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 September 30,2017
For the quarterly period ended March 31, 2019 |
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 |
| ☐ |
| 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 November 1April29, 2019, 201761,51,943,156520,890 shares of M.D.C. Holdings, Inc. common stock were outstanding.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30MARCH 31, 20192017
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ITEM 1. Unaudited Consolidated Financial Statements
September 30, | December 31, | |||||||||||||||
2017 | 2016 | March 31, | December 31, | |||||||||||||
| (Dollars in thousands, except | 2019 | 2018 | |||||||||||||
per share amounts) | (Dollars in thousands, except per | |||||||||||||||
(Unaudited) | share amounts) | |||||||||||||||
ASSETS | ||||||||||||||||
Homebuilding: |
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Cash and cash equivalents | $ | 351,399 | $ | 259,087 | $ | 416,374 | $ | 414,724 | ||||||||
Marketable securities | - | 59,770 | ||||||||||||||
Restricted cash | 8,723 | 3,778 | 8,136 | 6,363 | ||||||||||||
Trade and other receivables | 42,904 | 42,492 | 67,960 | 52,982 | ||||||||||||
Inventories: | ||||||||||||||||
Housing completed or under construction | 969,419 | 874,199 | 950,274 | 952,436 | ||||||||||||
Land and land under development | 863,002 | 884,615 | 1,198,824 | 1,180,558 | ||||||||||||
Total inventories | 1,832,421 | 1,758,814 | 2,149,098 | 2,132,994 | ||||||||||||
Property and equipment, net | 26,304 | 28,041 | 59,765 | 58,167 | ||||||||||||
Operating lease right-of-use asset | 32,604 | - | ||||||||||||||
Deferred tax asset, net | 64,164 | 74,888 | 34,504 | 37,178 | ||||||||||||
Metropolitan district bond securities (related party) | - | 30,162 | ||||||||||||||
Prepaid and other assets | 72,808 | 60,463 | 42,545 | 45,794 | ||||||||||||
Total homebuilding assets | 2,398,723 | 2,317,495 | 2,810,986 | 2,748,202 | ||||||||||||
Financial Services: | ||||||||||||||||
Cash and cash equivalents | 26,419 | 23,822 | 51,556 | 49,052 | ||||||||||||
Marketable securities | 40,221 | 36,436 | 45,767 | 40,879 | ||||||||||||
Mortgage loans held-for-sale, net | 89,804 | 138,774 | 110,810 | 149,211 | ||||||||||||
Other assets | 11,135 | 12,062 | 15,800 | 13,733 | ||||||||||||
Total financial services assets | 167,579 | 211,094 | 223,933 | 252,875 | ||||||||||||
Total Assets | $ | 2,566,302 | $ | 2,528,589 | $ | 3,034,919 | $ | 3,001,077 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Homebuilding: | ||||||||||||||||
Accounts payable | $ | 49,390 | $ | 42,088 | $ | 58,570 | $ | 50,505 | ||||||||
Accrued liabilities | 151,661 | 144,566 | 185,131 | 196,247 | ||||||||||||
Operating lease liability | 33,460 | - | ||||||||||||||
Revolving credit facility | 15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
Senior notes, net | 842,532 | 841,646 | 988,322 | 987,967 | ||||||||||||
Total homebuilding liabilities | 1,058,583 | 1,043,300 | 1,280,483 | 1,249,719 | ||||||||||||
Financial Services: | ||||||||||||||||
Accounts payable and accrued liabilities | 51,697 | 50,734 | 58,874 | 58,543 | ||||||||||||
Mortgage repurchase facility | 65,103 | 114,485 | 84,856 | 116,815 | ||||||||||||
Total financial services liabilities | 116,800 | 165,219 | 143,730 | 175,358 | ||||||||||||
Total Liabilities | 1,175,383 | 1,208,519 | 1,424,213 | 1,425,077 | ||||||||||||
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; 51,933,969 and 51,485,090 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 519 | 515 | ||||||||||||||
Common stock, $0.01 par value; 250,000,000 shares authorized; 61,520,890 and 56,615,352 issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 615 | 566 | ||||||||||||||
Additional paid-in-capital | 995,132 | 983,532 | 1,318,726 | 1,168,442 | ||||||||||||
Retained earnings | 392,442 | 313,952 | 291,365 | 406,992 | ||||||||||||
Accumulated other comprehensive income | 2,826 | 22,071 | ||||||||||||||
Total Stockholders' Equity | 1,390,919 | 1,320,070 | 1,610,706 | 1,576,000 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,566,302 | $ | 2,528,589 | $ | 3,034,919 | $ | 3,001,077 |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | Three Months Ended | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | March 31, | ||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2019 | 2018 | ||||||||||||||||||||||
(Unaudited) | (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||
Home sale revenues | $ | 584,947 | $ | 575,722 | $ | 1,796,046 | $ | 1,541,337 | $ | 647,278 | $ | 607,688 | ||||||||||||
Land sale revenues | 1,340 | 2,290 | 2,938 | 4,930 | ||||||||||||||||||||
Total home and land sale revenues | 586,287 | 578,012 | 1,798,984 | 1,546,267 | ||||||||||||||||||||
Home cost of sales | (485,147 | ) | (481,511 | ) | (1,493,166 | ) | (1,287,373 | ) | (524,552 | ) | (496,632 | ) | ||||||||||||
Land cost of sales | (1,259 | ) | (2,318 | ) | (2,672 | ) | (4,197 | ) | ||||||||||||||||
Inventory impairments | (4,540 | ) | (4,700 | ) | (9,390 | ) | (6,300 | ) | (610 | ) | (550 | ) | ||||||||||||
Total cost of sales | (490,946 | ) | (488,529 | ) | (1,505,228 | ) | (1,297,870 | ) | (525,162 | ) | (497,182 | ) | ||||||||||||
Gross margin | 95,341 | 89,483 | 293,756 | 248,397 | ||||||||||||||||||||
Gross profit | 122,116 | 110,506 | ||||||||||||||||||||||
Selling, general and administrative expenses | (69,102 | ) | (61,904 | ) | (206,109 | ) | (182,621 | ) | (82,261 | ) | (71,341 | ) | ||||||||||||
Interest and other income | 54,548 | 1,869 | 59,722 | 5,358 | 2,391 | 1,859 | ||||||||||||||||||
Other expense | (618 | ) | (1,558 | ) | (1,635 | ) | (2,463 | ) | (1,191 | ) | (563 | ) | ||||||||||||
Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||||||||||
Homebuilding pretax income | 80,169 | 27,675 | 145,683 | 67,737 | 41,055 | 40,461 | ||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||
Revenues | 17,464 | 17,408 | 54,516 | 44,248 | 17,404 | 19,035 | ||||||||||||||||||
Expenses | (8,849 | ) | (7,955 | ) | (25,247 | ) | (21,739 | ) | (8,957 | ) | (8,831 | ) | ||||||||||||
Interest and other income | 925 | 1,035 | 3,142 | 2,648 | 1,264 | 1,020 | ||||||||||||||||||
Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||||||||||
Net gain (loss) on marketable equity securities | 4,840 | (1,153 | ) | |||||||||||||||||||||
Financial services pretax income | 9,511 | 10,377 | 32,251 | 25,046 | 14,551 | 10,071 | ||||||||||||||||||
Income before income taxes | 89,680 | 38,052 | 177,934 | 92,783 | 55,606 | 50,532 | ||||||||||||||||||
Provision for income taxes | (28,517 | ) | (11,693 | ) | (60,651 | ) | (29,948 | ) | (15,056 | ) | (11,768 | ) | ||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | $ | 40,550 | $ | 38,764 | ||||||||||||
Other comprehensive income (loss) related to available for sale securities, net of tax | (23,175 | ) | 1,028 | (19,245 | ) | 3,871 | ||||||||||||||||||
Other comprehensive income | - | - | ||||||||||||||||||||||
Comprehensive income | $ | 37,988 | $ | 27,387 | $ | 98,038 | $ | 66,706 | $ | 40,550 | $ | 38,764 | ||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | $ | 0.66 | $ | 0.64 | ||||||||||||
Diluted | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | $ | 0.64 | $ | 0.63 | ||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | 60,939,364 | 60,340,774 | ||||||||||||||||||
Diluted | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | 62,708,334 | 61,447,563 | ||||||||||||||||||
Dividends declared per share | $ | 0.25 | $ | 0.24 | $ | 0.75 | $ | 0.72 | $ | 0.30 | $ | 0.28 |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
(Dollars in thousands, except share amounts)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
(Unaudited) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 117,283 | $ | 62,835 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Stock-based compensation expense | 3,100 | 6,636 | ||||||
Depreciation and amortization | 4,205 | 3,702 | ||||||
Inventory impairments | 9,390 | 6,300 | ||||||
Other-than-temporary impairment of marketable securities | 211 | 1,045 | ||||||
Gain on sale of marketable securities | (18,122 | ) | (911 | ) | ||||
Gain on sale of metropolitan district bond securities (related party) | (35,847 | ) | - | |||||
Deferred income tax expense | 22,795 | 11,357 | ||||||
Net changes in assets and liabilities: | ||||||||
Restricted cash | (4,945 | ) | (871 | ) | ||||
Trade and other receivables | 119 | (21,679 | ) | |||||
Mortgage loans held-for-sale | 48,970 | (2,319 | ) | |||||
Housing completed or under construction | (101,997 | ) | (229,739 | ) | ||||
Land and land under development | 19,886 | 141,131 | ||||||
Prepaid expenses and other assets | (11,229 | ) | (4,573 | ) | ||||
Accounts payable and accrued liabilities | 15,345 | 18,183 | ||||||
Net cash provided by (used in) operating activities | 69,164 | (8,903 | ) | |||||
Investing Activities: | ||||||||
Purchases of marketable securities | (17,604 | ) | (28,272 | ) | ||||
Sales of marketable securities | 83,315 | 56,873 | ||||||
Proceeds from sale of metropolitan district bond securities (related party) | 44,253 | - | ||||||
Purchases of property and equipment | (1,917 | ) | (3,865 | ) | ||||
Net cash provided by investing activities | 108,047 | 24,736 | ||||||
Financing Activities: | ||||||||
Advances (payments) on mortgage repurchase facility, net | (49,382 | ) | 3,400 | |||||
Dividend payments | (38,793 | ) | (36,763 | ) | ||||
Payments of deferred financing costs | (2,630 | ) | - | |||||
Proceeds from exercise of stock options | 8,503 | - | ||||||
Net cash used in financing activities | (82,302 | ) | (33,363 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 94,909 | (17,530 | ) | |||||
Cash and cash equivalents: | ||||||||
Beginning of period | 282,909 | 180,988 | ||||||
End of period | $ | 377,818 | $ | 163,458 |
Three-Month Period Ended March 31, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Total | |||||||||||||||||||
Balance at December 31, 2018 | 56,615,352 | $ | 566 | $ | 1,168,442 | $ | 406,992 | $ | - | $ | 1,576,000 | |||||||||||||
Cumulative effect of newly adopted accounting standards (Note 2) | - | - | - | (67 | ) | - | (67 | ) | ||||||||||||||||
Balance at January 1, 2019 | 56,615,352 | 566 | 1,168,442 | 406,925 | - | 1,575,933 | ||||||||||||||||||
Net Income | - | - | - | 40,550 | - | 40,550 | ||||||||||||||||||
Shares issued upon exercise of stock options and awards of restricted stock | 372,344 | 4 | 7,083 | - | - | 7,087 | ||||||||||||||||||
Cash dividends declared | - | - | - | (17,019 | ) | - | (17,019 | ) | ||||||||||||||||
Stock dividend declared | 4,534,908 | 45 | 138,950 | (139,091 | ) | (96 | ) | |||||||||||||||||
Stock-based compensation expense | - | - | 4,251 | - | - | 4,251 | ||||||||||||||||||
Forfeiture of restricted stock | (1,714 | ) | - | - | - | - | - | |||||||||||||||||
Balance at March 31, 2019 | 61,520,890 | $ | 615 | $ | 1,318,726 | $ | 291,365 | $ | - | $ | 1,610,706 |
Three-Month Period Ended March 31, 2018 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Total | |||||||||||||||||||
Balance at December 31, 2017 | 56,123,228 | $ | 561 | $ | 1,144,570 | $ | 258,164 | $ | 3,992 | $ | 1,407,287 | |||||||||||||
Cumulative effect of newly adopted accounting standards | - | - | - | 5,766 | (3,992 | ) | 1,774 | |||||||||||||||||
Balance at January 1, 2018 | 56,123,228 | 561 | 1,144,570 | 263,930 | - | 1,409,061 | ||||||||||||||||||
Net Income | - | - | - | 38,764 | - | 38,764 | ||||||||||||||||||
Shares issued upon exercise of stock options and awards of restricted stock | 97,783 | 1 | 281 | - | - | 282 | ||||||||||||||||||
Cash dividends declared | - | - | - | (16,865 | ) | - | (16,865 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 1,251 | - | - | 1,251 | ||||||||||||||||||
Forfeiture of restricted stock | (1,368 | ) | - | - | - | - | - | |||||||||||||||||
Balance at March 31, 2018 | 56,219,643 | $ | 562 | $ | 1,146,102 | $ | 285,829 | $ | - | $ | 1,432,493 |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 40,550 | $ | 38,764 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Stock-based compensation expense | 4,251 | 1,251 | ||||||
Depreciation and amortization | 4,878 | 4,636 | ||||||
Inventory impairments | 610 | 550 | ||||||
Net (gain) loss on marketable equity securities | (4,840 | ) | 1,153 | |||||
Amortization of discount / premiums on marketable debt securities, net | - | (182 | ) | |||||
Deferred income tax expense | 2,696 | 423 | ||||||
Net changes in assets and liabilities: | ||||||||
Trade and other receivables | (13,771 | ) | (3,261 | ) | ||||
Mortgage loans held-for-sale, net | 38,401 | 24,956 | ||||||
Housing completed or under construction | 2,137 | (65,378 | ) | |||||
Land and land under development | (18,496 | ) | (71,552 | ) | ||||
Prepaid and other assets | 1,085 | 389 | ||||||
Accounts payable and accrued liabilities | (3,153 | ) | 6,765 | |||||
Net cash provided by (used in) operating activities | 54,348 | (61,486 | ) | |||||
Investing Activities: | ||||||||
Purchases of marketable securities | (4,785 | ) | (8,761 | ) | ||||
Sales of marketable securities | 4,737 | 8,700 | ||||||
Purchases of property and equipment | (6,386 | ) | (6,316 | ) | ||||
Net cash used in investing activities | (6,434 | ) | (6,377 | ) | ||||
Financing Activities: | ||||||||
Payments on mortgage repurchase facility, net | (31,959 | ) | (22,214 | ) | ||||
Dividend payments | (17,115 | ) | (16,865 | ) | ||||
Proceeds from exercise of stock options | 7,087 | 282 | ||||||
Net cash used in financing activities | (41,987 | ) | (38,797 | ) | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 5,927 | (106,660 | ) | |||||
Cash, cash equivalents and restricted cash: | ||||||||
Beginning of period | 470,139 | 514,240 | ||||||
End of period | $ | 476,066 | $ | 407,580 | ||||
Reconciliation of cash, cash equivalents and restricted cash: | ||||||||
Homebuilding: | ||||||||
Cash and cash equivalents | $ | 416,374 | $ | 352,868 | ||||
Restricted cash | 8,136 | 6,198 | ||||||
Financial Services: | ||||||||
Cash and cash equivalents | 51,556 | 48,514 | ||||||
Total cash, cash equivalents and restricted cash | $ | 476,066 | $ | 407,580 |
The accompanying Notes toare an integral part of these Unaudited Consolidated Financial StatementsStatements.
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 September 30, 2017 March 31, 2019 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-K10-K for the year ended December 31, 2016.2018.
On November 21, 2016, MDC’sJanuary 28, 2019, MDC’s board of directors declared a 5%an 8% stock dividend that was distributed on December 20, 2016 February 28, 2019 to shareholders of record on December 6, 2016. February 14, 2019. 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,“may,” “will,“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-Q10-K, 10-Q and 8-K8-K should be considered.
Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.
2. | Recently Issued Accounting Standards |
In May 2014, the FinancialAdoption of New Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2014-09,2016-02, Revenue from Contracts with CustomersLeases ("(“ASU 2014-09"2016-02”) and createdis codified in ASC Topic 606 (“842, Leases (“ASC 606”842”), 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. We intend to adopt the new standard under the modified retrospective approach in the 2018first quarter.
Although we are still in the process of evaluating our contracts and updating our accounting policies, we do not believe the adoption of. ASC 606 will have a material impact on the amount or timing of our recognition of revenues. There are certain markets where we are unable to complete certain performance obligations (generally landscaping) at the time of closing due to weather. Based on ASC 606, we have concluded that we will defer revenue and the related cost of sales specific to the unfulfilled performance obligations until it is delivered to the homeowner, which is different than our842 supersedes current accounting treatment. We anticipate that these adjustments to revenue and cost of sales will be immaterial each quarter. ASC 606 also will impact our accounting for land sales. Currently we include the proceeds from land sales in land sale revenues in the homebuilding section of our consolidated statements of operations and comprehensive income and include the associated costs in land cost of sales. Under ASC 606, we have concluded that the entities that we typically sell land to will likely not meet the definition of a customer. In those instances in which our land is sold to a non-customer, our gain (loss) from the sale of the land will now be included in interest and other income in the homebuilding section of our consolidated statements of operations and comprehensive income. However, these sales are infrequent and, as such, each contract and the classification of the transaction will be evaluated when executed.
In addition, ASU 2014-09eliminates thelease guidance in ASC Topic 970,Real Estate, that currently prescribes the accounting for costs incurred to sell real estate projects. We will apply the new guidance in ASC Topic 340-40,Other Assets840 and Deferred Costs — Contracts With Customers (“ASC 340-40), to these costs. Under ASC 340-40, incremental costs of obtaining a contract with a customer (i.e., costs that would not have been incurred if the contract had not been obtained) will be recognized as an asset only if we expect to recover them. We are still evaluating the accounting for marketing costs under ASC 340-40, but have concluded that marketing costs that were previously capitalized to a deferred marketing asset will now either be expensed as incurred or will be capitalized to fixed assets and amortized over the life of the community. As a result of this change, the timing of recognition and classification of certain marketing costs will change from the current accounting treatment. We are continuing to evaluate the exact dollar impact ASU 2014-09 will have on recording revenue and our marketing costs in our consolidated financial statements and related disclosures.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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. As discussed below, during the 2017third quarter, we sold a significant portion of our investments in equity securities, but there is a possibility we will purchase additional equity securities in the future. If we do have a material amount of investments in equity securities after the date of adoption, we 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.
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 virtuallysubstantially all leases. The lease 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 assimilarly calculated and then adjusted for initial direct costs. In addition, ASU 2016-02ASC 842 expands the disclosure requirements for lessees. Upon adoption, we will be required to record a lease assetincrease the transparency and lease liability related to our operatingcomparability of the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for our interim and annual reporting periods beginning On January 1, 2019, and is to be appliedwe adopted ASC 842 using athe modified retrospective transition method. Early adoption is permitted. We do not planelected available practical expedients permitted under the transition guidance within the new standard, which among other items, allowed the Company to early adoptcarry forward its historical lease classification and not reassess existing leases under the guidancenew definition of a lease in ASC 842. In addition, we will account for lease and we are currently evaluating the impact the update will have on our consolidated financial statements and related disclosures.non-lease components as a single lease component.
In March 2016, Adoption of ASC 842 resulted in the FASB issued ASU 2016-09,Compensation - Stock Compensation: Improvementsrecording of additional net lease assets and lease liabilities of $34.2 million and $34.3 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718,Compensation – Stock Compensation (“ASC 718”).retained earnings. 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 2017first quarter. The primarydid not materially 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 nine months ended September 30, 2017, we recognized an excess tax deficiency of $0.0 million and an excess tax benefit of $0.1 million, respectively, in our tax provision for each period. Furthermore, as of September 30, 2017, we had options covering approximately 567,000 shares (1) with exercise prices above the MDC closing share price at September 30, 2017 and (2) that will have their ability to exercise expire at some point during the 2017fourth 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 ofor consolidated 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 for the year ending December 31, 2017.flows.
