What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-29 compared with 2020-04-30 · 230 added, 119 removed, 284 unchanged (55% of the section changed)

50 unchanged sentences

Some of the numbers included herein have been rounded for the convenience of presentation.

Century is e ngaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states.

Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states.

In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.

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first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections.

Our Century Complete brand targets first time homebuyers primarily sells homes through retail studios and the internet and provides no option or upgrade selections.

Our Century Complete brand, formerly referred to as Wade Jurney Homes, targets first time homebuyers, primarily sells homes through retail studios and the internet and provides no option or upgrade selections.

Our homebuilding operations are organized into the following five reportable segments:

West, Mountain, Texas, Southeast, and Century Complete.

Additionally, our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our home buyers have been identified as our Financial Services segment.

On February 6, 2020, in order to better align with our Century brand, we announced the rebranding of our Wade Jurney Homes brand to Century Complete.

We believe this rebranding will assist in showcasing the value proposition to potential buyers.

Additionally, our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment.

We build and sell an extensive range of home types across a variety of price points .

Potential Impact of COVID-19 Pandemic

The recent outbreak of the novel coronavirus, COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has created significant volatility, disruption, and uncertainty.

It has resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and social distancing, leading to the closure of businesses and causing weakened economic conditions that will likely worsen and may ultimately result in an economic slowdown or recession.

These actions have begun to adversely impact and will likely continue to adversely impact Century directly and indirectly.

In response to the pandemic and these government restrictions, Century has shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols.

We have limited our construction and other operations to those that are authorized under the various applicable governmental orders and shifted our corporate and other office functions to work remotely.

As of the date of this filing, other than the state of Michigan and certain municipalities within the Bay Area market of Northern California, construction and sale of residential real estate has been determined to be an essential business, and accordingly our operations have been exempt from the applicable health orders.

We are uncertain as to how long these restrictions will remain in place and whether the COVID-19 public health effort will be intensified to further restrict our business.

While these circumstances did not materially adversely affect our first quarter 2020 financial results, they have begun to negatively impact our business, including our ability to develop, construct, market and sell homes, and beginning in April 2020, have begun to negatively impact and will likely continue to negatively impact our revenues and other operating results.

The adverse effect of the COVID-19 pandemic on the broader economy has negatively impacted and will likely continue to negatively impact demand for new homes.

Continued demand for Century homes is uncertain but is unlikely to return quickly to the record levels that we experienced prior to the pandemic in light of anticipated higher unemployment rates, decreased consumer confidence, decreased availability of credit, and other factors.

This impact on demand for our homes will likely adversely affect our operating results in future periods, although, we cannot reasonably estimate the amount or duration of the impact at this time .

In addition, a decline in our home building operations will have a direct effect on the origination volume of and revenues from our Financial Services segment.

Impact of COVID-19 Pandemic

The outbreak of the novel coronavirus, COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, created significant volatility, disruption, and uncertainty across the nation and abroad.

It resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and weakened economic conditions resulting in an economic slowdown and recession.

The homebuilding industry started to experience slowing sales trends in mid-March through April of 2020 at the outset of the widespread uncertainty concerning the pandemic.

However, home sales sharply rebounded in May and June, aided by historically low interest rates, lack of supply, and potential renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas.

In response to the pandemic and government restrictions, we shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols.

Construction and sale of residential real estate has been determined to be an essential business, and accordingly our operations, other than in certain markets during the first weeks of April, have been exempted from the applicable health orders.

While these circumstances did not materially adversely affect our second quarter 2020 financial results, we recognize that long term macro-economic effects that could ultimately impact the homebuilding industry have yet to be known.

There is still uncertainty regarding the extent and duration of the COVID-19 pandemic, as the situation has continued to evolve, and associated government and consumer responses have remained in a state of flux, especially in light of recent spikes in infections in key markets.

Unemployment levels are at historically high levels and increases in COVID-19 positive cases in late June and early July of 2020 have resulted in the slowing or altering of the “re-opening” plans of numerous state and local municipalities.

Accordingly, despite overall strong demand and sales during the second quarter of 2020, continued future demand for Century homes is uncertain in light of higher unemployment rates and anticipated decreased consumer confidence, availability of credit, and other factors, including those described elsewhere in this report.

A decrease in demand for our homes would adversely affect our operating results in future periods, as well as have a direct effect on the origination volume of and revenues from our Financial Services segment.

In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventory in the future.

