mdc20170630_10q.htm Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

 (Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

84-0622967

(State or other jurisdiction

 

(I.R.S. employer

of incorporation or organization)

 

identification no.)

 

4350 South Monaco Street, Suite 500

 

80237

Denver, Colorado

 

(Zip code)

(Address of principal executive offices)

   

 

(303) 773-1100

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

             

Large Accelerated Filer

  

  

Accelerated Filer

  

Non-Accelerated Filer

  

  (Do not check if a smaller reporting company)

  

Smaller Reporting Company

  

Emerging growth company

  

 

       

 

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

 

As of July 31, 2017, 51,877,619 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 
 

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

 

INDEX

 

 

 

 

Page
No.

       

Part I. Financial Information:

 

       

 

Item 1.

Unaudited Consolidated Financial Statements:

 

       

 

 

Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

1

       

 

 

Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2017 and 2016

2

       

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

3

       

 

 

Notes to Unaudited Consolidated Financial Statements

4

       

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

       

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

       

 

Item 4.

Controls and Procedures

43

   

Part II. Other Information:

 

       

 

Item 1.

Legal Proceedings

44

       

 

Item 1A.

Risk Factors

44

       

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

       

 

Item 6.

Exhibits

46

     

 

Signature

46

 

 
 

Table of Contents
 

 

PART I

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands, except

 
   

per share amounts)

 
   

(Unaudited)

         
ASSETS                
                 
Homebuilding:                

Cash and cash equivalents

  $ 314,814     $ 259,087  

Marketable securities

    65,268       59,770  

Restricted cash

    5,027       3,778  

Trade and other receivables

    37,747       42,492  

Inventories:

               

Housing completed or under construction

    909,911       874,199  

Land and land under development

    846,825       884,615  

Total inventories

    1,756,736       1,758,814  

Property and equipment, net

    27,194       28,041  

Deferred tax asset, net

    62,446       74,888  

Metropolitan district bond securities (related party)

    31,864       30,162  

Prepaid and other assets

    67,009       60,463  

Total homebuilding assets

    2,368,105       2,317,495  

Financial Services:

               

Cash and cash equivalents

    23,162       23,822  

Marketable securities

    38,666       36,436  

Mortgage loans held-for-sale, net

    95,283       138,774  

Other assets

    11,195       12,062  

Total financial services assets

    168,306       211,094  

Total Assets

  $ 2,536,411     $ 2,528,589  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 48,327     $ 42,088  

Accrued liabilities

    148,199       144,566  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    842,232       841,646  

Total homebuilding liabilities

    1,053,758       1,043,300  

Financial Services:

               

Accounts payable and accrued liabilities

    49,873       50,734  

Mortgage repurchase facility

    69,127       114,485  

Total financial services liabilities

    119,000       165,219  

Total Liabilities

    1,172,758       1,208,519  

Stockholders' Equity

               

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding

    -       -  

Common stock, $0.01 par value; 250,000,000 shares authorized; 51,862,230 and 51,485,090 issued and outstanding at June 30, 2017 and December 31, 2016, respectively

    519       515  

Additional paid-in-capital

    992,870       983,532  

Retained earnings

    344,263       313,952  

Accumulated other comprehensive income

    26,001       22,071  

Total Stockholders' Equity

    1,363,653       1,320,070  

Total Liabilities and Stockholders' Equity

  $ 2,536,411     $ 2,528,589  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands, except per share amounts)

 
   

(Unaudited)

 

Homebuilding:

                               

Home sale revenues

  $ 647,620     $ 571,195     $ 1,211,099     $ 965,615  

Land sale revenues

    1,351       316       1,598       2,640  

Total home and land sale revenues

    648,971       571,511       1,212,697       968,255  

Home cost of sales

    (539,077 )     (475,836 )     (1,008,019 )     (805,862 )

Land cost of sales

    (1,202 )     (216 )     (1,413 )     (1,879 )

Inventory impairments

    -       (1,600 )     (4,850 )     (1,600 )

Total cost of sales

    (540,279 )     (477,652 )     (1,014,282 )     (809,341 )

Gross margin

    108,692       93,859       198,415       158,914  

Selling, general and administrative expenses

    (70,709 )     (64,440 )     (137,007 )     (120,717 )

Interest and other income

    2,847       2,553       5,174       3,489  

Other expense

    (666 )     (278 )     (1,017 )     (905 )

Other-than-temporary impairment of marketable securities

    (1 )     (288 )     (51 )     (719 )

Homebuilding pretax income

    40,163       31,406       65,514       40,062  
                                 

Financial Services:

                               

Revenues

    19,073       15,823       37,052       26,840  

Expenses

    (8,500 )     (7,543 )     (16,398 )     (13,784 )

Interest and other income

    1,238       772       2,217       1,613  

Other-than-temporary impairment of marketable securities

    (80 )     -       (131 )     -  

Financial services pretax income

    11,731       9,052       22,740       14,669  
                                 

Income before income taxes

    51,894       40,458       88,254       54,731  

Provision for income taxes

    (18,023 )     (13,545 )     (32,134 )     (18,255 )

Net income

  $ 33,871     $ 26,913     $ 56,120     $ 36,476  
                                 

Other comprehensive income related to available for sale securities, net of tax

    1,944       895       3,930       2,843  

Comprehensive income

  $ 35,815     $ 27,808     $ 60,050     $ 39,319  
                                 

Earnings per share:

                               

Basic

  $ 0.65     $ 0.52     $ 1.09     $ 0.71  

Diluted

  $ 0.64     $ 0.52     $ 1.07     $ 0.71  
                                 

Weighted average common shares outstanding

                               

Basic

    51,514,309       51,293,917       51,428,079       51,281,643  

Diluted

    52,444,123       51,304,829       52,065,968       51,291,359  
                                 

Dividends declared per share

  $ 0.25     $ 0.24     $ 0.50     $ 0.48  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Six Months Ended

 
   

June 30,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 
   

(Unaudited)

 

Operating Activities:

               

Net income

  $ 56,120     $ 36,476  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Stock-based compensation expense

    2,038       6,163  

Depreciation and amortization

    2,704       2,367  

Inventory impairments

    4,850       1,600  

Other-than-temporary impairment of marketable securities

    182       719  

Gain on sale of marketable securities

    (1,758 )     (262 )

Deferred income tax expense

    10,033       7,873  

Net changes in assets and liabilities:

               

Restricted cash

    (1,249 )     (196 )

Trade and other receivables

    5,419       (26,235 )

Mortgage loans held-for-sale

    43,491       (3,029 )

Housing completed or under construction

    (39,707 )     (186,805 )

Land and land under development

    37,521       122,701  

Prepaid expenses and other assets

    (7,602 )     (2,975 )

Accounts payable and accrued liabilities

    8,845       19,517  

Net cash provided by (used in) operating activities

    120,887       (22,086 )
                 

Investing Activities:

               

Purchases of marketable securities

    (12,043 )     (15,426 )

Sales of marketable securities

    11,450       50,765  

Purchases of property and equipment

    (1,364 )     (3,117 )

Net cash provided by (used in) investing activities

    (1,957 )     32,222  
                 

Financing Activities:

               

Advances (payments) on mortgage repurchase facility, net

    (45,358 )     4,686  

Dividend payments

    (25,809 )     (24,504 )

Proceeds from exercise of stock options

    7,304       -  

Net cash used in financing activities

    (63,863 )     (19,818 )
                 

Net increase (decrease) in cash and cash equivalents

    55,067       (9,682 )

Cash and cash equivalents:

               

Beginning of period

    282,909       180,988  

End of period

  $ 337,976     $ 171,306  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 
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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at June 30, 2017 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

On November 21, 2016, MDC’s board of directors declared a 5% stock dividend that was distributed on December 20, 2016 to shareholders of record on December 6, 2016. In accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any periods or dates prior to the stock dividend record date.

 

Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered.

 

2.

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and created ASC Topic 606 (“ASC 606”), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We expect to adopt the new standard under the modified retrospective approach in the 2018 first quarter. Although we are still in the process of evaluating our contracts and updating our accounting policies, we do not believe the adoption of ASU 2014-09 will have a material impact on the amount or timing of our recognition of revenues. While we are still evaluating the accounting for marketing costs under ASC 606, there is a possibility that the adoption of ASU 2014-09 will impact the timing of recognition and classification in our consolidated financial statements of certain marketing costs we incur to obtain sales contracts from our customers. For example, there are various marketing costs that we currently capitalize and amortize with each home delivered in a community. Under the new guidance, these costs may need to be expensed immediately. We are continuing to evaluate the exact impact ASU 2014-09 will have on recording revenue and our marketing costs in our consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which makes a number of changes to the current GAAP model, including changes to the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under ASU 2016-01, we will primarily be impacted by the changes to accounting for equity instruments with readily determinable fair values as they will no longer be permitted to be classified as available-for-sale (changes in fair value reported through other comprehensive income) and instead, all changes in fair value will be reported in earnings. ASU 2016-01 is effective for our interim and annual reporting periods beginning January 1, 2018 and is to be applied using a modified retrospective transition method. Early adoption of the applicable guidance from ASU 2016-01 is not permitted. Given the significant amount of our investments in equity securities, and assuming we have a similar level of investments when this guidance is adopted, we would expect that the impact to our consolidated statements of operations and comprehensive income from this update could be material. Furthermore, depending on trends in the stock market, we may see increased volatility in our consolidated statements of operations and comprehensive income.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a corresponding lease liability for virtually all leases. The liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees. Upon adoption, we will be required to record a lease asset and lease liability related to our operating leases. ASU 2016-02 is effective for our interim and annual reporting periods beginning January 1, 2019 and is to be applied using a modified retrospective transition method. Early adoption is permitted. We do not plan to early adopt the guidance and we are currently evaluating the impact the update will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 became effective for us in the 2017 first quarter. The primary impact from this guidance, on a prospective basis, will be to our provision for income taxes line item on our consolidated statements of operations and comprehensive income. Any excess tax benefits or deficiencies from (1) the exercise or expiration of options or (2) the vesting of stock awards will now be recognized through our income tax provision as opposed to additional paid-in capital (to the extent we had a sufficient pool of windfall tax benefits). As a result of exercises of stock options and vesting of stock awards during the three and six months ended June 30, 2017, $0.1 million in excess tax benefits were recognized in our tax provision for each period. Furthermore, as of June 30, 2017, we had options covering approximately 567,000 shares (1) with exercise prices above the MDC closing share price at June 30, 2017 and (2) that will have their ability to exercise expire at some point during the 2017 fourth quarter. If the exercise price continues to be greater than the share price of MDC throughout 2017, these options will likely expire unexercised and as a result, we could recognize approximately $2.6 million in additional expense in our provision for income taxes line item on our consolidated statements of operations and comprehensive income in 2017. Another provision of ASU 2016-09 that is relevant to the Company is the classification of excess tax benefits on the statement of cash flows, which was adopted on a prospective basis. This provision did not have a material effect on the statement of cash flows and is not expected to have a material impact on the statement of cash flows in future quarterly or annual filings. Adoption of ASU 2016-09 was not material to our statement of cash flows for the periods presented and we do not anticipate it will be material in 2017.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning January 1, 2021, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-13 and with our current holdings of financial instruments that are subject to credit losses, we do not believe adoption of this guidance will be material to our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which amends ASC Topic 230, Statement of Cash Flows, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments in ASU 2016-15 are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-15 and do not believe the guidance will have a material impact on our financial statements upon adoption.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”), which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. ASU 2016-18 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-18 and do not believe the guidance will have a material impact on our financial statements upon adoption.

 

 
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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

3.

Segment Reporting

 

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Chief Executive Officer and the Chief Operating Officer.

 

We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

 

 

West (Arizona, California, Nevada and Washington)

 

Mountain (Colorado and Utah)

 

East (Virginia, Florida and Maryland)

 

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

 

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance, treasury, information technology, insurance, risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in the homebuilding operations section of our consolidated statements of operations and comprehensive income.