Accounting Standards Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments—Credit Losses (Topic 326)326):Measurement of Credit Losses on Financial Instruments(“ (“ASU 2016-13”2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-132016-13 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 2016-132016-13 is effective for our interim and annual reporting periods beginning January 1, 2021, 2020, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-132016-13 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated 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 statement of cash flows 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 statement of cash flows upon adoption.
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 (“CEO”) and the Chief Operating Officer (“COO”).
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)(1) economic characteristics; (2)(2) housing products; (3)(3) class of homebuyer; (4)(4) regulatory environments; and (5)(5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:
● | West (Arizona, California, Nevada, Washington and |
● | Mountain (Colorado and Utah) |
● | East |
Our financial services business consists of the operations of the following operating segments: (1)(1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2)(2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3)(3) StarAmerican Insurance Ltd. (“StarAmerican”); (4)(4) American Home Insurance Agency, Inc.; and (5)(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)(1) consolidated revenue; (2)(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)(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 revenues for our homebuilding and financial services operations:
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
| (Dollars in thousands) | |||||||
Homebuilding | ||||||||
West | $ | 369,558 | $ | 319,509 | ||||
Mountain | 209,192 | 208,632 | ||||||
East | 68,528 | 79,547 | ||||||
Total homebuilding revenues | $ | 647,278 | $ | 607,688 | ||||
Financial Services | ||||||||
Mortgage operations | $ | 10,174 | $ | 12,696 | ||||
Other | 7,230 | 6,339 | ||||||
Total financial services revenues | $ | 17,404 | $ | 19,035 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The following table summarizes home and land sale revenues for our homebuilding operations and revenues for our financial services operations.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 326,804 | $ | 284,589 | $ | 959,641 | $ | 745,995 | ||||||||
Mountain | 167,066 | 192,876 | 564,558 | 521,034 | ||||||||||||
East | 92,417 | 100,547 | 274,785 | 279,238 | ||||||||||||
Total homebuilding revenues | $ | 586,287 | $ | 578,012 | $ | 1,798,984 | $ | 1,546,267 | ||||||||
Financial Services | ||||||||||||||||
Mortgage operations | $ | 11,176 | $ | 11,294 | $ | 36,056 | $ | 28,866 | ||||||||
Other | 6,288 | 6,114 | 18,460 | 15,382 | ||||||||||||
Total financial services revenues | $ | 17,464 | $ | 17,408 | $ | 54,516 | $ | 44,248 |
The following table summarizes pretax income (loss) for our homebuilding and financial services operations:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||
West | $ | 17,746 | $ | 18,392 | $ | 54,335 | $ | 43,830 | $ | 33,200 | $ | 24,373 | ||||||||||||
Mountain | 18,326 | 18,856 | 61,097 | 49,688 | 21,714 | 24,185 | ||||||||||||||||||
East | 2,613 | (2,267 | ) | 9,989 | 3,600 | 1,473 | 3,375 | |||||||||||||||||
Corporate | 41,484 | (7,306 | ) | 20,262 | (29,381 | ) | (15,332 | ) | (11,472 | ) | ||||||||||||||
Total homebuilding pretax income | $ | 80,169 | $ | 27,675 | $ | 145,683 | $ | 67,737 | $ | 41,055 | $ | 40,461 | ||||||||||||
Financial Services | ||||||||||||||||||||||||
Mortgage operations | $ | 5,857 | $ | 6,723 | $ | 21,093 | $ | 16,491 | $ | 4,993 | $ | 7,520 | ||||||||||||
Other | 3,654 | 3,654 | 11,158 | 8,555 | 9,558 | 2,551 | ||||||||||||||||||
Total financial services pretax income | $ | 9,511 | $ | 10,377 | $ | 32,251 | $ | 25,046 | $ | 14,551 | $ | 10,071 | ||||||||||||
Total pretax income | $ | 89,680 | $ | 38,052 | $ | 177,934 | $ | 92,783 | $ | 55,606 | $ | 50,532 |
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.
March 31, | December 31, | |||||||||||||||
September 30, | December 31, | 2019 | 2018 | |||||||||||||
2017 | 2016 | (Dollars in thousands) | ||||||||||||||
Homebuilding assets | (Dollars in thousands) | |||||||||||||||
West | $ | 1,052,795 | $ | 1,035,033 | $ | 1,307,761 | $ | 1,301,374 | ||||||||
Mountain | 677,721 | 571,139 | 818,451 | 793,150 | ||||||||||||
East | 217,238 | 256,816 | 170,670 | 169,485 | ||||||||||||
Corporate | 450,969 | 454,507 | 514,104 | 484,193 | ||||||||||||
Total homebuilding assets | $ | 2,398,723 | $ | 2,317,495 | $ | 2,810,986 | $ | 2,748,202 | ||||||||
Financial services assets | ||||||||||||||||
Mortgage operations | $ | 102,704 | $ | 153,182 | $ | 123,139 | $ | 159,677 | ||||||||
Other | 64,875 | 57,912 | 100,794 | 93,198 | ||||||||||||
Total financial services assets | $ | 167,579 | $ | 211,094 | $ | 223,933 | $ | 252,875 | ||||||||
Total assets | $ | 2,566,302 | $ | 2,528,589 | $ | 3,034,919 | $ | 3,001,077 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
4. Earnings Per Share
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-classtwo-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-classtwo-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-classtwo-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 shares of unvested restricted stock held by participating security holders. 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 260.260. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations.
Three Months Ended | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | March 31, | ||||||||||||||||||||||
September 30, | September 30, | 2019 | 2018 | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | (Dollars in thousands, except per | ||||||||||||||||||||
(Dollars in thousands, except per share amounts) | share amounts) | |||||||||||||||||||||||
Numerator | ||||||||||||||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | $ | 40,550 | $ | 38,764 | ||||||||||||
Less: distributed earnings allocated to participating securities | (68 | ) | (45 | ) | (196 | ) | (124 | ) | (111 | ) | (105 | ) | ||||||||||||
Less: undistributed earnings allocated to participating securities | (244 | ) | (49 | ) | (375 | ) | (83 | ) | (139 | ) | (124 | ) | ||||||||||||
Net income attributable to common stockholders (numerator for basic earnings per share) | 60,851 | 26,265 | 116,712 | 62,628 | 40,300 | 38,535 | ||||||||||||||||||
Add back: undistributed earnings allocated to participating securities | 244 | 49 | 375 | 83 | 139 | 124 | ||||||||||||||||||
Less: undistributed earnings reallocated to participating securities | (240 | ) | (49 | ) | (369 | ) | (83 | ) | (136 | ) | (122 | ) | ||||||||||||
Numerator for diluted earnings per share under two class method | $ | 60,855 | $ | 26,265 | $ | 116,718 | $ | 62,628 | $ | 40,303 | $ | 38,537 | ||||||||||||
Denominator | ||||||||||||||||||||||||
Weighted-average common shares outstanding | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | 60,939,364 | 60,340,774 | ||||||||||||||||||
Add: dilutive effect of stock options | 950,758 | 163,314 | 745,391 | 10,921 | 1,217,846 | 1,106,789 | ||||||||||||||||||
Add: dilutive effect of performance stock units | 551,124 | - | ||||||||||||||||||||||
Denominator for diluted earnings per share under two class method | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | 62,708,334 | 61,447,563 | ||||||||||||||||||
Basic Earnings Per Common Share | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | $ | 0.66 | $ | 0.64 | ||||||||||||
Diluted Earnings Per Common Share | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | $ | 0.64 | $ | 0.63 |
Diluted EPS for the three and nine months ended September 30, 2017 March 31, 2019 and 2018 excluded options to purchase approximately 0.7 million0.5 and 1.10.1 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 5.3 million and 6.4 million shares, respectively. The year-over-year decreases for the three and nine months ended September 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| Accumulated Other Comprehensive Income |
The following table sets forth our changes in accumulated other comprehensive income (“AOCI”):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Unrealized gains on available-for-sale marketable securities 1 : | ||||||||||||||||
Beginning balance | $ | 11,176 | $ | 5,344 | $ | 7,730 | $ | 3,657 | ||||||||
Other comprehensive income before reclassifications | 1,778 | 1,156 | 6,201 | 2,559 | ||||||||||||
Amounts reclassified from AOCI 2 | (10,128 | ) | (201 | ) | (11,105 | ) | 83 | |||||||||
Ending balance | $ | 2,826 | $ | 6,299 | $ | 2,826 | $ | 6,299 | ||||||||
Unrealized gains on available-for-sale metropolitan district bond securities 1 : | ||||||||||||||||
Beginning balance | $ | 14,825 | $ | 13,214 | $ | 14,341 | $ | 12,058 | ||||||||
Other comprehensive income before reclassifications | 7,400 | 73 | 7,884 | 1,229 | ||||||||||||
Amounts reclassified from AOCI | (22,225 | ) | - | (22,225 | ) | - | ||||||||||
Ending balance | $ | - | $ | 13,287 | $ | - | $ | 13,287 | ||||||||
Total ending AOCI | $ | 2,826 | $ | 19,586 | $ | 2,826 | $ | 19,586 |
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Beginning balance 1 | $ | - | $ | 3,992 | ||||
Adoption of accounting standards | - | (3,992 | ) | |||||
Ending balance | $ | - | $ | - |
|
|
|
| |||||||
(1) Amounts net-of-tax. |
The following table sets forthDuring the activityfirst quarter of 2018, an election was made to reclassify the income tax effects of the Tax Cuts and Jobs Act related to reclassifications out ofnet unrealized gains on equity investments from accumulated other comprehensive income related to available for sale securities:retained earnings.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Affected Line Item in the Statements of Operations | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding: Interest and other income | $ | 52,211 | $ | 555 | $ | 53,622 | $ | 817 | ||||||||
Homebuilding: Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||
Financial services: Interest and other income | - | 94 | 347 | 94 | ||||||||||||
Financial services: Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||
Income before income taxes | 52,182 | 323 | 53,758 | (134 | ) | |||||||||||
Provision for income taxes | (19,829 | ) | (122 | ) | (20,428 | ) | 51 | |||||||||
Net income | $ | 32,353 | $ | 201 | $ | 33,330 | $ | (83 | ) |
| 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-tierthree-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.
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 | Fair Value | |||||||||||||||||||||
Financial Instrument | Hierarchy | September 30, 2017 | December 31, 2016 | Hierarchy | March 31, 2019 | December 31, 2018 | ||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||
Marketable equity securities (available-for-sale) | Level 1 | $ | 40,221 | $ | 96,206 | |||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||||
Debt securities (available-for-sale) | Level 1 | $ | 34,860 | $ | 34,866 | |||||||||||||||||
Marketable securities | ||||||||||||||||||||||
Equity securities | Level 1 | $ | 45,767 | $ | 40,879 | |||||||||||||||||
Mortgage loans held-for-sale, net | Level 2 | $ | 89,804 | $ | 138,774 | Level 2 | $ | 110,810 | $ | 149,211 | ||||||||||||
Metropolitan district bond securities (related party) (available-for-sale) | Level 3 | $ | - | $ | 30,162 |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of September 30, 2017 March 31, 2019 and December 31, 2016.2018.
Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), 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 Equity securities. As of September 30, 2017 and December 31, 2016, we held marketableOur equity securities which consist of holdings in corporate equities, preferredcommon stock and exchange traded funds. As of September 30, 2017 March 31, 2019 and December 31, 2016, 2018, all of our equity securities were recorded at fair value with all changes in fair value recorded to net gain (loss) on marketable equity securities in the financial services section of our consolidated statements of operations and comprehensive income.
Debt securities. Our debt securities consist of U.S. government securities. As of March 31, 2019 and December 31, 2018, all of our debt 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 anany 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 nine months ended September 30, 2017, we recorded pretax OTTI’s of $0.0 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 $1.0 million, respectively.
The following tables set forth the cost and estimated fair value of our available-for-sale marketableavailable for sale debt securities:
September 30, 2017 | ||||||||||||||||
Cost Basis | OTTI | Net Cost Basis | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding equity securities | $ | - | $ | - | $ | - | $ | - | ||||||||
Financial services equity securities | 36,304 | (366 | ) | 35,938 | 40,221 | |||||||||||
Total marketable equity securities | $ | 36,304 | $ | (366 | ) | $ | 35,938 | $ | 40,221 |
March 31, 2019 | ||||||||||||||||
Amortized Cost Basis | OTTI | Net Amortized Cost | Fair Value | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Financial Services | ||||||||||||||||
Cash and cash equivalents | ||||||||||||||||
Debt securities | $ | 34,860 | $ | - | $ | 34,860 | $ | 34,860 |
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 |
December 31, 2018 | ||||||||||||||||
Amortized Cost Basis | OTTI | Net Amortized Cost | Fair Value | |||||||||||||
Financial Services | ||||||||||||||||
Cash and cash equivalents | ||||||||||||||||
Debt securities | $ | 34,866 | $ | - | $ | 34,866 | $ | 34,866 |
As of September 30, 2017 and December 31, 2016, our marketable equity securities were in net unrealized gain positions totaling $4.3 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 $0.6 million and $0.5 million as of September 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 September 30, 2017 is other-than-temporary.
M.D.C. HOLDINGS, INC.
NotesThe following table reconciles the net gain (loss) recognized during the three months ended March 31, 2019 and 2018 on equity securities to Unaudited Consolidated Financial Statements
the unrealized gain (loss) recognized during the periods on equity securities still held at the reporting date.
September 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 | $ | (615 | ) | $ | 1,384 | 5 | $ | (457 | ) | $ | 6,045 |
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Net gain (loss) recognized during the period on equity securities | $ | 4,840 | $ | (1,153 | ) | |||
Less: Net gain recognized during the period on equity securities sold during the period | (237 | ) | (96 | ) | ||||
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date | $ | 4,603 | $ | (1,057 | ) |
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross realized gains on sales of available-for-sale securities | $ | 16,577 | $ | 740 | $ | 18,365 | $ | 2,210 | ||||||||
Gross realized losses on sales of available-for-sale securities | (213 | ) | (91 | ) | (243 | ) | (1,299 | ) | ||||||||
Net realized gain on sales of available-for-sale securities | $ | 16,364 | $ | 649 | $ | 18,122 | $ | 911 |
Mortgage loans held-for-sale, net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1)(1) mortgage loans held-for-sale that are under commitments to sell and (2)(2) mortgage loans held-for-sale that are not under commitments to sell. At September 30, 2017 March 31, 2019 and December 31, 2016, 2018, we had $75.3$96.2 million and $96.2$130.8 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 September 30, 2017 March 31, 2019 and December 31, 2016, 2018, we had $14.5$14.6 million and $42.6$18.5 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 nine months ended September 30, 2017, March 31, 2019, we recorded net gains on the sales of mortgage loans of $9.8$11.7 million, and $28.5 million, respectively, compared to $10.0 million and $22.5$9.0 million for the same periodsperiod 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. During the 2017third quarter, we sold the Metro Bonds for net proceeds of $44.3 million. With a cost basis of $8.4 million, we recorded a realized gain of $35.8 million, which is included in interest and other income in the homebuilding section of our consolidated statement of operations and comprehensive income.year.
Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 1819 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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.
September 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
5⅝% Senior Notes due February 2020, net | $ | 247,613 | $ | 268,113 | $ | 246,915 | $ | 265,611 | ||||||||
5½% Senior Notes due January 2024, net | 248,535 | 270,250 | 248,391 | 258,800 | ||||||||||||
6% Senior Notes due January 2043, net | 346,384 | 340,423 | 346,340 | 297,087 | ||||||||||||
Total | $ | 842,532 | $ | 878,786 | $ | 841,646 | $ | 821,498 |
March 31, 2019 | December 31, 2018 | |||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
$250 Million 5⅝% Senior Notes due February 2020, net | $ | 249,109 | $ | 254,304 | $ | 248,850 | $ | 253,413 | ||||||||
$250 Million 5½% Senior Notes due January 2024, net | 248,841 | 258,479 | 248,789 | 242,983 | ||||||||||||
$500 Million 6% Senior Notes due January 2043, net | 490,372 | 434,117 | 490,328 | 386,552 | ||||||||||||
Total | $ | 988,322 | $ | 946,900 | $ | 987,967 | $ | 882,948 |
7. | Inventories |
The following table sets forth, by reportable segment, information relating to our homebuilding inventories:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Housing completed or under construction: | ||||||||||||||||
West | $ | 489,753 | $ | 470,503 | $ | 516,900 | $ | 521,960 | ||||||||
Mountain | 343,394 | 277,922 | 356,177 | 347,738 | ||||||||||||
East | 136,272 | 125,774 | 77,197 | 82,738 | ||||||||||||
Subtotal | 969,419 | 874,199 | 950,274 | 952,436 | ||||||||||||
Land and land under development: | ||||||||||||||||
West | 489,758 | 499,186 | 699,704 | 705,591 | ||||||||||||
Mountain | 305,953 | 271,252 | 420,155 | 402,657 | ||||||||||||
East | 67,291 | 114,177 | 78,965 | 72,310 | ||||||||||||
Subtotal | 863,002 | 884,615 | 1,198,824 | 1,180,558 | ||||||||||||
Total inventories | $ | 1,832,421 | $ | 1,758,814 | $ | 2,149,098 | $ | 2,132,994 |
Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes.homes. Costs capitalized to land and land under development primarily include: (1)(1) land costs; (2)(2) land development costs; (3)(3) entitlement costs; (4)(4) capitalized interest; (5)(5) engineering fees; and (6)(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)(1) land costs transferred from land and land under development; (2)(2) direct construction costs associated with a house; (3)(3) real property taxes, engineering fees, permits and other fees; (4)(4) capitalized interest; and (5)(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“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 currentlycurrently being offered for sale and lot size; and
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known or probable events indicating that the carrying value may not be recoverable.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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’ssubdivision’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, we measure it 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.studies, which are considered Level 3 inputs. 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.
Impairments of homebuilding inventory by segment for the three and nine months ended September 30, 2017 March 31, 2019 and 20162018 are shown in the table below.
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
West | $ | 1,885 | $ | - | $ | 5,985 | $ | 1,400 | $ | - | $ | 375 | ||||||||||||
Mountain | 370 | - | 370 | - | 400 | 175 | ||||||||||||||||||
East | 2,285 | 4,700 | 3,035 | 4,900 | 210 | - | ||||||||||||||||||
Total inventory impairments | $ | 4,540 | $ | 4,700 | $ | 9,390 | $ | 6,300 | $ | 610 | $ | 550 |
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 | Inventory | Fair Value of After Impairments | Number of | Discount Rate | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||
March 31, 2017 | 33 | $ | 4,850 | $ | 19,952 | 2 | 12% | to | 18% | |||||||||||||
June 30, 2017 | 35 | $ | - | $ | - | - | N/A | |||||||||||||||
September 30, 2017 | 33 | $ | 4,540 | $ | 52,190 | 9 | 10% | to | 15% | |||||||||||||
March 31, 2016 | 14 | $ | - | $ | - | - | N/A | |||||||||||||||
June 30, 2016 | 17 | $ | 1,600 | $ | 6,415 | 2 | 12% | to | 15% | |||||||||||||
September 30, 2016 | 25 | $ | 4,700 | $ | 12,295 | 2 | 15% | to | 18% |
Impairment Data | Quantitative Data | |||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of After Impairments | Number of | Discount Rate | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
March 31, 2019 | 16 | $ | 610 | $ | 10,476 | 2 | N/A | |||||||||||||
March 31, 2018 | 24 | $ | 550 | $ | 5,223 | 2 | 12 | % |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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 | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Homebuilding interest incurred | $ | 13,212 | $ | 13,187 | $ | 39,594 | $ | 39,511 | $ | 16,031 | $ | 15,625 | ||||||||||||
Less: Interest capitalized | (13,212 | ) | (13,187 | ) | (39,594 | ) | (39,511 | ) | (16,031 | ) | (15,625 | ) | ||||||||||||
Homebuilding interest expensed | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Interest capitalized, beginning of period | $ | 62,091 | $ | 77,150 | $ | 68,085 | $ | 77,541 | $ | 54,845 | $ | 57,541 | ||||||||||||
Plus: Interest capitalized during period | 13,212 | 13,187 | 39,594 | 39,511 | 16,031 | 15,625 | ||||||||||||||||||
Less: Previously capitalized interest included in home and land cost of sales | (15,087 | ) | (15,922 | ) | (47,463 | ) | (42,637 | ) | (13,929 | ) | (14,428 | ) | ||||||||||||
Interest capitalized, end of period | $ | 60,216 | $ | 74,415 | $ | 60,216 | $ | 74,415 | $ | 56,947 | $ | 58,738 |
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We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters, and are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and no variable lease payments, except for common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.