Given the significant uncertainty regarding the impact of COVID-19, and in particular during the late March and April 2020 timeframe, we took significant steps to preserve cash and ensure we were positioned appropriately from a working capital perspective, including but not limited to extending the timing of certain land acquisitions, slowing or altering our land development activities, drawing additional amounts on our revolving line of credit, and implementing a reduction in our workforce along with other cost savings measures.

As a result, and aided by the strong demand during the second quarter, we ended the second quarter of 2020 with no amounts outstanding on our revolving line of credit, $173.5 million of cash and cash equivalents, $46.6 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 37.5%.

While the impact of the COVID-19 pandemic will continue to evolve, we believe that we are well positioned to both operate in an uncertain environment as well as take advantage of strategic opportunities as they arise.

Results of Operations

During the three months ended March 31, 2020, we delivered 1,864 homes, with an average sales price of $307.2 thousand.

These deliveries represent an increase of 12.1%, as compared to the three months ended March 31, 2019.

During the three months ended March 31, 2020, we generated approximately $572.7 million in home sales revenues, approximately $34.1 million in income before income tax expense, and approximately $26.1 million in net income.

For the three months ended March 31, 2020, our new home contracts, net of cancelations, totaled 2,388, a 28.5% increase over the same period in 2019.

As of March 31, 2020, we had a backlog of 2,594 homes, a 9.2% increase as compared to March 31, 2019, representing approximately $861.1 million in sales value, a 19.9% increase as compared to March 31, 2019.

The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019.

During the three and six months ended June 30, 2020, we delivered 2,480 and 4,344 homes, respectively, with an average sales price of $301.4 thousand and $303.9 thousand, respectively.

These deliveries represent increases of 26.1% and 19.7%, respectively, as compared to the three and six months ended June 30, 2019.

During the three and six months ended June 30, 2020, we generated approximately $747.4 million and $1,320.1 million in home sales revenues, respectively, approximately $50.1 million and $84.2 million in income before income tax expense, respectively, and approximately $38.5 million and $64.6 million, respectively, in net income.

For the three and six months ended June 30, 2020, our new home contracts, net of cancelations, totaled 2,664 and 5,052, respectively, a 22.1% and 25.0% increase over the same respective periods in 2019.

As of June 30, 2020, we had a backlog of 2,778 homes, a 7.2% increase as compared to June 30, 2019, representing approximately $962.8 million in sales value, a 22.8% increase as compared to June 30, 2019.

The following table summarizes our results of operations for the three and six months ended June 30, 2020 and 2019.

(in thousands, except per share amounts)

Three Months Ended March 31,

Increase (Decrease)

Three Months Ended June 30,

Six Months Ended June 30,

Consolidated Statements of Operations:

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Selling, general, and administrative

Inventory impairment

Loss on debt extinguishment

Inventory impairment and other

Other income (expense)

19 unchanged sentences

Net homebuilding debt to net capital (1)

NM – Not Meaningful

(1) This is a non-GAAP financial measure and should not be used as a substitute for the Company’s operating results prepared in accordance with GAAP.

See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures .” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP .

(2) Homebuilding gross margin percentage is inclusive of a $0.8 million inventory impairment included within inventory impairment and other on our consolidated financial statements.

(2) Homebuilding gross margin percentage is inclusive of a $0.9 million and $1.7 million inventory impairment for the three and six months ended June 30, 2020, respectively, included within inventory impairment and other on our consolidated financial statements.

(3) As Century Complete does not sell homes by community, but through studios and other methods, that segment is excluded from the count of selling communities.

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Income before Income Tax

Three Months Ended March 31,

Three Months Ended June 30,

Century Complete

Financial Services

In our West segment, for the three months ended March 31, 2020, our income before income tax increased by $6.7 million, to $15.3 million.

During the three months ended March 31, 2020, we delivered 233 homes, with an average sales price of $543.2 thousand, and generated $126.6 million in home sales revenue.

Income before income tax increased during the three months ended March 31, 2020 primarily due to an increase in deliveries of 13% and the benefit of non-recurring land sales.

In our Mountain segment, for the three months ended March 31, 2020, our income before income tax decreased by $0.8 million, to $18.5 million.

The decrease of income before income tax for the three months ended March 31, 2020 is primarily related to the decrease in home sales revenue which was driven by a decrease in our average sales price.

In our Texas segment, for the three months ended March 31, 2020, our income before income tax increased by $1.7 million, to $5.5 million, as compared $3.8 million for the same period in 2019.