 

The following table summarizes home and land sale revenues for our homebuilding operations and revenues for our financial services operations.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Homebuilding

 

(Dollars in thousands)

 

West

  $ 323,758     $ 270,031     $ 632,837     $ 461,406  

Mountain

    224,356       190,334       397,492       328,158  

East

    100,857       111,146       182,368       178,691  

Total homebuilding revenues

  $ 648,971     $ 571,511     $ 1,212,697     $ 968,255  
                                 

Financial Services

                               

Mortgage operations

  $ 12,697     $ 10,702     $ 24,880     $ 17,572  

Other

    6,376       5,121       12,172       9,268  

Total financial services revenues

  $ 19,073     $ 15,823     $ 37,052     $ 26,840  

 

 
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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

The following table summarizes pretax income (loss) for our homebuilding and financial services operations:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Homebuilding

 

(Dollars in thousands)

 

West

  $ 21,134     $ 15,740     $ 36,589     $ 25,438  

Mountain

    24,541       20,748       42,771       30,832  

East

    4,734       4,500       7,376       5,867  

Corporate

    (10,246 )     (9,582 )     (21,222 )     (22,075 )

Total homebuilding pretax income

  $ 40,163     $ 31,406     $ 65,514     $ 40,062  
                                 

Financial Services

                               

Mortgage operations

  $ 7,670     $ 6,445     $ 15,236     $ 9,768  

Other

    4,061       2,607       7,504       4,901  

Total financial services pretax income

  $ 11,731     $ 9,052     $ 22,740     $ 14,669  
                                 

Total pretax income

  $ 51,894     $ 40,458     $ 88,254     $ 54,731  

 

The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include our cash and cash equivalents, marketable securities and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 

Homebuilding assets

 

(Dollars in thousands)

 

West

  $ 1,005,590     $ 1,035,033  

Mountain

    630,621       571,139  

East

    230,096       256,816  

Corporate

    501,798       454,507  

Total homebuilding assets

  $ 2,368,105     $ 2,317,495  
                 

Financial services assets

               

Mortgage operations

  $ 107,904     $ 153,182  

Other

    60,402       57,912  

Total financial services assets

  $ 168,306     $ 211,094  
                 

Total assets

  $ 2,536,411     $ 2,528,589  

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

4.

Earnings Per Share     

 

ASC 260 requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and participating security holders consisting of shareholders of unvested restricted stock. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding. The following table shows our basic and diluted EPS calculations:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands, except per share amounts)

 

Numerator

                               

Net income

  $ 33,871     $ 26,913     $ 56,120     $ 36,476  

Less: distributed earnings allocated to participating securities

    (61 )     (39 )     (128 )     (79 )

Less: undistributed earnings allocated to participating securities

    (98 )     (47 )     (140 )     (36 )

Net income attributable to common stockholders (numerator for basic earnings per share)

    33,712       26,827       55,852       36,361  

Add back: undistributed earnings allocated to participating securities

    98       47       140       36  

Less: undistributed earnings reallocated to participating securities

    (96 )     (47 )     (138 )     (36 )

Numerator for diluted earnings per share under two class method

  $ 33,714     $ 26,827     $ 55,854     $ 36,361  
                                 

Denominator

                               

Weighted-average common shares outstanding

    51,514,309       51,293,917       51,428,079       51,281,643  

Add: dilutive effect of stock options

    929,814       10,912       637,889       9,716  

Denominator for diluted earnings per share under two class method

    52,444,123       51,304,829       52,065,968       51,291,359  
                                 

Basic Earnings Per Common Share

  $ 0.65     $ 0.52     $ 1.09     $ 0.71  

Diluted Earnings Per Common Share

  $ 0.64     $ 0.52     $ 1.07     $ 0.71  

 

Diluted EPS for the three and six months ended June 30, 2017 excluded options to purchase approximately 0.9 million and 1.4 million shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive. For the same periods in 2016, diluted EPS excluded options to purchase approximately 6.4 million and 6.5 million shares, respectively. The year-over-year decreases for the three and six months ended June 30, 2017 in anti-dilutive shares and the year-over-year increases in dilutive shares were primarily the result of year-over-year increases in the average price of MDC stock.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

5.

Accumulated Other Comprehensive Income

 

The following table sets forth our changes in accumulated other comprehensive income (“AOCI”):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Unrealized gains on available-for-sale marketable securities 1 :

                               

Beginning balance

  $ 9,479     $ 5,016     $ 7,730     $ 3,657  

Other comprehensive income before reclassifications

    2,389       880       4,423       1,404  

Amounts reclassified from AOCI 2

    (692 )     (552 )     (977 )     283  

Ending balance

  $ 11,176     $ 5,344     $ 11,176     $ 5,344  
                                 

Unrealized gains on available-for-sale metropolitan district bond securities 1 :

                               

Beginning balance

  $ 14,578     $ 12,647     $ 14,341     $ 12,058  

Other comprehensive income before reclassifications

    247       567       484       1,156  

Amounts reclassified from AOCI

    -       -       -       -  

Ending balance

  $ 14,825     $ 13,214     $ 14,825     $ 13,214  
                                 

Total ending AOCI

  $ 26,001     $ 18,558     $ 26,001     $ 18,558  

                                                                                                      

 

 

(1)

All amounts net-of-tax.

 

(2)

See separate table below for details about these reclassifications

 

The following table sets forth the activity related to reclassifications out of accumulated other comprehensive income related to available for sale securities:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

Affected Line Item in the Statements of Operations

 

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Homebuilding: Interest and other income

  $ 889     $ 1,177     $ 1,411     $ 262  

Homebuilding: Other-than-temporary impairment of marketable securities

    (1 )     (288 )     (51 )     (719 )

Financial services: Interest and other income

    308       -       347       -  

Financial services: Other-than-temporary impairment of marketable securities

    (80 )     -       (131 )     -  

Income before income taxes

    1,116       889       1,576       (457 )

Provision for income taxes

    (424 )     (337 )     (599 )     174  

Net income

  $ 692     $ 552     $ 977     $ (283 )

 

6.

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

 

         

Fair Value

 

Financial Instrument

 

Hierarchy

   

June 30,

2017

   

December 31,

2016

 
         

(Dollars in thousands)

 

Marketable equity securities (available-for-sale)

 

Level 1

    $ 103,934     $ 96,206  

Mortgage loans held-for-sale, net

 

Level 2

    $ 95,283     $ 138,774  

Metropolitan district bond securities (related party) (available-for-sale)

 

Level 3

    $ 31,864     $ 30,162  

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of June 30, 2017 and December 31, 2016.

 

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

 

Marketable securities.  As of June 30, 2017 and December 31, 2016, we held marketable equity securities, which consist of holdings in corporate equities, preferred stock and exchange traded funds. As of June 30, 2017 and December 31, 2016, all of our equity securities were treated as available-for-sale investments and as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if an unrealized loss, if applicable, is other-than-temporary.

 

Each quarter we assess all of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”). If the unrealized loss is determined to be other-than-temporary, an OTTI is recorded in other-than-temporary impairment of marketable securities in the homebuilding or financial services sections of our consolidated statements of operations and comprehensive income. During the three and six months ended June 30, 2017, we recorded pretax OTTI’s of $0.1 million and $0.2 million, respectively, for certain of our equity securities that were in an unrealized loss position as of the end of each respective period. For the same periods in 2016, we recorded pretax OTTI’s of $0.3 million and $0.7 million, respectively.

 

The following tables set forth the cost and estimated fair value of our available-for-sale marketable securities:

 

   

June 30, 2017

 
   

Cost Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 50,676     $ (556 )   $ 50,120     $ 65,268  

Financial services equity securities

    36,125       (337 )     35,788       38,666  

Total marketable equity securities

  $ 86,801     $ (893 )   $ 85,908     $ 103,934  

 

   

December 31, 2016

 
   

Cost Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 48,910     $ (685 )   $ 48,225     $ 59,770  

Financial services equity securities

    35,885       (373 )     35,512       36,436  

Total marketable equity securities

  $ 84,795     $ (1,058 )   $ 83,737     $ 96,206  

 

 
- 10 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

As of June 30, 2017 and December 31, 2016, our marketable equity securities were in net unrealized gain positions totaling $18.0 million and $12.5 million, respectively. Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.7 million and $0.5 million as of June 30, 2017 and December 31, 2016, respectively. The table below sets forth the aggregated unrealized losses for individual equity securities that were in unrealized loss positions but did not have OTTIs recognized. We do not believe the decline in the value of these marketable securities as of June 30, 2017 is other-than-temporary.

 

   

June 30, 2017

   

December 31, 2016

 
   

Number of

Securities in a

Loss Position

   

Aggregate

Loss Position

   

Aggregate

Fair Value of

Securities in

a Loss

Position

   

Number of

Securities in a

Loss Position

   

Aggregate

Loss Position

   

Aggregate

Fair Value of

Securities in

a Loss

Position

 
   

(Dollars in thousands)

 

Marketable equity securities

    1     $ (703 )   $ 1,296       5     $ (457 )   $ 6,045  

 

The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities. We record the net amount of these gains and losses to either other expense or interest and other income, dependent upon whether there is a net realized loss or gain, respectively, in the homebuilding section or financial services section of our consolidated statements of operations and comprehensive income.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Gross realized gains on sales of available-for-sale securities

  $ 1,198     $ 1,379     $ 1,788     $ 1,470  

Gross realized losses on sales of available-for-sale securities

    (1 )     (202 )     (30 )     (1,208 )

Net realized gain on sales of available-for-sale securities

  $ 1,197     $ 1,177     $ 1,758     $ 262  

 

Mortgage loans held-for-sale, net.  Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At June 30, 2017 and December 31, 2016, we had $76.1 million and $96.2 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At June 30, 2017 and December 31, 2016, we had $19.2 million and $42.6 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.    

 

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2017, we recorded net gains on the sales of mortgage loans of $10.2 million and $18.7 million, respectively, compared to $6.9 million and $12.5 million for the same periods in the prior year, respectively.

 

Metropolitan district bond securities (related party).  The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District, which are generally received in the fourth quarter, and are supported by an annual levy on the taxable assessed value of real estate and personal property within the Metro District’s boundaries. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments in perpetuity until the unpaid principal and accrued interest is paid in full.

 

 
- 11 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

In accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), we adjust the bond principal balance using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we update its fair value on a quarterly basis, with the adjustment being recorded through AOCI. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as they drive increases to the tax paying base for the Metro District, (2) the forecasted assessed value of those closed homes and (3) the discount rate. Cash receipts, which are scheduled to be received in the fourth quarter, reduce the carrying value of the Metro Bonds. The increases in the value of the Metro Bonds during the past two years are primarily based on a larger percentage of future cash flows coming from homes that have closed, which utilize a lower discount rate as those cash flows have a reduced amount of risk. The table below provides quantitative data, as of June 30, 2017, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

 

   

Quantitative Data

   

Sensitivity Analysis

 

Unobservable Input

 

Range

   

Weighted Average

   

Movement in
Fair Value from
Increase in Input

   

Movement in
Fair Value from
Decrease in Input

 

Forecasted number of homes closed per year

    0 to 120       107    

Increase

   

Decrease

 

Forecasted assessed value

    $465,000 to $1,200,000       $567,000    

Increase

   

Decrease

 

Discount rates

    5% to 12%       7.5%    

Decrease

   

Increase

 
                                     

 

The table set forth below summarizes the activity for our Metro Bonds:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 31,004     $ 27,277     $ 30,162     $ 25,911  

Increase in fair value (recorded in other comprehensive income)

    398       915       780       1,865  

Change due to accretion of principal

    462       412       922       828  

Cash receipts

    -       -       -       -  

Balance at end of period

  $ 31,864     $ 28,604     $ 31,864     $ 28,604  

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

 

Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes which were provided by multiple sources.

 

   

June 30, 2017

   

December 31, 2016

 
   

Carrying
Amount

   

Fair Value

   

Carrying
Amount

   

Fair Value

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 247,377     $ 267,406     $ 246,915     $ 265,611  

5½% Senior Notes due January 2024, net

    248,487       266,958       248,391       258,800  

6% Senior Notes due January 2043, net

    346,368       326,285       346,340       297,087  

Total

  $ 842,232     $ 860,649     $ 841,646     $ 821,498  

 

 
- 12 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

7.