The following table sets forthproperty related lease for the componentsCompany’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.
Operating lease expense is included as a component of selling, general and administrative expenses and expenses in the homebuilding prepaid and other assets:financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Deferred marketing costs | $ | 37,178 | $ | 35,313 | ||||
Land option deposits | 16,277 | 8,683 | ||||||
Goodwill | 6,008 | 6,008 | ||||||
Prepaid expenses | 6,011 | 4,735 | ||||||
Deferred debt issuance costs on revolving credit facility, net | 6,139 | 4,340 | ||||||
Other | 1,195 | 1,384 | ||||||
Total | $ | 72,808 | $ | 60,463 |
Three Months Ended | ||||
March 31, 2019 | ||||
(Dollars in thousands) | ||||
Operating lease cost 1 | $ | 1,980 | ||
Less: Sublease income (Note 20) | (37 | ) | ||
Net lease cost | $ | 1,943 |
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1 Includes variable lease costs, which are immaterial. |
The following table sets forthSupplemental cash flow information relatingrelated to homebuilding accrued liabilities:leases was as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Customer and escrow deposits | $ | 37,578 | $ | 27,183 | ||||
Warranty accrual | 20,725 | 20,678 | ||||||
Accrued compensation and related expenses | 27,624 | 27,830 | ||||||
Accrued interest | 11,031 | 23,234 | ||||||
Construction defect claim reserves | 7,480 | 8,750 | ||||||
Land development and home construction accruals | 6,212 | 8,695 | ||||||
Other accrued liabilities | 41,011 | 28,196 | ||||||
Total accrued liabilities | $ | 151,661 | $ | 144,566 |
Three Months Ended | ||||
March 31, 2019 | ||||
| (Dollars in thousands) | |||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 1,771 | ||
Leased assets obtained in exchange for new operating lease liabilities | $ | 1,477 |
Supplemental cash flow information related to non-cash transactions also includes the recognition of operating lease right-of-use assets of $33.5 million and operating lease liabilities of $34.3 million upon adoption of ASC 842.
Weighted-average remaining lease term and discount rate for operating leases were as follows:
March 31, 2019 | ||||
Weighted-average remaining lease term (in years) | 6.8 | |||
Weighted-average discount rate | 5.5 | % |
M.D.C. HOLDINGS, INC.Maturities of operating lease liabilities were as follows:
Notes
Year Ended | ||||
December 31, | ||||
(Dollars in thousands) | ||||
2019 (excluding the three months ended March 31, 2019) | $ | 5,315 | ||
2020 | 6,317 | |||
2021 | 6,066 | |||
2022 | 5,752 | |||
2023 | 5,148 | |||
Thereafter | 13,118 | |||
Total operating lease payments 1 | $ | 41,716 | ||
Less: Interest | 7,133 | |||
Present value of operating lease liabilities 2 | $ | 34,583 |
__________________________________________________ |
1 Operating lease payments exclude $0.6 million of legally binding lease payments for leases signed but not yet commenced. |
2 Financial services operating lease liabilities of $1.1 million are included as a component of accrued liabilities in the financial services section of our consolidated balance sheet at March 31, 2019. |
10. | Homebuilding Prepaid and Other Assets |
The following table sets forth the components of homebuilding prepaid and other assets:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Land option deposits | $ | 21,951 | $ | 23,805 | ||||
Goodwill | 6,008 | 6,008 | ||||||
Prepaid expenses | 6,614 | 7,324 | ||||||
Deferred debt issuance costs on revolving credit facility, net | 7,279 | 7,662 | ||||||
Other | 693 | 995 | ||||||
Total | $ | 42,545 | $ | 45,794 |
11. | Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities |
The following table sets forth information relating to Unaudited Consolidated Financial Statementshomebuilding accrued liabilities:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Customer and escrow deposits | $ | 36,986 | $ | 34,463 | ||||
Warranty accrual | 29,992 | 28,262 | ||||||
Accrued compensation and related expenses | 22,438 | 39,459 | ||||||
Accrued interest | 13,281 | 27,734 | ||||||
Construction defect claim reserves | 8,367 | 8,464 | ||||||
Land development and home construction accruals | 9,064 | 8,683 | ||||||
Income taxes payable | 18,337 | 6,245 | ||||||
Other accrued liabilities | 46,666 | 42,937 | ||||||
Total accrued liabilities | $ | 185,131 | $ | 196,247 |
The following table sets forth information relating to financial services accounts payable and accrued liabilities:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Insurance reserves | $ | 43,016 | $ | 42,204 | $ | 47,852 | $ | 46,844 | ||||||||
Accounts payable and other accrued liabilities | 8,681 | 8,530 | 11,022 | 11,699 | ||||||||||||
Total accounts payable and accrued liabilities | $ | 51,697 | $ | 50,734 | $ | 58,874 | $ | 58,543 |
1 | Warranty Accrual |
Our homes are sold with limited third-partythird-party warranties and, under our agreement with the issuer of the third-partythird-party warranties, we are responsible for performing all of the work for the firsttwo 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.
The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three and nine months ended September 30, 2017 March 31, 2019 and 2016.2018. For both the three and nine months ended September 30, 2017, March 31, 2019 and 2018, we recorded adjustments to decreaseincrease our warranty accrual by $0.4 million. The decreases were driven by an adjustment to a specific warranty accrual where we determined that a portion of the previously accrued amount would be covered by insurance. For the three and nine months ended September 30, 2016, we increased our warranty reserve by $1.8$0.9 million and $5.1$3.1 million, respectively. The adjustments maderecorded during 2016the three months ended March 31, 2019 related to homes with structural related issues, while the adjustments recorded during the three months ended March 31, 2018 were due to higher than expected recentgeneral warranty related expenditures.
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 20,965 | $ | 17,217 | $ | 20,678 | $ | 15,328 | $ | 28,262 | $ | 21,909 | ||||||||||||
Expense provisions | 2,448 | 2,390 | 7,691 | 6,147 | 3,348 | 2,598 | ||||||||||||||||||
Cash payments | (2,263 | ) | (2,723 | ) | (7,269 | ) | (7,828 | ) | (2,493 | ) | (2,500 | ) | ||||||||||||
Adjustments | (425 | ) | 1,825 | (375 | ) | 5,062 | 875 | 3,106 | ||||||||||||||||
Balance at end of period | $ | 20,725 | $ | 18,709 | $ | 20,725 | $ | 18,709 | $ | 29,992 | $ | 25,113 |
1 | 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)(1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2)(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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and nine months ended September 30, 2017 March 31, 2019 and 2016.2018. These reserves are included as a component of accrued liabilities in either the financial services orand homebuilding sections of the consolidated balance sheets.
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 49,647 | $ | 46,900 | $ | 50,954 | $ | 45,811 | $ | 55,308 | $ | 52,686 | ||||||||||||
Expense provisions | 2,383 | 1,888 | 6,884 | 5,222 | 2,465 | 2,304 | ||||||||||||||||||
Cash payments, net of recoveries | (1,535 | ) | (635 | ) | (7,343 | ) | (2,880 | ) | (1,554 | ) | (1,595 | ) | ||||||||||||
Balance at end of period | $ | 50,495 | $ | 48,153 | $ | 50,495 | $ | 48,153 | $ | 56,219 | $ | 53,395 |
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 nine months ended September 30, 2017 March 31, 2019 and 20162018 are not necessarily indicative of what future cash payments will be for subsequent periods.
1 | 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 31.8%27.1% and 34.1%23.3% for the three and nine months ended September 30, 2017,March 31, 2019 and 2018, respectively, compared to 30.7% and 32.3% for the three and nine months ended September 30, 2016, respectively. The rates for the three and nine months ended September 30, 2017 resultedresulting in income tax expense of $28.5$15.1 million and $60.7 million, respectively, compared to income tax expense of $11.7 million and $29.9$11.8 million for the same periods, in 2016.respectively. The year-over-year increase in our effective tax rate for the three months ended September 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. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rateMarch 31, 2019 was due to the foregoinga $1.2 million benefit from energy tax credits matter coupled with the establishment of a valuation allowance in the 2017which reduced our 2018 first quarter against certain state net operating loss carryforwards where realizationtax rate. It is currently uncertain as to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was more uncertain atrecorded for the time. These items were somewhat offset by the release of the Metro Bonds valuation allowance discussed above.2019 first quarter.
At September 30, 2017 March 31, 2019 and December 31, 2016 2018 we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $64.2$34.5 million and $74.9$37.2 million, respectively. The valuation allowances were primarily related to various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods coupled with minimal operating activity that existexists in certain states.
1 | Senior Notes |
The carrying value of our senior notes as of September 30, 2017 March 31, 2019 and December 31, 2016, 2018, net of any unamortized debt issuance costs or discount, were as follows:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
5⅝% Senior Notes due February 2020, net | $ | 247,613 | $ | 246,915 | $ | 249,109 | $ | 248,850 | ||||||||
5½% Senior Notes due January 2024, net | 248,535 | 248,391 | 248,841 | 248,789 | ||||||||||||
6% Senior Notes due January 2043, net | 346,384 | 346,340 | 490,372 | 490,328 | ||||||||||||
Total | $ | 842,532 | $ | 841,646 | $ | 988,322 | $ | 987,967 |
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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Subsequent to September 30, 2017, we completed a public offering of an additional $150 million principal amount of our 6% senior notes due 2043. See Note 20 for additional information.
1 | Stock-Based Compensation |
We account for share-based awards in accordance with ASC Topic 718Compensation–Stock Compensation (“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 nine months ended September 30, 2017 March 31, 2019 and 2016:2018:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Stock option grants expense | $ | 391 | $ | 328 | $ | 747 | $ | 5,621 | $ | 255 | $ | 56 | ||||||||||||
Restricted stock awards expense | 445 | 145 | 1,224 | 1,015 | 911 | 744 | ||||||||||||||||||
Performance share units expense | 226 | - | 1,129 | - | 3,085 | 451 | ||||||||||||||||||
Total stock based compensation | $ | 1,062 | $ | 473 | $ | 3,100 | $ | 6,636 | $ | 4,251 | $ | 1,251 |
On May 18, 2015, the Company granted a non-qualified stock option to each of the Chief Executive Officer23, 2018, June 20, 2017 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, onethird 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 2016second quarter. Included in the stock option grant expense for the nine months ended September 30, 2016, shown in the table above, was $5.0 million of stock option grant expense related to these market-based option grants. During the 2017second 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 CEO, the 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”.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%(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.earned (“Threshold Goals”). 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 and 2018, 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 haveeach grant has been provided in the table below.
Threshold Goal | Target Goal | Maximum Goal |
| |||||||||||||||||||||||||||||
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 | Maximum Potential Expense to be Recognized* | ||||||||||||||||||||
CEO |
| July 1, 2016 | July 1, 2015 |
| 61,236 |
| 122,472 |
| 244,944 |
| $ | 4,815 | ||||||||||||||||||||
COO | July 25, 2016 | to | to | $1.975 billion | 61,236 | $2.074 billion | 122,472 | $2.173 billion | 244,944 | $2.370 billion | $ | 19.66 | 4,815 | |||||||||||||||||||
CFO | June 30, 2019 | June 30, 2016 | 15,309 | 30,618 | 61,236 | 1,204 | ||||||||||||||||||||||||||
$ | 10,834 | |||||||||||||||||||||||||||||||
CEO |
| April 1, 2017 | April 1, 2016 |
| 64,152 |
| 128,304 |
| 256,608 |
| $ | 7,142 | ||||||||||||||||||||
COO | June 20, 2017 | to | to | $2.426 billion | 64,152 | $2.547 billion | 128,304 | $2.669 billion | 256,608 | $2.911 billion | $ | 27.83 | 7,142 | |||||||||||||||||||
CFO | March 31, 2020 | March 31, 2017 | 16,038 | 32,076 | 64,152 | 1,786 | ||||||||||||||||||||||||||
$ | 16,070 | |||||||||||||||||||||||||||||||
CEO |
| April 1, 2018 | April 1, 2017 |
| 64,800 |
| 129,600 |
| 259,200 |
| $ | 6,629 | ||||||||||||||||||||
COO | May 23, 2018 | to | to | $2.543 billion | 64,800 | $2.670 billion | 129,600 | $2.797 billion | 259,200 | $3.052 billion | $ | 25.57 | 6,629 | |||||||||||||||||||
CFO | March 31, 2021 | March 31, 2018 | 16,200 | 32,400 | 64,800 | 1,657 | ||||||||||||||||||||||||||
_______________________ | $ | 14,915 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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 |
* Dollars in thousands |
In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). 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 basedperformance-based stock awards until achievement of the performance targets are probable of occurring.
2016 PSU Grants. As of September 30, 2017, March 31, 2019, the Company determined that achievement of the ThresholdMaximum Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $0.9 million for the three months ended March 31, 2019. As of March 31, 2018, the Company had concluded that achievement of the Target Goals was probable for the PSUs granted in 2016 and, as such, recorded share-based award expense related to the awards of $0.2$0.5 million and $1.1 million, respectively, for the three and nine months ended September 30, 2017. ForMarch 31, 2018.
2017 PSU Grants. As of March 31, 2019, the PSUs granted in 2017,Company determined that achievement of the Target Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $2.2 million for the three months ended March 31, 2019. As of March 31, 2018, 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 had been recognized as of March 31, 2018.
2018 PSU Grants. For the PSUs granted in May of 2018, the Company concluded that achievement of any of the performance metrics has not met the level of probability required to record compensation expense and, as such, no expense related to these awards has been recognized as of September 30, 2017.March 31, 2019.
1 | 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 September 30, 2017, March 31, 2019, we had outstanding surety bonds and letters of credit totaling $184.9$245.5 million and $65.5$89.3 million, respectively, including $31.6$61.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $33.0$126.6 million and $25.3$51.2 million, respectively. All letters of credit as of September 30, 2017, March 31, 2019, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 1819 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-partythird-party obligations.
Litigation Reserves.Litigation. 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. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At September 30, 2017, March 31, 2019, we had cash deposits and letters of credit totaling $11.4$19.3 million and $3.6$4.8 million, respectively, at risk associated with the option to purchase 6,3066,368 lots.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| 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 September 30, 2017, March 31, 2019, we had interest rate lock commitments with an aggregate principal balance of $101.2$149.4 million. Additionally, we had $14.0$14.1 million of mortgage loans held-for-sale at September 30, 2017 March 31, 2019 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 $85.0$121.0 million at September 30, 2017.March 31, 2019.
For the three and nine months ended September 30, 2017, March 31, 2019 and 2018, we recorded net lossesgains of $0.5$0.9 million and $0.5$1.5 million, respectively, on our derivatives, compared to net gainsderivatives.
1 | 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 was amended on September 29, 2017 November 1, 2018 to (1)(1) extend the Revolving Credit Facility maturity to December 16, 2022, (2)18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3)(3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) (1) 0.0%, (2) (2) a specified eurocurrencyprime rate, or (3)(3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.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.
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 Revolving Credit Facility. 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 September 30, 2017.March 31, 2019.
We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At September 30, 2017 March 31, 2019 and December 31, 2016, 2018, there were $34.0$27.6 million and $23.0$27.8 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both September 30, 2017 and December 31, 2016, weWe had $15.0$15.0 million outstanding under the Revolving Credit Facility.Facility as of March 31, 2019 and December 31, 2018. As of September 30, 2017, March 31, 2019, availability under the Revolving Credit Facility was approximately $651.0$957.4 million.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 10, 2017, the9, 2018, the Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018. 8, 2019. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75$75 million (subject to increase by up to $75$75 million under certain conditions) 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 DecemberMarch 27, 2016 2019 from $75$75 million to $125$100 million and was effective through April 24, 2019. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130 million on December 27, 2018 and was effective through January 25, 2017. 2019. At September 30, 2017 March 31, 2019 and December 31, 2016, 2018, HomeAmerican had $65.1$84.9 million and $114.5$116.8 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.based on a LIBOR rate or successor benchmark rate.
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 September 30, 2017.March 31, 2019.
| Related Party Transactions |
We contributed $1.5 million and $1.0$0.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the ninethree months ended September 30, 2017 and 2016, respectively. The Foundation is a Delaware non-profit corporation that was incorporated on September 30,1999.
March 31, 2019. The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section501(c)(3) 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at September 30, 2017, March 31, 2019, all of whom serve without compensation:
Name | MDC Title | |
Larry A. Mizel | Chairman and CEO | |
David D. Mandarich | President and COO |
Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.