The increase in income before income tax is primarily related to a 47% increase in the number of homes delivered during the three months ended March 31, 2020 as compared to the same period in 2019, which was partially offset by a decrease in the average sales price as we continued our shift towards first time homebuyers.

In our Southeast segment, for the three months ended March 31, 2020, our income before income tax increased by $2.6 million, to $8.3 million, as compared to $5.7 million for the same period in 2019.

The increase in income before income tax for the three months ended March 31, 2020 is primarily related to the increase in homes delivered, average sales price, and total home sales revenues.

New Homes Delivered

Average Sales Price of Homes Delivered

Home Sales Revenues

Income before Income Tax

Six Months Ended June 30,

Century Complete

For the three months ended March 31, 2020, we delivered 623 homes, with an average price of $157.4 thousand, and generated $98.1 million in home sales revenues.

Our income before income tax for the three months ended March 31, 2020 was $0.8 million, as compared to $4.0 million for the same period in 2019.

The decrease in income before income tax is primarily attributable to increase in certain fixed costs and $0.8 million in one-time inventory impairment charges during the three months ended March 31, 2020.

Financial Services

Our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our home buyers have been identified as our Financial Services segment.

In our West segment, for the three and six months ended June 30, 2020, our income before income tax increased by $3.8 million and $10.5 million, respectively, to $13.7 million and $29.1 million, respectively, compared to the same periods in 2019.

These increases were primarily due to increases in new home deliveries of 22.7% and 20.0%, respectively, compared to the same periods in 2019, and the benefit of non-recurring land sales in the current year periods.

During the three and six months ended June 30, 2020, we delivered 313 homes and 546 homes, respectively, with an average sales price of $530.6 thousand and $536.0 thousand, respectively, and generated $166.1 million and $292.7 million, respectively, in home sales revenue.

In our Mountain segment, for the three and six months ended June 30, 2020, our income before income tax decreased by $1.9 million and $2.7 million, respectively, to $20.6 million and $39.1 million, respectively, compared to the same periods in 2019.

These decreases were primarily related to decreases in home sales revenue for the three and six months ended June 30, 2020 compared to the same periods in 2019, which were primarily driven by decreases in our average sales prices in the current year periods.

In our Texas segment, for the three and six months ended June 30, 2020, our income before income tax increased by $4.0 million and $5.8 million, respectively, to $9.6 million and $15.1 million, respectively, compared to the same periods in 2019.

These increases were primarily related to 87.8% and 69.9% increases in the number of homes delivered during the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019, which were partially offset by decreases in the average sales prices during the current year periods as we continued our shift towards first time homebuyers.

For the three months ended June 30, 2020, the increase

in income before income tax was partially offset by a $0.9 million impairment charge reflected during the three months ended June 30, 2020.

In our Southeast segment, for the three and six months ended June 30, 2020, our income before income tax increased by $7.4 million and $9.9 million, respectively, to $12.0 million and $20.3 million, respectively, as compared to $4.6 million and $10.4 million for the same periods in 2019.

These increases were primarily related to 43.0% and 27.1% increases in the number of homes delivered during the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019.

Century Complete

For the three and six months ended June 30, 2020, we delivered 835 homes and 1,458 homes, respectively, with an average price of $160.1 thousand and $159.0 thousand, respectively, and generated $133.7 million and $231.8 million in home sales revenues, respectively, in our Century Complete segment.

Our income before income tax for the three and six months ended June 30, 2020 was $8.5 million and $9.3 million, respectively, as compared to $8.3 million and $12.3 million for the same periods in 2019.

The increase in income before income tax for the three month comparison is primarily attributable to a 14.7% increase in new home deliveries.

The decrease in income before income tax for the six month comparison is primarily attributable to an increase in certain fixed costs and $0.8 million in inventory impairment charges.

Financial Services

Our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment.

Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days.

During the three months ended March 31, 2020, income before income tax decreased $1.4 million to $0.2 million compared to the same period during 2019.

The decrease was primarily the result of $3.0 million non-cash, unrealized loss related to our hedging activity, partially offset by a $1.4 million overall increase in financial services revenue.

During the three months ended March 31, 2020, our Corporate segment generated losses of $14.5 million, as compared to losses of $20.0 million for the same period in 2019.