Inventories

 

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Housing Completed or Under Construction:

               

West

  $ 464,759     $ 470,503  

Mountain

    308,177       277,922  

East

    136,975       125,774  

Subtotal

    909,911       874,199  

Land and Land Under Development:

               

West

    475,237       499,186  

Mountain

    292,074       271,252  

East

    79,514       114,177  

Subtotal

    846,825       884,615  

Total Inventories

  $ 1,756,736     $ 1,758,814  

 

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

 

In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable.  We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

 

 

actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

 

estimated future undiscounted cash flows and Operating Margin;

 

forecasted Operating Margin for homes in backlog;

 

actual and trending net home orders;

 

homes available for sale;

 

market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

 

known or probable events indicating that the carrying value may not be recoverable.

 

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

 

If land is classified as held for sale, in accordance with ASC 360, we measure it at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

 

 
- 13 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

Impairments of homebuilding inventory by segment for the three and six months ended June 30, 2017 and 2016 are shown in the table below.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

West

  $ -     $ 1,400     $ 4,100     $ 1,400  

Mountain

    -       -       -       -  

East

    -       200       750       200  

Total Inventory Impairments

  $ -     $ 1,600     $ 4,850     $ 1,600  

 

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

 

   

Impairment Data

   

Quantitative Data

 

Three Months Ended

 

Total
Subdivisions
Tested

   

Inventory
Impairments

   

 

Fair Value of
Inventory

After

Impairments

   

Number of
Subdivisions
Impaired

   

Discount Rate

 
   

(Dollars in thousands)

             

March 31, 2017

    33     $ 4,850     $ 19,952       2       12% to 18%

June 30, 2017

    35     $ -     $ -       -         N/A    
                                             

March 31, 2016

    14     $ -     $ -       -       N/A    

June 30, 2016

    17     $ 1,600     $ 6,415       2       12% to 15%

 

8.

Capitalization of Interest

 

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Homebuilding interest incurred

  $ 13,194     $ 13,106     $ 26,382     $ 26,324  

Less: Interest capitalized

    (13,194 )     (13,106 )     (26,382 )     (26,324 )

Homebuilding interest expensed

  $ -     $ -     $ -     $ -  
                                 

Interest capitalized, beginning of period

  $ 66,076     $ 79,783     $ 68,085     $ 77,541  

Plus: Interest capitalized during period

    13,194       13,106       26,382       26,324  

Less: Previously capitalized interest included in home and land cost of sales

    (17,179 )     (15,739 )     (32,376 )     (26,715 )

Interest capitalized, end of period

  $ 62,091     $ 77,150     $ 62,091     $ 77,150  

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

9.

Homebuilding Prepaid and Other Assets

 

The following table sets forth the components of homebuilding prepaid and other assets:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Deferred marketing costs

  $ 36,322     $ 35,313  

Land option deposits

    15,727       8,683  

Goodwill

    6,008       6,008  

Prepaid expenses

    3,713       4,735  

Deferred debt issuance costs on revolving credit facility, net

    3,786       4,340  

Other

    1,453       1,384  

Total

  $ 67,009     $ 60,463  

 

10.

Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

The following table sets forth information relating to homebuilding accrued liabilities:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Customer and escrow deposits

  $ 37,156     $ 27,183  

Warranty accrual

    20,965       20,678  

Accrued compensation and related expenses

    20,127       27,830  

Accrued interest

    23,234       23,234  

Land development and home construction accruals

    7,009       8,695  

Other accrued liabilities

    39,708       36,946  

Total accrued liabilities

  $ 148,199     $ 144,566  

 

The following table sets forth information relating to financial services accounts payable and accrued liabilities:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Insurance reserves

  $ 41,705     $ 42,204  

Accounts payable and other accrued liabilities

    8,168       8,530  

Total accounts payable and accrued liabilities

  $ 49,873     $ 50,734  

 

11.

Warranty Accrual

 

Our homes are sold with limited third-party warranties and, under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage and paying for substantially all of the work required to be performed during years three through ten of the warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is recorded based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

 

Our warranty accrual is included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three and six months ended June 30, 2017 and 2016. For the six months ended June 30, 2017, we recorded adjustments to increase our warranty accrual of $0.1 million. No such adjustments were recorded during the three months ended June 30, 2017. For the three and six months ended June 30, 2016, we increased our warranty reserve by $0.3 million and $3.2 million, respectively. The adjustments made during 2016 were due to higher than expected recent warranty related expenditures.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 20,770     $ 16,852     $ 20,678     $ 15,328  

Expense provisions

    2,836       2,305       5,243       3,757  

Cash payments

    (2,641 )     (2,190 )     (5,006 )     (5,105 )

Adjustments

    -       250       50       3,237  

Balance at end of period

  $ 20,965     $ 17,217     $ 20,965     $ 17,217  

 

12.

Insurance and Construction Defect Claim Reserves

 

The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.

 

The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant are based on actuarial studies that include known facts similar to those established for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.

 

The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and six months ended June 30, 2017 and 2016. These reserves are included as a component of accrued liabilities in either the financial services or homebuilding sections of the consolidated balance sheets.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 51,851     $ 46,379     $ 50,954     $ 45,811  

Expense provisions

    2,385       1,946       4,501       3,334  

Cash payments, net of recoveries

    (4,589 )     (1,425 )     (5,808 )     (2,245 )

Balance at end of period

  $ 49,647     $ 46,900     $ 49,647     $ 46,900  

 

In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

13.

Income Taxes

 

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 34.7% and 36.4% for the three and six months ended June 30, 2017, respectively, compared to 33.5% and 33.4% for the three and six months ended June 30, 2016, respectively. The rates for the three and six months ended June 30, 2017 resulted in income tax expense of $18.0 million and $32.1 million, respectively, compared to income tax expense of $13.5 million and $18.3 million for the three and six months ended June 30, 2016. The year-over-year increase in our effective tax rate for the three months ended June 30, 2017 was primarily the result of our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. For the six months ended June 30, 2017, the year-over-year increase in our effective tax rate was due to the foregoing energy credits matter coupled with an establishment of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realization was more uncertain at the time.

 

At June 30, 2017 and December 31, 2016 we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $62.4 million and $74.9 million, respectively. The valuation allowances were related to: (1) various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods that exist in certain states; and (2) the portion of the amount by which the carrying value of our Metro Bonds for tax purposes exceeds our carrying value for book purposes, as we believe realization of that portion is more uncertain at this time.

 

 

14.

Senior Notes

 

The carrying value of our senior notes as of June 30, 2017 and December 31, 2016, net of any unamortized debt issuance costs or discount, were as follows:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 247,377     $ 246,915  

5½% Senior Notes due January 2024, net

    248,487       248,391  

6% Senior Notes due January 2043, net

    346,368       346,340  

Total

  $ 842,232     $ 841,646  

 

Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries

.

 

15.

Stock-Based Compensation

 

We account for share-based awards in accordance with ASC 718, which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three and six months ended June 30, 2017 and 2016:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Stock option grants expense

  $ 80     $ 2,643     $ 356     $ 5,293  

Restricted stock awards expense

    460       533       779       870  

Performance share units expense

    903       -       903       -  

Total stock based compensation

  $ 1,443     $ 3,176     $ 2,038     $ 6,163  

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

On May 18, 2015, the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 1,050,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, one third of the option shares will vest as of each of the third, fourth, and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any 20 out of 30 consecutive trading days closes at a price equal to or greater than 120% of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was $27.10 and the expiration date of each option is May 18, 2025. In accordance with ASC 718, the market-based awards were assigned a fair value of $5.35 per share (total value of $11.2 million) on the date of grant using a Monte Carlo simulation model and, as calculated under that model, all expense was recorded on a straight-line basis through the end of the 2016 second quarter. Included in the stock option grant expense for the three and six months ended June 30, 2016, shown in the table above, was $2.5 million and $5.0 million, respectively, of stock option grant expense related to these market-based option grants. During the 2017 second quarter, the market-based condition was achieved and, as a result, the shares fully vested and became exercisable.

 

On July 25, 2016 and June 20, 2017, the Company granted long term performance stock unit awards (“PSUs”) to each of the Chief Executive Officer (“CEO”), the Chief Operating Officer (“COO”), and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs will be earned based upon the Company’s performance, over a three year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period”. Each award is conditioned upon the Company achieving an average gross margin from home sales percentage (excluding impairments) of at least fifteen percent (15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10% (“Threshold Goals”), 50% of the Target Goals will be earned. If Performance Revenues exceed the Base Revenues by at least 20%, 200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for both grants have been provided in the table below.

 

                                   

Threshold Goal

   

Target Goal

   

Maximum Goal

           

Maximum

Potential

 

Awardee

 

Date of

Award

   

Performance

Period

   

Base Period

   

Base

Period

Revenues

   

PSUs

   

Home

Sale

Revenues

   

PSUs

   

Home

Sale

Revenues

   

PSUs

   

Home

Sale

Revenues

   

Fair Value

per Share

   

Expense

to be

Recognized

 

CEO

          July 1, 2016        July 1, 2015                52,500             105,000             210,000                   $ 4,815  

COO

    July 25, 2016        to       to       $1.975 billion         52,500       $2.074 billion       105,000       $2.173 billion       210,000       $2.370 billion     $ 22.93       4,815  

CFO

            June 30, 2019       June 30, 2016               13,125               26,250               52,500                       1,204  
                                                                                            $ 10,834  
                                                                                                 

CEO

          April 1, 2017        April 1, 2016              55,000             110,000             220,000                   $ 6,802  

COO

    June 20, 2017       to       to       $2.426 billion       55,000       $2.547 billion       110,000       $2.669 billion       220,000       $2.911 billion     $ 30.92       6,802  

CFO

            March 31, 2020       March 31, 2017                13,750               27,500               55,000                       1,701  
                                                                                            $ 15,305  

 

In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance based stock awards until achievement of the performance targets are probable of occurring. As of June 30, 2017, the Company determined that achievement of the Threshold Goals was probable for the PSUs granted in 2016 and, as such, recorded share-based award expense of $0.9 million related to the awards. For the PSUs granted in 2017, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense at that time and, as such, no expense related to the grant of these awards has been recognized as of June 30, 2017.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

16.

Commitments and Contingencies

 

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At June 30, 2017, we had outstanding surety bonds and letters of credit totaling $175.8 million and $64.6 million, respectively, including $31.8 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $24.1 million and $32.3 million, respectively. All letters of credit as of June 30, 2017, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

We have made no material guarantees with respect to third-party obligations.

 

Litigation Reserves. Due to the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of 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.

 

Lot Option Contracts. In the ordinary course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At June 30, 2017, we had cash deposits and letters of credit totaling $14.5 million and $3.1 million, respectively, at risk associated with the option to purchase 5,090 lots.

 

17.

Derivative Financial Instruments

 

The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.

 

At June 30, 2017, we had interest rate lock commitments with an aggregate principal balance of $110.7 million. Additionally, we had $18.6 million of mortgage loans held-for-sale at June 30, 2017 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $106.0 million at June 30, 2017.

 

For the three and six months ended June 30, 2017, we recorded a net gain of $0.2 million and a net loss of $0.0 million, respectively, on our derivatives, compared to net gains on of $0.4 million and $1.0 million for the same periods in 2016.

 

18.

Lines of Credit

 

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement has an aggregate commitment of $550 million (the “Commitment”) and was amended on December 18, 2015 to extend the maturity to December 18, 2020. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and the consent of the designated agent and the co-administrative agent. As defined in the Revolving Credit Facility agreement, interest rates on outstanding borrowings are equal to the highest of (1) 0.0% or (2) a specified eurocurrency rate, federal funds effective rate or prime rate, plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the facility agreement. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of June 30, 2017.

 

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At June 30, 2017 and December 31, 2016, there were $32.8 million and $23.0 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both June 30, 2017 and December 31, 2016, we had $15.0 million outstanding under the Revolving Credit Facility. As of June 30, 2017, availability under the Revolving Credit Facility was approximately $502.2 million.

