XNYS:MDC M.D.C. Holdings, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

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

of incorporation or organization)

 

(I.R.S. employer

identification no.)

 

4350 South Monaco Street, Suite 500  
Denver, Colorado   80237
(Address of principal executive offices)   (Zip code)

(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  x    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  x    No  ¨

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

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

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

As of July 30, 2012, 47,993,316 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

 


Table of Contents

M.D.C. HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012

INDEX

 

               Page
No.
 

Part I. Financial Information:

  
   Item 1.    Unaudited Consolidated Financial Statements:   
      Consolidated Balance Sheets at June 30, 2012 and December 31, 2011      1   
     

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011

     2   
      Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011      3   
      Notes to Unaudited Consolidated Financial Statements      4   
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      37   
   Item 4.    Controls and Procedures      37   

Part II. Other Information:

  
   Item 1.    Legal Proceedings      38   
   Item 1A.    Risk Factors      38   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      39   
   Item 3.    Defaults Upon Senior Securities      39   
   Item 4.    Mine Safety Disclosures      39   
   Item 5.    Other Information      39   
   Item 6.    Exhibits      40   
   Signature      40   

 

(i)


Table of Contents
ITEM 1. Unaudited Consolidated Financial Statement

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

 

     June 30,
2012
    December 31,
2011
 
     (Dollars in thousands, except per share amounts)  
     (Unaudited)  
ASSETS   

Homebuilding:

    

Cash and cash equivalents

   $ 298,274      $ 316,418   

Marketable securities

     454,775        485,434   

Restricted cash

     2,260        667   

Trade and other receivables

     40,341        21,593   

Inventories:

    

Housing completed or under construction

     437,287        300,714   

Land and land under development

     414,466        505,338   

Property and equipment, net

     34,471        36,277   

Deferred tax asset, net of valuation allowance of $273,828 and $281,178 at June 30, 2012 and December 31, 2011, respectively

     —          —     

Prepaid expenses and other assets

     44,272        50,423   
  

 

 

   

 

 

 

Total homebuilding assets

     1,726,146        1,716,864   

Financial Services:

    

Cash and cash equivalents

     27,850        26,943   

Marketable securities

     32,256        34,509   

Mortgage loans held-for-sale, net

     65,687        78,335   

Prepaid expenses and other assets

     3,975        2,074   
  

 

 

   

 

 

 

Total financial services assets

     129,768        141,861   
  

 

 

   

 

 

 

Total Assets

   $ 1,855,914      $ 1,858,725   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Homebuilding:

    

Accounts payable

   $ 42,829      $ 25,645   

Accrued liabilities

     111,730        119,188   

Senior notes, net

     744,470        744,108   
  

 

 

   

 

 

 

Total homebuilding liabilities

     899,029        888,941   

Financial Services:

    

Accounts payable and accrued liabilities

     52,965        52,446   

Mortgage repurchase facility

     32,660        48,702   
  

 

 

   

 

 

 

Total financial services liabilities

     85,625        101,148   
  

 

 

   

 

 

 

Total Liabilities

     984,654        990,089   
  

 

 

   

 

 

 

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; 47,990,975 issued and outstanding at June 30, 2012 and 48,017,108 and 47,957,196 issued and outstanding, respectively, at December 31, 2011

     480        480   

Additional paid-in-capital

     870,331        863,128   

Retained earnings

     1,839        12,927   

Accumulated other comprehensive income (loss)

     (1,390     (7,240

Treasury stock, at cost; no shares at June 30, 2012 and 59,912 at December 31, 2011

     —          (659
  

 

 

   

 

 

 

Total Stockholders’ Equity

     871,260        868,636   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,855,914      $ 1,858,725   
  

 

 

   

 

 

 

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

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share amounts)  
           (Unaudited)        

Homebuilding:

        

Home sale revenues

   $ 256,532      $ 206,163      $ 441,210      $ 369,546   

Land sale revenues

     1,815        2,565        3,405        2,769   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total home sale and land revenues

     258,347        208,728        444,615        372,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Home cost of sales

     (220,220     (179,097     (378,874     (320,078

Land cost of sales

     (1,718     (1,741     (3,208     (1,758

Inventory impairments

     —          (8,633     —          (8,633
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     (221,938     (189,471     (382,082     (330,469
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     36,409        19,257        62,533        41,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     (39,223     (49,158     (73,347     (96,811

Interest income

     5,373        6,986        11,286        13,474   

Interest expense

     —          (7,334     (808     (16,001

Other income (expense)

     418        (2,643     576        (884
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     2,977        (32,892     240        (58,376
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

        

Revenues

     10,587        6,731        18,306        12,434   

Expenses

     (3,909     (3,642     (6,766     (7,565
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial services pretax income

     6,678        3,089        11,540        4,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     9,655        (29,803     11,780        (53,507

Benefit (provision) for income taxes

     983        1,823        1,123        5,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 10,638      $ (27,980   $ 12,903      $ (47,859
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized gain (loss) related to available-for-sale securities

     (698     (1,971     5,850        1,332   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 9,940      $ (29,951   $ 18,753      $ (46,527
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Basic

   $ 0.22      $ (0.60   $ 0.27      $ (1.03

Diluted

   $ 0.22      $ (0.60   $ 0.26      $ (1.03

Weighted Average Common Shares Outstanding:

        

Basic

     47,398,088        46,719,233        47,367,051        46,717,408   

Diluted

     47,752,729        46,719,233        47,677,067        46,717,408   

Dividends declared per share

   $ 0.25      $ 0.25      $ 0.50      $ 0.50   

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

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

     Six Months
Ended June 30,
 
     2012     2011  
     (Dollars in thousands)  
     (Unaudited)  

Operating Activities:

    

Net income (loss)

   $ 12,903      $ (47,859

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

    

Stock-based compensation expense

     7,721        6,680   

Depreciation and amortization

     2,656        3,217   

Inventory impairments and write-offs of land option deposits

     311        12,305   

Amortization of (premium) discount on marketable debt securities

     (151     912   

Net changes in assets and liabilities:

    

Restricted cash

     (1,593     (184

Trade and other receivables

     (18,345     18,935   

Mortgage loans held-for-sale

     12,648        25,914   

Housing completed or under construction

     (136,387     51,590   

Land and land under development

     91,048        (108,622

Prepaid expenses and other assets

     3,956        (1,376

Accounts payable

     17,169        (5,910

Accrued liabilities

     (7,526     (24,859
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (15,590     (69,257
  

 

 

   

 

 

 

Investing Activities:

    

Purchase of marketable securities

     (292,788     (258,423

Maturity of marketable securities

     106,000        451,000   

Sale of marketable securities

     225,701        129,677   

Purchase of property and equipment and other

     (668     (29,295
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     38,245        292,959   
  

 

 

   

 

 

 

Financing Activities:

    

Payments on mortgage repurchase facility

     (90,409     (47,115

Advances on mortgage repurchase facility

     74,367        30,669   

Dividend payments

     (23,990     (23,692

Proceeds from exercise of stock options

     140        46   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (39,892     (40,092
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (17,237     183,610   

Cash and cash equivalents:

    

Beginning of period

     343,361        572,225   
  

 

 

   

 

 

 

End of period

   $ 326,124      $ 755,835   
  

 

 

   

 

 

 

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

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

1. Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. (“MDC” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at June 30, 2012 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2011.

Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2012 presentation.

Refer to the economic conditions described under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Risk Factors Relating to our Business” in Item 1A of the Company’s December 31, 2011 Annual Report on Form 10-K.

 

2. Recently Adopted Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements, (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for the Company’s interim and annual periods beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU 2011-05 were effective for our interim and annual periods beginning January 1, 2012 and were applied retrospectively. The adoption of the provisions of ASU 2011-05 did not have a material impact on the Company’s consolidated financial position or results of operations.

In September 2011, the FASB issued an amendment to ASC 350, Intangibles—Goodwill and Other (“ASC 350”), which simplifies how entities test goodwill for impairment. Previous guidance under ASC 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under ASC 350. The amendments are effective for us for annual and interim goodwill impairment tests performed for fiscal years beginning January 1, 2012, and early adoption is permitted. We adopted this standard in the 2012 first quarter. The adoption of the provisions of ASC 350 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

3. Segment Reporting

The Company’s operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its chief operating decision-makers (“CODMs”) as two key executives—the Chief Executive Officer and the Chief Operating Officer.

The Company has identified each homebuilding subdivision as an operating segment as each homebuilding subdivision engages in business activities from which it earns revenue, primarily from the sale of single-family detached homes, generally to first-time and first-time move-up homebuyers. Subdivisions in the reportable segments noted below have been aggregated because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. The Company’s homebuilding reportable segments are as follows:

 

  (1) West (Arizona, California, Nevada and Washington)
  (2) Mountain (Colorado and Utah)
  (3) East (Virginia and Maryland, which includes Pennsylvania, Delaware and New Jersey)
  (4) Other (Florida and Illinois)

The Company’s Financial Services reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. These operating segments have been aggregated into one reportable segment because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance and treasury, information technology, insurance and 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 segment. 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 segment.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes home and land sale revenues and homebuilding pretax income (loss) for the Company’s homebuilding operations. Intercompany adjustments noted in the table below relate to mortgage-related costs that were paid by the homebuilding segments to HomeAmerican as a part of home purchase incentives provided to certain homebuyers.

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Home and land sale revenues:

        

West

   $ 117,424      $ 68,844      $ 186,965      $ 110,453   

Mountain

     79,699        78,158        140,290        147,934   

East

     51,948        50,839        96,897        93,277   

Other

     9,276        10,887        20,463        20,651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total home and land sale revenues

   $ 258,347      $ 208,728      $ 444,615      $ 372,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss):

        

West

   $ 2,677      $ (11,837   $ 2,844      $ (16,397

Mountain

     4,640        (1,204     6,795        (2,436

East

     480        (2,345     2,300        (4,301

Other

     (346     (916     (64     (1,692

Corporate

     (4,474     (16,590     (11,635     (33,550
  

 

 

   

 

 

   

 

 

   

 

 

 

Total homebuilding pretax income (loss)

   $ 2,977      $ (32,892   $ 240      $ (58,376
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes total assets for the Company’s homebuilding operations. The assets in the Company’s Corporate segment primarily include cash, cash equivalents, marketable securities and property and equipment, net.

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Homebuilding assets:

     

West

   $ 363,759       $ 346,442   

Mountain

     299,793         262,787   

East

     234,495         223,606   

Other

     30,545         31,468   

Corporate

     797,554         852,561   
  

 

 

    

 

 

 

Total homebuilding assets

   $ 1,726,146       $ 1,716,864   
  

 

 

    

 

 

 

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

4. Earnings (Loss) Per Share

A company that has participating security holders (for example, unvested restricted stock that has non-forfeitable dividend rights) is required to utilize the two-class method for purposes of calculating earnings (loss) per share (“EPS”). The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders, based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income or loss). Currently, the Company has one class of security and has participating security holders consisting of shareholders of unvested restricted stock. The following table shows basic and diluted EPS calculations

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share amounts)  

Basic and Diluted Earnings (Loss) Per Common Share:

        

Net income (loss)

   $ 10,638      $ (27,980   $ 12,903      $ (47,859

Less: distributed and undistributed earnings allocated to participating securities

     (149     (206     (308     (365
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) attributable to common stockholders

   $ 10,489      $ (28,186   $ 12,595      $ (48,224
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted-average shares outstanding

     47,398,088        46,719,233        47,367,051        46,717,408   

Dilutive effect of common stock equivalents

     354,641        —          310,016        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average common shares outstanding, assuming conversion of common stock equivalents

     47,752,729        46,719,233        47,677,067        46,717,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings (Loss) Per Common Share

   $ 0.22      $ (0.60   $ 0.27      $ (1.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Earnings (Loss) Per Common Share

   $ 0.22      $ (0.60   $ 0.26      $ (1.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include most types of stock options and unvested restricted stock. A total of 1.0 million unvested performance-based stock options were excluded from the calculation of diluted EPS for both the three and six months ended June 30, 2012 as the performance-based conditions were not met at June 30, 2012. Diluted EPS for the three and six months ended June 30, 2012 also excluded options to purchase approximately 4.8 million shares and 5.1 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same reason, diluted EPS for both the three and six months ended June 30, 2011 excluded options to purchase approximately 5.2 million shares of common stock. In addition, diluted EPS for the three and six months ending June 30, 2011 excluded common stock equivalents because the effect of their inclusion would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS was 0.4 million shares for both the three and six months ended June 30, 2011.

 

5. Fair Value Measurements

Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), as updated and amended by ASU 2011-04, defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

            Fair Value  

Financial Instrument

   Hierarchy      June 30, 2012      December 31, 2011  
            (Dollars in thousands)  

Marketable Securities (available-for-sale)

        

Equity securities

     Level 1       $ 178,846       $ 160,021   

Debt securities

     Level 2         308,185         359,922   
     

 

 

    

 

 

 

Total available-for-sale securities

      $ 487,031       $ 519,943   
     

 

 

    

 

 

 

Mortgage Loans Held-For-Sale, net

     Level 2       $ 65,687       $ 78,335   
     

 

 

    

 

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents. For cash and cash equivalents, the fair value approximates carrying value.

Marketable Securities. The Company’s marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of June 30, 2012 and December 31, 2011, all of the Company’s marketable securities were treated as available-for-sale investments and, as such, the Company has recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income.