The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and will continue through October 31, 2021, with an option to extend to October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the initial term from $26.50 to $28.68 per rentable square foot per year, and increasing over the extension term from $29.26 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.
|
|
On October 16, 2017, we completed a public offering of an additional $150 million principal amount of our 6% senior notes due 2043, which are of the same series and have the same terms as our senior notes issued on January 10,2013 and May 13, 2013 (collectively the “6% Notes”). The 6% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $144.2 million, net of discount and underwriting fees. We plan to use the proceeds of the offering for general corporate purposes, which may include repayment of debt.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| 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.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 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 Oregon, 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) (1) no default or event of default exists or would result from release of such guarantee, (2)(2) the Guarantor being released has consolidated net worth of less than 5% of the Company’sCompany’s consolidated net worth as of the end of the most recent fiscal quarter, (3)(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)(4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5)(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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Balance Sheet
September 30, 2017 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
ASSETS | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Cash and cash equivalents | $ | 347,217 | $ | 4,182 | $ | - | $ | - | $ | 351,399 | ||||||||||
Marketable securities | - | - | - | - | - | |||||||||||||||
Restricted cash | - | 8,723 | - | - | 8,723 | |||||||||||||||
Trade and other receivables | 5,517 | 39,577 | - | (2,190 | ) | 42,904 | ||||||||||||||
Inventories: | ||||||||||||||||||||
Housing completed or under construction | - | 969,419 | - | - | 969,419 | |||||||||||||||
Land and land under development | - | 863,002 | - | - | 863,002 | |||||||||||||||
Total inventories | - | 1,832,421 | - | - | 1,832,421 | |||||||||||||||
Intercompany receivables | 1,603,012 | 2,803 | 5,254 | (1,611,069 | ) | - | ||||||||||||||
Investment in subsidiaries | 278,885 | - | - | (278,885 | ) | - | ||||||||||||||
Property and equipment, net | 24,408 | 1,896 | - | - | 26,304 | |||||||||||||||
Deferred tax asset, net | 65,284 | - | - | (1,120 | ) | 64,164 | ||||||||||||||
Metropolitan district bond securities (related party) | - | - | - | - | - | |||||||||||||||
Prepaid and other assets | 8,155 | 64,653 | - | - | 72,808 | |||||||||||||||
Total homebuilding assets | 2,332,478 | 1,954,255 | 5,254 | (1,893,264 | ) | 2,398,723 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Cash and cash equivalents | - | - | 26,419 | - | 26,419 | |||||||||||||||
Marketable securities | - | - | 40,221 | - | 40,221 | |||||||||||||||
Intercompany receivables | - | - | 35,765 | (35,765 | ) | - | ||||||||||||||
Mortgage loans held-for-sale, net | - | - | 89,804 | - | 89,804 | |||||||||||||||
Other assets | - | - | 10,015 | 1,120 | 11,135 | |||||||||||||||
Total financial services assets | - | - | 202,224 | (34,645 | ) | 167,579 | ||||||||||||||
Total Assets | $ | 2,332,478 | $ | 1,954,255 | $ | 207,478 | $ | (1,927,909 | ) | $ | 2,566,302 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Accounts payable | $ | - | $ | 49,390 | $ | - | $ | - | $ | 49,390 | ||||||||||
Accrued liabilities | 40,205 | 112,986 | 98 | (1,628 | ) | 151,661 | ||||||||||||||
Advances and notes payable to parent and subsidiaries | 43,822 | 1,572,098 | 26,802 | (1,642,722 | ) | - | ||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | |||||||||||||||
Senior notes, net | 842,532 | - | - | - | 842,532 | |||||||||||||||
Total homebuilding liabilities | 941,559 | 1,734,474 | 26,900 | (1,644,350 | ) | 1,058,583 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Accounts payable and other liabilities | - | - | 52,259 | (562 | ) | 51,697 | ||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 4,112 | (4,112 | ) | - | ||||||||||||||
Mortgage repurchase facility | - | - | 65,103 | - | 65,103 | |||||||||||||||
Total financial services liabilities | - | - | 121,474 | (4,674 | ) | 116,800 | ||||||||||||||
Total Liabilities | 941,559 | 1,734,474 | 148,374 | (1,649,024 | ) | 1,175,383 | ||||||||||||||
Equity: | ||||||||||||||||||||
Total Stockholders' Equity | 1,390,919 | 219,781 | 59,104 | (278,885 | ) | 1,390,919 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,332,478 | $ | 1,954,255 | $ | 207,478 | $ | (1,927,909 | ) | $ | 2,566,302 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental CondensedCondensed Combining Balance Sheet
December 31, 2016 | March 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 255,679 | $ | 3,408 | $ | - | $ | - | $ | 259,087 | $ | 411,750 | $ | 4,624 | $ | - | $ | - | $ | 416,374 | ||||||||||||||||||||
Marketable securities | 59,770 | - | - | - | 59,770 | |||||||||||||||||||||||||||||||||||
Restricted cash | - | 3,778 | - | - | 3,778 | - | 8,136 | - | - | 8,136 | ||||||||||||||||||||||||||||||
Trade and other receivables | 5,380 | 39,247 | - | (2,135 | ) | 42,492 | 589 | 67,371 | - | - | 67,960 | |||||||||||||||||||||||||||||
Inventories: | ||||||||||||||||||||||||||||||||||||||||
Housing completed or under construction | - | 874,199 | - | - | 874,199 | - | 950,274 | - | - | 950,274 | ||||||||||||||||||||||||||||||
Land and land under development | - | 884,615 | - | - | 884,615 | - | 1,198,824 | - | - | 1,198,824 | ||||||||||||||||||||||||||||||
Total inventories | - | 1,758,814 | - | - | 1,758,814 | - | 2,149,098 | - | - | 2,149,098 | ||||||||||||||||||||||||||||||
Intercompany receivables | 1,475,291 | 2,803 | 5,289 | (1,483,383 | ) | - | 1,939,500 | 6,509 | - | (1,946,009 | ) | - | ||||||||||||||||||||||||||||
Investment in subsidiaries | 295,214 | - | - | (295,214 | ) | - | 272,420 | - | - | (272,420 | ) | - | ||||||||||||||||||||||||||||
Property and equipment, net | 25,495 | 2,546 | - | - | 28,041 | 23,608 | 36,157 | - | - | 59,765 | ||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||
Operating lease right-of-use asset | 32,604 | - | - | - | 32,604 | |||||||||||||||||||||||||||||||||||
Deferred tax asset, net | 34,513 | - | - | (9 | ) | 34,504 | ||||||||||||||||||||||||||||||||||
Prepaid and other assets | 11,050 | 31,495 | - | - | 42,545 | |||||||||||||||||||||||||||||||||||
Total homebuilding assets | 2,726,034 | 2,303,390 | - | (2,218,438 | ) | 2,810,986 | ||||||||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | - | - | 23,822 | - | 23,822 | - | - | 51,556 | - | 51,556 | ||||||||||||||||||||||||||||||
Marketable securities | - | - | 36,436 | - | 36,436 | - | - | 45,767 | - | 45,767 | ||||||||||||||||||||||||||||||
Intercompany receivables | - | - | 40,042 | (40,042 | ) | - | - | - | 21,713 | (21,713 | ) | - | ||||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | - | - | 138,774 | - | 138,774 | - | - | 110,810 | - | 110,810 | ||||||||||||||||||||||||||||||
Other assets | - | - | 12,831 | (769 | ) | 12,062 | - | - | 15,791 | 9 | 15,800 | |||||||||||||||||||||||||||||
Total Financial Services Assets | - | - | 251,905 | (40,811 | ) | 211,094 | ||||||||||||||||||||||||||||||||||
Total financial services assets | - | - | 245,637 | (21,704 | ) | 223,933 | ||||||||||||||||||||||||||||||||||
Total Assets | $ | 2,226,377 | $ | 1,865,792 | $ | 257,194 | $ | (1,820,774 | ) | $ | 2,528,589 | $ | 2,726,034 | $ | 2,303,390 | $ | 245,637 | $ | (2,240,142 | ) | $ | 3,034,919 | ||||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | - | $ | 42,088 | $ | - | $ | - | $ | 42,088 | $ | 39 | $ | 58,531 | $ | - | $ | - | $ | 58,570 | ||||||||||||||||||||
Accrued liabilities | 1,527 | 136,615 | 143 | 6,281 | 144,566 | 50,285 | 132,666 | - | 2,180 | 185,131 | ||||||||||||||||||||||||||||||
Operating lease liabilities | 33,460 | - | - | - | 33,460 | |||||||||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | 48,134 | 1,445,276 | 26,266 | (1,519,676 | ) | - | 28,222 | 1,930,727 | 296 | (1,959,245 | ) | - | ||||||||||||||||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | 15,000 | - | - | - | 15,000 | ||||||||||||||||||||||||||||||
Senior notes, net | 841,646 | - | - | - | 841,646 | 988,322 | - | - | - | 988,322 | ||||||||||||||||||||||||||||||
Total Homebuilding Liabilities | 906,307 | 1,623,979 | 26,409 | (1,513,395 | ) | 1,043,300 | ||||||||||||||||||||||||||||||||||
Total homebuilding liabilities | 1,115,328 | 2,121,924 | 296 | (1,957,065 | ) | 1,280,483 | ||||||||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | - | - | 59,150 | (8,416 | ) | 50,734 | ||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | - | - | 61,054 | (2,180 | ) | 58,874 | ||||||||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 3,749 | (3,749 | ) | - | - | - | 8,477 | (8,477 | ) | - | ||||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 114,485 | - | 114,485 | - | - | 84,856 | - | 84,856 | ||||||||||||||||||||||||||||||
Total Financial Services Liabilities | - | - | 177,384 | (12,165 | ) | 165,219 | ||||||||||||||||||||||||||||||||||
Total financial services liabilities | - | - | 154,387 | (10,657 | ) | 143,730 | ||||||||||||||||||||||||||||||||||
Total Liabilities | 906,307 | 1,623,979 | 203,793 | (1,525,560 | ) | 1,208,519 | 1,115,328 | 2,121,924 | 154,683 | (1,967,722 | ) | 1,424,213 | ||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Total Stockholders' Equity | 1,320,070 | 241,813 | 53,401 | (295,214 | ) | 1,320,070 | 1,610,706 | 181,466 | 90,954 | (272,420 | ) | 1,610,706 | ||||||||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,226,377 | $ | 1,865,792 | $ | 257,194 | $ | (1,820,774 | ) | $ | 2,528,589 | $ | 2,726,034 | $ | 2,303,390 | $ | 245,637 | $ | (2,240,142 | ) | $ | 3,034,919 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
SupplementalSupplemental Condensed Combining Statement of OperationsBalance Sheet
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Revenues | $ | - | $ | 586,287 | $ | - | $ | - | $ | 586,287 | ||||||||||
Cost of sales | - | (486,406 | ) | - | - | (486,406 | ) | |||||||||||||
Inventory impairments | - | (4,540 | ) | - | - | (4,540 | ) | |||||||||||||
Gross margin | - | 95,341 | - | - | 95,341 | |||||||||||||||
Selling, general, and administrative expenses | (11,911 | ) | (56,983 | ) | - | (208 | ) | (69,102 | ) | |||||||||||
Equity income of subsidiaries | 33,329 | - | - | (33,329 | ) | - | ||||||||||||||
Interest and other income | 53,740 | 941 | 1 | (134 | ) | 54,548 | ||||||||||||||
Other expense | 7 | (625 | ) | - | - | (618 | ) | |||||||||||||
Other-than-temporary impairment of marketable securities | - | - | - | - | - | |||||||||||||||
Homebuilding pretax income (loss) | 75,165 | 38,674 | 1 | (33,671 | ) | 80,169 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | 9,169 | 342 | 9,511 | |||||||||||||||
Income before income taxes | 75,165 | 38,674 | 9,170 | (33,329 | ) | 89,680 | ||||||||||||||
(Provision) benefit for income taxes | (14,002 | ) | (11,168 | ) | (3,347 | ) | - | (28,517 | ) | |||||||||||
Net income | $ | 61,163 | $ | 27,506 | $ | 5,823 | $ | (33,329 | ) | $ | 61,163 | |||||||||
Other comprehensive income related to available-for-sale securities, net of tax | (23,175 | ) | - | 927 | (927 | ) | (23,175 | ) | ||||||||||||
Comprehensive income | $ | 37,988 | $ | 27,506 | $ | 6,750 | $ | (34,256 | ) | $ | 37,988 |
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December 31, 2018 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
ASSETS | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Cash and cash equivalents | $ | 410,127 | $ | 4,597 | $ | - | $ | - | $ | 414,724 | ||||||||||
Restricted cash | - | 6,363 | - | - | 6,363 | |||||||||||||||
Trade and other receivables | 758 | 52,224 | - | - | 52,982 | |||||||||||||||
Inventories: | ||||||||||||||||||||
Housing completed or under construction | - | 952,436 | - | - | 952,436 | |||||||||||||||
Land and land under development | - | 1,180,558 | - | - | 1,180,558 | |||||||||||||||
Total inventories | - | 2,132,994 | - | - | 2,132,994 | |||||||||||||||
Intercompany receivables | 1,735,342 | 7,369 | - | (1,742,711 | ) | - | ||||||||||||||
Investment in subsidiaries | 455,848 | - | - | (455,848 | ) | - | ||||||||||||||
Property and equipment, net | 23,896 | 34,271 | - | - | 58,167 | |||||||||||||||
Deferred tax assets, net | 36,168 | - | - | 1,010 | 37,178 | |||||||||||||||
Metropolitan district bond securities (related party) | - | - | - | - | - | |||||||||||||||
Other assets | 12,234 | 33,560 | - | - | 45,794 | |||||||||||||||
Total Homebuilding Assets | 2,674,373 | 2,271,378 | - | (2,197,549 | ) | 2,748,202 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Cash and cash equivalents | - | - | 49,052 | - | 49,052 | |||||||||||||||
Marketable securities | - | - | 40,879 | - | 40,879 | |||||||||||||||
Intercompany receivables | - | - | 22,346 | (22,346 | ) | - | ||||||||||||||
Mortgage loans held-for-sale, net | - | - | 149,211 | - | 149,211 | |||||||||||||||
Other assets | - | - | 14,743 | (1,010 | ) | 13,733 | ||||||||||||||
Total Financial Services Assets | - | - | 276,231 | (23,356 | ) | 252,875 | ||||||||||||||
Total Assets | $ | 2,674,373 | $ | 2,271,378 | $ | 276,231 | $ | (2,220,905 | ) | $ | 3,001,077 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Accounts payable | $ | - | $ | 50,505 | $ | - | $ | - | $ | 50,505 | ||||||||||
Accrued liabilities | 65,691 | 125,387 | - | 5,169 | 196,247 | |||||||||||||||
Advances and notes payable to parent and subsidiaries | 29,715 | 1,727,248 | 295 | (1,757,258 | ) | - | ||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | |||||||||||||||
Senior notes, net | 987,967 | - | - | - | 987,967 | |||||||||||||||
Total Homebuilding Liabilities | 1,098,373 | 1,903,140 | 295 | (1,752,089 | ) | 1,249,719 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Accounts payable and accrued liabilities | - | - | 63,712 | (5,169 | ) | 58,543 | ||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 7,799 | (7,799 | ) | - | ||||||||||||||
Mortgage repurchase facility | - | - | 116,815 | - | 116,815 | |||||||||||||||
Total Financial Services Liabilities | - | - | 188,326 | (12,968 | ) | 175,358 | ||||||||||||||
Total Liabilities | 1,098,373 | 1,903,140 | 188,621 | (1,765,057 | ) | 1,425,077 | ||||||||||||||
Equity: | ||||||||||||||||||||
Total Stockholders' Equity | 1,576,000 | 368,238 | 87,610 | (455,848 | ) | 1,576,000 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,674,373 | $ | 2,271,378 | $ | 276,231 | $ | (2,220,905 | ) | $ | 3,001,077 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
SupplementalSupplemental Condensed Combining Statement of Operations
Nine Months Ended September 30, 2017 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Revenues | $ | - | $ | 1,798,984 | $ | - | $ | - | $ | 1,798,984 | $ | - | $ | 647,278 | $ | - | $ | - | $ | 647,278 | ||||||||||||||||||||
Home and land cost of sales | - | (1,495,838 | ) | - | - | (1,495,838 | ) | |||||||||||||||||||||||||||||||||
Cost of sales | - | (524,552 | ) | - | - | (524,552 | ) | |||||||||||||||||||||||||||||||||
Inventory impairments | - | (9,390 | ) | - | - | (9,390 | ) | - | (610 | ) | - | - | (610 | ) | ||||||||||||||||||||||||||
Gross margin | - | 293,756 | - | - | 293,756 | - | 122,116 | - | - | 122,116 | ||||||||||||||||||||||||||||||
Selling, general, and administrative expenses | (36,539 | ) | (168,988 | ) | - | (582 | ) | (206,109 | ) | (17,438 | ) | (64,701 | ) | - | (122 | ) | (82,261 | ) | ||||||||||||||||||||||
Equity income of subsidiaries | 102,469 | - | - | (102,469 | ) | - | 52,165 | - | - | (52,165 | ) | - | ||||||||||||||||||||||||||||
Interest and other income | 57,748 | 2,281 | 5 | (312 | ) | 59,722 | 2,409 | 155 | - | (173 | ) | 2,391 | ||||||||||||||||||||||||||||
Other expense | 23 | (1,658 | ) | - | - | (1,635 | ) | 7 | (1,198 | ) | - | - | (1,191 | ) | ||||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | (51 | ) | - | - | - | (51 | ) | |||||||||||||||||||||||||||||||||
Homebuilding pretax income (loss) | 123,650 | 125,391 | 5 | (103,363 | ) | 145,683 | 37,143 | 56,372 | - | (52,460 | ) | 41,055 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Financial services pretax income | - | - | 31,357 | 894 | 32,251 | - | - | 14,256 | 295 | 14,551 | ||||||||||||||||||||||||||||||
Income before income taxes | 123,650 | 125,391 | 31,362 | (102,469 | ) | 177,934 | 37,143 | 56,372 | 14,256 | (52,165 | ) | 55,606 | ||||||||||||||||||||||||||||
(Provision) benefit for income taxes | (6,367 | ) | (42,742 | ) | (11,542 | ) | - | (60,651 | ) | 3,407 | (15,264 | ) | (3,199 | ) | - | (15,056 | ) | |||||||||||||||||||||||
Net income | $ | 117,283 | $ | 82,649 | $ | 19,820 | $ | (102,469 | ) | $ | 117,283 | $ | 40,550 | $ | 41,108 | $ | 11,057 | $ | (52,165 | ) | $ | 40,550 | ||||||||||||||||||
Other comprehensive income related to available for sale securities, net of tax | (19,245 | ) | - | 2,217 | (2,217 | ) | (19,245 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income related to available-for-sale securities, net of tax | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 98,038 | $ | 82,649 | $ | 22,037 | $ | (104,686 | ) | $ | 98,038 | $ | 40,550 | $ | 41,108 | $ | 11,057 | $ | (52,165 | ) | $ | 40,550 |
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2016 | Non- | |||||||||||||||||||||||||||||||||||||||
Non- | Guarantor | Guarantor | Eliminating | Consolidated | ||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Homebuilding: | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Revenues | $ | - | $ | 1,546,267 | $ | - | $ | - | $ | 1,546,267 | $ | - | $ | 607,688 | $ | - | $ | - | $ | 607,688 | ||||||||||||||||||||
Home and land cost of sales | - | (1,291,270 | ) | (300 | ) | - | (1,291,570 | ) | ||||||||||||||||||||||||||||||||
Cost of sales | - | (496,632 | ) | - | - | (496,632 | ) | |||||||||||||||||||||||||||||||||
Inventory impairments | - | (6,300 | ) | - | - | (6,300 | ) | - | (550 | ) | - | - | (550 | ) | ||||||||||||||||||||||||||
Gross margin | - | 248,697 | (300 | ) | - | 248,397 | - | 110,506 | - | - | 110,506 | |||||||||||||||||||||||||||||
Selling, general, and administrative expenses | (31,598 | ) | (150,492 | ) | - | (531 | ) | (182,621 | ) | (12,808 | ) | (58,329 | ) | - | (204 | ) | (71,341 | ) | ||||||||||||||||||||||
Equity income of subsidiaries | 80,990 | - | - | (80,990 | ) | - | 47,169 | - | - | (47,169 | ) | - | ||||||||||||||||||||||||||||
Interest and other income | 3,970 | 1,652 | 4 | (268 | ) | 5,358 | 1,773 | 318 | 2 | (234 | ) | 1,859 | ||||||||||||||||||||||||||||
Interest expense | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Other expense | (2 | ) | (2,461 | ) | - | - | (2,463 | ) | 7 | (570 | ) | - | - | (563 | ) | |||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | (934 | ) | - | - | - | (934 | ) | |||||||||||||||||||||||||||||||||
Homebuilding pretax income (loss) | 52,426 | 97,396 | (296 | ) | (81,789 | ) | 67,737 | 36,141 | 51,925 | 2 | (47,607 | ) | 40,461 | |||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Financial services pretax income | - | - | 24,247 | 799 | 25,046 | - | - | 9,633 | 438 | 10,071 | ||||||||||||||||||||||||||||||
Income before income taxes | 52,426 | 97,396 | 23,951 | (80,990 | ) | 92,783 | 36,141 | 51,925 | 9,635 | (47,169 | ) | 50,532 | ||||||||||||||||||||||||||||
(Provision) benefit for income taxes | 10,409 | (31,438 | ) | (8,919 | ) | - | (29,948 | ) | 2,623 | (12,092 | ) | (2,299 | ) | - | (11,768 | ) | ||||||||||||||||||||||||
Net income | $ | 62,835 | $ | 65,958 | $ | 15,032 | $ | (80,990 | ) | $ | 62,835 | $ | 38,764 | $ | 39,833 | $ | 7,336 | $ | (47,169 | ) | $ | 38,764 | ||||||||||||||||||
Other comprehensive income related to available for sale securities, net of tax | 3,871 | - | 680 | (680 | ) | 3,871 | ||||||||||||||||||||||||||||||||||
Other comprehensive income related to available-for-sale securities, net of tax | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Comprehensive income | $ | 66,706 | $ | 65,958 | $ | 15,712 | $ | (81,670 | ) | $ | 66,706 | $ | 38,764 | $ | 39,833 | $ | 7,336 | $ | (47,169 | ) | $ | 38,764 |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Statement of Cash Flows
Nine Months Ended September 30, 2017 | Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 26,918 | $ | (21,023 | ) | $ | 63,269 | $ | - | $ | 69,164 | $ | (18,145 | ) | $ | 31,508 | $ | 40,985 | $ | - | $ | 54,348 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 97,540 | (198 | ) | (254 | ) | 10,959 | 108,047 | 29,796 | (6,094 | ) | (93 | ) | (30,043 | ) | (6,434 | ) | ||||||||||||||||||||||||
Financing activities: | ||||||||||||||||||||||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 21,995 | (11,036 | ) | (10,959 | ) | - | - | (23,614 | ) | (6,429 | ) | 30,043 | - | ||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | (49,382 | ) | - | (49,382 | ) | - | - | (31,959 | ) | - | (31,959 | ) | ||||||||||||||||||||||||||
Dividend payments | (38,793 | ) | - | - | - | (38,793 | ) | (17,115 | ) | - | - | - | (17,115 | ) | ||||||||||||||||||||||||||
Payments of deferred financing costs | (2,630 | ) | - | - | - | (2,630 | ) | |||||||||||||||||||||||||||||||||
Proceeds from exercise of stock options | 8,503 | - | - | - | 8,503 | 7,087 | - | - | - | 7,087 | ||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (32,920 | ) | 21,995 | (60,418 | ) | (10,959 | ) | (82,302 | ) | (10,028 | ) | (23,614 | ) | (38,388 | ) | 30,043 | (41,987 | ) | ||||||||||||||||||||||
Net increase in cash and cash equivalents | 91,538 | 774 | 2,597 | - | 94,909 | |||||||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,623 | 1,800 | 2,504 | - | 5,927 | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||
Beginning of period | 255,679 | 3,408 | 23,822 | - | 282,909 | 410,127 | 10,960 | 49,052 | - | 470,139 | ||||||||||||||||||||||||||||||
End of period | $ | 347,217 | $ | 4,182 | $ | 26,419 | $ | - | $ | 377,818 | $ | 411,750 | $ | 12,760 | $ | 51,556 | $ | - | $ | 476,066 |
Nine Months Ended September 30, 2016 | Three Months Ended March 31, 2018 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (5,918 | ) | $ | (17,581 | ) | $ | 14,596 | $ | - | $ | (8,903 | ) | $ | (8,950 | ) | $ | (79,547 | ) | $ | 27,011 | $ | - | $ | (61,486 | ) | ||||||||||||||
Net cash provided by (used in) investing activities | 26,166 | (1,252 | ) | (9,797 | ) | 9,619 | 24,736 | (94,576 | ) | (6,250 | ) | (60 | ) | 94,509 | (6,377 | ) | ||||||||||||||||||||||||
Financing activities: | ||||||||||||||||||||||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 20,284 | (10,665 | ) | (9,619 | ) | - | - | 83,203 | 11,306 | (94,509 | ) | - | |||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 3,400 | - | 3,400 | - | - | (22,214 | ) | - | (22,214 | ) | ||||||||||||||||||||||||||||
Dividend payments | (36,763 | ) | - | - | - | (36,763 | ) | (16,865 | ) | - | - | - | (16,865 | ) | ||||||||||||||||||||||||||
Payments of deferred financing costs | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Proceeds from the exercise of stock options | - | - | - | - | - | 282 | - | - | - | 282 | ||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (36,763 | ) | 20,284 | (7,265 | ) | (9,619 | ) | (33,363 | ) | (16,583 | ) | 83,203 | (10,908 | ) | (94,509 | ) | (38,797 | ) | ||||||||||||||||||||||
Net increase in cash and cash equivalents | (16,515 | ) | 1,451 | (2,466 | ) | - | (17,530 | ) | ||||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (120,109 | ) | (2,594 | ) | 16,043 | - | (106,660 | ) | ||||||||||||||||||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||
Beginning of period | 141,245 | 3,097 | 36,646 | - | 180,988 | 468,718 | 13,051 | 32,471 | - | 514,240 | ||||||||||||||||||||||||||||||
End of period | $ | 124,730 | $ | 4,548 | $ | 34,180 | $ | - | $ | 163,458 | $ | 348,609 | $ | 10,457 | $ | 48,514 | $ | - | $ | 407,580 |
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’smanagement’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, 20162018 and this Quarterly Report on Form 10-Q.The Company distributed an 8% stock dividend on February28, 2019 to shareholders of record on February14, 2019. In accordance with Accounting Standards Codification 260, “Earnings per Share,” basic and diluted earnings per share amounts, weighted-average shares outstanding, and dividends declared per share have been restated for all periods presented to reflect the effect of this stock dividend.