 

Mortgage Repurchase Facility. HomeAmerican entered into an Amended and Restated Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), effective September 16, 2016. The Mortgage Repurchase Facility amends and restates the prior Master Repurchase Agreement with USBNA dated as of November 12, 2008, as amended, which contained similar terms. The Mortgage Repurchase Facility increases the facility amount from $50 million to $75 million, extends the expiration date to September 15, 2017, adjusts the facility’s sublimits, expands the types of eligible loans, and reduces the facility fee. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on June 28, 2017 from $75 million to $100 million and was effective through July 27, 2017. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $125 million from December 27, 2016 through January 25, 2017. At June 30, 2017 and December 31, 2016, HomeAmerican had $69.1 million and $114.5 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of June 30, 2017.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

19.

Related Party Transactions

 

We contributed $1.5 million and $1.0 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the six months ended June 30, 2017 and 2016, respectively. The Foundation is a Delaware non-profit corporation that was incorporated on September 30, 1999.

 

The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at June 30, 2017, all of whom serve without compensation:

 

Name

 

MDC Title

 

Larry A. Mizel

 

Chairman and Chief Executive Officer

 

David D. Mandarich

 

President

 

 

Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.

 

See Note 6 for related party information regarding the Metro District.

 

20.

Supplemental Guarantor Information

 

Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company.

 

 

M.D.C. Land Corporation

 

RAH of Florida, Inc.

 

Richmond American Construction, Inc.

 

Richmond American Homes of Arizona, Inc.

 

Richmond American Homes of Colorado, Inc.

 

Richmond American Homes of Delaware, Inc.

 

Richmond American Homes of Florida, LP

 

Richmond American Homes of Illinois, Inc.

 

Richmond American Homes of Maryland, Inc.

 

Richmond American Homes of Nevada, Inc.

 

Richmond American Homes of New Jersey, Inc.

 

Richmond American Homes of Pennsylvania, Inc.

 

Richmond American Homes of Utah, Inc.

 

Richmond American Homes of Virginia, Inc.

 

Richmond American Homes of Washington, Inc.

 

The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.

 

We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Balance Sheet

 

   

June 30, 2017

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 310,329     $ 4,485     $ -     $ -     $ 314,814  

Marketable securities

    65,268       -       -       -       65,268  

Restricted cash

    -       5,027       -       -       5,027  

Trade and other receivables

    5,490       34,378       -       (2,121 )     37,747  

Inventories:

                                       

Housing completed or under construction

    -       909,911       -       -       909,911  

Land and land under development

    -       846,825       -       -       846,825  

Total inventories

    -       1,756,736       -       -       1,756,736  
                                         

Intercompany receivables

    1,442,812       2,802       5,645       (1,451,259 )     -  

Investment in subsidiaries

    354,952       -       -       (354,952 )     -  

Property and equipment, net

    25,057       2,137       -       -       27,194  

Deferred tax asset, net

    63,094       -       -       (648 )     62,446  

Metropolitan district bond securities (related party)

    31,864       -       -       -       31,864  

Prepaid and other assets

    3,464       63,545       -       -       67,009  

Total homebuilding assets

    2,302,330       1,869,110       5,645       (1,808,980 )     2,368,105  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       23,162       -       23,162  

Marketable securities

    -       -       38,666       -       38,666  

Intercompany receivables

    -       -       39,342       (39,342 )     -  

Mortgage loans held-for-sale, net

    -       -       95,283       -       95,283  

Other assets

    -       -       10,547       648       11,195  

Total financial services assets

    -       -       207,000       (38,694 )     168,306  

Total Assets

  $ 2,302,330     $ 1,869,110     $ 212,645     $ (1,847,674 )   $ 2,536,411  
                                         

LIABILITIES AND EQUITY

                                       
                                         

Homebuilding:

                                       

Accounts payable

  $ -     $ 48,327     $ -     $ -     $ 48,327  

Accrued liabilities

    33,656       111,794       99       2,650       148,199  

Advances and notes payable to parent and subsidiaries

    47,789       1,412,036       27,016       (1,486,841 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    842,232       -       -       -       842,232  

Total homebuilding liabilities

    938,677       1,572,157       27,115       (1,484,191 )     1,053,758  
                                         

Financial Services:

                                       

Accounts payable and other liabilities

    -       -       54,644       (4,771 )     49,873  

Advances and notes payable to parent and subsidiaries

    -       -       3,760       (3,760 )     -  

Mortgage repurchase facility

    -       -       69,127       -       69,127  

Total financial services liabilities

    -       -       127,531       (8,531 )     119,000  

Total Liabilities

    938,677       1,572,157       154,646       (1,492,722 )     1,172,758  
                                         

Equity:

                                       

Total Stockholders' Equity

    1,363,653       296,953       57,999       (354,952 )     1,363,653  

Total Liabilities and Stockholders' Equity

  $ 2,302,330     $ 1,869,110     $ 212,645     $ (1,847,674 )   $ 2,536,411  

 

 
- 22 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Balance Sheet

 

   

December 31, 2016

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 255,679     $ 3,408     $ -     $ -     $ 259,087  

Marketable securities

    59,770       -       -       -       59,770  

Restricted cash

    -       3,778       -       -       3,778  

Trade and other receivables

    5,380       39,247       -       (2,135 )     42,492  

Inventories:

                                       

Housing completed or under construction

    -       874,199       -       -       874,199  

Land and land under development

    -       884,615       -       -       884,615  

Total inventories

    -       1,758,814       -       -       1,758,814  
                                         

Intercompany receivables

    1,475,291       2,803       5,289       (1,483,383 )     -  

Investment in subsidiaries

    295,214       -       -       (295,214 )     -  

Property and equipment, net

    25,495       2,546       -       -       28,041  

Deferred tax assets, net

    74,119       -       -       769       74,888  

Metropolitan district bond securities (related party)

    30,162       -       -       -       30,162  

Other assets

    5,267       55,196       -       -       60,463  

Total Homebuilding Assets

    2,226,377       1,865,792       5,289       (1,779,963 )     2,317,495  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       23,822       -       23,822  

Marketable securities

    -       -       36,436       -       36,436  

Intercompany receivables

    -       -       40,042       (40,042 )     -  

Mortgage loans held-for-sale, net

    -       -       138,774       -       138,774  

Other assets

    -       -       12,831       (769 )     12,062  

Total Financial Services Assets

    -       -       251,905       (40,811 )     211,094  

Total Assets

  $ 2,226,377     $ 1,865,792     $ 257,194     $ (1,820,774 )   $ 2,528,589  
                                         

LIABILITIES AND EQUITY

                                       
                                         

Homebuilding:

                                       

Accounts payable

  $ -     $ 42,088     $ -     $ -     $ 42,088  

Accrued liabilities

    1,527       136,615       143       6,281       144,566  

Advances and notes payable to parent and subsidiaries

    48,134       1,445,276       26,266       (1,519,676 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    841,646       -       -       -       841,646  

Total Homebuilding Liabilities

    906,307       1,623,979       26,409       (1,513,395 )     1,043,300  
                                         

Financial Services:

                                       

Accounts payable and accrued liabilities

    -       -       59,150       (8,416 )     50,734  

Advances and notes payable to parent and subsidiaries

    -       -       3,749       (3,749 )     -  

Mortgage repurchase facility

    -       -       114,485       -       114,485  

Total Financial Services Liabilities

    -       -       177,384       (12,165 )     165,219  

Total Liabilities

    906,307       1,623,979       203,793       (1,525,560 )     1,208,519  
                                         

Equity:

                                       

Total Stockholders' Equity

    1,320,070       241,813       53,401       (295,214 )     1,320,070  

Total Liabilities and Stockholders' Equity

  $ 2,226,377     $ 1,865,792     $ 257,194     $ (1,820,774 )   $ 2,528,589  

 

 
- 23 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Operations

 

   

Three Months Ended June 30, 2017

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 648,971     $ -     $ -     $ 648,971  

Cost of sales

    -       (540,279 )     -       -       (540,279 )

Inventory impairments

    -       -       -       -       -  

Gross margin

    -       108,692       -       -       108,692  

Selling, general, and administrative expenses

    (12,233 )     (58,284 )     -       (192 )     (70,709 )

Equity income of subsidiaries

    40,109       -       -       (40,109 )     -  

Interest and other income

    2,332       666       3       (154 )     2,847  

Other expense

    8       (674 )     -       -       (666 )

Other-than-temporary impairment of marketable securities

    (1 )     -       -       -       (1 )

Homebuilding pretax income (loss)

    30,215       50,400       3       (40,455 )     40,163  

Financial Services:

                                       

Financial services pretax income

    -       -       11,385       346       11,731  

Income before income taxes

    30,215       50,400       11,388       (40,109 )     51,894  

(Provision) benefit for income taxes

    3,656       (17,479 )     (4,200 )     -       (18,023 )

Net income

  $ 33,871     $ 32,921     $ 7,188     $ (40,109 )   $ 33,871  

Other comprehensive income related to available-for-sale securities, net of tax

    1,944       -       456       (456 )     1,944  

Comprehensive income

  $ 35,815     $ 32,921     $ 7,644     $ (40,565 )   $ 35,815  

 

   

Three Months Ended June 30, 2016

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 571,511     $ -     $ -     $ 571,511  

Cost of sales

    -       (476,052 )     -       -       (476,052 )

Inventory impairments

    -       (1,600 )     -       -       (1,600 )

Gross margin

    -       93,859       -       -       93,859  

Selling, general, and administrative expenses

    (11,228 )     (53,024 )     -       (188 )     (64,440 )

Equity income of subsidiaries

    32,909       -       -       (32,909 )     -  

Interest and other income

    2,020       423       2       108       2,553  

Interest expense

    -       -       -       -       -  

Other expense

    (1 )     (277 )     -       -       (278 )

Other-than-temporary impairment of marketable securities

    (288 )     -       -       -       (288 )

Homebuilding pretax income (loss)

    23,412       40,981       2       (32,989 )     31,406  

Financial Services:

                                       

Financial services pretax income

    -       -       8,972       80       9,052  

Income before income taxes

    23,412       40,981       8,974       (32,909 )     40,458  

(Provision) benefit for income taxes

    3,501       (13,746 )     (3,300 )     -       (13,545 )

Net income

  $ 26,913     $ 27,235     $ 5,674     $ (32,909 )   $ 26,913  

Other comprehensive income related to available-for-sale securities, net of tax

    895       -       371       (371 )     895  

Comprehensive income

  $ 27,808     $ 27,235     $ 6,045     $ (33,280 )   $ 27,808  

 

 
- 24 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Operations

 

   

Six Months Ended June 30, 2017

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 1,212,697     $ -     $ -     $ 1,212,697  

Home and land cost of sales

    -       (1,009,432 )     -       -       (1,009,432 )

Inventory impairments

    -       (4,850 )     -       -       (4,850 )

Gross margin

    -       198,415       -       -       198,415  

Selling, general, and administrative expenses

    (24,628 )     (112,005 )     -       (374 )     (137,007 )

Equity income of subsidiaries

    69,140       -       -       (69,140 )     -  

Interest and other income

    4,008       1,340       4       (178 )     5,174  

Other expense

    16       (1,033 )     -       -       (1,017 )

Other-than-temporary impairment of marketable securities

    (51 )     -       -       -       (51 )

Homebuilding pretax income (loss)

    48,485       86,717       4       (69,692 )     65,514  

Financial Services:

                                       

Financial services pretax income

    -       -       22,188       552       22,740  

Income before income taxes

    48,485       86,717       22,192       (69,140 )     88,254  

(Provision) benefit for income taxes

    7,635       (31,574 )     (8,195 )     -       (32,134 )

Net income

  $ 56,120     $ 55,143     $ 13,997     $ (69,140 )   $ 56,120  

Other comprehensive income related to available for sale securities, net of tax

    3,930       -       1,290       (1,290 )     3,930  

Comprehensive income

  $ 60,050     $ 55,143     $ 15,287     $ (70,430 )   $ 60,050  

 

   

Six Months Ended June 30, 2016

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 
Homebuilding:                                        

Revenues

  $ -     $ 968,255     $ -     $ -     $ 968,255  

Home and land cost of sales

    -       (807,441 )     (300 )     -       (807,741 )

Inventory impairments

    -       (1,600 )     -       -       (1,600 )