The following tables set forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities.

 

     June 30, 2012      December 31, 2011  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
     (Dollars in thousands)  

Homebuilding:

           

Equity security

   $ 183,736       $ 178,846       $ 169,565       $ 160,021   

Debt securities

     272,797         275,929         323,454         325,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 456,533       $ 454,775       $ 493,019       $ 485,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Services:

           

Total available-for-sale debt securities

   $ 31,888       $ 32,256       $ 34,164       $ 34,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012 and December 31, 2011, the Company’s marketable securities (homebuilding and financial services in aggregate) were in an unrealized loss position of $1.4 million and $7.2 million, respectively. The equity securities, which consist of four mutual funds which primarily invest in bonds, have a combined unrealized loss of $4.9 million as of June 30, 2012. Management currently does not have the intent to sell any of its securities that are currently in an unrealized loss position, and it is currently not likely that the Company will be required to sell these marketable securities before the recovery of their cost basis. Additionally, due to the short period of time that the Company’s marketable securities have been in an unrealized loss position, and that the decline in market value occurred during a period of overall decline in market values, the decline is believed to be temporary.

Mortgage Loans Held-for-Sale, Net. As of June 30, 2012, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At June 30, 2012 and December 31, 2011, the Company had $61.0 million and $77.5 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon Level 2 inputs, which were the quoted market prices for those mortgage loans. At June 30, 2012 and December 31, 2011, the Company had $4.7 million and $0.8 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell, and as such, the fair value was based upon Level 2 fair value inputs, primarily the estimated market price received from an outside party.

 

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M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Inventories. The Company’s inventories consist of housing completed or under construction and land and land under development. The Company’s inventories are primarily associated with subdivisions where the Company intends to construct and sell homes on the land, including model and unsold started homes. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering fees and permits and fees; (4) capitalized interest; and (5) indirect construction costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that the Company begins construction of a home on an owned lot. Costs capitalized to land and land under development primarily include: (1) land costs; (2) development costs for the land; (3) entitlement costs; (4) capitalized interest; and (5) title insurance, taxes and closing costs directly related to the purchase of the land parcel.

Homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. The Company determines impairments on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, the Company reviews, among other things, the following for each subdivision:

 

   

actual and trending “Operating Profit” (which is defined as home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) for homes closed;

 

   

estimated future undiscounted cash flows and Operating Profit;

 

   

forecasted Operating Profit for homes in Backlog (as defined);

 

   

actual and trending net and gross home orders;

 

   

base sales price and home sales incentive information for homes closed and homes in Backlog;

 

   

market information for each sub-market; and

 

   

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

If events or circumstances indicate that the carrying value of the Company’s inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. The Company generally determines the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. For both the three months and six months ended June 30, 2011, the Company recognized inventory impairment charges of $8.6 million. The discount rates used in the Company’s estimated discounted cash flows ranged from 12% to 18% during the three months and six months ended June 30, 2011. The Company did not record any inventory impairments during the three and six months ended June 30, 2012.

Related Party Assets. Related party assets are included in prepaid expenses and other assets in the Company’s Consolidated Balance Sheets. The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The estimated cash flows from the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. The estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

Mortgage Repurchase Facility. The Company’s Mortgage Repurchase Facility is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities. The fair value approximates carrying value.

 

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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, including market prices of bonds in the homebuilding sector.

 

     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
     (Dollars in thousands)  

5.375% Senior Notes due 2014

   $ 249,528       $ 263,275       $ 249,438       $ 254,667   

5.375% Senior Notes due 2015

     249,876         266,058         249,857         252,083   

5.625% Senior Notes due 2020

     245,066         250,600         244,813         227,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 744,470       $ 779,933       $ 744,108       $ 734,217   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

6. Inventories

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

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Housing Completed or Under Construction

     

West

   $ 178,425       $ 121,343   

Mountain

     142,118         80,964   

East

     97,774         81,623   

Other Homebuilding

     18,970         16,784   
  

 

 

    

 

 

 

Subtotal

     437,287         300,714   
  

 

 

    

 

 

 

Land and Land Under Development

     

West

     149,579         199,941   

Mountain

     134,172         164,961   

East

     120,657         127,291   

Other Homebuilding

     10,058         13,145   
  

 

 

    

 

 

 

Subtotal

     414,466         505,338   
  

 

 

    

 

 

 

Total Inventories

   $ 851,753       $ 806,052   
  

 

 

    

 

 

 

In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. The Company evaluates its inventories for impairment at each quarter end. Please see “Inventories” in Note 5 for more detail on the methods and assumptions that were used to estimate the fair value of the Company’s inventories. Based on the impairment review, we did not record any inventory impairments during the three and six months ended June 30, 2012.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The inventory impairments recognized for the three and six months ended June 30, 2011 are shown in the table below:

 

     Three Months
Ended June 30,
2011
     Six Months
Ended June 30,
2011
 
     (Dollars in thousands)  

Housing Completed or Under Construction

     

West

   $ 954       $ 954   

Mountain

     239         239   

East

     —           —     

Other Homebuilding

     —           —     
  

 

 

    

 

 

 

Subtotal

     1,193         1,193   
  

 

 

    

 

 

 

Land and Land Under Development

     

West

     5,919         5,919   

Mountain

     1,236         1,236   

East

     285         285   

Other Homebuilding

     —           —     
  

 

 

    

 

 

 

Subtotal

     7,440         7,440   
  

 

 

    

 

 

 

Consolidated Inventory Impairments

   $ 8,633       $ 8,633   
  

 

 

    

 

 

 

The inventory impairments recorded during the three and six months ended June 30, 2011 resulted from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.

 

7. Capitalization of Interest

The Company capitalizes interest on its senior notes associated with its qualified assets, which includes land and land under development that is actively being developed, homes under construction through the completion of construction. When construction of an unsold home is complete, such home is no longer considered to be a qualified asset and interest is no longer capitalized on that home. The Company expensed no interest for the three and six months ended June 30, 2012 and expensed $7.4 million and $16.1 million of interest primarily associated with interest incurred on its homebuilding debt during the three and six months ended June 30, 2011, respectively. The table set forth below summarizes homebuilding interest activity.

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Interest incurred

   $ 10,573      $ 18,144      $ 21,136      $ 36,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized, beginning of period

   $ 63,633      $ 43,762      $ 58,742      $ 38,446   

Interest capitalized during period

     10,573        10,750        20,358        20,269   

Less: previously capitalized interest included in home cost of sales

     (7,105     (5,454     (11,999     (9,657
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest capitalized, end of period

   $ 67,101      $ 49,058      $ 67,101      $ 49,058   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

8. Homebuilding Prepaid Expenses and Other Assets

The following table sets forth the information relating to prepaid expenses and other assets.

