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Business Acquisitions
 9 Months Ended
Sep. 30, 2017
Business Acquisitions  
Business Acquisition

Note 2 – Business Acquisitions

 

On April 3, 2017, we acquired substantially all of the assets of Savvy Homes, LLC and certain of its affiliated entities (“Savvy”) for approximately $43 million, including an earn-out, which remains subject to customary post-closing adjustments. The assets acquired included substantially all of the real estate, land acquisition agreements and permits associated with the Savvy business, and certain of its leases, contracts, commitments and purchase orders. We also assumed certain liabilities of Savvy, including the liabilities and obligations relating to the acquired contracts, but excluding other liabilities including home warranty obligations relating to homes closed by Savvy prior to the acquisition. Savvy acquires raw and developed land, develops raw land and constructs single-family homes in the Raleigh, North Carolina area and enhances our position in a key growth market. The results of Savvy’s operations are included in our consolidated financial statements from the acquisition date of April 3, 2017. During the three months ended September 30, 2017, Savvy’s revenues and net loss were $18.4 million and $1.3 million, respectively. During the nine months ended September 30, 2017, Savvy’s revenues and net loss were $35.8 million and $1.5 million, respectively.

 

The Savvy acquisition was accounted for in accordance with ASC 805, Business Combinations (“ASC 805”). We recorded the acquired assets and liabilities at their estimated fair values. We determined the estimated fair values with the assistance of appraisals or valuations performed by independent third-party specialists, discounted cash flow analyses, quoted market prices where available, and estimates by management. To the extent the consideration transferred exceeded the fair value of the net assets acquired in this transaction, such excess was assigned to goodwill.

 

The following table summarizes the calculation of the fair value of the total consideration transferred to Savvy and its preliminary allocation to the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

 

 

 

 

 

Fair value of consideration transferred:

    

 

 

 

Cash paid for Savvy net assets

 

$

41,150

 

Contingent consideration (earn-out)

 

 

1,818

 

Total consideration transferred

 

$

42,968

 

 

 

 

 

 

Assets acquired and liabilities assumed:

 

 

 

 

Assets

 

 

 

 

Receivables and other assets

 

$

159

 

Land and other inventories

 

 

39,311

 

Property and equipment

 

 

455

 

Trade name

 

 

407

 

Goodwill

 

 

10,718

 

Total assets acquired

 

 

51,050

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable

 

 

7,692

 

Accrued and other liabilities

 

 

390

 

Total liabilities assumed

 

 

8,082

 

Total net assets acquired

 

$

42,968

 

 

Fair Value

 

Receivables and other assets, property and equipment, accounts payable and accrued and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities.

 

We determined the fair value of land and other inventories on a lot-by-lot basis primarily using market comparable land and home sales transactions combined with our estimates related to expected average home selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. The fair values of identified intangible assets were determined using discounted cash flow models.

 

The $0.4 million of acquired intangible assets relates to trade names that are being amortized over 2.75 years. Amortization expense for these assets totaled less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2017, respectively, which is included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income.

 

We engaged a third-party valuation specialist to assist with the determination of the estimated fair value of intangible assets acquired. We estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information available at that time. The valuation of these tangible and identifiable intangible assets and liabilities is subject to further management review and may change between the preliminary allocation and the end of the purchase price allocation period.

 

Transaction and Integration Costs

 

Transaction and integration costs directly related to the Savvy acquisition, including legal and accounting fees, were $0.1 million and $1.0 million for the three and nine months ended September 30, 2017, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive income. Such costs were expensed as incurred in accordance with ASC 805.

 

Goodwill

 

As of the acquisition date, goodwill included the expected economic value attributable to Savvy’s assembled workforce. The acquisition provided increased scale and presence in an existing market with immediate revenue opportunities through an established backlog.

 

Supplemental Pro Forma Information

 

The following represents pro forma operating results as if Savvy had been included in our consolidated statements of operations and comprehensive income as of the beginning of the fiscal year presented (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended September 30,

 

 

 

September 30, 2016

 

2017

 

2016

 

Revenue

    

$

220,569

    

$

579,951

    

$

572,868

    

Net income

 

 

12,678

 

 

1,823

 

 

132,752

 

Basic earnings per share

 

 

0.57

 

 

0.08

 

 

5.93

 

Diluted earnings per share

 

 

0.52

 

 

0.08

 

 

5.12

 

 

The supplemental pro forma operating results have been determined after adjusting the operating results of Savvy to reflect additional expense that would have been recorded assuming the fair value adjustments to inventory and intangible assets had been applied as of January 1, 2016. These results may not be indicative of future operating results.