Gross margin

    -       159,214       (300 )     -       158,914  

Selling, general, and administrative expenses

    (23,330 )     (97,040 )     -       (347 )     (120,717 )

Equity income of subsidiaries

    50,279       -       -       (50,279 )     -  

Interest and other income

    2,492       1,152       3       (158 )     3,489  

Other expense

    (3 )     (902 )     -       -       (905 )

Other-than-temporary impairment of marketable securities

    (719 )     -       -       -       (719 )

Homebuilding pretax income (loss)

    28,719       62,424       (297 )     (50,784 )     40,062  

Financial Services:

                                       

Financial services pretax income

    -       -       14,164       505       14,669  

Income before income taxes

    28,719       62,424       13,867       (50,279 )     54,731  

(Provision) benefit for income taxes

    7,757       (20,822 )     (5,190 )     -       (18,255 )

Net income

  $ 36,476     $ 41,602     $ 8,677     $ (50,279 )   $ 36,476  

Other comprehensive income related to available for sale securities, net of tax

    2,843       -       370       (370 )     2,843  

Comprehensive income

  $ 39,319     $ 41,602     $ 9,047     $ (50,649 )   $ 39,319  

 

 
- 25 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statement of Cash Flows

 

   

Six Months Ended June 30, 2017

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

  $ 32,086     $ 34,505     $ 54,296     $ -     $ 120,887  

Net cash provided by (used in) investing activities

    41,069       (88 )     (59 )     (42,879 )     (1,957 )

Financing activities:

                                       

Payments from (advances to) subsidiaries

    -       (33,340 )     (9,539 )     42,879       -  

Mortgage repurchase facility

    -       -       (45,358 )     -       (45,358 )

Dividend payments

    (25,809 )     -       -       -       (25,809 )

Proceeds from exercise of stock options

    7,304       -       -       -       7,304  

Net cash provided by (used in) financing activities

    (18,505 )     (33,340 )     (54,897 )     42,879       (63,863 )
                                         

Net increase in cash and cash equivalents

    54,650       1,077       (660 )     -       55,067  

Cash and cash equivalents:

                                       

Beginning of period

    255,679       3,408       23,822       -       282,909  

End of period

  $ 310,329     $ 4,485     $ 23,162     $ -     $ 337,976  

 

   

Six Months Ended June 30, 2016

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

  $ 17,988     $ (45,748 )   $ 5,674     $ -     $ (22,086 )

Net cash provided by (used in) investing activities

    (6,756 )     (1,132 )     (2,967 )     43,077       32,222  

Financing activities:

                                       

Payments from (advances to) subsidiaries

    -       47,816       (4,739 )     (43,077 )     -  

Mortgage repurchase facility

    -       -       4,686       -       4,686  

Dividend payments

    (24,504 )     -       -       -       (24,504 )

Proceeds from the exercise of stock options

    -       -       -       -       -  

Net cash provided by (used in) financing activities

    (24,504 )     47,816       (53 )     (43,077 )     (19,818 )
                                         

Net increase in cash and cash equivalents

    (13,272 )     936       2,654       -       (9,682 )

Cash and cash equivalents:

                                       

Beginning of period

    141,245       3,097       36,646       -       180,988  

End of period

  $ 127,973     $ 4,033     $ 39,300     $ -     $ 171,306  

 

 
- 26 -

Table of Contents
 

  

ITEM 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management’s experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2016 and this Quarterly Report on Form 10-Q.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
    (Dollars in thousands, except per share amounts)  

Homebuilding:

 

 

                 

Home sale revenues

  $ 647,620     $ 571,195     $ 1,211,099     $ 965,615  

Land sale revenues

    1,351       316       1,598       2,640  

Total home and land sale revenues

    648,971       571,511       1,212,697       968,255  

Home cost of sales

    (539,077 )     (475,836 )     (1,008,019 )     (805,862 )

Land cost of sales

    (1,202 )     (216 )     (1,413 )     (1,879 )

Inventory impairments

    -       (1,600 )     (4,850 )     (1,600 )

Total cost of sales

    (540,279 )     (477,652 )     (1,014,282 )     (809,341 )

Gross margin

    108,692       93,859       198,415       158,914  

Gross margin %

    16.7 %     16.4 %     16.4 %     16.4 %

Selling, general and administrative expenses

    (70,709 )     (64,440 )     (137,007 )     (120,717 )

Interest and other income

    2,847       2,553       5,174       3,489  

Other expense

    (666 )     (278 )     (1,017 )     (905 )

Other-than-temporary impairment of marketable securities

    (1 )     (288 )     (51 )     (719 )

Homebuilding pretax income

    40,163       31,406       65,514       40,062  
                                 

Financial Services:

                               

Revenues

    19,073       15,823       37,052       26,840  

Expenses

    (8,500 )     (7,543 )     (16,398 )     (13,784 )

Interest and other income

    1,238       772       2,217       1,613  

Other-than-temporary impairment of marketable securities

    (80 )     -       (131 )     -  

Financial services pretax income

    11,731       9,052       22,740       14,669  
                                 

Income before income taxes

    51,894       40,458       88,254       54,731  

Provision for income taxes

    (18,023 )     (13,545 )     (32,134 )     (18,255 )

Net income

  $ 33,871     $ 26,913     $ 56,120     $ 36,476  
                                 

Earnings per share:

                               

Basic

  $ 0.65     $ 0.52     $ 1.09     $ 0.71  

Diluted

  $ 0.64     $ 0.52     $ 1.07     $ 0.71  
                                 

Weighted average common shares outstanding:

                               

Basic

    51,514,309       51,293,917       51,428,079       51,281,643  

Diluted

    52,444,123       51,304,829       52,065,968       51,291,359  
                                 

Dividends declared per share

  $ 0.25     $ 0.24     $ 0.50     $ 0.48  
                                 

Cash provided by (used in):

                               

Operating Activities

  $ 27,001     $ (7,101 )   $ 120,887     $ (22,086 )

Investing Activities

  $ (457 )   $ 19,048     $ (1,957 )   $ 32,222  

Financing Activities

  $ (8,630 )   $ 20,824     $ (63,863 )   $ (19,818 )

 

 
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Table of Contents
 

 

Overview

 

Industry Conditions

 

The homebuilding industry has continued to be supported by robust economic fundamentals such as strong consumer confidence and improving levels of employment and personal income. These conditions, in addition to improvements in household formation and a low supply of new homes, drove favorable operating conditions for homebuilders in many markets. Despite three Federal Reserve interest rate increases since December 2016, mortgage interest rates have remained near historical lows, supporting affordability for new home purchases. Furthermore, many builders in the industry continue to focus on new, more affordable home plans designed to capture increasing demand from first-time homebuyers.

  

Three Months Ended June 30, 2017

 

For the three months ended June 30, 2017, our net income was $33.9 million, or $0.64 per diluted share, a 26% increase compared to net income of $26.9 million, or $0.52 per diluted share, for the same period in the prior year. The increase was primarily driven by an improvement in home sale revenues of 13%, a 40 basis point improvement in our gross margin from home sale revenues percentage, and a 40 basis point improvement in our selling, general and administrative (“SG&A”) expenses as a percentage of home sale revenues (“SG&A rate”), slightly offset by a 120 basis point increase in our effective tax rate.

 

Home sale revenues were up from $571.2 million in the 2016 second quarter to $647.6 million in the 2017 second quarter. This $76.4 million improvement was primarily the result of an 11% increase in the number of homes delivered and, to a lesser extent, a 2% increase in our average selling price. Our improvement in the number of homes delivered was the result of an 8% year-over-year increase in our beginning homes in backlog and a stronger backlog conversion rate.

 

The dollar value of net new home orders decreased 2% from the prior year period, driven by a 4% decline in average active communities from 165 in the 2016 second quarter to 158 in the same period in the current year. The impact of the decrease in average active communities was partially offset by a slight improvement in our monthly sales absorption pace from 3.34 in the 2016 second quarter to 3.41 for the 2017 second quarter.

  

Six Months Ended June 30, 2017

 

For the six months ended June 30, 2017, our net income was $56.1 million, or $1.07 per diluted share, a 54% increase compared to net income of $36.5 million, or $0.71 per diluted share, for the same period in the prior year. The increase was primarily driven by an improvement in home sale revenues of 25% and a 120 basis point improvement in our SG&A rate, slightly offset by a $3.3 million increase in inventory impairments.

 

Outlook*

We ended the second quarter with our active community count down 4% year-over-year, in part due to the strong rate of sales activity we experienced over the past year. However, we have made significant progress in the process of adding new communities to our operations. In the second quarter alone, we approved more than 3,300 lots for acquisition, far exceeding the activity for any other quarter over the past three years. We believe that the increase in approval activity gives us the opportunity to increase our active community count by the end of 2017, relative to our active community count at the end of the second quarter.

 

We continue to see robust demand for our new more affordable homes, which are generally smaller and less complex to build. We anticipate that these homes will become a larger percentage of our deliveries as the year progresses and this percentage should continue to increase in 2018. The positive response to these homes reinforces our belief that the first-time homebuyer may drive growth in new home sales nationwide. Although overall economic conditions remain strong, there remains substantial uncertainty surrounding how the policies of the new presidential administration will impact the homebuilding industry.

 

We ended the 2017 second quarter with overall liquidity of nearly $1.0 billion and no senior note maturities until 2020. We believe that our financial position at June 30, 2017 provides us with the ability to grow operations as opportunities arise while still providing adequate protection from the historically volatile and cyclical nature of the housing market and domestic and global economies.

 

* See "Forward-Looking Statements" below.

 

 
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Table of Contents
 

 

Homebuilding

 

Pretax Income

 

   

Three Months Ended

                   

Six Months Ended

                 
   

June 30,

   

Change

   

June 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

   

2017

   

2016

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 21,134     $ 15,740     $ 5,394       34 %   $ 36,589     $ 25,438     $ 11,151       44 %

Mountain

    24,541       20,748       3,793       18 %     42,771       30,832       11,939       39 %

East

    4,734       4,500       234       5 %     7,376       5,867       1,509       26 %

Corporate

    (10,246 )     (9,582 )     (664 )     7 %     (21,222 )     (22,075 )     853       (4) %

Total homebuilding pretax income

  $ 40,163     $ 31,406     $ 8,757       28 %   $ 65,514     $ 40,062     $ 25,452       64 %

 

Homebuilding pretax income for the 2017 second quarter was $40.2 million, an increase of $8.8 million from $31.4 million for the same period in the prior year. The increase was primarily attributable to (1) a 13% increase in home sale revenues, (2) a 40 basis point improvement in our gross margin from home sale revenues percentage, driven by slight year-over-year improvements in each of our homebuilding segments and a higher percentage of homes delivered in our West and Mountain segments, which have higher gross margin from home sale revenues percentages, and (3) a 40 basis point improvement in our SG&A rate. The year-over-year increases in pretax income for each of our West and Mountain segments were driven primarily by higher home sale revenues of 20% and 17%, respectively. Our West segment also benefited from an improvement in its SG&A rate. Our East segment had a significant decline in general and administrative expenses, primarily due to a decrease in headcount, which was mostly offset by a 9% decrease in home sale revenues. The pretax loss for our Corporate segment increased from the prior year primarily as a result of an increase in compensation expenses mostly due to an increase in headcount.

 

For the six months ended June 30, 2017, we recorded homebuilding pretax income of $65.5 million, compared to $40.1 million for the same period in the prior year, an increase of $25.5 million, or 64%. The increase was primarily attributable to a 25% increase in home sale revenues and a 120 basis point improvement in our SG&A rate, partly offset by $4.9 million in inventory impairments. The year-over-year increases in pretax income for our West and Mountain segments were driven primarily by higher home sale revenues of 37% and 21%, respectively. Our West and East segment benefited from improvements in their SG&A rates, which was the primary driver of the increase in pretax income for our East segment. The improvement in our West segment, however, was negatively impacted by $4.1 million of inventory impairments taken in the 2017 first quarter. The pretax loss for our Corporate segment was reduced from the prior year primarily as a result of an increase in interest and other income from investments and a decrease in stock-based compensation expense.

