollar Value		Average Sales Price

Atlanta	412	$	123,224	$	299.1	386	$	97,992	$	253.9	6.7	%	25.7	%	17.8	%
Central Texas	136		66,073		485.8	124		57,933		467.2	9.7	%	14.1	%	4.0	%
Colorado	268		126,321		471.3	300		138,153		460.5	(10.7)	%	(8.6)	%	2.3	%
Houston	23		8,025		348.9	52		15,439		296.9	(55.8)	%	(48.0)	%	17.5	%
Nevada	144		53,986		374.9	42		15,614		371.8	242.9	%	245.8	%	0.8	%
Utah	9		3,298		366.5	—		—		—	NM		NM		NM
Total / Weighted Average	992	$	380,926	$	384.0	904	$	325,131	$	359.7	9.7	%	17.2	%	6.8	%

NM – Not Meaningful

Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At September 30, 2016, we had 992 homes in backlog with a total value of $380.9 million, which represents an increase of 9.7% and 17.2%, respectively, as compared to September 30, 2015. The increase in backlog and backlog value is primarily attributable to the increase in the demand for new homes in the communities in which we operate.

Critical Accounting Policies

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 19, 2016, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies.” We have had no significant changes in our critical accounting policies from those described therein.

Prior period amounts related to the proceeds from home closings held for our benefit in escrow, which are typically held for less than a few days, were previously classified in “Accounts receivable” on our Condensed Consolidated Balance Sheets and have been reclassified as “Cash held in escrow.” The amount reclassified as of December 31, 2015 was $11.8 million.

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Liquidity and Capital Resources

Overview

Our principal uses of capital for the nine months ended September 30, 2016 were land purchases, land development, home construction, and the payment of routine liabilities. We used funds generated by operations and available borrowings under our Credit Agreement to meet our short-term working capital requirements.

Cash flows for each of our communities depend on the stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our statement of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities. As we continue to expand our business, we expect that cash outlays for land purchases and land development to grow our lot inventory could exceed our cash generated by operations.

Covenant Compliance

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, as modified as described below, we refer to as the “Credit Agreement”). The Credit Agreement provides the Company with a revolving line of credit (which, as modified as described below, we refer to as the “Revolving Credit Facility”) of up to $120 million. Under the terms of the Credit Agreement, we are entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, we 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 Revolving Credit Facility are guaranteed by certain of our subsidiaries.

On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and (iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.

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 Revolving 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,

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based upon the ratio of the book value of all risk assets owned by the Company and its subsidiaries on a consolidated basis to the Company’s tangible net worth.

As of September 30, 2016, we were in compliance with all covenants under the Credit Agreement.

Cash Flows—Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

For the nine months ended September 30, 2016 and 2015, the comparison of cash flows is as follows:

Net cash used in operating activities decreased to $61.4 million during the nine months ended September 30, 2016 from net cash used of $146.9 million during the nine months ended September 30, 2015. The decrease in cash used in operations was primarily a result of a net outflow associated with inventories of $85.6 million during the nine months ended September 30, 2016, compared to a net outflow of $156.5 million during the same period in 2015, primarily driven by the increase in number of homes delivered as well as the higher average sales price of those homes. We had net cash used in working capital items including cash held in escrow, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses and other liabilities of $15.3 million for the nine months ended September 30, 2016, as compared to cash used of $20.4 million for the same period in 2015.

Net cash used in investing activities was $5.0 million during the nine months ended September 30, 2016, compared to $2.7 million used during the same period in 2015. The increase relates to increased purchases of property and equipment and deceased proceeds received from the sale of assets, partially offset by proceeds from a secured note receivable.

Net cash provided by financing activities was $54.5 million during the nine months ended September 30, 2016, compared to $128.9 million during the same period in 2015. The decrease in cash provided by financing activities is primarily attributed to the issuance of senior notes in 2015 totaling $59.0 million, an increase in net payments on our Revolving Credit Facility totaling $25.0 million, and a decrease in cash used for repurchasing our common stock under our stock repurchase program and upon the vesting of restricted stock awards totaling $2.5 million more used in 2016. These decreases in cash provided in 2016 were partially offset by an increase in proceeds from insurance premium notes totaling $11.2 million and a decrease in debt issuance costs paid of $1.7 million.

As of September 30, 2016, our cash balance was $17.4 million.