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Deferred marketing costs

   $ 18,112       $ 20,786   

Land option deposits

     4,850         6,952   

Deferred debt issuance costs, net

     2,942         3,235   

Prepaid expenses

     3,156         4,376   

Related party assets

     6,663         6,663   

Goodwill and intangible assets, net

     6,196         6,308   

Other

     2,353         2,103   
  

 

 

    

 

 

 

Total

   $ 44,272       $ 50,423   
  

 

 

    

 

 

 

 

9. Homebuilding Accrued Liabilities

The following table sets forth information relating to accrued liabilities.

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Warranty reserves

   $ 24,036       $ 25,525   

Accrued interest payable

     13,698         13,698   

Accrued executive deferred compensation

     25,806         24,136   

Liability for unrecognized tax benefits

     3,121         3,303   

Legal accruals

     1,750         9,360   

Land development and home construction accruals

     10,114         10,619   

Accrued compensation and related expenses

     12,504         11,350   

Customer and escrow deposits

     9,545         5,468   

Other accrued liabilities

     11,156         15,729   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 111,730       $ 119,188   
  

 

 

    

 

 

 

 

10. Warranty Accrual

The Company records expenses and warranty accruals for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The Company’s management estimates the warranty reserves based on the Company’s trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring. Warranty payments incurred for an individual house may differ from the related accrual established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate. The table set forth below summarizes warranty accrual activity for the three and six months ended June 30, 2012 and 2011.

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
           (Dollars in thousands)        

Balance at beginning of period

   $ 25,076      $ 33,615      $ 25,525      $ 34,704   

Expense provisions

     878        1,034        1,643        1,875   

Cash payments

     (1,918     (1,617     (3,132     (3,116

Adjustments

     —          (1,832     —          (2,263
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 24,036      $ 31,200      $ 24,036      $ 31,200   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The cash payments for the six months ended June 30, 2012 are shown net of $1.3 million of reimbursements received from a third party vendor during the 2012 first quarter for amounts that were or will be paid from the Company’s warranty reserves. Excluding the reimbursement, cash payments for the six months ended June 30, 2012 were significantly higher than the previous year primarily due to payments made on a specific warranty reserve related to several subdivisions in the Texas market, which we exited in 2006.

During the three and six months ended June 30, 2011, we experienced lower warranty payments on previously closed homes as compared to the prior year periods. We believe the lower warranty payment experience rate in the 2011 periods were driven by, among other things, tighter focus and controls over our warranty expenditures, a significant drop in sales volumes over the last several years, which resulted in fewer homes under warranty, and better quality controls and construction practices. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, partially offset by increases in specific warranty reserves established for warranty-related issues in a limited number of subdivisions, we recorded adjustments to reduce our warranty reserve by $1.8 million and $2.3 million for the three and six months ended June 30, 2011, respectively.

 

11. Insurance Reserves

The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies with Allegiant and re-insurance agreements issued by StarAmerican; (2) self-insurance, including workers compensation; and (3) deductible amounts under the Company’s insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns such as those caused by natural disasters, fires, or accidents, depending on the business conducted, and changing regulatory and legal environments.

The table set forth below summarizes the insurance reserve activity for the three and six months ended June 30, 2012 and 2011. The insurance reserve is included in accounts payable and accrued liabilities in the Financial Services segment of the accompanying balance sheets.

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012      2011     2012     2011  
            (Dollars in thousands)        

Balance at beginning of year

   $ 44,922       $ 52,031      $ 50,459      $ 52,901   

Expense provisions

     909         587        1,553        1,067   

Cash payments

     —           (656     (6,181     (2,006

Adjustments

     —           348        —          348   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 45,831       $ 52,310      $ 45,831      $ 52,310   
  

 

 

    

 

 

   

 

 

   

 

 

 

In the ordinary course of business, the Company makes payments from its insurance reserves to settle litigation claims arising primarily from its homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments shown for the three and six months ended June 30, 2012 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

12. Income Taxes

The Company is required, at the end of each interim period, to estimate its 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. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2012 and 2011 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax income or loss. The income tax benefits of $1.0 million and $1.1 million during the three and six months ended June 30, 2012, respectively, resulted primarily from the release of reserves related to settlements with various taxing authorities. The income tax benefits of $1.8 million and $5.6 million for the three and six months ended June 30, 2011, respectively, resulted primarily from the Company’s 2011 second quarter settlement of various state income tax matters and the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. At June 30, 2012 and December 31, 2011, the Company had a full valuation allowance recorded against its net deferred tax asset. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

The components of our net deferred tax asset are as follows.

 

     June 30,
2012
    December 31,
2011
 
     (Dollars in thousands)  

Deferred tax assets:

  

Federal net operating loss carryforwards

   $ 137,736      $ 133,454   

State net operating loss carryforwards

     53,815        53,350   

Stock-based compensation expense

     27,775        26,771   

Accrued liabilities

     26,299        29,600   

Asset impairment charges

     24,665        31,137   

Alternative minimum tax and other tax credit carryforwards

     10,296        10,296   

Inventory, additional costs capitalized for tax

     3,466        3,466   

Unrealized loss on marketable securities

     535        2,787   

Other

     1,593        1,522   
  

 

 

   

 

 

 

Total deferred tax assets

     286,180        292,383   

Valuation allowance

     (273,828     (281,178
  

 

 

   

 

 

 

Total deferred tax assets, net of valuation allowance

     12,352        11,205   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Deferred revenue

     6,420        5,589   

Property, equipment and other assets

     1,013        706   

Inventory, additional costs capitalized for financial statement purposes

     537        542   

Accrued liabilities

     32        32   

Other, net

     4,350        4,336   
  

 

 

   

 

 

 

Total deferred tax liabilities

     12,352        11,205   
  

 

 

   

 

 

 

Net deferred tax asset

   $ —        $ —     
  

 

 

   

 

 

 

 

13. Senior Notes

The Company’s 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. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries. The following table sets forth the carrying amount of the Company’s senior notes as of June 30, 2012 and December 31, 2011, net of applicable discounts:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

5.375% Senior Notes due 2014

   $ 249,528       $ 249,438   

5.375% Senior Notes due 2015

     249,876         249,857   

5.625% Senior Notes due 2020

     245,066         244,813   
  

 

 

    

 

 

 

Total

   $   744,470       $ 744,108   
  

 

 

    

 

 

 

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

14. Stock Based Compensation

We account for share-based awards in accordance with Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation, 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 the fair value on the date of grant.

During the three and six months ended June 30, 2012, the Company recognized $3.6 million and $4.7 million, respectively, for option grants, compared to $2.2 million and $4.1 million, respectively, during the same periods in the prior year. The Company recognized $1.5 million and $3.0 million for restricted stock awards during the three and six months ended June 30, 2012, respectively, compared to $1.4 million and $2.5 million, respectively, during the same periods in the prior year.