 

Assets

 

   

June 30,

   

December 31,

   

Change

 
   

2017

   

2016

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 1,005,590     $ 1,035,033     $ (29,443 )     (3) %

Mountain

    630,621       571,139       59,482       10 %

East

    230,096       256,816       (26,720 )     (10) %

Corporate

    501,798       454,507       47,291       10 %

Total homebuilding assets

  $ 2,368,105     $ 2,317,495     $ 50,610       2 %

 

Total homebuilding assets increased at June 30, 2017 compared to December 31, 2016. In our Mountain segment, the increase was driven by (1) higher land and land under development balances due to strong land acquisition activity during the six months ended June 30, 2017, and (2) a higher number of homes completed or under construction as result of an increase in backlog under construction. For our West segment, the decline in total homebuilding assets was primarily due to the timing of land acquisition activity during the six months ended June 30, 2017. The reduction in assets in our East segment is due to reduced land acquisition activity as our returns in our Maryland and Virginia markets have been lower than the returns we expect to realize. Assets for our Corporate segment increased primarily as a result of an increase in cash and cash equivalents that was driven by positive operating results.

 

 
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Table of Contents
 

 

Home and Land Sale Revenues

 

   

June 30,

   

Change

   

June 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

   

2017

   

2016

   

Amount

   

%

 
   

(Dollars in thousands)

 

West

  $ 323,758     $ 270,031     $ 53,727       20 %   $ 632,837     $ 461,406     $ 171,431       37 %

Mountain

    224,356       190,334       34,022       18 %     397,492       328,158       69,334       21 %

East

    100,857       111,146       (10,289 )     (9) %     182,368       178,691       3,677       2 %

Total home and land sale revenues

  $ 648,971     $ 571,511     $ 77,460       14 %   $ 1,212,697     $ 968,255     $ 244,442       25 %

 

For the 2017 second quarter, home and land sale revenues increased $77.5 million year-over-year to $649.0 million. For the six months ended June 30, 2017 home and land sale revenues increased $244.4 million from the same period in the prior year to $1.21 billion. The increases for both the three and six months ended June 30, 2017 compared to the same periods in the prior year were driven by increases in new home deliveries of 11% and 22%, respectively.

 

New Home Deliveries

 

   

Three Months Ended June 30,

 
   

2017

   

2016

   

% Change

 
   

Homes

   

Dollar
Value

   

Average

Price

   

Homes

   

Dollar
Value

   

Average

Price

   

Homes

   

Dollar
Value

   

Average

Price

 
   

(Dollars in thousands)

 

Arizona

    212     $ 68,943     $ 325.2       201     $ 60,976     $ 303.4       5 %     13 %     7 %

California

    210       131,746       627.4       192       117,985       614.5       9 %     12 %     2 %

Nevada

    215       75,687       352.0       148       51,834       350.2       45 %     46 %     1 %

Washington

    91       47,382       520.7       85       39,236       461.6       7 %     21 %     13 %

West

    728       323,758       444.7       626       270,031       431.4       16 %     20 %     3 %

Colorado

    414       203,141       490.7       353       172,100       487.5       17 %     18 %     1 %

Utah

    48       19,864       413.8       51       17,935       351.7       (6) %     11 %     18 %

Mountain

    462       223,005       482.7       404       190,035       470.4       14 %     17 %     3 %

Maryland

    64       27,760       433.8       83       41,639       501.7       (23 )%     (33) %     (14) %

Virginia

    53       32,365       610.7       75       38,623       515.0       (29) %     (16) %     19 %

Florida

    105       40,732       387.9       84       30,867       367.5       25 %     32 %     6 %

East

    222       100,857       454.3       242       111,129       459.2       (8) %     (9) %     (1) %

Total

    1,412     $ 647,620     $ 458.7       1,272     $ 571,195     $ 449.1       11 %     13 %     2 %

 

   

Six Months Ended June 30,

 
   

2017

   

2016

   

% Change

 
   

Homes

   

Dollar
Value

   

Average

Price

   

Homes

   

Dollar
Value

   

Average

Price

   

Homes

   

Dollar
Value

   

Average

Price

 
   

(Dollars in thousands)

 

Arizona

    400     $ 124,619     $ 311.5       361     $ 106,038     $ 293.7       11 %     18 %     6 %

California

    439       268,229       611.0       317       193,515       610.5       38 %     39 %     0 %

Nevada

    402       141,820       352.8       255       90,260       354.0       58 %     57 %     (0) %

Washington

    192       98,170       511.3       159       71,593       450.3       21 %     37 %     14 %

West

    1,433       632,838       441.6       1,092       461,406       422.5       31 %     37 %     5 %

Colorado

    750       363,328       484.4       602       293,675       487.8       25 %     24 %     (1) %

Utah

    81       32,568       402.1       90       32,510       361.2       (10) %     0 %     11 %

Mountain

    831       395,896       476.4       692       326,185       471.4       20 %     21 %     1 %

Maryland

    99       44,363       448.1       117       57,445       491.0       (15) %     (23) %     (9) %

Virginia

    103       58,894       571.8       115       58,777       511.1       (10) %     0 %     12 %

Florida

    202       79,108       391.6       163       61,802       379.2       24 %     28 %     3 %

East

    404       182,365       451.4       395       178,024       450.7       2 %     2 %     0 %

Total

    2,668     $ 1,211,099     $ 453.9       2,179     $ 965,615     $ 443.1       22 %     25 %     2 %

 

 
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Table of Contents
 

 

For both the three and six months ended June 30, 2017, most of our markets experienced year-over-year increases in the number of homes delivered due primarily to year-over-year improvements in the number of units in backlog to begin each period and/or improved backlog conversion rates. The improvements in our consolidated backlog conversion rates were driven by improving conversion rates in certain of our larger markets, specifically, Arizona, Nevada and Colorado. Through the first six months of 2017, our build-to-order cycle times have improved, notably in our Colorado market, helping to drive the better backlog conversion rates. However, as cycle times remain high in many of our markets and as a result of having historically low levels of unsold homes available to sell and close within the upcoming quarter, we will likely continue to experience lower seasonal backlog conversion rates relative to same-quarter historic averages for the foreseeable future. Furthermore, we expect our backlog conversion rate for the 2017 third quarter to be negatively impacted as a result of a floor joist recall, which was announced by the floor joist manufacturer at the beginning of the 2017 third quarter and impacts certain homes under construction in our Colorado market. See "Forward-Looking Statements" below.

 

Our average selling price of homes delivered for both the three and six months ended June 30, 2017 improved slightly as price increases implemented in many of our markets were partially offset by a higher percentage of our deliveries coming from our new more affordable homes. For both the three and six months ended June 30, 2017 our Washington, Utah and Virginia markets experienced the highest percentage increases in average selling prices driven by a combination of price increases and a shift in the mix of homes delivered to higher priced communities. Our Maryland market was the only market that experienced year-over-year declines in average selling price for both the three and six months ended June 30, 2017 as a result of a shift in mix to lower priced communities.

 

Gross Margin

 

Our gross margin from home sales percentage for the three months ended June 30, 2017 increased year-over-year from 16.4% to 16.8%. Our 2016 second quarter included $1.6 million, or 30 basis points, in inventory impairments while our 2017 second quarter included no such impairments.

 

Our gross margin from home sales percentage for the six months ended June 30, 2107 was flat year-over-year at 16.4%. The six months ended June 30, 2017 included $4.9 million of inventory impairments while the same period in 2016 included $1.6 million of inventory impairments and $3.2 million of adjustments to increase our warranty accrual.

 

 

Inventory Impairments

 

Impairments of homebuilding inventory by segment for the three months and six months ended June 30, 2017 and 2016 are shown in the table below.

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

West

  $ -     $ 1,400     $ 4,100     $ 1,400  

Mountain

    -       -       -       -  

East

    -       200       750       200  

Total Inventory Impairments

  $ -     $ 1,600     $ 4,850     $ 1,600  

 

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.

 

   

Impairment Data

   

Quantitative Data

 

Three Months Ended

 

Total
Subdivisions
Tested

   

Inventory
Impairments

   

Fair Value of
Inventory After Impairments

   

Number of
Subdivisions
Impaired

   

Discount Rate

 
   

(Dollars in thousands)

         

March 31, 2017

    33     $ 4,850     $ 19,952       2       12% to 18%  

June 30, 2017

    35     $ -     $ -       -       N/A  
                                         

March 31, 2016

    14     $ -     $ -       -       N/A  

June 30, 2016

    17     $ 1,600     $ 6,415       2       12% to 15%  

 

 
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Table of Contents
 

 

Selling, General and Administrative Expenses

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 
   

(Dollars in thousands)

 

General and administrative expenses

  $ 32,292     $ 31,414     $ 878     $ 64,661     $ 62,880     $ 1,781  

General and administrative expense as a percentage of home sale revenues

    5.0 %     5.5 %  

(50) bps

      5.3 %     6.5 %  

(120) bps

 
                                                 

Marketing expenses

  $ 16,976     $ 14,433     $ 2,543     $ 32,100     $ 26,466     $ 5,634  

Marketing expenses as a percentage of home sale revenues

    2.6 %     2.5 %  

10 bps

      2.7 %     2.7 %  

0 bps

 
                                                 

Commissions expenses

  $ 21,441     $ 18,593     $ 2,848     $ 40,246     $ 31,371     $ 8,875  

Commissions expenses as a percentage of home sale revenues

    3.3 %     3.3 %  

0 bps

      3.3 %     3.2 %  

10 bps

 
                                                 

Total selling, general and administrative expenses

  $ 70,709     $ 64,440     $ 6,269     $ 137,007     $ 120,717     $ 16,290  

Total selling, general and administrative expenses as a percentage of home sale revenues

    10.9 %     11.3 %  

(40) bps

      11.3 %     12.5 %  

(120) bps

 

 

For the three and six months ended June 30, 2017, the increases in our general and administrative expenses were primarily due to increased compensation-related expenses driven by higher average headcount. Despite the increases in our general and administrative expenses, our SG&A rates improved year-over-year by 40 basis points and 120 basis points for the three and six months ended June 30, 2017, respectively. The improvements in our SG&A rates were driven primarily by an increased ability to leverage our fixed overhead as a result of our 13% and 25% year-over-year increases in home sale revenues for the three and six months ended June 30, 2017, respectively.

 

Our commissions expenses are variable with home sale revenues. As such, the year-over-year increases in home sale revenues drove the changes in commissions expenses year-over-year for both periods presented. The increases in marketing expenses were partially attributable to the growth new home deliveries. In addition, increased model costs per home delivered and higher headcount drove the year-over-year increases in marketing costs.