Three Months Ended | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | March 31, | ||||||||||||||||||||||
September 30, | September 30, | 2019 | 2018 | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | (Dollars in thousands, except per share amounts) | ||||||||||||||||||||
Homebuilding: | (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
Home sale revenues | $ | 584,947 | $ | 575,722 | $ | 1,796,046 | $ | 1,541,337 | $ | 647,278 | $ | 607,688 | ||||||||||||
Land sale revenues | 1,340 | 2,290 | 2,938 | 4,930 | ||||||||||||||||||||
Total home and land sale revenues | 586,287 | 578,012 | 1,798,984 | 1,546,267 | ||||||||||||||||||||
Home cost of sales | (485,147 | ) | (481,511 | ) | (1,493,166 | ) | (1,287,373 | ) | (524,552 | ) | (496,632 | ) | ||||||||||||
Land cost of sales | (1,259 | ) | (2,318 | ) | (2,672 | ) | (4,197 | ) | ||||||||||||||||
Inventory impairments | (4,540 | ) | (4,700 | ) | (9,390 | ) | (6,300 | ) | (610 | ) | (550 | ) | ||||||||||||
Total cost of sales | (490,946 | ) | (488,529 | ) | (1,505,228 | ) | (1,297,870 | ) | (525,162 | ) | (497,182 | ) | ||||||||||||
Gross profit | 122,116 | 110,506 | ||||||||||||||||||||||
Gross margin | 95,341 | 89,483 | 293,756 | 248,397 | 18.9 | % | 18.2 | % | ||||||||||||||||
Gross margin % | 16.3 | % | 15.5 | % | 16.3 | % | 16.1 | % | ||||||||||||||||
Selling, general and administrative expenses | (69,102 | ) | (61,904 | ) | (206,109 | ) | (182,621 | ) | (82,261 | ) | (71,341 | ) | ||||||||||||
Interest and other income | 54,548 | 1,869 | 59,722 | 5,358 | 2,391 | 1,859 | ||||||||||||||||||
Other expense | (618 | ) | (1,558 | ) | (1,635 | ) | (2,463 | ) | (1,191 | ) | (563 | ) | ||||||||||||
Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||||||||||
Homebuilding pretax income | 80,169 | 27,675 | 145,683 | 67,737 | 41,055 | 40,461 | ||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||
Revenues | 17,464 | 17,408 | 54,516 | 44,248 | 17,404 | 19,035 | ||||||||||||||||||
Expenses | (8,849 | ) | (7,955 | ) | (25,247 | ) | (21,739 | ) | (8,957 | ) | (8,831 | ) | ||||||||||||
Interest and other income | 925 | 1,035 | 3,142 | 2,648 | 1,264 | 1,020 | ||||||||||||||||||
Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||||||||||
Net gain (loss) on marketable equity securities | 4,840 | (1,153 | ) | |||||||||||||||||||||
Financial services pretax income | 9,511 | 10,377 | 32,251 | 25,046 | 14,551 | 10,071 | ||||||||||||||||||
Income before income taxes | 89,680 | 38,052 | 177,934 | 92,783 | 55,606 | 50,532 | ||||||||||||||||||
Provision for income taxes | (28,517 | ) | (11,693 | ) | (60,651 | ) | (29,948 | ) | (15,056 | ) | (11,768 | ) | ||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | $ | 40,550 | $ | 38,764 | ||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | $ | 0.66 | $ | 0.64 | ||||||||||||
Diluted | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | $ | 0.64 | $ | 0.63 | ||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | 60,939,364 | 60,340,774 | ||||||||||||||||||
Diluted | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | 62,708,334 | 61,447,563 | ||||||||||||||||||
Dividends declared per share | $ | 0.25 | $ | 0.24 | $ | 0.75 | $ | 0.72 | $ | 0.30 | $ | 0.28 | ||||||||||||
Cash provided by (used in): | ||||||||||||||||||||||||
Operating Activities | $ | (51,723 | ) | $ | 13,183 | $ | 69,164 | $ | (8,903 | ) | $ | 54,348 | $ | (61,486 | ) | |||||||||
Investing Activities | $ | 110,004 | $ | (7,486 | ) | $ | 108,047 | $ | 24,736 | $ | (6,434 | ) | $ | (6,377 | ) | |||||||||
Financing Activities | $ | (18,439 | ) | $ | (13,545 | ) | $ | (82,302 | ) | $ | (33,363 | ) | $ | (41,987 | ) | $ | (38,797 | ) |
OOverviewverview
Three Months Ended September 30, 2017Months EndedMarch 31, 2019
For the three months ended September 30, 2017,March 31, 2019, our net income was $61.2$40.6 million, or $1.16$0.64 per diluted share, a 132%5% increase compared to net income of $26.4$38.8 million, or $0.51$0.63 per diluted share, for the same period in the prior year. The increase was primarily the result of a $52.5$4.5 million improvementincrease in our pretax income from financial services resulting from $4.8 million of net gains on equity securities for the three months ended March 31, 2019 as compared to $1.2 million of net losses on equity securities for the same period in the prior year. Our pretax income from homebuilding operations, which benefited from a 2% increase in home sale revenues,increased by only $0.6 million year-over-year, as an 80 basis point improvement in our gross margin from home sale revenues percentage, and a $52.7$11.6 million increase in our interest and other income as a result of the sale of investments held by our Corporate segment. These items were slightlyhomebuilding gross profit was mostly offset by a 100 basis point increase in ourhigher selling, general and administrative (“SG&A”) expensescosts. The increases in financial services and homebuilding pretax income were partially offset by a higher effective tax rate that was mostly due to federal energy tax credits, which reduced our 2018 first quarter income tax expense by $1.2 million. It is currently uncertain as a percentage of home sale revenues (“SG&A rate”).to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was recorded for the 2019 first quarter.
Home sale revenues were up from $575.7$607.7 million in the 2016 third2018 first quarter to $584.9$647.3 million in the 2017 third2019 first quarter. The $9.2$39.6 million year-over-year improvement was primarily the result of a 2%7% increase in the number of homes delivered as our backlog to start the quarter was up 2% year-over-year. Our number of homes delivered during the 2017 third quarter was negatively impacted by the Weyerhaeuser joist issue (see below) and Hurricane Irma (see below). Because of these two issues, approximately 115 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods.quarter.
The dollar value of our net new home orders increased 6%decreased 1% from the prior year period driven by an 8% increasea 4% decrease in our the average selling price, consistent with our ongoing focus on offering more affordable home plans. The decrease in the average selling price was also caused by a shift in the mix of home orders to our more affordable markets. However, the average selling price decrease was almost entirely offset by a 3% increase in the number of net new orders, resulting from a 15% increase in average active subdivisions that wasmore than offset partially by a 2% declinean 11% decrease in our number of net new orders. Our monthly sales absorption pace improved by 2% year-over-year. However, a 4% decline in average active communities for the 2017 third quarter drove the decrease in our number of net new orders.pace.
Nine Months Ended September 30, 2017Industry Conditions and Outlook for MDC*
ForWe have experienced steadily improving net new order activity to start the nine months ended September 30, 2017,year as monthly absorption rates remain healthy, albeit down from recent peak levels experienced in 2018. Overall, we believe industry conditions remain strong as we continued to see a positive economic environment driven by factors such as low unemployment, increasing wages, controlled inventory levels and low interest rates throughout the first quarter of 2019.
We have positioned ourselves for continued growth in the face of a slower monthly absorption pace environment, through achieving a 15% year-over-year increase in our active community count to end the first quarter of 2019. In addition, our backlog conversion rates have improved year-over-year, benefiting from lower cycle times for our more affordable home plans. The demand for affordable product lines remained strong during the first quarter of 2019, accounting for 60% of our net income was $117.3 million, or $2.23 per diluted share, an 87% increasenew orders compared to net income of $62.8 million, or $1.22 per diluted share, for the same period44% in the prior year. The increaseyear period.
Our dollar value of homes in backlog to end the 2019 first quarter was down 12% year-over-year to $1.65 billion. This decrease is primarily the result of our continued focus on more affordable home plans, a $77.9 million improvementshift in the mix of home sales to our pretax income from homebuilding operations, which benefited from a 17% increase in home sale revenuesmore affordable markets and a $54.4lower pace of sales over the past six months.
Our liquidity to end the 2019 first quarter was up 27% year-over-year to $1.49 billion, providing us with significant resources to fund continued growth. This increase was in large part due to the $300 million increase in our interest and other income as a result of the sale of investments held by our Corporate Segment, as discussed above.
Industry Conditions and Outlook for MDC
Through the first three quarters of 2017, solid economic fundamentals continued to support the homebuilding industry, driving robust demand for new homes, especially in the first-time homebuyer segment. To meet the growing demand, we have taken a number of steps to grow community count.
First, we have substantially increased our approvals of future lots for purchase. During the 2017 third quarter, we approved the purchase of nearly 2,500 lots and year-to-date we have approved the purchase of over 7,800 lots, which is more than double the approvals from the same period a year ago. Increasingly, our lot approvals have focused on the first-time homebuyer segment, which has responded favorably to one of our newest product lines, the SeasonsTM collection.
Second, in September 2017, we announced that we will commence operations in the greater Portland area, giving us additional exposure to the Pacific Northwest, where we have experienced solid results.
Third, because our growth initiatives may require additional capital, we (1) expanded the capacity under our line of credit at the end of the third quarter to $700 million and extended its maturity by two years to December 2022, and (2) at the start of$1.0 billion during the fourth quarter added $150 million to our senior notes due January 2043.of 2018.
We ended the 2017 third quarter with liquidity of $1.08 billion, an increase of 40% over the prior year. The higher liquidity provides us with additional resources to fund our increased lot approval activity, providing us the foundation for community count growth in 2018.*
Other
Defective Weyerhaeuser Joists
During the 2017 third quarter, we were notified by Weyerhaeuser Company, a product vendor, of a manufacturing defect with certain of its floor I-joists used in certain homes built in our Colorado market (the “joist issue”). The joist issue impacted 216 homes, 23 of which had closed. Of the 193 homes that had not yet closed, approximately 90 were scheduled to close in the 2017 third quarter that did not close. The vendor has committed to us that it will absorb the costs associated with the removal and replacement of the defective joists. While this issue negatively impacted our number of homes delivered, absorption rate and cancellation rate in our Colorado market during the quarter, and may continue to impact these metrics in the next two quarters, we do not believe the resolution of this issue will be material to our results of operations, liquidity, or our financial condition. See "Forward-Looking Statements" below.
Hurricane Irma
Both sales and deliveries for the 2017 third quarter in our Florida market were negatively impacted by Hurricane Irma. Delivery of approximately 25 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods. In addition, sales were also disrupted as sales offices had to be closed for several days. There was no other material impact from this event.
* See "Forward-Looking Statements"below.
Homebuilding
Pretax Income:
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
West | $ | 17,746 | $ | 18,392 | $ | (646 | ) | (4) | % | $ | 54,335 | $ | 43,830 | $ | 10,505 | 24 | % | $ | 33,200 | $ | 24,373 | $ | 8,827 | 36 | % | |||||||||||||||||||||||
Mountain | 18,326 | 18,856 | (530 | ) | (3) | % | 61,097 | 49,688 | 11,409 | 23 | % | 21,714 | 24,185 | (2,471 | ) | (10 | %) | |||||||||||||||||||||||||||||||
East | 2,613 | (2,267 | ) | 4,880 | (215) | % | 9,989 | 3,600 | 6,389 | 177 | % | 1,473 | 3,375 | (1,902 | ) | (56 | %) | |||||||||||||||||||||||||||||||
Corporate | 41,484 | (7,306 | ) | 48,790 | (668) | % | 20,262 | (29,381 | ) | 49,643 | (169) | % | (15,332 | ) | (11,472 | ) | (3,860 | ) | (34 | %) | ||||||||||||||||||||||||||||
Total homebuilding pretax income | $ | 80,169 | $ | 27,675 | $ | 52,494 | 190 | % | $ | 145,683 | $ | 67,737 | $ | 77,946 | 115 | % | ||||||||||||||||||||||||||||||||
Total Homebuilding pretax income | $ | 41,055 | $ | 40,461 | $ | 594 | 1 | % |
HomebuildingFor the three months ended March 31, 2019, we recorded homebuilding pretax income for the 2017 third quarter was $80.2of $41.1 million, an increase of $52.5$0.6 million from $27.7$40.5 million for the same period in the prior year. The increase was primarily attributabledue to a 2%7% increase in home sale revenues an 80and a 70 basis point improvement in our gross margin from home sale revenues percentage, andsales. However, these improvements were mostly offset by a $52.7 million100 basis point increase in our interestselling, general and other incomeadministrative expenses as a resultpercentage of thehome sale of investments held by our Corporate segment.revenues.
For ourOur West segment the benefit of a 15% year-over-year improvement in home sale revenues was more than offset by higher G&A costs, due mostly to headcount growth, and a one-time legal charge taken during the 2017 third quarter. While our Mountain segment experienced a 13% year-over-year decline in home sale revenues, we were able to mostly offset the impact of the decrease with an improvement in our gross margin from home sales percentage. Our East segment experienced a $4.9$8.8 million year-over-year improvement in pretax income, primarily due to a $2.4 million reduction in inventory impairments coupled with an improved gross margin from home sales percentage. The pretax gain for our Corporate segment was driven by the higher interest and other income discussed above, partially offset by an increase in compensation-related expenses that was driven by an increase in headcount as we plan for future growth.
For the nine months ended September 30, 2017, we recorded homebuilding pretax income of $145.7 million, compared to $67.7 million for the same period in the prior year, an increase of $77.9 million or 115%. The increase was primarily attributable to a 17%16% increase in home sale revenues andrevenues. Our Mountain segment experienced a $54.4$2.5 million increasedecrease in our interest and otherpretax income as a result offrom the sale of investments held by our Corporate segment, slightly offset by a $3.1 million increase in inventory impairments and higher compensation-related expensesprior year period, primarily due to increased headcount. The year-over-year increasesselling, general and administrative expenses driven by an increased average active community count. Our East segment experienced a $1.9 million decrease in pretax income for our West and Mountain segments were driven primarily by higherfrom the prior year, due to a 14% decrease in home sale revenues of 29% and 9%, respectively.revenues. Our East segment hadCorporate Segment experienced a $6.4$3.9 million improvementyear-over-year decrease in pretax income as a resultdue to additional stock based compensation expense of a $1.9$3.0 million, reduction in inventory impairments and a slightly improved gross margin from home sales percentage. The pretax gain for our Corporate segment wasprimarily driven by the higher interest and other income discussed above, partially offset by an increase in compensation-related expenses due to an increase in headcount.performance-based stock awards.