The decrease in expenses during the three months ended March 31, 2020 was primarily attributed to the following:

(1) a $4.6 million decrease in salaries and wages related to lower bonus and performance share expense accruals, and (2) a decrease in legal costs of $0.8 million.

During the three and six months ended June 30, 2020, income before income tax increased $10.8 million and $9.4 million, respectively, to $13.0 million and $13.2 million, respectively, compared to the same periods in 2019.

These increases were primarily the result of $15.8 million and $17.2 million overall increases in financial services revenue during the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019.

During the three and six months ended June 30, 2020, our Corporate segment generated losses of $27.4 million and $41.9 million, respectively, as compared to losses of $32.4 million and $52.4 million, respectively, for the same periods in 2019.

The decrease for the three month comparison was primarily attributed to the following:

a $10.8 million decrease in loss on debt extinguishment, partially offset by (1) a $5.0 million increase in salaries and wages related to higher bonus expense, and (2) an increase in legal costs of $1.1 million.

The decrease for six month comparison was primarily attributed to the loss on debt extinguishment of $10.8 million that occurred during the prior year period.

Homebuilding Gross Margin

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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, increased during the three months ended March 31, 2020 to 17.7% as compared to 17.1% for the same period in 2019, which was primarily driven by a 0.6% decrease in cost of home sales revenues.

In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment, interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory.

Three Months Ended March 31,

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three months ended June 30, 2020 to 16.9% as compared to 17.2% for the same period in 2019, which was primarily driven by impairment charges and a 0.2% increase in cost of home sales revenues as a percentage of home sales revenues.

Our homebuilding gross margin for the six months ended June 30, 2020 remained consistent at 17.2% compared to the same period in 2019.

For a portion of the three months ended June 30, 2020, we made the strategic decision to increase incentives across our markets, leading to an increase in incentives as a percent of home sales revenue as compared to the three months ended June 30, 2019.

In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and other, interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory.

Three Months Ended June 30,

Home sales revenues

Cost of home sales revenues

Inventory impairment

Inventory impairment and other

Gross margin from home sales

Inventory impairment

Inventory impairment and other

Interest in cost of home sales revenues

Adjusted homebuilding gross margin excluding interest and inventory impairment

Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1)

Purchase price accounting for acquired work in process inventory

Adjusted homebuilding gross margin excluding interest, inventory impairment and purchase price accounting for acquired work in process inventory

Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1)

Six Months Ended June 30,

Home sales revenues

Cost of home sales revenues

Inventory impairment and other

Gross margin from home sales

Inventory impairment and other

Interest in cost of home sales revenues

Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1)

Purchase price accounting for acquired work in process inventory

Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1)

(1) This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP.

See the reconciliations to the most comparable GAAP measure and other information under “—Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

For the three months ended March 31, 2020, excluding impairment, interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 20.2% as compared to 19.8% for the same period in 2019.

For the three and six months ended June 30, 2020, excluding impairment and other, interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 19.5% and 19.8%, respectively, as compared to 19.6% and 19.7% for the same periods in 2019.

We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

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(dollars in thousands)

Three Months Ended March 31,

Three Months Ended June 30,

Selling, general and administrative

As a percentage of home sales revenue

Our selling, general and administrative expense increased $4.7 million for the three months ended March 31, 2020 as compared to the same period in 2019.

The increase was primarily attributable to the following:

(1) an increase of $3.1 million in commission expense due to the 9.4% increase in home sales revenues, (2) an increase of $0.7 million in franchise tax expenses, (3) an increase of $0.7 million in legal costs, and (4) nominal increases in numerous items associated with our increased scale throughout selling, general and administrative expense.

Six Months Ended June 30,

Selling, general and administrative

As a percentage of homes sales revenue

Our selling, general and administrative expense increased $11.5 million and $16.2 million for the three and six months ended June 30, 2020, respectively, as compared to the same periods in 2019.

The increase for the three months ended June 30, 2020 was primarily attributable to the following:

(1) an increase of $7.5 million in commission expense due to the 22.8% increase in home sales revenues, and (2) an increase of $4.0 million in our estimate of bonuses for 2020 as a result of our strong second quarter 2020 results.

The increase for the six months ended June 30, 2020 was primarily attributable to the following:

(1) an increase of $10.6 million in commission expense due to the 16.6% increase in home sales revenues, (2) an increase of $6.6 million across various salary and wage expenses, and (3) a increase of $1.2 million in taxes and licenses.