  

 
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Table of Contents
 

 

Other Homebuilding Operating Data

 

Net New Orders:

 

   

Three Months Ended June 30,

 
   

2017

   

2016

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate

 
   

(Dollars in thousands)

 

Arizona

    230     $ 75,049     $ 326.3       2.89       236     $ 70,699     $ 299.6       2.62       (3) %     6 %     9 %     10 %

California

    234       143,208       612.0       4.59       308       177,934       577.7       5.33       (24) %     (20) %     6 %     (14) %

Nevada

    267       92,407       346.1       4.45       230       80,263       349.0       3.48       16 %     15 %     (1) %     28 %

Washington

    127       68,876       542.3       4.34       118       55,934       474.0       3.42       8 %     23 %     14 %     27 %

West

    858       379,540       442.4       3.90       892       384,830       431.4       3.59       (4) %     (1) %     3 %     9 %

Colorado

    458       215,472       470.5       3.59       413       192,543       466.2       4.02       11 %     12 %     1 %     (11) %

Utah

    67       29,046       433.5       3.19       77       28,057       364.4       3.21       (13) %     4 %     19 %     (1) %

Mountain

    525       244,518       465.7       3.54       490       220,600       450.2       3.87       7 %     11 %     3 %     (9) %

Maryland

    32       14,819       463.1       1.19       69       31,918       462.6       1.67       (54) %     (54) %     0 %     (29 )%

Virginia

    63       32,790       520.5       4.20       73       36,892       505.4       2.95       (14) %     (11) %     3 %     42 %

Florida

    120       38,940       324.5       2.05       122       48,236       395.4       2.32       (2) %     (19) %     (18) %     (12) %

East

    215       86,549       402.6       2.14       264       117,046       443.4       2.23       (19) %     (26) %     (9) %     (4) %

Total

    1,598     $ 710,607     $ 444.7       3.41       1,646     $ 722,476     $ 438.9       3.34       (3) %     (2) %     1 %     2 %

 

   

Six Months Ended June 30,

 
   

2017

   

2016

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate *

   

Homes

   

Dollar Value

   

Average Price

   

Monthly Absorption Rate

 
   

(Dollars in thousands)

 

Arizona

    446     $ 143,119     $ 320.9       2.86       459     $ 139,785     $ 304.5       2.49       (3) %     2 %     5 %     15 %

California

    477       298,621       626.0       4.31       537       321,162       598.1       4.54       (11) %     (7) %     5 %     (5) %

Nevada

    562       192,898       343.2       4.65       459       160,074       348.7       3.57       22 %     21 %     (2 )%     30 %

Washington

    266       144,368       542.7       4.14       242       116,073       479.6       3.17       10 %     24 %     13 %     31 %

West

    1,751       779,006       444.9       3.88       1,697       737,094       434.4       3.34       3 %     6 %     2 %     16 %

Colorado

    959       456,162       475.7       3.93       906       428,747       473.2       4.11       6 %     6 %     1 %     (4) %

Utah

    123       52,616       427.8       2.52       143       52,629       368.0       3.03       (14) %     (0) %     16 %     (17) %

Mountain

    1,082       508,778       470.2       3.69       1,049       481,376       458.9       3.92       3 %     6 %     2 %     (6) %

Maryland

    83       37,189       448.1       1.49       158       74,068       468.8       2.09       (47) %     (50) %     (4) %     (29) %

Virginia

    127       67,229       529.4       3.61       158       81,036       512.9       3.07       (20) %     (17) %     3 %     18 %

Florida

    251       91,117       363.0       2.20       230       96,279       418.6       2.42       9 %     (5) %     (13) %     (9) %

East

    461       195,535       424.2       2.25       546       251,383       460.4       2.46       (16) %     (22) %     (8) %     (9) %

Total

    3,294     $ 1,483,319     $ 450.3       3.47       3,292     $ 1,469,853     $ 446.5       3.30       0 %     1 %     1 %     5 %

 

* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period

 

For both the three and six months ended June 30, 2017, the dollar value of net new orders was consistent with the same periods in the prior year as homes sold and the average selling price were relatively flat year-over-year for each period.

 

For each period in the current year, our California, Maryland and Virginia markets each experienced year-over-year declines in average active communities, driving the number of homes sold down. The reduced community count in our Virginia market was somewhat offset by robust year-over-year improvement in our monthly sales absorption pace as we experienced improving demand for our higher density products. Net new orders were up year-over-year in both periods in our Colorado market as a result of significant year-over-year improvements in community count. Our Washington market, which has one of the lowest housing inventory supplies in the country, realized significant year-over-year improvements in monthly sales absorption rates in both periods while still driving price increases in existing communities. In our Nevada market, the year-over-year increases in absorption rates were driven by strong demand for our new communities that we have opened over the past twelve months. While our Nevada and Colorado markets had relatively flat year-over-year average selling prices, we did see notable price appreciation in many existing communities that was offset by the impact of sales of more affordable homes. Florida was the only market to experience a decline in average selling price in both periods mostly the result of a shift in mix in lower priced communities.

  
 
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Active Subdivisions:

 

                           

Average Active Subdivisions

   

Average Active Subdivisions

 
   

Active Subdivisions

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

%

   

June 30,

   

%

   

June 30,

   

%

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 

Arizona

    26       30       (13) %     27       30       (10) %     26       31       (16) %

California

    17       20       (15) %     17       19       (11) %     18       20       (10) %

Nevada

    18       22       (18) %     20       22       (9) %     20       21       (5) %

Washington

    9       10       (10) %     10       12       (17) %     11       13       (15) %

West

    70       82       (15) %     74       83       (11) %     75       85       (12) %

Colorado

    44       28       57 %     43       34       26 %     41       37       11 %

Utah

    6       8       (25) %     7       8       (13) %     8       8       0 %

Mountain

    50       36       39 %     50       42       19 %     49       45       9 %

Maryland

    9       13       (31) %     9       14       (36) %     9       13       (31) %

Virginia

    5       9       (44) %     5       8       (38) %     6       9       (33) %

Florida

    19       19       0 %     20       18       11 %     19       16       19 %

East

    33       41       (20) %     34       40       (15) %     34       38       (11) %

Total

    153       159       (4) %     158       165       (4) %     158       168       (6) %

  

At June 30, 2017, we had 153 active subdivisions, a 4% decrease from June 30, 2016. For Colorado, the increase was due to increased land acquisition activity during the past twelve months. In Virginia and Maryland, we have tempered our land acquisition activity over the past two years as our recent returns in these markets have been lower than returns we expect to realize. For all remaining markets, the year-over-year changes were primarily driven by the timing of opening new communities versus closing out older ones. Furthermore, over the past couple of quarters, we have substantially increased our land approval activity, with our second quarter alone including the approval of more than 3,300 lots for acquisition, far exceeding the activity for any other quarter over the past three years.

 

 
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Cancellation Rate:

 

   

Cancellations As a Percentage of Homes in Beginning Backlog

   

Cancellations As a Percentage of Gross Sales*

 
   

Three Months Ended June 30,

   

Change in

   

Three Months Ended June 30,

   

Change in

   

Six Months Ended June 30,

   

Change in

 
   

2017

   

2016

   

Percentage

   

2017

   

2016

   

Percentage

   

2017

   

2016

   

Percentage

 

Arizona

    13 %     20 %     (7 )%     16 %     25 %     (9 )%     18 %     23 %     (5 )%

California

    12 %     16 %     (4 )%     20 %     19 %     1 %     20 %     19 %     1 %

Nevada

    8 %     13 %     (5 )%     11 %     15 %     (4 )%     11 %     14 %     (3 )%

Washington

    8 %     10 %     (2 )%     14 %     16 %     (2 )%     17 %     17 %     0 %

West

    10 %     15 %     (5 )%     16 %     19 %     (3 )%     16 %     19 %     (3 )%

Colorado

    8 %     11 %     (3 )%     16 %     22 %     (6 )%     17 %     18 %     (1 )%

Utah

    17 %     13 %     4 %     25 %     18 %     7 %     22 %     19 %     3 %

Mountain

    9 %     11 %     (2 )%     17 %     22 %     (5 )%     18 %     18 %     0 %

Maryland

    18 %     17 %     1 %     37 %     27 %     10 %     31 %     23 %     8 %

Virginia

    12 %     11 %     1 %     19 %     18 %     1 %     21 %     16 %     5 %

Florida

    11 %     21 %     (10 )%     22 %     26 %     (4 )%     21 %     26 %     (5 )%

East

    13 %     17 %     (4 )%     24 %     24 %     0 %     23 %     22 %     1 %

Total

    10 %     14 %     (4 )%     17 %     21 %     (4 )%     18 %     19 %     (1 )%
   
* Cancellations as a percentage of gross sales data has been provided for information only. No commentary is included below.

 

Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) improved from 14% in the 2016 second quarter to 10% in the 2017 second quarter. Florida had the most notable decrease in cancellation rate as a result of process improvements around accepting sales and managing backlog.

 

Backlog:

 

   

At June 30,

 
   

2017

   

2016

   

% Change

 
   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

   

Homes

   

Dollar
Value

   

Average Price

 
   

(Dollars in thousands)

 

Arizona

    368     $ 125,097     $ 339.9       419     $ 129,591     $ 309.3       (12) %     (3) %     10 %

California

    519       347,822       670.2       562       360,450       641.4       (8) %     (4) %     4 %

Nevada

    467       160,349       343.4       399       138,604       347.4       17 %     16 %     (1) %

Washington

    311       169,045       543.6       262       127,968       488.4       19 %     32 %     11 %

West

    1,665       802,313       481.9       1,642       756,613       460.8       1 %     6 %     5 %

Colorado

    1,173       571,956       487.6       1,126       546,356       485.2       4 %     5 %     0 %

Utah

    146       62,225       426.2       161       59,133       367.3       (9) %     5 %     16 %

Mountain

    1,319       634,181       480.8       1,287       605,489       470.5       2 %     5 %     2 %

Maryland

    76       38,329       504.3       131       61,623       470.4       (42) %     (38) %     7 %

Virginia

    135       70,384       521.4       144       76,278       529.7       (6) %     (8) %     (2) %

Florida

    315       132,628       421.0       241       107,679       446.8       31 %     23 %     (6) %

East

    526       241,341       458.8       516       245,580       475.9       2 %     (2) %     (4) %

Total

    3,510     $ 1,677,835     $ 478.0       3,445     $ 1,607,682     $ 466.7       2 %     4 %     2 %

 

At June 30, 2017, we had 3,510 homes in backlog with a total value of $1.68 billion, representing respective increases of 65 homes and $70.2 million from June 30, 2016. The majority of our markets experienced year-over-year growth in the dollar value of backlog primarily as a result of strong sales activity over the last twelve months. Backlog in our Maryland and Virginia markets declined from June 30, 2016 as a result of reduced sales activity over the last twelve months, mostly due to lower community count.

 

 
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Homes Completed or Under Construction (WIP lots):

 

   

June 30,

   

%

 
   

2017

   

2016

   

Change

 

Unsold:

                       

Completed

    77       100       (23) %

Under construction

    153       263       (42) %

Total unsold started homes

    230       363       (37) %

Sold homes under construction or completed

    2,547       2,535       0 %

Model homes under construction or completed

    316       289       9 %

Total homes completed or under construction

    3,093       3,187       (3) %

 

Over the past couple of years, we have increased our focus on build-to-order homes and limited the number of unsold homes that we start without a sales contract, giving our customers the best opportunity to personalize their homes. As a result, our supply of unsold homes has declined by 37% year-over-year from June 30, 2016. The decline in unsold homes was partially offset by an increase in model homes, while sold homes under construction was nearly unchanged from the prior year resulting in a 3% decrease in our total homes completed or under construction.

 

Lots Owned and Optioned (including homes completed or under construction):

 

   

June 30, 2017

   

June 30, 2016

         
   

Lots

Owned

   

Lots

Optioned

   

Total

   

Lots

Owned

   

Lots

Optioned

   

Total

   

Total %

Change

 

Arizona

    1,794       553       2,347       1,565       259       1,824       29 %

California

    1,491       502       1,993       1,834       79       1,913       4 %

Nevada

    1,709       907       2,616       2,087       67       2,154       21 %

Washington

    671       49       720       816       35       851       (15) %

West

    5,665       2,011       7,676       6,302       440       6,742       14 %

Colorado

    4,684       1,934       6,618       3,937       1,423       5,360       23 %

Utah

    302       123       425       424       -       424       0 %

Mountain

    4,986       2,057       7,043       4,361       1,423       5,784       22 %

Maryland

    142       69       211       297       168       465       (55) %

Virginia

    283       37       320       498       107       605       (47) %

Florida

    928       916       1,844       1,038       512       1,550       19 %

East

    1,353       1,022       2,375       1,833       787       2,620       (9) %

Total

    12,004       5,090       17,094       12,496       2,650       15,146       13 %

 

Our total owned and optioned lots at June 30, 2017 were 17,094, up 13% from June 30, 2016, due to substantial growth in our optioned lots as a result of our significant land acquisition approval activity over the past two quarters. The decline in lots controlled in our Maryland and Virginia markets is primarily due to reductions in land acquisition activity over the past two years as our recent returns in these markets have been lower than returns we expect to realize. We believe that our total lot supply of approximately 3.1 years (which is based on our last twelve months deliveries and is within our stated strategic range), coupled with our planned acquisition activity, can support deliveries growth in future periods. See "Forward-Looking Statements" below.