On March 8, 2012, the Company granted a long term performance-based non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 500,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of the performance-based options provide that, over a three year period, one third of the option shares will vest as of March 1 following any fiscal year in which, in addition to the Company achieving a Home Gross Margin of at least 16.7% (as calculated in the Company’s 2011 Form 10-K, excluding warranty adjustments and interest), the Company achieves: (1) at least a 10% increase in total revenue over 2011 (166,667 option shares vest); (2) at least a 15% increase in total revenue over 2011 (166,667 option shares vest); or (3) at least a 20% increase in total revenue over 2011 (166,666 option shares vest). Any of the three tranches of option shares that are not performance vested by March 1, 2015 shall be forfeited. ASC 718 prohibits recognition of expense associated with performance based stock awards until achievement of the performance targets are probable of occurring. As of June 30, 2012, the Company had concluded that achievement of all the performance targets had met the level of probability required to record compensation expense at that time, and as such, $2.5 million of compensation expense was recognized related to the grant of these awards during the 2012 second quarter.

In accordance with ASC 718, the performance-based awards are valued at the fair value on the date of grant. The grant date fair value of these awards was $7.42 per share. The maximum potential expense that would be recognized by the Company if all of the performance targets were met would be approximately $7.4 million.

 

15. Commitments and Contingencies

Surety Bonds and Letters of Credit. The Company is required to obtain surety bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At June 30, 2012, the Company had issued and outstanding surety bonds and letters of credit totaling $60.7 million and $17.9 million, respectively, including $7.1 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 million. In the event any such surety bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Mortgage Loan Loss Reserves. In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other things: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; and (2) a current assessment of the potential exposure associated with future claims of fraud in mortgage loans originated in prior periods. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Financial Services Segment of the Consolidated Balance Sheets, and the associated expenses are included in expenses in the Financial Services segment of the accompanying Consolidated Statements of Operations.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the mortgage loan loss reserve activity for the three months and six months ended June 30, 2012 and 2011.

 

     Three Months
Ended June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012     2011  
     (Dollars in thousands)     (Dollars in thousands)  

Balance at beginning of year

   $ 639       $ 7,636      $ 442      $ 6,881   

Expense provisions

     160         335        455        1,297   

Cash payments

     —           (3,871     (98     (4,078
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 799       $ 4,100      $ 799      $ 4,100   
  

 

 

    

 

 

   

 

 

   

 

 

 

During 2011, HomeAmerican reached settlements with third parties concerning claims and potential claims to repurchase certain previously sold mortgage loans, including a comprehensive settlement with Bank of America. The Company believes that the settlements substantially reduce its future exposure to liabilities associated with previously sold mortgage loans, as our experience was significantly worse for the mortgage loans sold that were covered by the Bank of America settlement when compared to the mortgage loans sold that were not covered by the settlement.

Legal Accruals. Because of the nature of the homebuilding business, the Company and certain of its 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 homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon the Company’s financial condition, results of operations or cash flows.

For the three and six months ended June 30 2012, the Company had legal recoveries of $3.8 million and $7.6 million, respectively, which were included in selling, general and administrative expenses.

Lot Option Contracts. In the normal course of business, the Company enters 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 allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments and minimizes the amount of the Company’s land inventories on its consolidated balance sheets. The Company’s obligation with respect to Option Contracts generally is limited to forfeiture of the related cash deposits and/or letters of credit. At June 30, 2012 the Company had cash deposits and letters of credit of $3.9 million and $3.6 million, respectively, at risk associated with the option to purchase 1,546 lots.

 

16. Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At June 30, 2012, the Company had $49.1 million in interest rate lock commitments and $36.0 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in Financial Services revenues in the Consolidated Statements of Operations and Comprehensive Income with an offset to Financial Services prepaid expenses and other assets or accounts payable or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

17. Mortgage Repurchase Facility

Mortgage Lending. HomeAmerican has a Master Repurchase Agreement, (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”) which matures on September 27, 2012. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. As of June 30, 2012, the Mortgage Repurchase Facility had a maximum aggregate commitment of $50 million. At June 30, 2012 and December 31, 2011, we had $32.7 million and $48.7 million, respectively, of mortgage loans that we are obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that we are obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility on the Consolidated Balance Sheets. Advances under the Mortgage Repurchase Facility carry a Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.5%, or (ii) 3.75%. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants customary for agreements of this type. The negative covenants include, among others, (i) an Adjusted Tangible Net Worth requirement, (ii) a minimum Adjusted Tangible Net Worth Ratio, (iii) an Adjusted Net Income requirement, (iv) a minimum Liquidity requirement; and (v) a requirement that HomeAmerican’s HUD Compare Ratio may be no more than 1.50 to 1.00. The foregoing terms are defined in the Mortgage Repurchase Facility. We believe we are in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility and we are not aware of any covenant violations.

 

18. Supplemental Guarantor Information

The Company’s 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 by the Company.

 

   

M.D.C. Land Corporation

 

   

RAH of Florida, Inc.

 

   

Richmond American Construction, Inc.

 

   

Richmond American Homes of Arizona, Inc.

 

   

Richmond American Homes of Colorado, Inc.

 

   

Richmond American Homes of Delaware, Inc.

 

   

Richmond American Homes of Florida, LP

 

   

Richmond American Homes of Illinois, Inc.

 

   

Richmond American Homes of Maryland, Inc.

 

   

Richmond American Homes of Nevada, Inc.

 

   

Richmond American Homes of New Jersey, Inc.

 

   

Richmond American Homes of Pennsylvania, Inc.

 

   

Richmond American Homes of Utah, Inc.

 

   

Richmond American Homes of Virginia, Inc.

Subsidiaries that do not guarantee the Company’s senior notes (collectively, the “Non-Guarantor Subsidiaries”) primarily include:

 

   

American Home Insurance

 

   

American Home Title

 

   

HomeAmerican

 

   

StarAmerican

 

   

Allegiant

 

   

Richmond American Homes of West Virginia, Inc.

 

   

Richmond American Homes of Washington, Inc.

 

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Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

The Company has 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.