Income Tax Expense

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Our 2020 estimated annual effective tax rate of 23.4% is driven by our blended federal and state statutory rate of 25.6%, and certain other permanent differences between GAAP and tax which decreased our rate by 2.2%.

For the three months ended March 31, 2020, our estimated annual rate of 23.7% was impacted by discrete items which had a net impact of decreasing our rate by 0.3%, including excess tax benefits for vested stock-based compensation .

For the three months ended March 31, 2020 and 2019, we recorded income tax expense of $8.0 million and $5.9 million, respectively .

For the six months ended June 30, 2020, our estimated annual rate of 23.4% was impacted by discrete items which had a net impact of decreasing our rate by 0.1%, including excess tax benefits for vested stock-based compensation.

For the three months ended June 30, 2020 and 2019, we recorded income tax expense of $11.7 million and $5.3 million, respectively.

For the six months ended June 30, 2020 and 2019, we recorded income tax expense of $19.6 million and $11.2 million, respectively .

Segment Assets

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Lots owned and

March 31, 2020

June 30, 2020

December 31, 2019

Century Complete

Of our total lots owned and controlled as of March 31, 2020, 58.2% were owned and 41.8% were controlled, as compared to 48.1% owned and 51.2% controlled as of December 31, 2019.

Total assets increased by $410.7 million, or 16.4%, to $2.9 billion at March 31, 2020 as compared to December 31, 2019.

The increase is driven by investments in inventory during the period in addition to a $395.5 million increase in cash and cash equivalents.

Of our total lots owned and controlled as of June 30, 2020, 55.1% were owned and 44.9% were controlled, as compared to 48.1% owned and 51.9% controlled as of December 31, 2019.

Total assets increased by $51.8 million, or 2.1%, to $2.6 billion at June 30, 2020 as compared to December 31, 2019.

The increase is driven by a 169% increase in corporate assets related to excess cash generated partially offset by a decrease in inventories across our markets, which are both attributable to our record home sales during the current year period.

Other Homebuilding Operating Data

Three Months Ended

Six Months Ended

Net new home contracts

Increase (Decrease)

Century Complete

Net new home contracts (new home contracts net of cancellations) for the three months ended March 31, 2020 increased by 530 homes, or 28.5%, to 2,388, compared to 1,858 for the same period in 2019.

The increase in our net new home contracts was primarily driven by stronger sales in our West, Mountain, Texas, and Southeast regions.

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three months ended March 31, 2020 by segment are included in the tables below:

Three Months Ended March 31,

Net new home contracts (new home contracts net of cancellations) for the three months ended June 30, 2020 increased by 482 homes, or 22.1%, to 2,664, compared to 2,182 for the same period in 2019.

Net new home contracts for the six months ended June 30, 2020 increased by 1,012 homes, or 25.0%, to 5,052, compared to 4,040 for the same period in 2019.

The increases in our net new home contracts were primarily driven by stronger sales in our West, Mountain, Texas, and Southeast regions.

Since market conditions and further impacts from COVID-19 remain uncertain, it is difficult to predict our future net new home contracts .

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and six months ended June 30, 2020 by segment are included in the tables below:

Three Months Ended June 30,

Increase (Decrease)

Century Complete

NM – Not Meaningful

Our absorption rates increased by 45.5% to 4.8 per month during the three months ended March 31, 2020, as compared to the same period in 2019.

The increase in absorption rate is attributable to the strong homebuilding market and economic trends across our markets that we experienced during the three months ended March 31, 2020 prior to the COVID-19 pandemic.

Six Months Ended June 30,

Century Complete

During the three and six months ended June 30, 2020, our absorption rates increased by 35.1% and 40.0%, respectively, to 5.0 and 4.9 per month, respectively, as compared to the same periods in 2019.

These increases are attributable to historically low interest rates and strong demand for new homes during current year periods, in particular during the three months ended June 30, 2020.

Selling communities at period end

As of March 31,

As of June 30,

Increase/(Decrease)

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N/A – Not Applicable

Our selling communities increased to 128 communities at March 31, 2020 as compared to 125 at March 31, 2019.

Our selling communities nominally decreased to 122 communities at June 30, 2020 as compared to 125 at June 30, 2019.

As Century Complete does not sell homes by community, but through studios and other methods, there are no communities or absorptions presented for that segment.

(Dollars in thousands)

As of March 31,

As of June 30,

Average Sales Price

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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 March 31, 2020, we had 2,594 homes in backlog with a total value of $861.1 million, which represents an increase of 9.2% and 19.9%, respectively, as compared to March 31, 2019.