Assets:
September 30, | December 31, | Change | March 31, | December 31, | Change | |||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
West | $ | 1,052,795 | $ | 1,035,033 | $ | 17,762 | 2 | % | $ | 1,307,761 | $ | 1,301,374 | $ | 6,387 | 0 | % | ||||||||||||||||
Mountain | 677,721 | 571,139 | 106,582 | 19 | % | 818,451 | 793,150 | 25,301 | 3 | % | ||||||||||||||||||||||
East | 217,238 | 256,816 | (39,578 | ) | (15) | % | 170,670 | 169,485 | 1,185 | 1 | % | |||||||||||||||||||||
Corporate | 450,969 | 454,507 | (3,538 | ) | (1) | % | 514,104 | 484,193 | 29,911 | 6 | % | |||||||||||||||||||||
Total homebuilding assets | $ | 2,398,723 | $ | 2,317,495 | $ | 81,228 | 4 | % | $ | 2,810,986 | $ | 2,748,202 | $ | 62,784 | 2 | % |
Total homebuilding assets increased 4%2% from December 31, 20162018 to September 30, 2017, mostly driven byMarch 31, 2019. The largest increase outside of our Corporate segment was in our Mountain segment which had (1) higherand was the result of increases in our inventory balances. These increases were driven by land development spend and land under development balances due to strong land acquisition activity during the nine months ended September 30, 2017, and (2) a highergreater number of homes completed or under construction as a result of anperiod-end. The increase in backlog under construction. The funds for the land acquisition activity came from our Corporate segment drivingwas the result of the adoption of ASC 842 on January 1, 2019, which requires a decline in our Corporate segment’s assets that was mostly offset by our positive operating resultslessee to recognize a right-of-use asset and gains on the sale of investments. Homebuilding assets in our East segment are down from December 31, 2017 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.a corresponding lease liability for substantially all leases.
Home and Land Sale Revenues
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
West | $ | 326,804 | $ | 284,589 | $ | 42,215 | 15 | % | $ | 959,641 | $ | 745,995 | $ | 213,646 | 29 | % | ||||||||||||||||
Mountain | 167,066 | 192,876 | (25,810 | ) | (13) | % | 564,558 | 521,034 | 43,524 | 8 | % | |||||||||||||||||||||
East | 92,417 | 100,547 | (8,130 | ) | (8) | % | 274,785 | 279,238 | (4,453 | ) | (2) | % | ||||||||||||||||||||
Total home and land sale revenues | $ | 586,287 | $ | 578,012 | $ | 8,275 | 1 | % | $ | 1,798,984 | $ | 1,546,267 | $ | 252,717 | 16 | % |
For the 2017 third quarter, home and land sale revenues increased $8.3 million year-over-year to $586.3 million. For the nine months ended September 30, 2017 home and land sale revenues increased $252.7 million from the same period in the prior year to $1.80 billion. The increases for both the three and nine months ended September 30, 2017 compared to the same periods in the prior year were primarily driven by increases in new home deliveries of 2% and 15%, respectively.
New Home Deliveries
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 186 | $ | 58,640 | $ | 315.3 | 221 | $ | 64,314 | $ | 291.0 | (16) | % | (9) | % | 8 | % | ||||||||||||||||||||
California | 223 | 135,745 | 608.7 | 195 | 125,602 | 644.1 | 14 | % | 8 | % | (5) | % | ||||||||||||||||||||||||
Nevada | 240 | 81,483 | 339.5 | 177 | 59,601 | 336.7 | 36 | % | 37 | % | 1 | % | ||||||||||||||||||||||||
Washington | 98 | 50,936 | 519.8 | 75 | 35,072 | 467.6 | 31 | % | 45 | % | 11 | % | ||||||||||||||||||||||||
West | 747 | 326,804 | 437.5 | 668 | 284,589 | 426.0 | 12 | % | 15 | % | 3 | % | ||||||||||||||||||||||||
Colorado | 314 | 146,883 | 467.8 | 343 | 169,858 | 495.2 | (8) | % | (14) | % | (6) | % | ||||||||||||||||||||||||
Utah | 45 | 18,843 | 418.7 | 55 | 20,728 | 376.9 | (18) | % | (9) | % | 11 | % | ||||||||||||||||||||||||
Mountain | 359 | 165,726 | 461.6 | 398 | 190,586 | 478.9 | (10) | % | (13) | % | (4) | % | ||||||||||||||||||||||||
Maryland | 41 | 21,506 | 524.5 | 61 | 27,297 | 447.5 | (33) | % | (21) | % | 17 | % | ||||||||||||||||||||||||
Virginia | 68 | 33,537 | 493.2 | 78 | 39,795 | 510.2 | (13) | % | (16) | % | (3) | % | ||||||||||||||||||||||||
Florida | 102 | 37,374 | 366.4 | 88 | 33,455 | 380.2 | 16 | % | 12 | % | (4) | % | ||||||||||||||||||||||||
East | 211 | 92,417 | 438.0 | 227 | 100,547 | 442.9 | (7) | % | (8) | % | (1) | % | ||||||||||||||||||||||||
Total | 1,317 | $ | 584,947 | $ | 444.2 | 1,293 | $ | 575,722 | $ | 445.3 | 2 | % | 2 | % | (0) | % |
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 586 | $ | 183,258 | $ | 312.7 | 582 | $ | 170,352 | $ | 292.7 | 1 | % | 8 | % | 7 | % | ||||||||||||||||||||
California | 662 | 403,974 | 610.2 | 512 | 319,116 | 623.3 | 29 | % | 27 | % | (2) | % | ||||||||||||||||||||||||
Nevada | 642 | 223,303 | 347.8 | 432 | 149,861 | 346.9 | 49 | % | 49 | % | 0 | % | ||||||||||||||||||||||||
Washington | 290 | 149,106 | 514.2 | 234 | 106,665 | 455.8 | 24 | % | 40 | % | 13 | % | ||||||||||||||||||||||||
West | 2,180 | 959,641 | 440.2 | 1,760 | 745,994 | 423.9 | 24 | % | 29 | % | 4 | % | ||||||||||||||||||||||||
Colorado | 1,064 | 510,211 | 479.5 | 945 | 463,534 | 490.5 | 13 | % | 10 | % | (2) | % | ||||||||||||||||||||||||
Utah | 126 | 51,409 | 408.0 | 145 | 53,238 | 367.2 | (13) | % | (3) | % | 11 | % | ||||||||||||||||||||||||
Mountain | 1,190 | 561,620 | 471.9 | 1,090 | 516,772 | 474.1 | 9 | % | 9 | % | (0) | % | ||||||||||||||||||||||||
Maryland | 140 | 65,870 | 470.5 | 178 | 84,742 | 476.1 | (21) | % | (22) | % | (1) | % | ||||||||||||||||||||||||
Virginia | 171 | 92,432 | 540.5 | 193 | 98,572 | 510.7 | (11) | % | (6) | % | 6 | % | ||||||||||||||||||||||||
Florida | 304 | 116,483 | 383.2 | 251 | 95,257 | 379.5 | 21 | % | 22 | % | 1 | % | ||||||||||||||||||||||||
East | 615 | 274,785 | 446.8 | 622 | 278,571 | 447.9 | (1) | % | (1) | % | (0) | % | ||||||||||||||||||||||||
Total | 3,985 | $ | 1,796,046 | $ | 450.7 | 3,472 | $ | 1,541,337 | $ | 443.9 | 15 | % | 17 | % | 2 | % |
For the three months ended September 30, 2017, we realized a 2% increase in the number of homes delivered, primarily due to a 2% year-over-year increase in the number of homes in backlog to start the quarter. For all our markets, excluding California and Colorado, the year-over-year change in the number of homes delivered was mostly the result of the change in the number of homes in beginning backlog. In our California market, we started off the quarter with backlog down 8% but were able to achieve a 14% increase in the number of homes delivered primarily due to a shift in the mix of homes delivered to communities that have shorter construction cycle times. While our beginning backlog in our Colorado market was up 4% year-over-year, the number of homes delivered declined by 8%. This decrease is almost solely attributable to the joist issue, which only impacted our Colorado market. Delivery of approximately 90 homes that were previously projected to close in the 2017 third quarter was delayed to later quarters as a result of this issue. Furthermore, we anticipate that closings over the next two quarters will continue to be impacted by this issue*. In our Florida market, despite beginning backlog being up 31% year-over-year, we only realized a 16% increase in the number of homes delivered as a result of Hurricane Irma. Delivery of approximately 25 homes that were previously scheduled to close in the 2017 third quarter was delayed to later quarters as a result of the hurricane.
Our Washington, Utah and Maryland markets each experienced notable increases in the average selling price of homes delivered due to price increases implemented over the past year coupled with a shift in mix to higher priced communities. Our Colorado market had the largest decrease in the average selling price of homes delivered, due to a significant increase in the share of its closings coming from our more affordable plans designed for the first-time homebuyer. In our California market, price increases implemented in the past year were more than offset by a shift in the mix of deliveries to non-coastal communities, which have a lower average selling price. For most of our remaining markets, the average selling price benefited from price increases that have been implemented over the past twelve months. Any remaining differences were due to a shift in mix to differently priced communities.
For the nine months ended September 30, 2017, the year-over-year changes in homes delivered in most of our markets was primarily the result of the year-over-year change in the number of units in backlog to begin the year. In our Maryland and Virginia markets, while we started the year with beginning backlog units up from the prior year, our number of homes delivered is down year-over-year primarily due to year-over-year declines in the number of net new orders in the first part of 2017 as a result of community count decreases. Commentary around average selling price for the nine-months ended September 30, 2017 is consistent with the commentary above for the three-months ended September 30, 2017.
* See "Forward-Looking Statements" below
Gross Margin
Our gross margin from home sales percentage for the three months ended September 30, 2017 increased to 16.3% from 15.5% in the three months ended September 30, 2016. During the 2017 and 2016 third quarters, we recorded inventory impairments of $4.5 million and $4.7 million, respectively. The impairments recorded for each period negatively impacted gross margin by 80 basis points. Additionally, during the 2016 third quarter we recorded adjustments of $1.8 million (a 30 basis point negative impact to gross margins) to increase our warranty accrual while for our 2017 third quarter, we recorded adjustments to decrease our warranty accrual by $0.4 million (a 10 basis point positive impact to gross margins).
Our gross margin from home sales percentage for the nine months ended September 30, 2017 increased by 20 basis points year-over-year to 16.3%. The nine months ended September 30, 2017 included $9.4 million (a 50 basis point negative impact to gross margins) of inventory impairments, while the same period in 2016 included $6.3 million (a 40 basis point negative impact to gross margins) of inventory impairments and $5.1 million (a 30 basis point negative impact to gross margins) of adjustments to increase our warranty accrual.
Inventory Impairments
Impairments of homebuilding inventory by segment for the three months and nine months ended September 30, 2017 and 2016 are shown in the table below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
West | $ | 1,885 | $ | - | $ | 5,985 | $ | 1,400 | ||||||||
Mountain | 370 | - | 370 | - | ||||||||||||
East | 2,285 | 4,700 | 3,035 | 4,900 | ||||||||||||
Total inventory impairments | $ | 4,540 | $ | 4,700 | $ | 9,390 | $ | 6,300 |
The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory. Two communities combined for $3.0 million of our impairments recorded during the 2017 third quarter. The impairment in one community in our West segment was the result of significant pricing pressures while the impairment in one community in our East segment was due to expected future negative cash flows from a limited number of lots that drove total expected future cash flows for the community negative. The remaining impairments were relatively small on a community-by-community basis and were primarily related to close-out communities.
Impairment Data | Quantitative Data | ||||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of | Number of | Discount Rate | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
March 31, 2017 | 33 | $ | 4,850 | $ | 19,952 | 2 | 12% | to | 18% | ||||||||||||
June 30, 2017 | 35 | $ | - | $ | - | - | N/A | ||||||||||||||
September 30, 2017 | 33 | $ | 4,540 | $ | 52,190 | 9 | 10% | to | 15% | ||||||||||||
March 31, 2016 | 14 | $ | - | $ | - | - | N/A | ||||||||||||||
June 30, 2016 | 17 | $ | 1,600 | $ | 6,415 | 2 | 12% | to | 15% | ||||||||||||
September 30, 2016 | 25 | $ | 4,700 | $ | 12,295 | 2 | 15% | to | 18% |
Selling, General and Administrative Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
General and administrative expenses | $ | 33,170 | $ | 27,758 | $ | 5,412 | $ | 97,831 | $ | 90,638 | $ | 7,193 | ||||||||||||
General and administrative expenses as a percentage of home sale revenues | 5.7 | % | 4.8 | % | 90 bps | 5.4 | % | 5.9 | % | (50) bps | ||||||||||||||
Marketing expenses | $ | 16,445 | $ | 15,262 | $ | 1,183 | $ | 48,545 | $ | 41,728 | $ | 6,817 | ||||||||||||
Marketing expenses as a percentage of home sale revenues | 2.8 | % | 2.7 | % | 10 bps | 2.7 | % | 2.7 | % | 0 bps | ||||||||||||||
Commissions expenses | $ | 19,487 | $ | 18,884 | $ | 603 | $ | 59,733 | $ | 50,255 | $ | 9,478 | ||||||||||||
Commissions expenses as a percentage of home sale revenues | 3.3 | % | 3.3 | % | 0 bps | 3.3 | % | 3.3 | % | 0 bps | ||||||||||||||
Total selling, general and administrative expenses | $ | 69,102 | $ | 61,904 | $ | 7,198 | $ | 206,109 | $ | 182,621 | $ | 23,488 | ||||||||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 11.8 | % | 10.8 | % | 100 bps | 11.5 | % | 11.8 | % | (30) bps |
For both the three and nine months ended September 30, 2017, as we continued to plan for the future growth of our business, we increased headcount, resulting in higher compensation-related expenses, which increased our general and administrative expenses. For the nine months ended September 30, 2017, we were able to leverage our 17% year-over-year increase in home sale revenues, to produce a year-over-year improvement in our SG&A rate of 30 basis points. However, for our 2017 third quarter, we experienced a 100 basis point increase in our SG&A rate. As discussed in the New Home Deliveries section above, deliveries and home sale revenues in our Colorado and Florida markets during the 2017 quarter were negatively impacted by the joist issue and Hurricane Irma, respectively. Absent these issues, we estimate that our SG&A rate might have increased by only 40 basis points year-over-year. & Home Sale Revenues:
Our commissions expenses are variable with home sale revenues. As such, the year-over-year increasesChanges in home sale revenues drove theare impacted by changes in commissions expensesthe number of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below.
Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
West | 752 | $ | 369,558 | $ | 491.4 | 681 | $ | 319,509 | $ | 469.2 | 10 | % | 16 | % | 5 | % | ||||||||||||||||||||
Mountain | 409 | 209,192 | 511.5 | 416 | 208,632 | 501.5 | (2 | %) | 0 | % | 2 | % | ||||||||||||||||||||||||
East | 197 | 68,528 | 347.9 | 177 | 79,547 | 449.4 | 11 | % | (14 | %) | (23 | %) | ||||||||||||||||||||||||
Total | 1,358 | $ | 647,278 | $ | 476.6 | 1,274 | $ | 607,688 | $ | 477.0 | 7 | % | 7 | % | (0 | %) |
West Segment Commentary
Our West segment experienced a 10% year-over-year for both periods presented.increase in the number of new homes delivered as a result of a 5% increase in the number of homes in backlog to start the quarter. Our California markets also benefited from an improved backlog conversion rate as there were a significant number of sales accepted at the end of 2017 that could not be delivered in the first quarter of 2018, which negatively impacted our prior year backlog conversion rate. The 5% increase in average selling price of homes delivered is the result of price increases in marketing expenseswe implemented across most markets during the 2018 spring selling season, which were partially attributableoffset by a shift in mix in our California markets to lower priced communities.
Mountain Segment Commentary
While the number of homes in backlog to start the quarter was down 17% year-over-year, new homes delivered decreased by only 2% due to an improved backlog conversion rate that was driven by (1) shorter average cycle times and (2) a higher percentage of homes both sold and delivered in the first quarter of 2019 as compared to the growth in new home deliveries. In addition, increased model costs per home delivered and higher headcount drove the year-over-year increases in marketing costs.
Interest and Other Income
Our interest and other income for the three and nine months ended September 30, 2017 was $54.5 million and $59.7 million, respectively, compared to $1.9 million and $5.4 million, respectively, for the same periods in the prior year. The year-over-year increases in interest and other income2018 first quarter. Cycle time improvements were primarily driven by our Colorado markets as a result of a vendor related product defect issue that negatively impacted cycle times for those homes delivered in the first half of 2018. The average selling price of homes delivered increased 2% as a result of price increases implemented in the first half of 2018 in our Colorado markets.
East Segment Commentary
The 23% decrease in the average selling price of homes delivered in our East segment is due to a change in mix resulting from (1) the salea higher percentage of our “Metro Bonds”deliveries coming from our Florida markets, which have a lower average selling price than our mid-Atlantic market and (2) the salea higher percentage of marketable equity securities helddeliveries in this segment coming from communities that offer more affordable home plans. The 11% increase in new home deliveries was driven by an increased backlog conversion rate across all markets as a result of (1) a decrease in cancellation rates and (2) a higher percentage of deliveries from our Corporate segment. During the 2017 third quarter, we sold the Metro Bonds with a cost basis of $8.4 million for net proceeds of $44.2 million resulting in a realized gain of $35.8 million. The sale ofmore affordable product offerings, which typically have shorter cycle times than our marketable equity securities held by our Corporate segment resulted in realized gains of $16.4 million and $17.8 million for the three and nine months ended September 30, 2017, respectively.more traditional products.
.
Gross Margin from Home Sales:
Our gross margin from home sales for the three months ended March 31, 2019 increased 70 basis points year-over-year from 18.2% to 18.9%. During the three months ended March 31, 2019 and 2018, we recorded $0.9 million and $3.1 million of expense to adjust our warranty accrual. The adjustments to our warranty accrual negatively impacted gross margin by 10 basis points and 50 basis points, respectively. Our gross margin from home sales in the 2019 first quarter was positively impacted by a 20 basis point improvement in our capitalized interest in cost of sales as a percentage of home sale revenues, while the 2018 first quarter benefited by 20 basis points due to recoveries from a vendor as a result of product defect related issues.
Inventory Impairments:
Impairments of homebuilding inventory by segment for the three months ended March 31, 2019 and 2018 are shown in the table below:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
West | $ | - | $ | 375 | ||||
Mountain | 400 | 175 | ||||||
East | 210 | - | ||||||
Total inventory impairments | $ | 610 | $ | 550 |
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 | Inventory | Fair Value of Impairments | Number of | Discount Rate | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
March 31, 2019 | 16 | $ | 610 | $ | 10,476 | 2 | N/A | |||||||||||||
March 31, 2018 | 24 | $ | 550 | $ | 5,223 | 2 | 12 | % |
Selling, General and Administrative Expenses:
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
General and administrative expenses | $ | 42,572 | $ | 35,753 | $ | 6,819 | ||||||
General and administrative expenses as a percentage of home sale revenues | 6.6 | % | 5.9 | % | 70 bps | |||||||
Marketing expenses | $ | 18,296 | $ | 15,571 | $ | 2,725 | ||||||
Marketing expenses as a percentage of home sale revenues | 2.8 | % | 2.6 | % | 20 bps | |||||||
Commissions expenses | $ | 21,393 | $ | 20,017 | $ | 1,376 | ||||||
Commissions expenses as a percentage of home sale revenues | 3.3 | % | 3.3 | % | 0 bps | |||||||
Total selling, general and administrative expenses | $ | 82,261 | $ | 71,341 | $ | 10,920 | ||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 12.7 | % | 11.7 | % | 100 bps |
For the three months ended March 31, 2019, the increases in our general and administrative expenses were due to increased compensation-related expenses driven by higher average headcount and additional stock based compensation expense of $3.0 million, primarily caused by the performance-based stock awards that were granted in 2017.
Our marketing expenses increased for the three months ended March 31, 2019 due to increased sales office and model home expenses resulting from a 15% increase in active subdivisions as well as increased compensation-related expenses driven by higher average headcount.