Supplemental Condensed Combining Balance Sheets

 

     June 30, 2012  
     MDC     Guarantor
Subsidiaries
     Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        
ASSETS       

Homebuilding:

           

Cash and cash equivalents

   $ 294,862      $ 3,322       $ 90      $ —        $ 298,274   

Marketable securities

     454,775        —           —          —          454,775   

Restricted cash

     —          2,260         —          —          2,260   

Trade and other receivables

     6,713        31,934         1,694        —          40,341   

Inventories:

           

Housing completed or under construction

     —          410,656         26,631        —          437,287   

Land and land under development

     —          398,860         15,606        —          414,466   

Investment in subsidiaries

     146,691        —           —          (146,691     —     

Other assets, net

     41,204        29,070         8,469        —          78,743   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total homebuilding assets

     944,245        876,102         52,490        (146,691     1,726,146   

Financial Services:

           

Cash and cash equivalents

     —          —           27,850        —          27,850   

Marketable securities

     —          —           32,256        —          32,256   

Mortgage loans held-for-sale, net

     —          —           65,687        —          65,687   

Prepaid expenses and other assets

     —          —           5,675        (1,700     3,975   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total financial services assets

     —          —           131,468        (1,700     129,768   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 944,245      $ 876,102       $ 183,958      $ (148,391   $ 1,855,914   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND EQUITY            

Homebuilding:

           

Accounts payable

   $ (4   $ 42,382       $ 451      $ —        $ 42,829   

Accrued liabilities

     58,214        49,114         4,402        —          111,730   

Advances and notes payable to parent and subsidiaries

     (729,695     710,170         28,480        (8,955     —     

Senior notes, net

     744,470        —           —          —          744,470   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total homebuilding liabilities

     72,985        801,666         33,333        (8,955     899,029   

Financial Services:

           

Accounts payable and other liabilities

     —          —           52,965        —          52,965   

Advances and notes payable to parent and subsidiaries

     —          —           (7,255     7,255        —     

Mortgage repurchase facility

     —          —           32,660        —          32,660   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total financial services liabilities

     —          —           78,370        7,255        85,625   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities

     72,985        801,666         111,703        (1,700     984,654   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity:

           

Total Stockholder’s Equity

     871,260        74,436         72,255        (146,691     871,260   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 944,245      $ 876,102       $ 183,958      $ (148,391   $ 1,855,914   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

- 18 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Balance Sheets

 

     December 31, 2011  
     MDC     Guarantor
Subsidiaries
     Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (dollars in thousands)        
ASSETS       

Homebuilding:

           

Cash and cash equivalents

   $ 313,566      $ 2,771       $ 81      $ —        $ 316,418   

Marketable securities

     485,434        —           —          —          485,434   

Restricted cash

     —          667         —          —          667   

Trade and other receivables

     8,368        12,740         485        —          21,593   

Inventories:

           

Housing completed or under construction

     —          280,932         19,782        —          300,714   

Land and land under development

     —          489,305         16,033        —          505,338   

Investment in subsidiaries

     126,768        —           —          (126,768     —     

Other assets, net

     45,287        33,074         8,435        (96     86,700   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total homebuilding assets

     979,423        819,489         44,816        (126,864     1,716,864   

Financial Services:

           

Cash and cash equivalents

     —          —           26,943        —          26,943   

Marketable securities

     —          —           34,509        —          34,509   

Mortgage loans held-for-sale, net

     —          —           78,335        —          78,335   

Prepaid expenses and other assets

     —          —           3,774        (1,700     2,074   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total financial services assets

     —          —           143,561        (1,700     141,861   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 979,423      $ 819,489       $ 188,377      $ (128,564   $ 1,858,725   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND EQUITY            

Homebuilding:

           

Accounts payable

   $ —        $ 23,409       $ 2,236      $ —        $ 25,645   

Accrued liabilities

     67,199        50,271         1,814        (96     119,188   

Advances and notes payable to parent and subsidiaries

     (700,520     682,088         21,998        (3,566     —     

Senior notes, net

     744,108        —           —          —          744,108   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total homebuilding liabilities

     110,787        755,768         26,048        (3,662     888,941   

Financial Services:

           

Accounts payable and other liabilities

     —          —           52,446        —          52,446   

Advances and notes payable to parent and subsidiaries

     —          —           (1,866     1,866        —     

Mortgage repurchase facility

     —          —           48,702        —          48,702   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total financial services liabilities

     —          —           99,282        1,866        101,148   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities

     110,787        755,768         125,330        (1,796     990,089   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity:

           

Total Stockholder’s Equity

     868,636        63,721         63,047        (126,768     868,636   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 979,423      $ 819,489       $ 188,377      $ (128,564   $ 1,858,725   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

- 19 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statements of Operations

 

     Three Months Ended June 30, 2012  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
     (Dollars in thousands)  

Homebuilding:

        

Revenues

   $ —        $ 241,323      $ 18,707      $ (1,683   $ 258,347   

Cost of Sales

     —          (207,681     (15,940     1,683        (221,938

Inventory impairments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          33,642        2,767        —          36,409   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general, and administrative expenses

     (10,261     (26,378     (2,584     —          (39,223

Equity income (loss) of subsidiaries

     12,415        —          —          (12,415     —     

Interest income

     5,368        5        —          —          5,373   

Interest expense

     —          —          —          —          —     

Other income (expense)

     420        (41     39        —          418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     7,942        7,228        222        (12,415     2,977   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

          

Financial services pretax income (loss)

     —          —          6,678        —          6,678   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     7,942        7,228        6,900        (12,415     9,655   

(Provision) benefit for income taxes

     2,696        765        (2,478     —          983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 10,638      $ 7,993      $ 4,422      $ (12,415   $ 10,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2011  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        

Homebuilding:

        

Revenues

   $ —        $ 196,119      $ 13,783      $ (1,174   $ 208,728   

Cost of Sales

     —          (169,741     (12,271     1,174        (180,838

Inventory impairments

     —          (8,633     —          —          (8,633
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          17,745        1,512        —          19,257   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general, and administrative expenses

     (15,982     (31,252     (1,924     —          (49,158

Equity income (loss) of subsidiaries

     (13,221     —          —          13,221        —     

Interest income

     6,979        7        —          —          6,986   

Interest expense

     (7,334     —          —          —          (7,334

Other income (expense)

     (251     (2,453     61        —          (2,643
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     (29,809     (15,953     (351     13,221        (32,892
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

          

Financial services pretax income (loss)

     —          —          3,089        —          3,089   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (29,809     (15,953     2,738        13,221        (29,803

(Provision) benefit for income taxes

     1,829        1,208        (1,214     —          1,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (27,980   $ (14,745   $ 1,524      $ 13,221      $ (27,980
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 20 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statements of Operations

 

     Six Months Ended June 30, 2012  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        

Homebuilding:

      

Revenues

   $ —        $ 416,855      $ 30,713      $ (2,953   $ 444,615   

Cost of Sales

     —          (358,755     (26,280     2,953        (382,082

Inventory impairments

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          58,100        4,433        —          62,533   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general, and administrative expenses

     (22,569     (48,371     (2,407     —          (73,347

Equity income (loss) of subsidiaries

     20,120        —          —          (20,120     —     

Interest income

     11,278        8        —          —          11,286   

Interest expense

     (778     (30     —          —          (808

Other income (expense)