At June 30, 2020, we had 2,778 homes in backlog with a total value of $962.8 million, which represents an increase of 7.2% and 22.8%, respectively, as compared to June 30, 2019.

The increase in backlog dollar value is primarily attributable to the increases in backlog units and a 14.5% increase in the backlog average sales price.

Supplemental Guarantor Information

Our 5.875% senior notes due 2025 and 6.750% senior notes due 2027 (which we collectively refer to as our “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 collectively as “Guarantors”).

Our subsidiaries associated with our financial services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes.

The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors.

The guarantees are effectively subordinated to any secured debt of the Guarantors.

In addition, our former 6.875% senior notes due 2022 which were extinguished during the second quarter of 2019, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.

As of June 30, 2020, Century Communities, Inc.

had outstanding $900.0 million in total principal amount of Senior Notes.

Each of the indentures governing our 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 respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective indentures) or is made in compliance with applicable provisions of the applicable 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 applicable indenture;

provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the respective indentures);

(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 applicable 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 applicable 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 applicable Indenture;

(4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the respective Indentures), in accordance with the applicable indenture;

(5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge;

or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture.

The indenture governing our former 6.875% senior notes due 2022 contained a similar provision.

If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes.

This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee.

On the basis of historical financial information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature.

The Company cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

As the guarantees were made in connection with exchange offers effected in February 2015, October 2015 and April 2017 and the issuance of the 5.875% senior notes due 2025 and of the 6.750% senior notes due 2027, 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.

On March 2, 2020, the SEC adopted amendments to Rules 3-10 and 3-16 of Regulation S-X, under Rule Release No.

33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (“Rule 33-10762”), that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities (which we previously included within the notes to our financial statements in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q).

The amendments under Rule 33-10762 are effective January 4, 2021, but voluntary compliance is permitted in advance of the effective date.

We have adopted the new disclosure requirements permitted under Rule 33-10762 for the period ending June 30, 2020.

The following summarized financial information is presented for Century Communities, Inc.

and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc.

and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from Non-Guarantor Subsidiaries.

Century Communities, Inc.

and Guarantor Subsidiaries

Summarized Balance Sheet Data (in thousands)

June 30, 2020

December 31, 2019

Cash and cash equivalents

Cash held in escrow

Accounts receivable

Prepaid expenses and other assets

Property and equipment, net

Deferred tax assets, net

Liabilities and stockholders’ equity

Accounts payable

Accrued expenses and other liabilities

Notes payable

Revolving line of credit

Total liabilities

Stockholders’ equity:

Total liabilities and stockholders’ equity

Summarized Statement of Operations Data (in thousands)

Six Months Ended June 30, 2020

Year Ended December 31, 2019

Total homebuilding revenues

Total homebuilding cost of revenues

Selling, general and administrative

Loss on debt extinguishment

Inventory impairment and other

Other income (expense)

Income before income tax expense

Critical Accounting Policies

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Liquidity and Capital Resources

Our principal uses of capital for the three months ended March 31, 2020 were our land purchases, land development, home construction, and the payment of routine liabilities.

We use funds generated by operations, available borrowings under our revolving line of credit, and from time to time proceeds from sales of common stock, including under our current at-the-market facility, and debt securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.

Our principal uses of capital for the three and six months ended June 30, 2020 were our land purchases, land development, home construction, and the payment of routine liabilities.

We use funds generated by operations, available borrowings under our revolving line of credit, and from time to time proceeds from sales of our common stock, including under our current at-the-market facility, and debt securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.

Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings.

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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.

In light of the current COVID-19 pandemic, we have taken certain measures to ensure we are positioned with cash flow and liquidity to endure an extended period of lower demand, should it arise.

Specifically, we have reduced starting construction on unsold homes in our Century Complete segment, and with few exceptions eliminated them in our Century Communities brand.

We will continue to start construction on pre-sold homes where we have appropriate deposits and loan approvals.

Additionally, we have terminated a number of pending land acquisitions and we have successfully extended expected closing dates.

We have also slowed or stopped our land

development activities and instituted a variety of actions designed to reduce our operating expenses including a reduction in the size of our workforce through a targeted layoff in April 2020 .

In response to the COVID-19 pandemic, we took certain measures to ensure we are positioned with cash flow and liquidity to endure an extended period of lower demand for our homes, should it arise.