 

 
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Financial Services

 

   

Three Months Ended

                   

Six Months Ended

                 
   

June 30,

   

Change

   

June 30,

   

Change

 
   

2017

   

2016

   

Amount

   

%

   

2017

   

2016

   

Amount

   

%

 
    (Dollars in thousands)  

Financial services revenues

     

Mortgage operations

  $ 12,697     $ 10,702     $ 1,995       19 %   $ 24,880     $ 17,572     $ 7,308       42 %

Other

    6,376       5,121       1,255       25 %     12,172       9,268       2,904       31 %

Total financial services revenues

  $ 19,073     $ 15,823     $ 3,250       21 %   $ 37,052     $ 26,840     $ 10,212       38 %
                                                                 

Financial services pretax income

                                                               

Mortgage operations

  $ 7,670     $ 6,445     $ 1,225       19 %   $ 15,236     $ 9,768     $ 5,468       56 %

Other

    4,061       2,607       1,454       56 %     7,504       4,901       2,603       53 %

Total financial services pretax income

  $ 11,731     $ 9,052     $ 2,679       30 %   $ 22,740     $ 14,669     $ 8,071       55 %

 

 For the three and six months ended June 30, 2017, our financial services pretax income was up $2.7 million, or 30%, and $8.1 million, or 55%, respectively, from the same periods in the prior year. The increases in our mortgage operations segment were the result of (1) increases in the dollar value of loans locked, originated, and sold; and (2) higher gains on loans locked and originated. The higher pretax incomes in our other financial services segment for both periods were driven primarily by increased new home deliveries.

 

The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. “Capture rate” is defined as the number of mortgage loans originated by our mortgage operations segment for our homebuyers as a percent of our total home closings.

 

   

Three Months Ended

   

% or

   

Six Months Ended

   

% or

 
   

June 30,

   

Percentage

   

June 30,

   

Percentage

 
   

2017

   

2016

   

Change

   

2017

   

2016

   

Change

 
    (Dollars in thousands)  

Total Originations (including transfer loans):

     

Loans

    887       758       17 %     1,673       1,284       30 %

Principal

  $ 311,109     $ 270,523       15 %   $ 584,455     $ 451,485       29 %

Capture Rate Data:

                                               

Capture rate as % of all homes delivered

    62 %     59 %     3 %     62 %     58 %     4 %

Capture rate as % of all homes delivered (excludes cash sales)

    66 %     63 %     3 %     66 %     61 %     5 %

Mortgage Loan Origination Product Mix:

                                               

FHA loans

    18 %     18 %     0 %     19 %     19 %     0 %

Other government loans (VA & USDA)

    21 %     26 %     (5) %     22 %     25 %     (3) %

Total government loans

    39 %     44 %     (5) %     41 %     44 %     (3) %

Conventional loans

    61 %     56 %     5 %     59 %     56 %     3 %
      100 %     100 %     0 %     100 %     100 %     0 %

Loan Type:

                                               

Fixed rate

    96 %     98 %     (2) %     97 %     98 %     (1) %

ARM

    4 %     2 %     2 %     3 %     2 %     1 %

Credit Quality:

                                               

Average FICO Score

    735       737       (0) %     736       736       0 %

Other Data:

                                               

Average Combined LTV ratio

    82 %     84 %     (2) %     82 %     84 %     (2) %

Full documentation loans

    100 %     100 %     0 %     100 %     100 %     0 %

Loans Sold to Third Parties:

                                               

Loans

    901       679       33 %     1,809       1,304       39 %

Principal

  $ 311,915     $ 235,713       32 %   $ 628,056     $ 449,140       40 %

 

 
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Income Taxes

 

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 34.7% and 36.4% for the three and six months ended June 30, 2017, respectively, compared to 33.5% and 33.4% for the three and six months ended June 30, 2016, respectively. The rates for the three and six months ended June 30, 2017 resulted in income tax expense of $18.0 million and $32.1 million, respectively, compared to income tax expense of $13.5 million and $18.3 million for the same periods in 2016. The year-over-year increase in our effective tax rate for the three months ended June 30, 2017 was primarily the result of our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. For the six months ended June 30, 2017, the year-over-year increase in our effective tax rate was due to the foregoing energy credits matter coupled with an establishment of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realization was more uncertain at the time.

 

 
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. See "Forward-Looking Statements" below.

 

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We use our liquidity and capital resources to: (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, revolving credit facility and mortgage repurchase facility. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.50 billion.

 

We have marketable equity securities that consist primarily of holdings in corporate equities.

 

Capital Resources

 

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½% senior notes due 2024 and our 6% senior notes due 2043; (3) our Revolving Credit Facility and (4) our Mortgage Repurchase Facility (defined below). Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" below.

 

We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility

 

Senior Notes. Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries. We believe that we are in compliance with the representations, warranties and covenants in the senior note indentures.

 

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement has an aggregate commitment of $550 million (the “Commitment”) and was amended on December 18, 2015 to extend the maturity to December 18, 2020. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and the consent of the designated agent and the co-administrative agent. As defined in the Revolving Credit Facility agreement, interest rates on outstanding borrowings are equal to the highest of (1) 0.0% or (2) a specified eurocurrency rate, federal funds effective rate or prime rate, plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

 
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The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the facility agreement. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of June 30, 2017.

 

As of June 30, 2017, we had $15.0 million in borrowings and $32.8 million in letters of credit outstanding under the Revolving Credit Facility, leaving remaining borrowing capacity of $502.2 million.

 

Mortgage Repurchase Facility. HomeAmerican entered into an Amended and Restated Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), effective September 16, 2016. The Mortgage Repurchase Facility amends and restates the prior Master Repurchase Agreement with USBNA dated as of November 12, 2008, as amended, which contained similar terms. The Mortgage Repurchase Facility increases the facility amount from $50 million to $75 million, extends the expiration date to September 15, 2017, adjusts the facility’s sublimits, expands the types of eligible loans, and reduces the facility fee. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on June 28, 2017 from $75 million to $100 million and was effective through July 27, 2017. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $125 million from December 27, 2016 through January 25, 2017. At June 30, 2017 and December 31, 2016, HomeAmerican had $69.1 million and $114.5 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of June 30, 2017.

 

Dividends

 

During the three and six months ended June 30, 2017, we paid dividends of $0.25 per share and $0.50 per share, respectively, compared to $0.24 per share and $0.48 per share for the same periods in the prior year, respectively.

 

MDC Common Stock Repurchase Program

 

At June 30, 2017, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months ended June 30, 2017.

 

 
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Consolidated Cash Flow

  

During the six months ended June 30, 2017, we generated $120.9 million of cash from operating activities, primarily due to (1) net income of $56.1 million, (2) a $43.5 million decrease in mortgage loans held-for-sale, (3) a $10.0 million decrease in our deferred tax asset, (4) an $8.8 million increase in accounts payable and accrued liabilities, and (5) a $5.4 million decrease in trade and other receivables.

 

During the six months ended June 30, 2017, we used $2.0 million of cash for investing activities, primarily attributable to the purchase of $1.4 million in property and equipment.

 

During the six months ended June 30, 2017, we used $63.9 million in cash for financing activities, primarily related to payments of $45.4 million on our mortgage repurchase facility and dividend payments totaling $25.8 million. These amounts were slightly offset by proceeds of $7.3 million from the exercise of stock options.

 

Off-Balance Sheet Arrangements

 

Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At June 30, 2017, we had deposits of $14.5 million in the form of cash and $3.1 million in the form of letters of credit that secured option contracts to purchase 5,090 lots for a total estimated purchase price of $361.4 million.

 

Surety Bonds and Letters of Credit. At June 30, 2017, we had outstanding surety bonds and letters of credit totaling $175.8 million and $64.6 million, respectively, including $31.8 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $24.1 million and $32.3 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

We have made no material guarantees with respect to third-party obligations.

 

 
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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

 

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2016 Annual Report on Form 10-K.

 

OTHER

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

Our cash and investment policy and strategy is to achieve an appropriate investment return while preserving principal and managing risk. Our cash and cash equivalents may include immediately available commercial bank deposits, commercial paper, money market funds, certificates of deposit and time deposits. Our marketable securities consist of holdings in corporate equities, preferred stock and exchange traded funds. The market value and/or income derived from our equity securities can be negatively impacted by a number of market risk factors, including changes in interest rates, general economic conditions and equity markets. As of June 30, 2017, we had marketable securities in unrealized loss positions totaling $0.8 million, against which we recorded impairments totaling $0.1 million during the current quarter. For the remaining marketable securities in unrealized loss positions totaling $0.7 million, there can be no assurances that the cost basis of these securities will be recovered in the future. If we elect to sell, or are otherwise were required to sell these securities, we could be required to record losses if the market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.

 

We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate lock commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at June 30, 2017 had an aggregate principal balance of $110.7 million, all of which were under interest rate lock commitments at an average interest rate of 4.05%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $92.6 million at June 30, 2017, of which $18.6 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.05%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $106.0 million at June 30, 2017.

 

HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 15 and 40 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations and comprehensive income with an offset to either derivative assets or liabilities, depending on the nature of the change.

 

 
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We utilize our Revolving Credit Facility, our Mortgage Repurchase Facility and senior notes in our financing strategy. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but do not affect our earnings or cash flows. We do not have an obligation to prepay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value do not have an impact on our financial position, results of operations or cash flows. For variable rate debt such as our Revolving Credit Facility and Mortgage Repurchase Facility, changes in interest rates generally do not affect the fair value of the outstanding borrowing on the debt facilities, but does affect our earnings and cash flows. See “Forward-Looking Statements” above.

 

Item 4.     Controls and Procedures

 

(a)     Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer (principle executive officer) and the Chief Financial Officer (principal financial officer).  Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

(b) Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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M.D.C. HOLDINGS, INC.

FORM 10-Q

 

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, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of 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 significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2016. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2016, which include the following:

 

 

 

Changes in general economic, real estate and other business conditions may have an adverse effect on the homebuilding and mortgage industries, which could have a negative impact on our business.

 

 

Increased competition levels in the homebuilding and mortgage lending industries could have a negative impact on our homebuilding and mortgage operations.

 

 

If land is not available at reasonable prices or terms, we could be required to scale back our operations in a given market and/or we may operate at lower levels of profitability.

 

 

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

 

 

If mortgage interest rates rise, if down payment requirements are increased, if loan limits are decreased, or if mortgage financing otherwise becomes less available, it could adversely affect our business.

 

 

Expirations, amendments or changes to tax laws, incentives or credits currently available to our customers may negatively impact our business.

 

 

A decline in the market value of our homes or carrying value of our land would have a negative impact on our business.

 

 

Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our business.

 

 

Changes in energy prices may have an adverse effect on the economies in certain markets we operate in and our cost of building homes.

 

 

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on the results of our business.

 

 

Our business is subject to numerous federal, state and local laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.

 

 

In the ordinary course of business, we are required to obtain surety bonds, the unavailability of which could adversely affect our business.

 

 

Decreases in the market value of our investments in marketable securities could have an adverse impact on our business.

 

 

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.

 

 

Repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our business.

 

 

Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

 

 

We are dependent on the services of key employees, and the loss of their services could hurt our business.

 

 
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The interests of certain controlling shareholders may be adverse to investors

 

 

Information technology failures and data security breaches could harm our business.

  

 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company did not repurchase any shares during the three or six months ended June 30, 2017. Additionally, there were no sales of unregistered equity securities during the period.

 

 
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Item 6.

Exhibits

 

10.1

Third Amendment to the M.D.C. Holdings, Inc. 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed April 25, 2017). *

   
10.2 Form of 2017 Performance Share Unit Grant Agreement (2011 Equity Incentive Plan).
   
31.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

____________________

 

* Incorporated by reference

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date:     August 1, 2017

M.D.C. HOLDINGS, INC.

 

(Registrant)

 

 

 

 

 

By:     /s/ Robert N. Martin                                          

 

           Robert N. Martin

 

           Senior Vice President, Chief Financial Officer and Principal Accounting

           Officer (principal financial officer and duly authorized officer)

     

 
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INDEX TO EXHIBITS

 

 

Exhibit  

Number

Description                                                            

 

10.1

Third Amendment to the M.D.C. Holdings, Inc. 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed April 25, 2017). *

   
10.2 Form of 2017 Performance Share Unit Grant Agreement (2011 Equity Incentive Plan).
   
31.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101 The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (iv) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

____________________

 

* Incorporated by reference