     438        76        62        —          576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     8,489        9,783        2,088        (20,120     240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

          

Financial services pretax income (loss)

     —          —          11,540        —          11,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     8,489        9,783        13,628        (20,120     11,780   

(Provision) benefit for income taxes

     4,414        933        (4,224     —          1,123   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,903      $ 10,716      $ 9,404      $ (20,120   $ 12,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        

Homebuilding:

      

Revenues

   $ —        $ 362,220      $ 13,783      $ (3,688   $ 372,315   

Cost of Sales

     —          (313,253     (12,271     3,688        (321,836

Asset impairments

     —          (8,633     —          —          (8,633
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          40,334        1,512        —          41,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general, and administrative expenses

     (33,064     (61,823     (1,924     —          (96,811

Equity income (loss) of subsidiaries

     (19,273     —          —          19,273        —     

Interest income

     13,455        19        —          —          13,474   

Interest expense

     (16,001     —          —          —          (16,001

Other income (expense)

     2,063        (3,014     67        —          (884
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     (52,820     (24,484     (345     19,273        (58,376
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

          

Financial services pretax income (loss)

     —          —          4,869        —          4,869   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (52,820     (24,484     4,524        19,273        (53,507

(Provision) benefit for income taxes

     4,961        2,584        (1,897     —          5,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (47,859   $ (21,900   $ 2,627      $ 19,273      $ (47,859
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 21 -


Table of Contents

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Supplemental Condensed Combining Statements of Cash Flows

 

     Six Months Ended June 30, 2012  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        

Net cash provided by (used in) operating activities

   $ 16,882      $ (26,747   $ 14,395      $ (20,120   $ (15,590
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     36,475        (494     2,264        —          38,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Payments from (advances to) subsidiaries

     (48,211     27,792        299        20,120        —     

Mortgage repurchase facility

     —          —          (16,042     —          (16,042

Dividend payments

     (23,990     —          —          —          (23,990

Proceeds from the exercise of stock options

     140        —          —          —          140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (72,061     27,792        (15,743     20,120        (39,892
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (18,704     551        916        —          (17,237

Cash and cash equivalents:

          

Beginning of period

     313,566        2,771        27,024        —          343,361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 294,862      $ 3,322      $ 27,940      $ —        $ 326,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     MDC     Guarantor
Subsidiaries
    Non-
Guarantor

Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 
           (Dollars in thousands)        

Net cash provided by (used in) operating activities

   $ (25,813   $ (83,489   $ 20,772      $ 19,273      $ (69,257
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     321,930        (11     (28,960     —          292,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Payments from (advances to) subsidiaries

     (89,496     82,235        26,534        (19,273     —     

Mortgage repurchase facility

     —          —          (16,446     —          (16,446

Dividend payments

     (23,692     —          —          —          (23,692

Proceeds from the exercise of stock options

     46        —          —          —          46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (113,142     82,235        10,088        (19,273     (40,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     182,975        (1,265     1,900        —          183,610   

Cash and cash equivalents:

          

Beginning of period

     535,035        4,287        32,903        —          572,225   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

End of period

   $ 718,010      $ 3,022      $ 34,803      $ —        $ 755,835   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 22 -


Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. 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 Relating to our Business” of our Annual Report on Form 10-K for the year ended December 31, 2011 and this Quarterly Report on Form 10-Q.

M.D.C. HOLDINGS , INC.

Selected Financial Information (unaudited)

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share amounts)  

Homebuilding:

        

Home sale revenues

   $ 256,532      $ 206,163      $ 441,210      $ 369,546   

Land sale revenues

     1,815        2,565        3,405        2,769   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total home sale and land revenues

     258,347        208,728        444,615        372,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Home cost of sales

     (220,220     (179,097     (378,874     (320,078

Land cost of sales

     (1,718     (1,741     (3,208     (1,758

Inventory impairments

     —          (8,633     —          (8,633
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     (221,938     (189,471     (382,082     (330,469
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     36,409        19,257        62,533        41,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin %

     14.1     9.2     14.1     11.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

     (39,223     (49,158     (73,347     (96,811

Interest income

     5,373        6,986        11,286        13,474   

Interest expense

     —          (7,334     (808     (16,001

Other income (expense)

     418        (2,643     576        (884
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding pretax income (loss)

     2,977        (32,892     240        (58,376
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial Services:

        

Revenues

     10,587        6,731        18,306        12,434   

Expenses

     (3,909     (3,642     (6,766     (7,565
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial services pretax income

     6,678        3,089        11,540        4,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     9,655        (29,803     11,780        (53,507

Benefit from income taxes

     983        1,823        1,123        5,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 10,638      $ (27,980   $ 12,903      $ (47,859
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Basic

   $ 0.22      $ (0.60   $ 0.27      $ (1.03

Diluted

   $ 0.22      $ (0.60   $ 0.26      $ (1.03

Weighted Average Common Shares Outstanding:

        

Basic

     47,398,088        46,719,233        47,367,051        46,717,408   

Diluted

     47,752,729        46,719,233        47,677,067        46,717,408   

Dividends declared per share

   $ 0.25      $ 0.25      $ 0.50      $ 0.50   

Cash provided by (used in) Provided by :

        

Operating Activities

   $ 3,223      $ (11,556   $ (15,590   $ (69,257

Investing Activities

   $ 42,198      $ 187,918      $ 38,245      $ 292,959   

Financing Activities

   $ (5,036   $ (9,570   $ (39,892   $ (40,092

 

- 23 -


Table of Contents

Overview

Our results have improved by many measures for the three and six months ended June 30, 2012. We believe that the improvement is largely the result of implementing a series of strategic initiatives over the past few quarters, designed to help the Company achieve a goal of generating full-year profitability in 2012. These initiatives were previously discussed in detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the year ended December 31, 2011. In addition, we believe that we have benefited from recovering homebuilding activity in most of our markets and that better overall economic conditions have contributed to our improved results.

For the 2012 second quarter, the Company reported net income of $10.6 million, or $0.22 per diluted share, compared to a net loss of $28.0 million, or $0.60 per diluted share for the year earlier period. The improvement in quarterly performance was driven primarily by a 24% increase in home sale revenues, a $9.9 million decrease in our homebuilding selling, general and administrative (“SG&A”) expenses, an $8.6 million reduction in impairments and a $7.3 million decrease in interest expense.

For the six months ended June 30, 2012, the Company reported net income of $12.9 million, or $0.26 per diluted share, compared to a net loss of $47.9 million, or $1.03 per diluted share for the year earlier period. The improvement in our performance was driven primarily by a 19% increase in home sale revenues, a $23.5 million decrease in our homebuilding SG&A expenses, a $15.2 million decrease in interest expense and an $8.6 million reduction in impairments.