Off-Balance Sheet Arrangements

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit, and the purchase of land under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. These contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time, or in bulk at a point in time, at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and these contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. Our obligations with respect to the option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of September 30, 2016, we had outstanding contracts for 8,163 lots totaling $351.6 million, and had $5.8 million of non-refundable cash deposits pertaining to land contracts.

Our utilization of land option contracts is dependent on, among other things, the availability of land sellers and others willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities. As of September 30, 2016 and December 31, 2015, we had $66.0 million and $63.6 million, respectively, in letters of credit and performance bonds issued and outstanding. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.

Adjusted EBITDA

The following table presents adjusted EBITDA for the three and nine months ended September 30, 2016 and 2015. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define adjusted EBITDA

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as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, and (v) adjustments resulting from the application of purchase accounting for acquired work in process inventory related to business combinations. We believe adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.


	Three Months Ended September 30,							Nine Months Ended September 30,
	2016		2015		% Change			2016		2015		% Change
Net income	$	13,342	$	10,583		26.1	%	$	34,467	$	26,732		28.9	%
Income tax expense		6,389		5,362		19.2	%		16,790		13,168		27.5	%
Interest in cost of home sales revenues		5,192		2,474		109.9	%		13,177		6,925		90.3	%
Interest expense		—		2		(100.0)	%		4		8		(50.0)	%
Depreciation and amortization expense		1,418		1,242		14.2	%		4,215		3,512		20.0	%
EBITDA		26,341		19,663		34.0	%		68,653		50,345		36.4	%
Purchase price accounting for acquired work in process inventory		100		204		(51.0)	%		318		2,645		(88.0)	%
Adjusted EBITDA	$	26,441	$	19,867		33.1	%	$	68,971	$	52,990		30.2	%

Net Debt to Net Capital

The following table presents our ratio of net debt to net capital, which is a non-GAAP financial measure. We calculate this by dividing net debt (notes payable and revolving line of credit less cash held in escrow and cash and cash equivalents) by net capital (net debt plus total stockholders’ equity). The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of the our ability to obtain external financing.


	September 30,		December 31,
	2016		2015
Notes payable and revolving line of credit	$	450,331	$	390,243
Total stockholders' equity		445,596		409,479
Total capital	$	895,927	$	799,722
Debt to capital		50.3%		48.8%

Notes payable and revolving line of credit	$	450,331	$	390,243
Cash held in escrow		(27,749)		(11,817)
Cash and cash equivalents		(17,354)		(29,287)
Net debt		405,228		349,139
Total stockholders' equity		445,596		409,479
Net capital	$	850,824	$	758,618

Net debt to net capital		47.6%		46.0%

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rates

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our Credit Agreement, which was entered into on October 21, 2014. Future 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 Revolving Credit Facility. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to changes in interest rates.

Inflation

Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) as of September 30, 2016, the end of the period covered by this Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2016 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

None.

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PART II

ITEM 1. LEGAL PROCEEDINGS.

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that was filed with the SEC on February 19, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three months ended September 30, 2016, certain of our employees surrendered approximately 5.8 thousand shares of our common stock owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our First Amended & Restated 2013 Long-Term Incentive Plan. The following table summarizes the repurchases that occurred during the three months ended September 30, 2016:


	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
July
Purchased 7/1 through 7/31	4,159	$	18.20	N/A		N/A
August
Purchased 8/1 through 8/31	—		—	N/A		N/A
September
Purchased 9/1 through 9/30	1,674		20.00	N/A		N/A
Total	5,833	$	18.72

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

The following exhibits are either filed herewith or incorporated herein by reference:


EXHIBIT INDEX
3.1		Certificate of Incorporation of the Company, as amended (incorporated by reference herein from Exhibit 3.1 to the initial filing of the Company’s Registration Statement on Form S-1 filed with the SEC on May 5, 2014)
3.2		Bylaws of the Company (incorporated by reference herein from Exhibit 3.2 to the initial filing of the Company’s Registration Statement on Form S-1 filed with the SEC on May 5, 2014)
10.1		Third Modification Agreement, dated as of August 19, 2016, by and among the Company, Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and the subsidiary guarantors of the Company party thereto (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2016)
31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1		Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.


	Century Communities, Inc.


Date: November 2, 2016	By:	/s/ Dale Francescon
		Dale Francescon
		Chairman of the Board and Co-Chief Executive Officer (Principal Executive Officer)



Date: November 2, 2016	By:	/s/ David Messenger
		David Messenger
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


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