Specifically commencing in mid-March of 2020, we slowed our land development activities and instituted a variety of actions designed to reduce our operating expenses, including a reduction in the size of our workforce through a targeted layoff in April 2020.

In addition, given the uncertainty surrounding the COVID-19 pandemic, we increased our borrowings under our revolving line of credit during the end of the first quarter of 2020 and into the beginning of the second quarter of 2020 as a proactive measure in order to expand our financial flexibility at that time.

We repaid these borrowings during the second quarter of 2020 in light of our strong second quarter 2020 operating results and to decrease our interest expense.

Our Financial Services operations use funds generated from operations, and availability under our mortgage repurchase facilities to finance operations including originations of mortgage loans to our homebuyers.

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In November 2019, we filed a prospectus supplement to offer up to $100.0 million under the shelf registration statement under our at-the-market facility described below.

We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic.

We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic, its impact on the macro-economy, and market conditions at the time .

Revolving Line of Credit

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These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly.

Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

As of March 31, 2020, we had $521.9 million outstanding under the credit facility with $118.1 million in availability, and were in compliance with all covenants.

Given the uncertainty surrounding the COVID-19 pandemic, the Company increased its borrowing during the first quarter of 2020 as a proactive measure in order to expand financial flexibility during this period of potential business disruption.

Borrowings under the Amended and Restated Credit Agreement bear interest

at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

As of June 30, 2020, we had no amounts outstanding under the credit facility and were in compliance with all covenants.

Mortgage Repurchase Facilities – Financial Services

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Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type.

As of March 31, 2020, we had $133.8 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder.

During the three months ended March 31, 2020 and 2019, we incurred interest expense on the repurchase facilities of $0.7 million and $0.6 million, respectively, which are included in financial services costs on our condensed consolidated statements of operations .

As of June 30, 2020, we had $197.5 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder.

During the three and six months ended June 30, 2020, we incurred interest expense on the repurchase facilities of $0.5 million and $1.3 million, respectively.

During the same periods in 2019, we incurred interest expense on the repurchase facilities of $0.9 million and $1.5 million, respectively.

Interest expense on mortgage repurchase facilities is included in financial services costs on our condensed consolidated statements of operations .

At-the-Market Offerings

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(which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement.

This Distribution Agreement, which superseded and replaced a prior similar Distribution Agreement, had all $100 million available for sale as of March 31, 2020.

We did not sell or issue any shares of our common stock during the three months ended March 31, 2020 or the three months ended March 31, 2019.

This Distribution Agreement, which superseded and replaced a prior similar Distribution Agreement, had all $100 million available for sale as of June 30, 2020.

We did not sell or issue any shares of our common stock during the three and six months ended June 30, 2020.

During the three and six months ended June 30, 2019, we sold and issued an aggregate of 0.1 million shares of our common stock under the previous Distribution Agreement, which provided proceeds of $2.7 million, and in connection with such sales, paid total commissions and fees to the sales agents of $0.1 million .

The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement.

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In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities.

As of March 31, 2020, and December 31, 2019, we had $343.7 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

As of June 30, 2020, and December 31, 2019, we had $335.9 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance bonds are not generally released until all development and construction activities are completed.

Our outstanding debt obligations included the following as of March 31, 2020 and December 31, 2019 (in thousands):

Our outstanding debt obligations included the following as of June 30, 2020 and December 31, 2019 (in thousands):

6.750% senior notes, due May 2027 (1)

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All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock.

No shares were repurchased during the three months ended March 31, 2020.

During the three months ended March 31, 2019, an aggregate of 83,000 shares were repurchased for a total purchase price of approximately $1.4 million or an average of $17.14 per share.

The maximum number of shares that may yet be purchased under the stock repurchase program as of March 31, 2020 is 3,812,939.

Cash Flows—Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

For the three months ended March 31, 2020 and 2019, the comparison of cash flows is as follows:

During the three and six months ended June 30, 2020 we did not repurchase any shares of common stock.

During the three months ended June 30, 2019 we did not repurchase any shares of common stock while during the six months ended June 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $1.4 million .

The maximum number of shares available to be purchased under the stock repurchase program as of June 30, 2020 is 3,812,939.

Cash Flows— Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

For the six months ended June 30, 2020 and 2019, the comparison of cash flows is as follows:

 Our primary sources of cash flows from operations are from the sale of single family attached and detached homes and mortgages.