As the overall housing market has continued to show signs of recovery over the last several quarters, our efforts to improve our sales process, product offering and cancellation rate have helped us to drive significantly improved sales results. During the 2012 second quarter, net new orders increased 32% year-over-year to a five-year high of 1,402 homes, driven by a 24% improvement in our absorption pace per community and a 900 basis point reduction in our cancellation rate. For the six months ended June 30, 2012, our net orders were up 39% year-over-year to 2,465 homes. With our quarter-end backlog up 42% over the prior year, coupled with the positive net income recorded to date in 2012, we believe we are well-positioned to achieve our goal of reaching profitability for 2012.

Our financial position remained strong at the end of the quarter, as evidenced by our total cash and marketable securities of $813 million, which exceeded the amount of our senior note debt by $69 million. We believe that our strong financial position gives us a competitive advantage as we pursue attractive land acquisition opportunities as the housing market improves, which can help us further grow our operations in the future.

Homebuilding

 

     Three Months
Ended June 30,
           Six Months
Ended June 30,
       
     2012     2011     Change      2012     2011     Change  
     (Dollars in thousands)  

Homebuilding pretax income (loss):

             

West

   $ 2,677      $ (11,837   $ 14,514       $ 2,844      $ (16,397   $ 19,241   

Mountain

     4,640        (1,204     5,844         6,795        (2,436     9,231   

East

     480        (2,345     2,825         2,300        (4,301     6,601   

Other

     (346     (916     570         (64     (1,692     1,628   

Corporate

     (4,474     (16,590     12,116         (11,635     (33,550     21,915   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total homebuilding pretax income (loss)

   $ 2,977      $ (32,892   $ 35,869       $ 240      $ (58,376   $ 58,616   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

For the 2012 second quarter, we reported homebuilding pretax income of $3.0 million, compared to a pretax loss of $32.9 million for the second quarter of 2011. The $35.9 million improvement in our homebuilding financial performance was driven primarily by a 24% increase in home sale revenues, a $9.9 million decrease in our homebuilding SG&A expenses, an $8.6 million reduction in impairments and a $7.3 million decrease in interest expense.

 

- 24 -


Table of Contents

For the six months ended June 30, 2012, we reported homebuilding pretax income of $0.2 million, compared to a pretax loss of $58.4 million for the same period in 2011. The $58.6 million improvement in our homebuilding financial performance was driven primarily by a 19% increase in home sale revenues, a $23.5 million decrease in our homebuilding SG&A expenses, an $8.6 million reduction in impairments and a $15.2 million decrease in interest expense.

The pretax results for our West segment improved $14.5 million and $19.2 million, respectively, for the three and six months ended June 30, 2012 due to an increase in homebuilding revenues resulting from a 63% and a 59% jump in new home deliveries as well as a reduction in impairment charges. For our Mountain segment, pretax results improved $5.8 million and $9.2 million, respectively, for the three and six months ended June 30, 2012 due to an increase in our gross margin percentage, a reduction of SG&A expenses, and a decrease in impairment charges. For the six month period, these improvements were partially offset by a decrease in homebuilding revenues. Pretax results for our East segment improved $2.8 million and $6.6 million, respectively, for the three and six months ended June 30, 2012, primarily related to a decrease in our SG&A expenses, including a benefit from a sizable legal recovery during the 2012 first quarter, and an increase in our gross margin percentage. For our Other homebuilding segment, pretax results increased $0.6 million and $1.6 million, respectively, for the three and six months ended June 30, 2012 due almost entirely to a reduction of SG&A expenses. Our pretax results for our non-operating Corporate segment improved $12.1 million and $21.9 million, respectively, for the three and six months ended June 30 2012 due to a reduction in both interest and SG&A expenses, which included legal recoveries of $3.8 million and $7.6 million, respectively.

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

Homebuilding assets:

  

West

   $ 363,759       $ 346,442   

Mountain

     299,793         262,787   

East

     234,495         223,606   

Other

     30,545         31,468   

Corporate

     797,554         852,561   
  

 

 

    

 

 

 

Total homebuilding assets

   $ 1,726,146       $ 1,716,864   
  

 

 

    

 

 

 

Homebuilding assets did not change significantly from December 31, 2011 to June 30, 2012, as small increases in the West, Mountain and East segments were mostly offset by a decrease in our non-operating Corporate segment.

Revenues

 

     Three Months
Ended June 30,
     Change     Six Months
Ended June 30,
     Change  
     2012      2011      Amount     %     2012      2011      Amount     %  
     (Dollars in thousands)                            

Home and land sale revenues:

                    

West

   $ 117,424       $ 68,844       $ 48,580        71   $ 186,965       $ 110,453       $ 76,512        69

Mountain

     79,699         78,158         1,541        2     140,290         147,934         (7,644     -5

East

     51,948         50,839         1,109        2     96,897         93,277         3,620        4

Other

     9,276         10,887         (1,611     -15     20,463         20,651         -188        -1
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total home and land sale revenues

   $ 258,347       $ 208,728       $ 49,619        24   $ 444,615       $ 372,315       $ 72,300        19
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total home and land sale revenues for the 2012 second quarter increased 24% to $258.3 million compared to $208.7 million for the prior year period. For the six months ended June 30, 2012, total home and land sales revenues increased 19% to $444.6 million compared to $372.3 million for the prior year period. The increase in revenues for both periods was driven primarily by changes to the number and average price of new home deliveries as shown in the table below.

 

- 25 -


Table of Contents

New Home Deliveries

 

     Three Months Ended June 30,  
     2012      2011      % Change  
     Homes      Dollar
Value
     Average
Price
     Homes      Dollar
Value
     Average
Price
     Homes     Dollar
Value
    Average
Price
 
     (Dollars in thousands)  

Arizona

     127       $ 27,086       $ 213.3         98       $ 18,299       $ 186.7         30     48     14

California

     133         43,195         324.8         62         19,704         317.8         115     119     2

Nevada

     155         28,460         183.6         80         14,731         184.1         94     93     0

Washington

     59         17,170         291.0         51         13,779         270.2         16     25     8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

West

     474         115,911         244.5         291         66,513         228.6         63     74     7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

Colorado

     185         66,254         358.1         182         60,047         329.9         2     10     9

Utah

     46         13,142         285.7         66         17,876         270.8         -30     -26     5
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

Mountain

     231         79,396         343.7         248         77,923         314.2         -7     2     9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

Maryland

     47         19,777         420.8         49         20,267         413.6         -4     -2     2

Virginia

     70         32,171         459.6         72         30,573         424.6         -3     5     8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

East

     117         51,948         444.0         121         50,840         420.2         -3     2     6
  

 

 

    

 

 

    

 

 

</