Other Homebuilding Operating Data
Net New Orders:Orders and Active Subdivisions:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | 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 | 192 | $ | 64,765 | $ | 337.3 | 2.53 | 225 | $ | 67,424 | $ | 299.7 | 2.56 | (15) | % | (4) | % | 13 | % | (1) | % | ||||||||||||||||||||||||||||
California | 250 | 164,265 | 657.1 | 4.17 | 260 | 152,901 | 588.1 | 4.08 | (4) | % | 7 | % | 12 | % | 2 | % | ||||||||||||||||||||||||||||||||
Nevada | 184 | 70,130 | 381.1 | 3.23 | 175 | 58,443 | 334.0 | 2.75 | 5 | % | 20 | % | 14 | % | 17 | % | ||||||||||||||||||||||||||||||||
Washington | 66 | 37,570 | 569.2 | 2.84 | 83 | 38,061 | 458.6 | 2.26 | (20) | % | (1) | % | 24 | % | 26 | % | ||||||||||||||||||||||||||||||||
West | 692 | 336,730 | 486.6 | 3.20 | 743 | 316,829 | 426.4 | 2.95 | (7) | % | 6 | % | 14 | % | 8 | % | ||||||||||||||||||||||||||||||||
Colorado | 333 | 162,725 | 488.7 | 2.45 | 321 | 146,911 | 457.7 | 3.82 | 4 | % | 11 | % | 7 | % | (36) | % | ||||||||||||||||||||||||||||||||
Utah | 48 | 23,041 | 480.0 | 2.29 | 35 | 14,718 | 420.5 | 1.41 | 37 | % | 57 | % | 14 | % | 62 | % | ||||||||||||||||||||||||||||||||
Mountain | 381 | 185,766 | 487.6 | 2.43 | 356 | 161,629 | 454.0 | 3.27 | 7 | % | 15 | % | 7 | % | (26) | % | ||||||||||||||||||||||||||||||||
Maryland | 39 | 17,006 | 436.1 | 2.00 | 50 | 22,612 | 452.2 | 1.42 | (22) | % | (25) | % | (4) | % | 41 | % | ||||||||||||||||||||||||||||||||
Virginia | 44 | 20,984 | 476.9 | 3.45 | 52 | 26,869 | 516.7 | 2.04 | (15) | % | (22) | % | (8) | % | 69 | % | ||||||||||||||||||||||||||||||||
Florida | 114 | 36,229 | 317.8 | 2.20 | 95 | 35,938 | 378.3 | 1.74 | 20 | % | 1 | % | (16) | % | 26 | % | ||||||||||||||||||||||||||||||||
East | 197 | 74,219 | 376.7 | 2.35 | 197 | 85,419 | 433.6 | 1.71 | 0 | % | (13) | % | (13) | % | 37 | % | ||||||||||||||||||||||||||||||||
Total | 1,270 | $ | 596,715 | $ | 469.9 | 2.78 | 1,296 | $ | 563,877 | $ | 435.1 | 2.72 | (2) | % | 6 | % | 8 | % | 2 | % |
Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
West | 965 | $ | 433,307 | $ | 449.0 | 3.82 | 1,033 | $ | 458,195 | $ | 443.6 | 4.78 | (7 | %) | (5 | %) | 1 | % | (20 | %) | ||||||||||||||||||||||||||||
Mountain | 719 | 336,932 | 468.6 | 3.52 | 667 | 327,006 | 490.3 | 3.92 | 8 | % | 3 | % | (4 | %) | (10 | %) | ||||||||||||||||||||||||||||||||
East | 272 | 81,179 | 298.5 | 4.17 | 204 | 78,459 | 384.6 | 2.99 | 33 | % | 3 | % | (22 | %) | 39 | % | ||||||||||||||||||||||||||||||||
Total | 1,956 | $ | 851,418 | $ | 435.3 | 3.75 | 1,904 | $ | 863,660 | $ | 453.6 | 4.19 | 3 | % | (1 | %) | (4 | %) | (11 | %) |
*Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period |
Average Active Subdivisions | ||||||||||||||||||||||||
Active Subdivisions | Three Months Ended | |||||||||||||||||||||||
March 31, | % | March 31, | % | |||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | |||||||||||||||||||
West | 88 | 73 | 21 | % | 84 | 72 | 17 | % | ||||||||||||||||
Mountain | 64 | 58 | 10 | % | 69 | 57 | 21 | % | ||||||||||||||||
East | 26 | 24 | 8 | % | 22 | 23 | (4 | %) | ||||||||||||||||
Total | 178 | 155 | 15 | % | 175 | 152 | 15 | % |
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | 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 | 638 | $ | 209,547 | $ | 328.4 | 2.76 | 684 | $ | 207,456 | $ | 303.3 | 2.52 | (7) | % | 1 | % | 8 | % | 10 | % | ||||||||||||||||||||||||||||
California | 727 | 465,164 | 639.8 | 4.21 | 797 | 476,341 | 597.7 | 4.36 | (9) | % | (2) | % | 7 | % | (3) | % | ||||||||||||||||||||||||||||||||
Nevada | 746 | 265,691 | 356.2 | 4.17 | 634 | 220,799 | 348.3 | 3.31 | 18 | % | 20 | % | 2 | % | 26 | % | ||||||||||||||||||||||||||||||||
Washington | 332 | 184,112 | 554.6 | 3.80 | 325 | 156,546 | 481.7 | 2.82 | 2 | % | 18 | % | 15 | % | 35 | % | ||||||||||||||||||||||||||||||||
West | 2,443 | 1,124,514 | 460.3 | 3.64 | 2,440 | 1,061,142 | 434.9 | 3.20 | 0 | % | 6 | % | 6 | % | 14 | % | ||||||||||||||||||||||||||||||||
Colorado | 1,292 | 627,845 | 485.9 | 3.40 | 1,227 | 583,309 | 475.4 | 4.00 | 5 | % | 8 | % | 2 | % | (15) | % | ||||||||||||||||||||||||||||||||
Utah | 171 | 77,114 | 451.0 | 2.41 | 178 | 67,394 | 378.6 | 2.47 | (4) | % | 14 | % | 19 | % | (2) | % | ||||||||||||||||||||||||||||||||
Mountain | 1,463 | 704,959 | 481.9 | 3.24 | 1,405 | 650,703 | 463.1 | 3.71 | 4 | % | 8 | % | 4 | % | (13) | % | ||||||||||||||||||||||||||||||||
Maryland | 122 | 54,468 | 446.5 | 1.65 | 208 | 96,590 | 464.4 | 1.89 | (41) | % | (44) | % | (4) | % | (13) | % | ||||||||||||||||||||||||||||||||
Virginia | 171 | 88,600 | 518.1 | 3.58 | 210 | 108,779 | 518.0 | 2.75 | (19) | % | (19) | % | 0 | % | 30 | % | ||||||||||||||||||||||||||||||||
Florida | 365 | 128,091 | 350.9 | 2.22 | 325 | 133,533 | 410.9 | 2.19 | 12 | % | (4) | % | (15) | % | 1 | % | ||||||||||||||||||||||||||||||||
East | 658 | 271,159 | 412.1 | 2.30 | 743 | 338,902 | 456.1 | 2.22 | (11) | % | (20) | % | (10) | % | 4 | % | ||||||||||||||||||||||||||||||||
Total | 4,564 | $ | 2,100,632 | $ | 460.3 | 3.24 | 4,588 | $ | 2,050,747 | $ | 447.0 | 3.11 | (1) | % | 2 | % | 3 | % | 4 | % | ||||||||||||||||||||||||||||
* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period
West Segment Commentary
For both the three and nine months ended September 30, 2017,March 31, 2019, the dollar value of net new orders was updecreased 5% year-over-year, as increases in the average price of homes sold were partially offsetdriven by declinesa 7% decrease in the number of net new orders. The lower number of net new orders was the result of a 20% decrease in the monthly sales absorption rate. While all markets experienced a decline in their sales pace year-over-year, California was the main driver of the decline as a result of: (1) a smaller relative proportion of affordable product offerings currently available in this market and (2) an increased cancellation rate (see further discussion below). The decline in our sales pace was mostly offset by a 17% increase in average active community count as all markets experienced a double digit percentage increase in average active community count with the exception of Arizona, which was flat year-over-year. Oregon, our newest market, finished the quarter with two active communities compared with none a year ago.
Mountain Segment Commentary
For the three months ended March 31, 2019, the dollar value of net new orders increased 3% from the same period in the prior year primarily due to an 8% increase in our number of net new orders. Our higher number of net new orders was the result of a 21% increase in average active community count as a result of growth in Utah where we continue to see strong potential and have increased our community count accordingly. This increase was partially offset by a 10% decrease in monthly sales absorption pace. Colorado and Utah both experienced a decline in sales pace consistent with industry trends, with Utah further impacted by an increased cancellation rate (see further discussion below).
DuringEast Segment Commentary
For the 2017 third quarter,three months ended March 31, 2019, our Nevada, Colorado and Utah markets experienced the largest percentage increases in the dollar valuevalues of net new orders increased 3% from the same period in 2018 as a result of year-over-year improvements in both the number of net new orders and average selling price of net new orders. In our Nevada and Colorado markets, the increases in average selling price were the result of both price increases implemented in most existing communities and shifts in mix to higher priced communities (in Colorado, this occurred even with our more affordable Seasons™ product line becoming a more significant contributor to our net new orders). The increase in average selling price in our Utah market was predominantly due to a shift in mix to higher priced communities. The increases in net new orders for our Nevada and Utah markets were driven by improvements39% improvement in our monthly sales absorption paces despite year-over-year declinesrate was largely offset by a 22% decline in our average active subdivisions.selling price of net new orders. The 2017 third quarter absorptionimproved sales pace was primarily due to an increased offering of more affordable products in our Florida markets, which have realized a higher selling pace. The sales pace in our Colorado market was negatively impacted byFlorida markets also benefited from a number of factors including (1) a higherdecreased cancellation rate and lower sales pace as a result of the joist issue, (2) a higher number of sales coming from inactive communities in 2016 third quarter compared to the 2017 third quarter, and (3) close-out of certain communities prior to the start of the 2017 third quarter that had robust monthly sales absorption paces in the 2016 third quarter. Despite our monthly absorption pace in our Colorado market being driven down by the above factors, we were able to achieve growth in the number of net new orders as our(see further discussion below). Our average active community count was up 61% year-over-year. While salesdown slightly due to decreased land acquisition activity in the mid-Atlantic region over the past two years where we have invested less because our Floridareturns in this market was impacted negatively by Hurricane Irma,had been lower than expected. However, as noted above, we were still able to achieve a 26% year-over-year increasehave recently experienced improving returns in the mid-Atlantic region resulting in our monthly sales absorption pace as a result of strong demand. In our Maryland and Virginia markets, strong improvements in our monthly sales absorption pace, driven by improving demand for higher density products, were more than offset by the impact of substantial declines in average active subdivisions.
For the nine months ended September 30, 2017, the dollar value of net new orders was up slightly when compared to the same period in 2016 as slight improvements in average selling price and our monthly sales absorption pace were modestly offset by a lower average active community count. Our Nevada, Washington, Utah and Colorado markets experienced the most meaningful year-over-year improvements in the dollar value of net new orders. The increase in Nevada’s dollar value of net new orders was primarily the result of a substantially improved monthly sales absorption pace due to higher demand in newly opened communities. In our Washington market, the primary driver of the increase in the dollar value of net new orders was an increase in the average selling price due to price increases implemented in existing communities that were prompted by high demandreinvestment in this market. A 24% year-over-year increase in the number of average active subdivisions in our Colorado market was partially offset by a lower monthly sales absorption rate due mostly to the joist issue discussed above. The increase in dollar value of net new orders for our Utah market was primarily the result of an increasedecrease in the average selling price of net new orders is due to price increases implemented in most existing communities. As discussed above, inmix as a result of: (1) a higher percentage of our Maryland and Virginia markets, the year-over-year declines in the dollar value of net new orders were primarily driven by decreases in average active subdivisions.
Active Subdivisions:
Average Active Subdivisions | Average Active Subdivisions | |||||||||||||||||||||||||||||||||||
Active Subdivisions | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 30, | % | September 30, | % | September 30, | % | |||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||||
Arizona | 27 | 30 | (10) | % | 25 | 29 | (14) | % | 26 | 30 | (13) | % | ||||||||||||||||||||||||
California | 23 | 21 | 10 | % | 20 | 21 | (5) | % | 19 | 20 | (5) | % | ||||||||||||||||||||||||
Nevada | 19 | 20 | (5) | % | 19 | 21 | (10) | % | 20 | 21 | (5) | % | ||||||||||||||||||||||||
Washington | 7 | 14 | (50) | % | 8 | 12 | (33) | % | 10 | 13 | (23) | % | ||||||||||||||||||||||||
West | �� | 76 | 85 | (11) | % | 72 | 83 | (13) | % | 75 | 84 | (11) | % | |||||||||||||||||||||||
Colorado | 48 | 28 | 71 | % | 45 | 28 | 61 | % | 42 | 34 | 24 | % | ||||||||||||||||||||||||
Utah | 7 | 9 | (22) | % | 7 | 8 | (13) | % | 8 | 8 | 0 | % | ||||||||||||||||||||||||
Mountain | 55 | 37 | 49 | % | 52 | 36 | 44 | % | 50 | 42 | 19 | % | ||||||||||||||||||||||||
Maryland | 5 | 11 | (55) | % | 7 | 12 | (42) | % | 8 | 12 | (33) | % | ||||||||||||||||||||||||
Virginia | 4 | 8 | (50) | % | 4 | 9 | (56) | % | 5 | 9 | (44) | % | ||||||||||||||||||||||||
Florida | 14 | 18 | (22) | % | 17 | 18 | (6) | % | 18 | 17 | 6 | % | ||||||||||||||||||||||||
East | 23 | 37 | (38) | % | 28 | 39 | (28) | % | 31 | 38 | (18) | % | ||||||||||||||||||||||||
Total | 154 | 159 | (3) | % | 152 | 158 | (4) | % | 156 | 164 | (5) | % |
At September 30, 2017, we had 154 active subdivisions, up slightlycoming from the endan expanded offering of more affordable home plans, due to an increasing level of demand for these plans, and (2) a higher percentage of our 2017 second quarter and down 3%net new orders coming from September 30, 2016. For Colorado, the increase was due to increased land acquisition activity over the last two years. In Virginia and Maryland, weour Florida markets, which have tempereda lower average selling price than our land acquisition activity over the past two years as our returns in these markets have been lower than returns we expect to realize. Active subdivisions in our Washington market were down 50% year-over-year as of September 30, 2017. While a large driver of that decline was the closeout of communities earlier than anticipated due to strong sales, our land acquisition activity was lower than anticipated due to increased competition for the acquisition of new communities. For all remaining markets, the year-over-year changes were primarily driven by the timing of opening new communities versus closing out older ones, with many communities closing earlier than anticipated due to higher monthly absorption paces during 2017 compared to 2016. Furthermore, through the nine months ended September 30, 2017, we approved the acquisition of over 7,800 lots, more than double the number during the same period a year ago.mid-Atlantic operations.
Cancellation Rate:
Cancellations As a Percentage of Homes in Beginning Backlog | Cancellations As a Percentage of Gross Sales* | |||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Change in | Three Months Ended September 30, | Change in | Nine Months Ended September 30, | Change in | |||||||||||||||||||||||||||||||
2017 | 2016 | Percentage | 2017 | 2016 | Percentage | 2017 | 2016 | Percentage | ||||||||||||||||||||||||||||
Arizona | 18 | % | 19 | % | (1) | % | 26 | % | 26 | % | 0 | % | 18 | % | 24 | % | (6) | % | ||||||||||||||||||
California | 9 | % | 14 | % | (5) | % | 16 | % | 23 | % | (7) | % | 20 | % | 21 | % | (1) | % | ||||||||||||||||||
Nevada | 9 | % | 15 | % | (6) | % | 19 | % | 26 | % | (7) | % | 11 | % | 18 | % | (7) | % | ||||||||||||||||||
Washington | 8 | % | 6 | % | 2 | % | 27 | % | 17 | % | 10 | % | 17 | % | 17 | % | 0 | % | ||||||||||||||||||
West | 11 | % | 14 | % | (3) | % | 21 | % | 24 | % | (3) | % | 16 | % | 20 | % | (4) | % | ||||||||||||||||||
Colorado | 13 | % | 9 | % | 4 | % | 32 | % | 24 | % | 8 | % | 17 | % | 19 | % | (2) | % | ||||||||||||||||||
Utah | 13 | % | 10 | % | 3 | % | 28 | % | 31 | % | (3) | % | 22 | % | 22 | % | 0 | % | ||||||||||||||||||
Mountain | 13 | % | 9 | % | 4 | % | 32 | % | 24 | % | 8 | % | 18 | % | 20 | % | (2) | % | ||||||||||||||||||
Maryland | 9 | % | 18 | % | (9) | % | 15 | % | 32 | % | (17) | % | 31 | % | 25 | % | 6 | % | ||||||||||||||||||
Virginia | 7 | % | 15 | % | (8) | % | 17 | % | 30 | % | (13) | % | 21 | % | 20 | % | 1 | % | ||||||||||||||||||
Florida | 11 | % | 19 | % | (8) | % | 24 | % | 32 | % | (8) | % | 21 | % | 28 | % | (7) | % | ||||||||||||||||||
East | 10 | % | 17 | % | (7) | % | 21 | % | 31 | % | (10) | % | 23 | % | 25 | % | (2) | % | ||||||||||||||||||
Total | 12 | % | 13 | % | (1) | % | 24 | % | 25 | % | (1) | % | 18 | % | 21 | % | (3) | % | ||||||||||||||||||
* Cancellations as a percentage of gross sales data has been provided for information only. No commentary is included below.
Cancellations as a Percentage of Homes in Beginning Backlog | ||||||||||||
Three Months Ended March 31, | Change in | |||||||||||
2019 | 2018 | Percentage | ||||||||||
West | 14 | % | 14 | % | 0 | % | ||||||
Mountain | 14 | % | 11 | % | 3 | % | ||||||
East | 11 | % | 23 | % | (12 | %) | ||||||
Total | 14 | % | 14 | % | 0 | % |
Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) improvedremained unchanged year-over-year. Our East segment experienced the largest percentage decrease as we saw double digit percentage improvements across all markets. In addition, the cancellation rate in our Florida (East segment) markets benefited from 13%the implementation of additional underwriting procedures prior to the acceptance of new home contracts. Our Utah (Mountain segment) and Southern California (West segment) markets experienced the largest percentage increases year-over-year. The increase in Utah was primarily due to a shift in mix to include more first-time homebuyers, who have a higher likelihood of cancellation, while the 2016 third quarterincrease in Southern California is largely due to 12% in the 2017 third quarter. Each of our California, Nevada, Maryland, Virginia and Florida markets had notable decreases in their cancellation rateshomebuyer uncertainty as a result of process improvements around accepting sales and managing backlog. The increased cancellation rate in our Colorado market is the resultaffordability concerns.
Backlog:
At September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 374 | $ | 133,074 | $ | 355.8 | 423 | $ | 132,929 | $ | 314.3 | (12) | % | 0 | % | 13 | % | ||||||||||||||||||||
California | 546 | 378,448 | 693.1 | 627 | 389,622 | 621.4 | (13) | % | (3) | % | 12 | % | ||||||||||||||||||||||||
Nevada | 411 | 151,726 | 369.2 | 397 | 139,731 | 352.0 | 4 | % | 9 | % | 5 | % | ||||||||||||||||||||||||
Washington | 279 | 156,974 | 562.6 | 270 | 133,367 | 494.0 | 3 | % | 18 | % | 14 | % | ||||||||||||||||||||||||
West | 1,610 | 820,222 | 509.5 | 1,717 | 795,649 | 463.4 | (6) | % | 3 | % | 10 | % | ||||||||||||||||||||||||
Colorado | 1,192 | 595,675 | 499.7 | 1,104 | 530,662 | 480.7 | 8 | % | 12 | % | 4 | % | ||||||||||||||||||||||||
Utah | 149 | 67,830 | 455.2 | 141 | 53,180 | 377.2 | 6 | % | 28 | % | 21 | % | ||||||||||||||||||||||||
Mountain | 1,341 | 663,505 | 494.8 | 1,245 | 583,842 | 468.9 | 8 | % | 14 | % | 6 | % | ||||||||||||||||||||||||
Maryland | 74 | 34,102 | 460.8 | 120 | 56,837 | 473.6 | (38) | % | (40) | % | (3) | % | ||||||||||||||||||||||||
Virginia | 111 | 58,225 | 524.5 | 118 | 64,228 | 544.3 | (6) | % | (9) | % | (4) | % | ||||||||||||||||||||||||
Florida | 327 | 132,238 | 404.4 | 248 | 111,499 | 449.6 | 32 | % | 19 | % | (10) | % | ||||||||||||||||||||||||
East | 512 | 224,565 | 438.6 | 486 | 232,564 | 478.5 | 5 | % | (3) | % | (8) | % | ||||||||||||||||||||||||
Total | 3,463 | $ | 1,708,292 | $ | 493.3 | 3,448 | $ | 1,612,055 | $ | 467.5 | 0 | % | 6 | % | 6 | % |
March 31, | ||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
West | 1,736 | $ | 830,703 | $ | 478.5 | 1,803 | $ | 923,326 | $ | 512.1 | (4 | %) | (10 | %) | (7 | %) | ||||||||||||||||||||
Mountain | 1,353 | 690,623 | 510.4 | 1,504 | 766,010 | 509.3 | (10 | %) | (10 | %) | 0 | % | ||||||||||||||||||||||||
East | 445 | 133,140 | 299.2 | 482 | 190,102 | 394.4 | (8 | %) | (30 | %) | (24 | %) | ||||||||||||||||||||||||
Total | 3,534 | $ | 1,654,466 | $ | 468.2 | 3,789 | $ | 1,879,438 | $ | 496.0 | (7 | %) | (12 | %) | (6 | %) |
At September 30, 2017,March 31, 2019, we had 3,4633,534 homes in backlog with a total value of $1.71$1.65 billion, representing respective increasesdecreases of 15 homes7% and $96.2 million12% from September 30, 2016.March 31, 2018. The majority of our markets experienced a year-over-year growthdecline in both the number of homes in backlog and the average selling price of those homes to end the quarter. The decrease in the dollar valuenumber of homes in backlog is primarily as a result of the year-over-year decrease in net new orders in the fourth quarter of 2018 coupled with an increase in backlog conversion rates due to improved cycle times. The decrease in the average selling price increases overof homes in backlog is due to a shift in mix to lower priced communities, consistent with our focus on offering more affordable home plans, as well as a shift in geographical mix with an increased proportion of net new orders coming from our Arizona (West segment) and Florida (East segment) markets, which have the last twelve months. Backloglowest average selling prices in our Maryland and Virginia markets declined from September 30, 2016 as a result of reduced sales activity over the last twelve months, mostly due to lower community count.Company.
Homes Completed or Under Construction (WIP lots):
September 30, | % | March 31, | % | |||||||||||||||||||||
2017 | 2016 | Change | 2019 | 2018 | Change | |||||||||||||||||||
Unsold: | ||||||||||||||||||||||||
Completed | 78 | 81 | (4) | % | 120 | 86 | 40 | % | ||||||||||||||||
Under construction | 218 | 298 | (27) | % | 177 | 203 | (13 | %) | ||||||||||||||||
Total unsold started homes | 296 | 379 | (22) | % | 297 | 289 | 3 | % | ||||||||||||||||
Sold homes under construction or completed | 2,591 | 2,626 | (1) | % | 2,362 | 2,549 | (7 | %) | ||||||||||||||||
Model homes under construction or completed | 319 | 293 | 9 | % | 459 | 366 | 25 | % | ||||||||||||||||
Total homes completed or under construction | 3,206 | 3,298 | (3) | % | 3,118 | 3,204 | (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 22% year-over-year from September 30, 2016. The decline in unsold homes was partially offset by an increase inOur model homes, while sold homes under construction was nearly unchanged fromor completed were up 25% despite our active community count being up only 15% year-over-year. This is primarily the prior year.result of models being constructed to open new communities in the near future as we plan for growth in our active community count.
Lots Owned and Optioned (including homes completed or under construction):
September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | ||||||||||||||||||||||
Arizona | 1,971 | 761 | 2,732 | 1,515 | 269 | 1,784 | 53 | % | ||||||||||||||||||||
California | 1,454 | 679 | 2,133 | 1,753 | 75 | 1,828 | 17 | % | ||||||||||||||||||||
Nevada | 2,150 | 401 | 2,551 | 2,051 | 200 | 2,251 | 13 | % | ||||||||||||||||||||
Washington | 655 | 64 | 719 | 853 | - | 853 | (16) | % | ||||||||||||||||||||
West | 6,230 | 1,905 | 8,135 | 6,172 | 544 | 6,716 | 21 | % | ||||||||||||||||||||
Colorado | 4,622 | 2,960 | 7,582 | 4,051 | 1,347 | 5,398 | 40 | % | ||||||||||||||||||||
Utah | 456 | 132 | 588 | 380 | - | 380 | 55 | % | ||||||||||||||||||||
Mountain | 5,078 | 3,092 | 8,170 | 4,431 | 1,347 | 5,778 | 41 | % | ||||||||||||||||||||
Maryland | 122 | 48 | 170 | 261 | 143 | 404 | (58) | % | ||||||||||||||||||||
Virginia | 282 | 30 | 312 | 429 | 15 | 444 | (30) | % | ||||||||||||||||||||
Florida | 941 | 1,231 | 2,172 | 962 | 455 | 1,417 | 53 | % | ||||||||||||||||||||
East | 1,345 | 1,309 | 2,654 | 1,652 | 613 | 2,265 | 17 | % | ||||||||||||||||||||
Total | 12,653 | 6,306 | 18,959 | 12,255 | 2,504 | 14,759 | 28 | % |
March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | ||||||||||||||||||||||
West | 7,894 | 2,462 | 10,356 | 7,421 | 2,205 | 9,626 | 8 | % | ||||||||||||||||||||
Mountain | 6,636 | 2,612 | 9,248 | 5,206 | 3,398 | 8,604 | 7 | % | ||||||||||||||||||||
East | 1,989 | 1,294 | 3,283 | 1,531 | 1,692 | 3,223 | 2 | % | ||||||||||||||||||||
Total | 16,519 | 6,368 | 22,887 | 14,158 | 7,295 | 21,453 | 7 | % |
Our total owned and optioned lots at September 30, 2017March 31, 2019 were 18,959,22,887, up 28%7% from September 30, 2016,March 31, 2018, due to substantial growth in our optioned lots as a result of our significantincreased land acquisition approval activity over the past nine months. 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. Though our lots controlled count is down year-over-year in Washington, we remain committed to that market and continue to pursueyear across all land acquisition opportunities as they arise.markets. We believe that our total lot supply, of approximately 3.4 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 growth in future periods. See "Forward-Looking Statements" below.
Financial Services
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
Financial services revenues | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 11,176 | $ | 11,294 | $ | (118 | ) | (1) | % | $ | 36,056 | $ | 28,866 | $ | 7,190 | 25 | % | $ | 10,174 | $ | 12,696 | $ | (2,522 | ) | (20 | %) | ||||||||||||||||||||||
Other | 6,288 | 6,114 | 174 | 3 | % | 18,460 | 15,382 | 3,078 | 20 | % | 7,230 | 6,339 | 891 | 14 | % | |||||||||||||||||||||||||||||||||
Total financial services revenues | $ | 17,464 | $ | 17,408 | $ | 56 | 0 | % | $ | 54,516 | $ | 44,248 | $ | 10,268 | 23 | % | $ | 17,404 | $ | 19,035 | $ | (1,631 | ) | (9 | %) | |||||||||||||||||||||||
Financial services pretax income | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 5,857 | $ | 6,723 | $ | (866 | ) | (13) | % | $ | 21,093 | $ | 16,491 | $ | 4,602 | 28 | % | $ | 4,993 | $ | 7,520 | $ | (2,527 | ) | (34 | %) | ||||||||||||||||||||||
Other | 3,654 | 3,654 | - | 0 | % | 11,158 | 8,555 | 2,603 | 30 | % | 9,558 | 2,551 | 7,007 | 275 | % | |||||||||||||||||||||||||||||||||
Total financial services pretax income | $ | 9,511 | $ | 10,377 | $ | (866 | ) | (8) | % | $ | 32,251 | $ | 25,046 | $ | 7,205 | 29 | % | $ | 14,551 | $ | 10,071 | $ | 4,480 | 44 | % |
For the three months ended September 30, 2017,March 31, 2019, our financial serviceservices pretax income decreased $0.9increased $4.5 million, or 8%44%, from the same period in the prior year. The declineincrease was primarily the result of a decline in the dollar value of loans locked, originated and sold in our mortgage operations. For the nine months ended September 30, 2017, our financial services pretax income was up $7.2 million, or 29% from the same period in 2016. The increase in pretax income for our mortgage operations segment was 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 income indue to our other financial services segment and was driven by $4.8 million of net gains on equity securities for the ninethree months ended September 30, 2017March 31, 2019 as compared to $1.2 million of net losses on equity securities for the three months ended March 31, 2018. This was primarilypartially offset by a decrease in our mortgage operations segment, which saw a decrease in the resultcapture rate of increased new home deliveries.deliveries and an increase in special financing offers year-over-year, both of which negatively impacted pretax income for the three months ended March 31, 2019.
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 | Nine Months Ended | % or | Three Months Ended | % or | |||||||||||||||||||||||||||||||
September 30, | Percentage | September 30, | Percentage | March 31, | Percentage | |||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2019 | 2018 | Change | ||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Total Originations (including transfer loans): |
| |||||||||||||||||||||||||||||||||||
Loans | 824 | 862 | (4) | % | 2,497 | 2,146 | 16 | % | 783 | 807 | (3 | %) | ||||||||||||||||||||||||
Principal | $ | 288,326 | $ | 296,456 | (3) | % | $ | 872,781 | $ | 747,941 | 17 | % | $ | 285,525 | $ | 298,070 | (4 | %) | ||||||||||||||||||
Capture Rate Data: | ||||||||||||||||||||||||||||||||||||
Capture rate as % of all homes delivered | 62 | % | 66 | % | (4) | % | 62 | % | 61 | % | 1 | % | 58 | % | 63 | % | (5 | %) | ||||||||||||||||||
Capture rate as % of all homes delivered (excludes cash sales) | 66 | % | 69 | % | (3) | % | 66 | % | 64 | % | 2 | % | 62 | % | 68 | % | (6 | %) | ||||||||||||||||||
Mortgage Loan Origination Product Mix: | ||||||||||||||||||||||||||||||||||||
FHA loans | 20 | % | 21 | % | (1) | % | 19 | % | 20 | % | (1) | % | 17 | % | 14 | % | 3 | % | ||||||||||||||||||
Other government loans (VA & USDA) | 20 | % | 22 | % | (2) | % | 21 | % | 24 | % | (3) | % | 20 | % | 19 | % | 1 | % | ||||||||||||||||||
Total government loans | 40 | % | 43 | % | (3) | % | 40 | % | 44 | % | (4) | % | 37 | % | 33 | % | 4 | % | ||||||||||||||||||
Conventional loans | 60 | % | 57 | % | 3 | % | 60 | % | 56 | % | 4 | % | 63 | % | 67 | % | (4 | %) | ||||||||||||||||||
100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | |||||||||||||||||||
Loan Type: | ||||||||||||||||||||||||||||||||||||
Fixed rate | 97 | % | 97 | % | 0 | % | 97 | % | 98 | % | (1) | % | 96 | % | 97 | % | (1 | %) | ||||||||||||||||||
ARM | 3 | % | 3 | % | 0 | % | 3 | % | 2 | % | 1 | % | 4 | % | 3 | % | 1 | % | ||||||||||||||||||
Credit Quality: | ||||||||||||||||||||||||||||||||||||
Average FICO Score | 735 | 735 | 0 | % | 735 | 736 | (0) | % | 736 | 744 | (1 | %) | ||||||||||||||||||||||||
Other Data: | ` | ` | ||||||||||||||||||||||||||||||||||
Average Combined LTV ratio | 83 | % | 83 | % | 0 | % | 83 | % | 84 | % | (1) | % | 81 | % | 81 | % | 0 | % | ||||||||||||||||||
Full documentation loans | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | ||||||||||||||||||
Loans Sold to Third Parties: | ||||||||||||||||||||||||||||||||||||
Loans | 836 | 840 | (0) | % | 2,645 | 2,144 | 23 | % | 889 | 873 | 2 | % | ||||||||||||||||||||||||
Principal | $ | 293,375 | $ | 295,818 | (1) | % | $ | 921,431 | $ | 744,958 | 24 | % | $ | 320,414 | $ | 320,753 | (0 | %) |
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 31.8%27.1% and 34.1%23.3% for the three and nine months ended September 30, 2017,March 31, 2019 and 2018, respectively, compared to 30.7% and 32.3% for the three and nine months ended September 30, 2016, respectively. The rates for the three and nine months ended September 30, 2017 resultedresulting in income tax expense of $28.5$15.1 million and $60.7 million, respectively, compared to income tax expense of $11.7 million and $29.9$11.8 million for the same periods, in 2016.respectively. The year-over-year increase in our effective tax rate for the three months ended September 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. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rateMarch 31, 2019 was due to the foregoinga $1.2 million benefit from energy tax credits matter coupled with the establishment of a valuation allowance in the 2017which reduced our 2018 first quarter against certain state net operating loss carryforwards where realizationtax rate. It is currently uncertain as to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was more uncertain atrecorded for the time. These items were somewhat offset by the release of the Metro Bonds valuation allowance discussed above.2019 first quarter.
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’sManagement’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, 2016.2018.
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources to: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 facilityRevolving Credit Facility and mortgage repurchase facility.Mortgage Repurchase Facility (both defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.5 billion ($1.35 billion after the public offering of an additional $150 million principal amount of our 6% senior notes due 2043). See Note 20 for additional information.$1.35 billion.
We have marketable equity securities that consist primarily of holdings in corporate equities.common stock and exchange traded funds.
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 (see Note 20 for additional information on the public offering of an additional $150 million principal amount of these notes);2043; (3) our Revolving Credit Facility (defined below) 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 seniorsenior 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 was amended on September 29, 2017November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 16, 2022,18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a specified eurocurrencyprime rate, or (3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.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.
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 Revolving Credit Facility. 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 September 30, 2017.March 31, 2019.
AsWe incur costs associated with unused commitment fees pursuant to the terms of September 30, 2017, we had $15.0the Revolving Credit Facility. At March 31, 2019 and December 31, 2018, there were $27.6 million in borrowings and $34.0$27.8 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We had $15.0 million outstanding under the Revolving Credit Facility leaving remaining borrowing capacityas of $651.0March 31, 2019 and December 31, 2018. As of March 31, 2019, availability under the Revolving Credit Facility was approximately $957.4 million.
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 10, 2017,9, 2018, the Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018.8, 2019. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) 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 DecemberMarch 27, 20162019 from $75 million to $125$100 million and was effective through April 24, 2019. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130 million on December 27, 2018 and was effective through January 25, 2017.2019. At September 30, 2017March 31, 2019 and December 31, 2016,2018, HomeAmerican had $65.1$84.9 million and $114.5$116.8 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.based on a LIBOR rate or successor benchmark rate.
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 September 30, 2017.March 31, 2019.
Dividends
During the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we paid dividends of $0.25$0.30 per share and $0.75$0.28 per share, respectively, compared to $0.24 per share and $0.72 per share for the same periods in the prior year, respectively.
MDC Common Stock Repurchase Program
At September 30, 2017,March 31, 2019, 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 September 30, 2017.March 31, 2019.
ConsolidatedConsolidated Cash Flow
During the ninethree months ended September 30, 2017,March 31, 2019, we generated $69.2$54.3 million of cash from operating activities, primarily due to (1)to: 1) net income of $117.3$40.6 million, (2)2) a $49.0 millionnet decrease in mortgage loans held-for-sale (3)of $38.4 million, 3) non-cash add-backs to net income related to depreciation and stock-based compensation totaling $9.1 million and 4) a $22.8 million decrease in our net deferred tax asset, and (4) a $15.3 million increase in accounts payable and accrued liabilities. The increasesassets of $2.7 million. These amounts were partially offset byby: 1) a net increase in housing inventoryland and land under development of $82.1$18.5 million, an $11.2 million2) a net increase in prepaidtrade and other assets,receivables of $13.8 million and 3) net gains on the salemarketable equity securities of investments, including our Metro Bonds of $54.0$4.8 million.
During the ninethree months ended September 30, 2017,March 31, 2019, we generated $108.0used $6.4 million of cash for investing activities, primarily attributabledue to net proceeds from the sale and purchase of marketable equity securities of $65.7 million and proceeds from the sale of the Metro Bonds of $44.3 million. These amounts were slightly offset by the purchase of $1.9$6.4 million in property and equipment.
During the ninethree months ended September 30, 2017,March 31, 2019, we used $82.3$42.0 million inof cash for financing activities, primarily related to payments of $49.4 millionnet payments on our mortgage repurchase facility of $32.0 million and dividend payments totaling $38.8$17.1 million. These amounts were slightly offset by proceeds of $8.5$7.1 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 September 30, 2017,March 31, 2019, we had deposits of $11.1$22.0 million in the form of cash and $3.6$5.4 million in the form of letters of credit that secured option contracts to purchase 6,3066,368 lots for a total estimated purchase price of $463.0$463.1 million.
Surety Bonds and Letters of Credit. At September 30, 2017,March 31, 2019, we had outstanding surety bonds and letters of credit totaling $184.9$245.5 million and $65.5$89.3 million, respectively, including $31.6$61.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $33.0$126.6 million and $25.3$51.2 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 mademade no material guarantees with respect to third-party obligations.
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, 20162018 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, 20162018 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
| Quantitative and Qualitative Disclosures About Market Risk |
OurWe have a cash and investment policy and strategy isthat enables us to achieve an appropriate investment return while preserving principal and managing risk. OurUnder this policy, our cash and cash equivalents may include immediately availableU.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, certificates of deposit and time deposits.deposits, with maturities of three months or less. Our marketable securities consist of under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate equities, preferred stock and exchange traded funds. debt securities.
The market value and/or income derived from our equity securities can be negatively impacted bymay go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of equity securities may also decline for a number of market risk factors, including changes in interest rates, general economic conditionsother reasons that directly relate to the issuer, such as management performance, financial leverage, the issuer’s historical and equity markets. prospective earnings, the value of its assets and reduced demand for its goods and services. Equity securities generally have greater price volatility than bonds and other debt securities.
As of September 30, 2017, we hadMarch 31, 2019, our cash and cash equivalents included U.S. government securities, commercial bank deposits, money market funds and time deposits, with maturities of three months or less. As of March 31, 2019, our marketable securities included holdings in unrealized loss positions totaling $0.6 million, against which we recorded impairments totaling $0.0 million during the current quarter. For the remaining marketable securities in unrealized loss positions totaling $0.6 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.common stock and exchange traded funds.
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’sHomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at September 30, 2017March 31, 2019 had an aggregate principal balance of $101.2$149.4 million, all of which were under interest rate lock commitments at an average interest rate of 3.99%4.30%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $87.1$107.0 million at September 30, 2017,March 31, 2019, of which $14.0$14.1 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.04%4.47%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale thatwhich had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $85.0$121.0 million and $65.5 million at September 30, 2017.March 31, 2019 and December 31, 2018, respectively.
HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 1510 and 4035 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.
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.
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 September 30, 2017March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORM 10-Q10-Q
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.
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, 2016.2018. 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, 2016,2018, 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. |
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● | 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 or regulations may have an adverse effect on |
● | 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 |
● | 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. |
● | The interests of certain controlling shareholders may be adverse to other 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 nine months ended September 30, 2017.March 31, 2019. Additionally, there were no sales of unregistered equity securities during the period.
Exhibits |
10.1 | ||
10.2 | ||
10.3 |
10.4 |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | ||
The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of |
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* Incorporated by reference
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: | M.D.C. HOLDINGS, INC. | (Registrant)
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By: | /s/ Robert N. Martin |
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Robert N. Martin | |||
Officer (principal financial officer and duly authorized officer) |
INDEX TO EXHIBITS
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* Incorporated by reference
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