Our primary uses of cash flows from operations is the acquisition of land and expenditures associated with the construction of our single family attached and detached homes and the origination of mortgages held for sale.

During the three months ended March 31, 2020 and 2019, we used $12.5 million and $59.4 million in cash from operations, respectively.

The decrease in cash used in operations is primarily a result of a $9.0 million increase in net income and a

comparatively favorable decrease in changes in assets and liabilities for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

 Net cash used in investing activities decreased to $2.5 million during the three months ended March 31, 2020, compared to $3.3 million used during the same period in 2019.

During the six months ended June 30, 2020 and 2019, we generated $173.8 million and used $93.0 million in cash from operations, respectively.

The increase in cash provided by operations is primarily a result of a $32.0 million increase in net income

and a comparatively favorable changes in assets and liabilities for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

 Net cash used in investing activities decreased to $4.9 million during the six months ended June 30, 2020, compared to $6.2 million used during the same period in 2019.

The decrease was primarily related to less purchases of property and equipment.

 Net cash provided by financing activities was $410.0 million during the three months ended March 31, 2020, compared to $67.8 million during the same period in 2019.

The increase was primarily attributable to a $368.7 million increase in net borrowings under our revolving line of credit during the three months ended March 31, 2020 as compared to the same period in 2019, partially offset by a $26.6 million increase in net payments under our mortgage repurchase facilities.

As of March 31, 2020, our cash and cash equivalents and restricted cash balance was $453.5 million.

 Net cash used in financing activities was $50.5 million during the six months ended June 30, 2020, compared to $97.5 million provided by financing activities during the same period in 2019.

The change for the six months ended June 30, 2020 was primarily attributable to a $78.2 million increase in net payments under our revolving line of credit and a $108.1 million decrease in proceeds from issuance and extinguishments of senior notes, partially offset by a $27.2 million increase in net proceeds under our mortgage repurchase facilities.

As of June 30, 2020, our cash and cash equivalents and restricted cash balance was $177.0 million.

Off-Balance Sheet Arrangements

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Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits.

As of March 31, 2020, we had outstanding purchase contracts and option contracts for 14,979 lots with a total purchase price of approximately $647.0 million and had $36.1 million of non-refundable cash deposits pertaining to land option contracts.

As of June 30, 2020, we had outstanding purchase contracts and option contracts for 15,635 lots with a total purchase price of approximately $659.8 million and had $31.8 million of non-refundable cash deposits pertaining to land option contracts.

While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contracts occurring in future periods, if at all.

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We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities.

As of March 31, 2020, and December 31, 2019, we had $343.7 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

As of June 30, 2020, and December 31, 2019, we had $335.9 million and $344.1 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.

Contractual Obligations

For the three and six months ended June 30, 2020, there have been no material changes to the contractual obligations we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that was filed with the SEC on February 7, 2020.

Non-GAAP Financial Measures

In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net debt to net capital, and adjusted net earnings per diluted common shares.

In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, and adjusted net earnings per diluted common shares.

These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations.

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EBITDA and Adjusted EBITDA

The following table presents EBITDA and Adjusted EBITDA for the three months ended March 31, 2020, and 2019.

The following table presents EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2020, and 2019.

Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance.

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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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Income tax expense

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Depreciation and amortization expense

Inventory impairment

Loss on debt extinguishment

Inventory impairment and other

Restructuring costs

Purchase price accounting for acquired work in process inventory

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Three Months Ended

Six Months Ended

Weighted average common shares outstanding - basic

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Inventory impairment and other

Restructuring costs

Loss on debt extinguishment

Purchase price accounting for acquired work in process inventory

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Adjusted diluted earnings per share

(1) The tax rate used in calculating adjusted net income for the three months ended March 31, 2020 and March 31, 2019 was our GAAP tax rate of 23.4% and 25.6%, respectively .

(1) The tax rate used in calculating adjusted net income for the three and six months ended June 30, 2020 was 23.3%, which is reflective of the Company’s GAAP tax rate for the applicable period, as adjusted for certain discrete items.

For the three and six months ended June 30, 2019 the tax rate utilized was our GAAP tax rate of 25.6% .

QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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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 Amended and Restated Credit Agreement Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

Our primary exposure to market risk is interest rate risk associated with our Amended and Restated Credit Agreement Borrowings under the Amended and Restated Credit Agreement, which bears interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement.

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Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occurs during the second half of the year.

We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding in dustry.

We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding in dustry and the COVID-19 pandemic.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis