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 March 31,June 30, 2011
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 (Zip code) | |
(Address of principal executive offices) |
(303) 773-1100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes 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 AprilJune 30, 2011, 47,296,72047,530,000 shares of M.D.C. Holdings, Inc. common stock were outstanding.
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2011
INDEX
Page No. | ||||||||
Part I. | ||||||||
Item 1. | ||||||||
Consolidated Balance Sheets at | 1 | |||||||
2 | ||||||||
Consolidated Statements of Cash Flows for the | 3 | |||||||
4 | ||||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
Item 3. | ||||||||
Item 4. | ||||||||
Part II. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
ITEM 1. | Unaudited Consolidated Financial Statements |
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 589,043 | $ | 572,225 | $ | 755,835 | $ | 572,225 | ||||||||
Marketable securities | 866,072 | 968,729 | 646,895 | 968,729 | ||||||||||||
Restricted cash | 419 | 420 | 604 | 420 | ||||||||||||
Receivables | ||||||||||||||||
Home sales receivables | 10,051 | 8,530 | 7,797 | 8,530 | ||||||||||||
Income taxes receivable | 13,442 | 2,048 | - | 2,048 | ||||||||||||
Other receivables | 8,388 | 9,432 | 8,661 | 9,432 | ||||||||||||
Mortgage loans held-for-sale, net | 37,697 | 65,114 | 39,200 | 65,114 | ||||||||||||
Inventories, net | ||||||||||||||||
Housing completed or under construction | 345,554 | 372,422 | 336,514 | 372,422 | ||||||||||||
Land and land under development | 488,887 | 415,237 | 524,234 | 415,237 | ||||||||||||
Property and equipment, net | 39,711 | 40,826 | 38,769 | 40,826 | ||||||||||||
Deferred tax asset, net of valuation allowance of $239,012 and $231,379 at March 31, 2011 and December 31, 2010, respectively | - | - | ||||||||||||||
Deferred tax asset, net of valuation allowance of $252,209 and $231,379at June 30, 2011 and December 31, 2010, respectively | - | - | ||||||||||||||
Related party assets | 7,393 | 7,393 | 7,393 | 7,393 | ||||||||||||
Prepaid expenses and other assets, net | 47,882 | 85,393 | 54,402 | 85,393 | ||||||||||||
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Total Assets | $ | 2,454,539 | $ | 2,547,769 | $ | 2,420,304 | $ | 2,547,769 | ||||||||
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Liabilities | ||||||||||||||||
Accounts payable | $ | 23,173 | $ | 35,018 | $ | 29,108 | $ | 35,018 | ||||||||
Accrued liabilities | 210,053 | 260,729 | 204,890 | 260,729 | ||||||||||||
Income taxes payable | 734 | - | ||||||||||||||
Related party liabilities | 107 | 90 | 117 | 90 | ||||||||||||
Mortgage repurchase facility | 6,736 | 25,434 | 8,988 | 25,434 | ||||||||||||
Senior notes, net | 1,243,062 | 1,242,815 | 1,243,273 | 1,242,815 | ||||||||||||
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Total Liabilities | 1,483,131 | 1,564,086 | 1,487,110 | 1,564,086 | ||||||||||||
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Commitments and Contingencies | ||||||||||||||||
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; 47,351,000 and 47,295,000 issued and outstanding, respectively, at March 31, 2011 and 47,198,000 | 474 | 472 | ||||||||||||||
Common stock, $0.01 par value; 250,000,000 shares authorized; 47,530,000 and 47,474,000 issued and outstanding, respectively, at June 30, 2011 and 47,198,000 and 47,142,000 issued and outstanding, respectively,at December 31, 2010 | 475 | 472 | ||||||||||||||
Additional paid-in-capital | 836,360 | 820,237 | 839,964 | 820,237 | ||||||||||||
Retained earnings | 127,046 | 158,749 | 87,198 | 158,749 | ||||||||||||
Accumulated other comprehensive income | 8,187 | 4,884 | 6,216 | 4,884 | ||||||||||||
Treasury stock, at cost; 56,000 shares at March 31, 2011 and December 31, 2010 | (659 | ) | (659 | ) | ||||||||||||
Treasury stock, at cost; 56,000 shares at June 30, 2011 and December 31, 2010 | (659 | ) | (659 | ) | ||||||||||||
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Total Stockholders’ Equity | 971,408 | 983,683 | 933,194 | 983,683 | ||||||||||||
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Total Liabilities and Stockholders’ Equity | $ | 2,454,539 | $ | 2,547,769 | $ | 2,420,304 | $ | 2,547,769 | ||||||||
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The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
- 1 -
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Home sales revenue | $ | 163,383 | $ | 140,943 | $ | 206,163 | $ | 311,276 | $ | 369,546 | $ | 452,219 | ||||||||||||
Land sales revenue | 204 | 15 | 2,565 | 5,699 | 2,769 | 5,714 | ||||||||||||||||||
Other revenue | 6,160 | 6,120 | 6,957 | 9,355 | 13,117 | 15,475 | ||||||||||||||||||
Total Revenue | 169,747 | 147,078 | 215,685 | 326,330 | 385,432 | 473,408 | ||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||
Home cost of sales | 140,981 | 109,390 | 179,097 | 255,062 | 320,078 | 364,452 | ||||||||||||||||||
Land cost of sales | 17 | 191 | 1,741 | 4,974 | 1,758 | 5,165 | ||||||||||||||||||
Asset impairments | 279 | - | 9,119 | - | 9,398 | - | ||||||||||||||||||
Marketing expenses | 9,833 | 7,060 | 9,897 | 11,475 | 19,730 | 18,535 | ||||||||||||||||||
Commission expenses | 5,767 | 5,129 | 7,456 | 11,611 | 13,223 | 16,740 | ||||||||||||||||||
General and administrative expenses | 36,752 | 40,203 | 36,237 | 44,588 | 72,989 | 84,791 | ||||||||||||||||||
Other operating (income) expenses | (1,550 | ) | 491 | |||||||||||||||||||||
Other operating expenses | 2,447 | 529 | 897 | 1,020 | ||||||||||||||||||||
Related party expenses | 4 | 9 | 28 | - | 32 | 9 | ||||||||||||||||||
Total operating costs and expenses | 192,083 | 162,473 | 246,022 | 328,239 | 438,105 | 490,712 | ||||||||||||||||||
Loss from operations | (22,336 | ) | (15,395 | ) | (30,337 | ) | (1,909 | ) | (52,673 | ) | (17,304 | ) | ||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest income | 7,326 | 4,428 | 7,872 | 7,541 | 15,198 | 11,969 | ||||||||||||||||||
Interest expense | (8,730 | ) | (10,374 | ) | (7,394 | ) | (9,436 | ) | (16,124 | ) | (19,810 | ) | ||||||||||||
Gain on sale of other assets | 36 | 99 | ||||||||||||||||||||||
Other | 56 | 105 | 92 | 204 | ||||||||||||||||||||
Loss before income taxes | (23,704 | ) | (21,242 | ) | (29,803 | ) | (3,699 | ) | (53,507 | ) | (24,941 | ) | ||||||||||||
Benefit from income taxes, net | 3,825 | 369 | 1,823 | 15 | 5,648 | 384 | ||||||||||||||||||
Net loss | $ | (19,879 | ) | $ | (20,873 | ) | $ | (27,980 | ) | $ | (3,684 | ) | $ | (47,859 | ) | $ | (24,557 | ) | ||||||
Loss per share | ||||||||||||||||||||||||
Basic | $ | (0.43 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.03 | ) | $ | (0.53 | ) | ||||||
Diluted | $ | (0.43 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.03 | ) | $ | (0.53 | ) | ||||||
Dividends declared per share | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.50 | $ | 0.50 | ||||||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
- 2 -
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating Activities | ||||||||||||||||
Net loss | $ | (19,879 | ) | $ | (20,873 | ) | $ | (47,859 | ) | $ | (24,557 | ) | ||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||||||
Asset impairments | 9,398 | - | ||||||||||||||
Stock-based compensation expense | 3,121 | 4,056 | 6,680 | 8,202 | ||||||||||||
Amortization of deferred marketing costs | 2,139 | 1,667 | 4,850 | 5,528 | ||||||||||||
Depreciation and amortization of long-lived assets | 1,590 | 1,265 | 3,217 | 2,573 | ||||||||||||
Write-offs of land option deposits and pre-acquisition costs | 782 | 383 | 2,907 | 873 | ||||||||||||
(Gain) loss on sale of assets, net | (187 | ) | 175 | |||||||||||||
Other non-cash (income) expenses | 962 | 466 | 359 | 322 | ||||||||||||
Net changes in assets and liabilities: | ||||||||||||||||
Restricted cash | 1 | (118 | ) | (184 | ) | (237 | ) | |||||||||
Home sales and other receivables | (477 | ) | (5,952 | ) | 1,504 | (35,608 | ) | |||||||||
Income taxes receivable | (305 | ) | 141,991 | 17,431 | 144,503 | |||||||||||
Mortgage loans held-for-sale | 27,417 | 25,611 | 25,914 | (49,750 | ) | |||||||||||
Housing completed or under construction | 26,868 | (139,282 | ) | 51,411 | (122,647 | ) | ||||||||||
Land and land under development | (73,463 | ) | (13,318 | ) | (107,890 | ) | (105,669 | ) | ||||||||
Prepaid expenses and other assets | (1,295 | ) | (7,350 | ) | (6,226 | ) | (14,629 | ) | ||||||||
Accounts payable | (11,845 | ) | 27,768 | (5,910 | ) | 15,801 | ||||||||||
Accrued liabilities and related party liabilities | (13,130 | ) | (4,973 | ) | (24,859 | ) | (3,639 | ) | ||||||||
Net cash (used in) provided by operating activities | (57,701 | ) | 11,516 | |||||||||||||
Net cash used in operating activities | (69,257 | ) | (178,934 | ) | ||||||||||||
Investing Activities | ||||||||||||||||
Maturities of held-to-maturity debt securities | 146,000 | 48,662 | ||||||||||||||
Sales of available-for-sale securities | 84,030 | 5,294 | ||||||||||||||
Purchases of available-for-sale debt securities | (84,506 | ) | (101,973 | ) | ||||||||||||
Purchases of held-to-maturity debt securities | (40,000 | ) | (453,323 | ) | ||||||||||||
Purchase of property and equipment | (483 | ) | (2,105 | ) | ||||||||||||
Settlement of unsettled trades | - | 1,678 | ||||||||||||||
Purchase of marketable securities | (404,472 | ) | (722,159 | ) | ||||||||||||
Maturity of marketable securities | 451,000 | 88,287 | ||||||||||||||
Sales of marketable securities | 275,726 | 20,797 | ||||||||||||||
Purchase of property and equipment and other | (29,295 | ) | (5,072 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 105,041 | (501,767 | ) | 292,959 | (618,147 | ) | ||||||||||
Financing Activities | ||||||||||||||||
Payment on mortgage repurchase facility | (25,434 | ) | (29,119 | ) | (47,115 | ) | (45,470 | ) | ||||||||
Advances on mortgage repurchase facility | 6,736 | 4,718 | 30,669 | 81,660 | ||||||||||||
Dividend payments | (11,824 | ) | (11,784 | ) | (23,692 | ) | (23,570 | ) | ||||||||
Proceeds from issuance of senior notes | - | 242,288 | - | 242,288 | ||||||||||||
Proceeds from exercise of stock options | - | 35 | 46 | 53 | ||||||||||||
Net cash (used in) provided by financing activities | (30,522 | ) | 206,138 | (40,092 | ) | 254,961 | ||||||||||
Net increase (decrease) in cash and cash equivalents | 16,818 | (284,113 | ) | 183,610 | (542,120 | ) | ||||||||||
Cash and cash equivalents | ||||||||||||||||
Beginning of period | 572,225 | 1,234,252 | 572,225 | �� | 1,234,252 | |||||||||||
End of period | $ | 589,043 | $ | 950,139 | $ | 755,835 | $ | 692,132 | ||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
- 3 -
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 accounting principles generally accepted in the United States of America 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 March 31,June 30, 2011 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, 2010, filed with the SEC on February 10,11, 2011.
The Consolidated Statements of Operations for the three and six months ended March 31,June 30, 2011 and Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2011 are not necessarily indicative of the results to be expected for the full year. 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, 2010 Annual Report on Form 10-K.
2. | Fair Value Measurements |
Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
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 both held-to-maturity and available-for-sale securities. The Company’s held-to-maturity marketable securities consist of both 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 (2)(3) deposit securities, which may include, among others, certificates of deposit and time deposits. For those debtAs of June 30, 2011 all of the Company’s marketable securities thatare treated as available-for-sale investments and, as such, the Company has bothrecorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income during the abilitythree and six months ended June 30, 2011. As of December 31, 2010, the Company classified certain marketable securities as held-to-maturity as it had the intent and ability to hold its held-to-maturity investments to maturity at the time of their purchase. In July 2011, the Company sold $100 million of held-to-maturity marketable securities prior to their maturity dates,and, as a result, the Company classifies suchhas re-classified debt securities which were previously accounted for as held-to-maturity. The Company’s held-to-maturity debt securities are reported at amortized cost in the Consolidated Balance Sheets.as available-for-sale as of June 30, 2011.
The following table sets forth the Company’s carryingamortized cost and fair values of its held-to-maturity marketable securities, by both security type and maturity dateall of which were re-classified from held-to-maturity to available-for-sale (in thousands). The fair values of the Company’s marketable securities are based upon Level 1 and Level 2 fair value inputs.
March 31, 2011 | December 31, 2010 | |||||||||||||||
Recorded Amount | Estimated Fair Value | Recorded Amount | Estimated Fair Value | |||||||||||||
Held-to-Maturity | ||||||||||||||||
Debt securities - maturity less than 1 year | $ | 368,074 | $ | 368,299 | $ | 469,318 | $ | 469,956 | ||||||||
Debt securities - maturity 1 to 5 years | 114,874 | 116,054 | 120,078 | 121,406 | ||||||||||||
Total held-to-maturity securities | $ | 482,948 | $ | 484,353 | $ | 589,396 | $ | 591,362 | ||||||||
Included in the Company’s March 31, 2011 held-to-maturity investment balances are $482.9 million of debt securities that were in a gross unrealized gain position of $1.4 million.
4
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
For certain debt securities, primarily corporate debt that the Company does not have the intent to hold until maturity, the Company classifies such debt securities as available-for-sale. The Company’s available-for-sale securities also include holdings in a fund that invests predominantly in fixed income securities. The Company records all of its available-for-sale marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets.
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
Debt securities - maturity less than 1 year | $ | 67,755 | $ | 68,303 | $ | 469,318 | $ | 469,956 | ||||||||
Debt securities - maturity 1 to 5 years | 120,164 | 121,556 | 120,078 | 121,406 | ||||||||||||
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Total | $ | 187,919 | $ | 189,859 | $ | 589,396 | $ | 591,362 | ||||||||
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The following table sets forth the amortized cost and estimated fair value of the Company’s other available-for-sale marketable securities (in thousands).
March 31, 2011 | December 31, 2010 | |||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
Available-for-Sale | ||||||||||||||||
Equity security | $ | 103,956 | $ | 107,411 | $ | 103,189 | $ | 105,304 | ||||||||
Debt securities | 270,981 | 275,713 | 271,260 | 274,029 | ||||||||||||
Total available-for-sale securities | $ | 374,937 | $ | 383,124 | $ | 374,449 | $ | 379,333 | ||||||||
- 4 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
Equity security | $ | 165,064 | $ | 166,084 | $ | 103,189 | $ | 105,304 | ||||||||
Debt securities | 287,696 | 290,952 | 271,260 | 274,029 | ||||||||||||
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Total | $ | 452,760 | $ | 457,036 | $ | 374,449 | $ | 379,333 | ||||||||
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Mortgage Loans Held-for-Sale, Net. As of March 31,June 30, 2011, 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 March 31,June 30, 2011 and December 31, 2010, the Company had $23.6$30.3 million and $56.9 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 2 input being the quoted market prices for those mortgage loans. At March 31,June 30, 2011 and December 31, 2010, the Company had $14.1$8.9 million and $8.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.
Inventories. The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when the undiscounted future cash flow of a subdivision is less than its carrying value. The Company determines the estimated fair value of each subdivision byeither by: (1) calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation.evaluation; or (2) assessing what the market value of the land is in its current condition by considering the estimated price a willing buyer would pay for the land (other than in a forced liquidation), and recent land purchase transactions that the Company believes are indicators of fair value. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the level of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The estimated fair values of impaired subdivisions are based upon Level 3 cash flow inputs. The fair value of the Company’s asset impairments were not material during the three months ended March 31, 2011.inventory that was impaired at June 30, 2011 is as follows (in thousands).
Land and Land Under Development (Held-for- | Housing Completed or Under | Total Fair Value of | ||||||||||
Development) | for-Development) | Impaired Inventory | ||||||||||
West | $ | 8,084 | $ | 6,796 | 14,880 | |||||||
Mountain | 1,202 | 3,702 | 4,904 | |||||||||
East | - | - | - | |||||||||
Other Homebuilding | 201 | 587 | 788 | |||||||||
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Consolidated | $ | 9,487 | $ | 11,085 | $ | 20,572 | ||||||
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Related Party Assets. 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 Company used a 15% discount rate in determining the present value of the estimated future cash flows from the bonds. 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 (as defined below) 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.
- 5 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Senior Notes. The following table states the estimated fair values of the Company’s senior notes (in thousands).
June 30, 2011 | December 31, 2010 | |||||||||||||||
Recorded Amount | Estimated Fair Value | Recorded Amount | Estimated Fair Value | |||||||||||||
7% Senior Notes due 2012 | $ | 149,705 | $ | 162,000 | $ | 149,650 | $ | 160,493 | ||||||||
5 1/2% Senior Notes due 2013 | 349,810 | 374,500 | 349,748 | 362,198 | ||||||||||||
5 3/8% Medium Term Senior Notes due 2014 | 249,351 | 265,700 | 249,266 | 255,683 | ||||||||||||
5 3/8% Medium Term Senior Notes due 2015 | 249,839 | 259,050 | 249,821 | 251,450 | ||||||||||||
5 3/8% Senior Notes due 2020 | 244,568 | 244,525 | 244,330 | 244,400 | ||||||||||||
Total | $ | 1,243,273 | $ | 1,305,775 | $ | 1,242,815 | $ | 1,274,224 | ||||||||
As further described in Note 16, in July 2011 the following table areCompany extinguished a combined $237.0 million of its senior notes due in 2012 and 2013. The estimated fair value of the 7% Senior Notes due 2012 and 5 1/2% Senior Notes due 2013 is based upon Level 1 fair value inputs determined using the price the Company paid to acquire the senior notes. The estimated fair value of the remaining senior notes is based on Level 2 fair value inputs, including market prices of bonds in the homebuilding sector (in thousands).sector.
March 31, 2011 | December 31, 2010 | |||||||||||||||
Recorded Amount | Estimated Fair Value | Recorded Amount | Estimated Fair Value | |||||||||||||
7% Senior Notes due 2012 | $ | 149,700 | $ | 159,278 | $ | 149,650 | $ | 160,493 | ||||||||
5 1/2% Senior Notes due 2013 | 349,775 | 362,355 | 349,748 | 362,198 | ||||||||||||
5 3/8% Medium Term Senior Notes due 2014 | 249,308 | 263,163 | 249,266 | 255,683 | ||||||||||||
5 3/8% Medium Term Senior Notes due 2015 | 249,830 | 257,863 | 249,821 | 251,450 | ||||||||||||
5 3/8% Senior Notes due 2020 | 244,449 | 247,138 | 244,330 | 244,400 | ||||||||||||
Total | $ | 1,243,062 | $ | 1,289,797 | $ | 1,242,815 | $ | 1,274,224 | ||||||||
3. | Inventory Impairments |
The Company’s held-for-development inventory is included as a component of housing completed or under construction and land and land under development in the Consolidated Balance Sheets.
The Company evaluates its held-for-development inventory for impairment at each quarter end. The Company did not have any impairments of its homebuilding inventory during the three and six months ended June 20, 2010. The following table sets forth, by reportable segment, the asset impairments recorded during the three and six months ended June 30, 2011 (in thousands).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||
2011 | 2011 | |||||||
Land and Land Under Development (Held-for-Development) | ||||||||
West | $ | 5,919 | $ | 5,919 | ||||
Mountain | 1,236 | 1,236 | ||||||
East | 285 | 285 | ||||||
Other Homebuilding | - | - | ||||||
Subtotal | 7,440 | 7,440 | ||||||
Housing Completed or Under Construction (Held-for-Development) | ||||||||
West | 954 | 954 | ||||||
Mountain | 239 | 239 | ||||||
East | - | - | ||||||
Other Homebuilding | - | - | ||||||
Subtotal | 1,193 | 1,193 | ||||||
Other Assets | 486 | 765 | ||||||
Consolidated Asset Impairments | $ | 9,119 | $ | 9,398 | ||||
The Company recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.
- 6 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
4. | 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 March 31,June 30, 2011, the Company had $97.7$130.0 million in interest rate lock commitments and $84.0$94.5 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 other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three and six months ended March 31,June 30, 2011 and 2010.
Balance Sheet Components |
The following table sets for information relating to prepaid expenses and other assets, net (in thousands).
March 31, 2011 | December 31, 2010 | |||||||
Deferred marketing costs | $ | 23,723 | $ | 22,736 | ||||
Land option deposits | 11,579 | 11,606 | ||||||
Deferred debt issue costs, net | 4,751 | 5,021 | ||||||
Prepaid expenses | 3,886 | 5,935 | ||||||
IRS deposit (See Note 12) | - | 35,562 | ||||||
Other | 3,943 | 4,533 | ||||||
Total | $ | 47,882 | $ | 85,393 | ||||
6
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
June 30, 2011 | December 31, 2010 | |||||||
Deferred marketing costs | $ | 23,135 | $ | 22,736 | ||||
Land option deposits | 11,432 | 11,606 | ||||||
Goodwill | 5,958 | - | ||||||
Deferred debt issue costs, net | 4,552 | 5,021 | ||||||
Prepaid expenses | 3,331 | 5,935 | ||||||
IRS deposit (See Note 13) | - | 35,562 | ||||||
Other | 5,994 | 4,533 | ||||||
Total | $ | 54,402 | $ | 85,393 | ||||
The following table sets forth information relating to accrued liabilities (in thousands).
June 30, | December 31, | |||||||||||||||
March 31, 2011 | December 31, 2010 | 2011 | 2010 | |||||||||||||
Accrued liabilities | ||||||||||||||||
Insurance reserves (see Note 8) | $ | 52,031 | $ | 52,901 | ||||||||||||
Warranty reserves (see Note 7) | 33,615 | 34,704 | ||||||||||||||
Insurance reserves (see Note 9) | $ | 52,310 | $ | 52,901 | ||||||||||||
Warranty reserves (see Note 8) | 31,200 | 34,704 | ||||||||||||||
Accrued executive deferred compensation | 22,467 | 20,956 | ||||||||||||||
Accrued interest payable | 21,722 | 17,822 | 17,807 | 17,822 | ||||||||||||
Accrued executive deferred compensation | 21,711 | 20,956 | ||||||||||||||
Accrued compensation and related expenses | 15,609 | 22,659 | ||||||||||||||
Legal accruals (see Note 11) | 13,213 | 14,230 | ||||||||||||||
Liability for unrecognized tax benefits (see Note 13) | 14,546 | 55,850 | 11,808 | 55,850 | ||||||||||||
Legal accruals (see Note 10) | 12,750 | 14,230 | ||||||||||||||
Land development and home construction accruals | 12,090 | 12,450 | 11,043 | 12,450 | ||||||||||||
Accrued compensation and related expenses | 10,992 | 22,659 | ||||||||||||||
Mortgage loan loss reserves (see Note 10) | 7,636 | 6,881 | ||||||||||||||
Customer and escrow deposits | 5,099 | 4,523 | 6,631 | 4,523 | ||||||||||||
Mortgage loan loss reserves (see Note 11) | 4,100 | 6,881 | ||||||||||||||
Other accrued liabilities | 17,861 | 17,753 | 18,702 | 17,753 | ||||||||||||
Total accrued liabilities | $ | 210,053 | $ | 260,729 | $ | 204,890 | $ | 260,729 | ||||||||
- 7 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Loss Per Share |
For purposes of calculating earnings (loss) per share (“EPS”), aA company that has participating security holders (for example, unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method for purposes of calculating earnings (loss) per share.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 basic and diluted EPS calculations are shown below (in thousands, except per share amounts).
Three Months | Six Months | |||||||||||||||||||||||
Three Months Ended March 31, | Ended June 30, | Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Basic and Diluted Loss Per Common Share | ||||||||||||||||||||||||
Net loss | $ | (19,879 | ) | $ | (20,873 | ) | $ | (27,980 | ) | $ | (3,684 | ) | $ | (47,859 | ) | $ | (24,557 | ) | ||||||
Less: distributed and undistributed earnings allocated to participating securities | (159 | ) | (124 | ) | (206 | ) | (135 | ) | (365 | ) | (259 | ) | ||||||||||||
|
|
|
| |||||||||||||||||||||
Net loss attributable to common stockholders | $ | (20,038 | ) | $ | (20,997 | ) | $ | (28,186 | ) | $ | (3,819 | ) | $ | (48,224 | ) | $ | (24,816 | ) | ||||||
|
|
|
| |||||||||||||||||||||
Basic and diluted weighted-average shares outstanding | 46,716 | 46,613 | 46,719 | 46,617 | 46,717 | 46,615 | ||||||||||||||||||
Basic Loss Per Common Share | $ | (0.43 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.03 | ) | $ | (0.53 | ) | ||||||
|
|
|
| |||||||||||||||||||||
Dilutive Loss Per Common Share | $ | (0.43 | ) | $ | (0.45 | ) | $ | (0.60 | ) | $ | (0.08 | ) | $ | (1.03 | ) | $ | (0.53 | ) | ||||||
|
|
|
|
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 stock options and unvested restricted stock. Diluted EPS for the three and six months ending March 31,June 30, 2011 and 2010 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.8 million shares and 0.50.4 million shares during the three and six months ended March 31,June 30, 2011 and 2010, respectively.
7
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
Interest Activity |
The Company capitalizes interest on its senior notes associated with its qualifying assets, which includes land and land under development that is actively being developed and housing completed orhomes under construction through the completion of construction of a home.construction. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. The Company expensed $8.7$7.4 million and $10.3$9.4 million of interest that wasprimarily associated with interest incurred on its senior notes during the three months ended March 31,June 30, 2011 and 2010, respectively, and $16.1 million and $19.8 million during the six months ended June 30, 2011 and 2010, respectively, that could not be capitalized.
Interest activity is shown below (in thousands).
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Total Interest Incurred | ||||||||
Corporate and homebuilding segments | $ | 18,186 | $ | 16,931 | ||||
Financial Services and Other | 63 | 79 | ||||||
Total interest incurred | $ | 18,249 | $ | 17,010 | ||||
Total Interest Capitalized | ||||||||
Interest capitalized, beginning of period | $ | 38,446 | $ | 28,339 | ||||
Interest capitalized | 9,519 | 6,636 | ||||||
Previously capitalized interest included in home cost of sales | (4,203 | ) | (3,202 | ) | ||||
Interest capitalized, end of period | $ | 43,762 | $ | 31,773 | ||||
- 8 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total Interest Incurred | ||||||||||||||||
Corporate | $ | 18,084 | $ | 18,158 | $ | 36,270 | $ | 35,089 | ||||||||
Financial Services and Other | 60 | 127 | 123 | 206 | ||||||||||||
Total interest incurred | $ | 18,144 | $ | 18,285 | $ | 36,393 | $ | 35,295 | ||||||||
Total Interest Capitalized | ||||||||||||||||
Interest capitalized, beginning of period | $ | 43,762 | $ | 31,773 | $ | 38,446 | $ | 28,339 | ||||||||
Interest capitalized | 10,750 | 8,849 | 20,269 | 15,485 | ||||||||||||
Previously capitalized interest included in home cost of sales | (5,454 | ) | (8,202 | ) | (9,657 | ) | (11,404 | ) | ||||||||
Interest capitalized, end of period | $ | 49,058 | $ | 32,420 | $ | 49,058 | $ | 32,420 | ||||||||
Warranty Reserves |
The Company records expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The establishment of warranty reserves is primarily based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, 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 reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded.
The following table summarizes the warranty reserve activity for the three and six months ended March 31,June 30, 2011 and 2010 (in thousands).
Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Balance at beginning of year | $ | 34,704 | $ | 59,022 | ||||||||||||||||||||
Balance at beginning of period | $ | 33,615 | $ | 54,054 | $ | 34,704 | $ | 59,022 | ||||||||||||||||
Expense provisions | 841 | 990 | 1,034 | 2,220 | 1,875 | 3,210 | ||||||||||||||||||
Cash payments | (1,499 | ) | (2,029 | ) | (1,617 | ) | (2,611 | ) | (3,116 | ) | (4,640 | ) | ||||||||||||
Adjustments | (431 | ) | (3,929 | ) | (1,832 | ) | (1,677 | ) | (2,263 | ) | (5,606 | ) | ||||||||||||
Balance at end of period | $ | 33,615 | $ | 54,054 | $ | 31,200 | $ | 51,986 | $ | 31,200 | $ | 51,986 | ||||||||||||
The favorable warranty adjustments that were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations during the three and six months ended March 31,June 30, 2011 and 2010 were primarily the result of a continued favorable trend in the amount of warranty payments incurred on previously closed homes.
8
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
Insurance Reserves |
The Company records expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies and re-insurance agreements issued by StarAmerican Insurance Ltd. (“StarAmerican”) and Allegiant;Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (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.
- 9 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table summarizes the insurance reserve activity for the three and six months ended March 31,June 30, 2011 and 2010 (in thousands).
Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Balance at beginning of year | $ | 52,901 | $ | 51,606 | ||||||||||||||||||||
Balance at beginning of period | $ | 52,031 | $ | 51,390 | $ | 52,901 | $ | 51,606 | ||||||||||||||||
Expense provisions | 480 | 583 | 587 | 1,231 | 1,067 | 1,814 | ||||||||||||||||||
Cash payments | (1,350 | ) | (799 | ) | (656 | ) | (4,309 | ) | (2,006 | ) | (5,108 | ) | ||||||||||||
Adjustments | - | - | 348 | - | 348 | - | ||||||||||||||||||
Balance at end of period | $ | 52,031 | $ | 51,390 | $ | 52,310 | $ | 48,312 | $ | 52,310 | $ | 48,312 | ||||||||||||
Information on Business Segments |
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 |
(2) | Mountain (Colorado and Utah) |
(3) | East (Delaware Valley, Maryland and Virginia) |
(4) | Other Homebuilding (Florida and Illinois) |
The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant; (3) 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. The Company’s Corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment, earns interest income on its cash, cash equivalents and marketable securities, and incurs interest expense on its senior notes.
9
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
The following table summarizes revenue for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the revenue table below relate to Mortgage Loan Originationmortgage loan origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Homebuilding | ||||||||
West | $ | 42,483 | $ | 57,137 | ||||
Mountain | 71,124 | 46,682 | ||||||
East | 43,092 | 31,505 | ||||||
Other Homebuilding | 9,859 | 9,036 | ||||||
Total Homebuilding | 166,558 | 144,360 | ||||||
Financial Services and Other | 5,703 | 5,621 | ||||||
Corporate | - | - | ||||||
Intercompany adjustments | (2,514 | ) | (2,903 | ) | ||||
Consolidated | $ | 169,747 | $ | 147,078 | ||||
- 10 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 69,401 | $ | 123,193 | $ | 111,884 | $ | 180,330 | ||||||||
Mountain | 78,702 | 110,112 | 149,826 | 156,794 | ||||||||||||
East | 51,076 | 72,657 | 94,168 | 104,162 | ||||||||||||
Other Homebuilding | 10,949 | 16,757 | 20,808 | 25,793 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Homebuilding | 210,128 | 322,719 | 376,686 | 467,079 | ||||||||||||
Financial Services and Other | 6,731 | 9,143 | 12,434 | 14,764 | ||||||||||||
Corporate | - | - | - | - | ||||||||||||
Intercompany adjustments | (1,174 | ) | (5,532 | ) | (3,688 | ) | (8,435 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Consolidated | $ | 215,685 | $ | 326,330 | $ | 385,432 | $ | 473,408 | ||||||||
|
|
|
|
|
|
|
|
The following table summarizes (loss) income before income taxes for each of the Company’s six reportable segments (in thousands). Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes for each reportable segment in the table below, are charged by the Company’s Corporate segment to the homebuilding segments and the Financial Services and Other segment. Supervisory Fees represent costs incurred by the Company’s Corporate segment associated with certain resources that support the Company’s other reportable segments. Transfers, if any, between operating segments are recorded at cost.
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Homebuilding | ||||||||
West | $ | (4,560 | ) | $ | 2,354 | |||
Mountain | (1,232 | ) | 1,170 | |||||
East | (1,956 | ) | (1,519 | ) | ||||
Other Homebuilding | (776 | ) | (519 | ) | ||||
Total Homebuilding | (8,524 | ) | 1,486 | |||||
Financial Services and Other | 1,780 | 1,846 | ||||||
Corporate | (16,960 | ) | (24,574 | ) | ||||
Consolidated | $ | (23,704 | ) | $ | (21,242 | ) | ||
10
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | (11,837 | ) | $ | 6,357 | $ | (16,397 | ) | $ | 8,711 | ||||||
Mountain | (1,204 | ) | 4,962 | (2,436 | ) | 6,132 | ||||||||||
East | (2,345 | ) | 1,455 | (4,301 | ) | (64 | ) | |||||||||
Other Homebuilding | (916 | ) | 295 | (1,692 | ) | (224 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Total Homebuilding | (16,302 | ) | 13,069 | (24,826 | ) | 14,555 | ||||||||||
Financial Services and Other | 3,089 | 4,089 | 4,869 | 5,935 | ||||||||||||
Corporate | (16,590 | ) | (20,857 | ) | (33,550 | ) | (45,431 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Consolidated | $ | (29,803 | ) | $ | (3,699 | ) | $ | (53,507 | ) | $ | (24,941 | ) | ||||
|
|
|
|
|
|
|
|
The following table summarizes total assets for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the table below relate to loans from the Company’s Financial Services and Other segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents and marketable securities.
March 31, 2011 | December 31, 2010 | |||||||
Homebuilding | ||||||||
West | $ | 328,225 | $ | 300,652 | ||||
Mountain | 315,103 | 311,833 | ||||||
East | 205,502 | 188,693 | ||||||
Other Homebuilding | 39,138 | 40,554 | ||||||
Total Homebuilding | 887,968 | 841,732 | ||||||
Financial Services and Other | 110,206 | 135,286 | ||||||
Corporate | 1,459,182 | 1,573,408 | ||||||
Intercompany adjustments | (2,817 | ) | (2,657 | ) | ||||
Consolidated | $ | 2,454,539 | $ | 2,547,769 | ||||
- 11 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2011 | December 31, 2010 | |||||||
Homebuilding | ||||||||
West | $ | 360,939 | $ | 300,652 | ||||
Mountain | 308,805 | 311,833 | ||||||
East | 214,246 | 188,693 | ||||||
Other Homebuilding | 37,146 | 40,554 | ||||||
Total Homebuilding | 921,136 | 841,732 | ||||||
Financial Services and Other | 112,113 | 135,286 | ||||||
Corporate | 1,390,811 | 1,573,408 | ||||||
Intercompany adjustments | (3,756 | ) | (2,657 | ) | ||||
Consolidated | $ | 2,420,304 | $ | 2,547,769 | ||||
The following table summarizes depreciation and amortization of long-lived assets and amortization of deferred marketing costs for each of the Company’s six reportable segments (in thousands).
Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||
West | $ | 880 | $ | 1,074 | $ | 1,241 | $ | 2,211 | $ | 2,121 | $ | 3,285 | ||||||||||||
Mountain | 833 | 463 | 928 | 1,091 | 1,761 | 1,554 | ||||||||||||||||||
East | 444 | 312 | 602 | 639 | 1,046 | 951 | ||||||||||||||||||
Other Homebuilding | 210 | 161 | 189 | 237 | 399 | 398 | ||||||||||||||||||
Total Homebuilding | 2,367 | 2,010 | 2,960 | 4,178 | 5,327 | 6,188 | ||||||||||||||||||
Financial Services and Other | 173 | 169 | 157 | 170 | 330 | 339 | ||||||||||||||||||
Corporate | 1,189 | 753 | 1,221 | 821 | 2,410 | 1,574 | ||||||||||||||||||
Consolidated | $ | 3,729 | $ | 2,932 | $ | 4,338 | $ | 5,169 | $ | 8,067 | $ | 8,101 | ||||||||||||
Commitments and Contingencies |
The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At March 31,June 30, 2011 the Company had issued and outstanding performance bonds and letters of credit totaling $71.7$74.4 million and $20.8$22.9 million, respectively, including $7.2$9.1 million in letters of credit issued by HomeAmerican. In the event any such 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 matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. During the 2011, first quarter, HomeAmerican reached a settlementsettlements associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily as a result of this settlement,these settlements, the Company increased its estimated mortgage loan loss
11
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
reserve by $1.0$1.3 million during the threesix months ended March 31,June 30, 2011. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations.
- 12 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table summarizes the mortgage loan loss reserve activity for the three and six months ended March 31,June 30, 2011 and 2010 (in thousands).
Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Balance at beginning of year | $ | 6,881 | $ | 9,641 | ||||||||||||||||||||
Balance at beginning of period | $ | 7,636 | $ | 8,241 | $ | 6,881 | $ | 9,641 | ||||||||||||||||
Expense provisions | - | - | - | - | - | - | ||||||||||||||||||
Cash payments | (207 | ) | (1,400 | ) | (3,871 | ) | (172 | ) | (4,078 | ) | (1,572 | ) | ||||||||||||
Adjustments | 962 | - | 335 | - | 1,297 | - | ||||||||||||||||||
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| |||||||||||||||||||||
Balance at end of period | $ | 7,636 | $ | 8,241 | $ | 4,100 | $ | 8,069 | $ | 4,100 | $ | 8,069 | ||||||||||||
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|
Legal Accruals. Litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:
Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.
Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.
Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.
By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.
On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011 the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.
On March 31, 2011 the West Virginia Supreme Court of Appeals declined to enter a writ of prohibition with respect to the trial court’s re-entry of its judgment of default stating that the issues presented are more properly presented on appeal after full development of the record in the lower court.
12- 13 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:
Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This litigation was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.
MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.
Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes.
The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $12.8$13.2 million and $14.2 million at March 31,June 30, 2011 and December 31, 2010, respectively.
Line of Credit and Total Debt Obligations |
Mortgage Lending. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), which may include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at March 31,June 30, 2011 and December 31, 2010, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported as a liability in Mortgage Repurchase Facility in the Consolidated Balance Sheets. At March 31,June 30, 2011 and December 31, 2010, the Company had $6.7$9.0 million and $25.4 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.
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 Company’s debt obligations at March 31,June 30, 2011 and December 31, 2010 are as follows (in thousands):
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||
7% Senior Notes due 2012 | $ | 149,700 | $ | 149,650 | $ | 149,705 | $ | 149,650 | ||||||||
5 1/2% Senior Notes due 2013 | 349,775 | 349,748 | 349,810 | 349,748 | ||||||||||||
5 3/8% Medium-Term Senior Notes due 2014 | 249,308 | 249,266 | 249,351 | 249,266 | ||||||||||||
5 3/8% Medium-Term Senior Notes due 2015 | 249,830 | 249,821 | 249,839 | 249,821 | ||||||||||||
5 3/8% Senior Notes due 2020 | 244,449 | 244,330 | 244,568 | 244,330 | ||||||||||||
Total Senior Notes, net | $ | 1,243,062 | $ | 1,242,815 | 1,243,273 | 1,242,815 | ||||||||||
Mortgage repurchase facility | 6,736 | 25,434 | 8,988 | 25,434 | ||||||||||||
Total Debt | $ | 1,249,798 | $ | 1,268,249 | $ | 1,252,261 | $ | 1,268,249 | ||||||||
As further described in Note 16, in July 2011 the Company extinguished a combined $237.0 million of the senior notes due in 2012 and 2013.
13- 14 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
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. Based on these estimates, the Company had an income tax benefit of $3.8 million, or 16.1%, during the three months ended March 31, 2011, compared with $0.4 million, or 1.7%, during the three months ended March 31, 2010. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The increase in the income tax benefitbenefits of $1.8 million and $5.6 million during the three and six months ended June 30, 2011, first quarter, compared with the same period during 2010,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. The Company’s income tax benefits during the three and six months ended June 30, 2010 were not material to the Company’s results of operations.
The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. The Company’s liability for unrecognized tax benefits decreased fromwas $11.8 million and $55.9 million at June 30, 2011 and December 31, 2010, to $14.6 million at March 31, 2011. The $41.3 millionrespectively. This decrease during the 2011 first quarter resulted primarily from the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns.
In addition to the above, the Company’s 2011 first quarterreturns and settlement with the IRS resulted in an increase of $13.0 million to additional paid-in-capital in the Company’s Consolidated Statements of Stockholders’ Equity. Finally, since the Company settled for an amount less than the $35.6 million deposit the Company made with the IRS during 2008, the settlement resulted in an increase of $11.1 million tovarious state income taxes receivable in the Company’s Consolidated Balance Sheets.tax matters.
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. The increase in the Company’s total deferred tax asset at March 31,June 30, 2011 (per the table below) resulted primarily from an increase in the Company’s federal net operating loss carry forward, offset by a decrease in the Company’s asset impairment charges.forwards.
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. The Company had a valuation allowance of $239.0 million and $231.4 million at March 31,At June 30, 2011 and December 31, 2010, respectively, resulting inthe Company had a full valuation allowance recorded against its net deferred tax asset of zero.assets. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or 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.
14
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows (in thousands).
March 31, 2011 | December 31, 2010 | |||||||
Deferred tax assets | ||||||||
Federal net operating loss carryforward | $ | 84,745 | $ | 73,189 | ||||
State net operating loss carryforward | 48,196 | 47,041 | ||||||
Asset impairment charges | 41,502 | 46,118 | ||||||
Warranty, litigation and other reserves | 26,341 | 27,635 | ||||||
Stock-based compensation expense | 23,913 | 22,777 | ||||||
Alternative minimum tax and other tax credit carryforwards | 10,296 | 10,296 | ||||||
Accrued liabilities | 10,066 | 9,789 | ||||||
Inventory, additional costs capitalized for tax purposes | 5,368 | 5,368 | ||||||
Property, equipment and other assets, net | 1,795 | 1,773 | ||||||
Charitable contribution on carryforward | 945 | 938 | ||||||
Deferred revenue | 364 | 326 | ||||||
Total deferred tax assets | 253,531 | 245,250 | ||||||
Valuation allowance | (239,012 | ) | (231,379 | ) | ||||
Total deferred tax assets, net of valuation allowance | 14,519 | 13,871 | ||||||
Deferred tax liabilities | ||||||||
Deferred revenue | 5,788 | 6,401 | ||||||
Unrealized gain | 3,152 | 1,880 | ||||||
Accrued liabilities | 698 | 713 | ||||||
Inventory, additional costs capitalized for financial statement purposes | 590 | 604 | ||||||
Other, net | 4,291 | 4,273 | ||||||
Total deferred tax liabilities | 14,519 | 13,871 | ||||||
Net deferred tax asset | $ | - | $ | - | ||||
- 15 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2011 | December 31, 2010 | |||||||
Deferred tax assets | ||||||||
Federal net operating loss carryforward | $ | 98,854 | $ | 73,189 | ||||
State net operating loss carryforward | 49,485 | 47,041 | ||||||
Asset impairment charges | 38,307 | 46,118 | ||||||
Warranty, litigation and other reserves | 24,641 | 27,635 | ||||||
Stock-based compensation expense | 25,124 | 22,777 | ||||||
Alternative minimum tax and other tax credit carryforwards | 10,296 | 10,296 | ||||||
Accrued liabilities | 10,529 | 9,789 | ||||||
Inventory, additional costs capitalized for tax purposes | 5,368 | 5,368 | ||||||
Property, equipment and other assets, net | 1,761 | 1,773 | ||||||
Charitable contribution on carryforward | 946 | 938 | ||||||
Deferred revenue | 293 | 326 | ||||||
Total deferred tax assets | 265,604 | 245,250 | ||||||
Valuation allowance | (252,209 | ) | (231,379 | ) | ||||
Total deferred tax assets, net of valuation allowance | 13,395 | 13,871 | ||||||
Deferred tax liabilities | ||||||||
Deferred revenue | 5,731 | 6,401 | ||||||
Unrealized gain | 2,393 | 1,880 | ||||||
Inventory, additional costs capitalized for financial statement purposes | 580 | 604 | ||||||
Accrued liabilities | 383 | 713 | ||||||
Other, net | 4,308 | 4,273 | ||||||
Total deferred tax liabilities | 13,395 | 13,871 | ||||||
Net deferred tax asset | $ | - | $ | - | ||||
Variable Interest Entities |
In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or 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, including interest and other carrying costs, 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 non-refundable cash deposits and/or letters of credit, which totaled approximately $10.3 million and $5.3 million, respectively, at March 31, 2011.credit. At March 31,June 30, 2011, the Company had the right to acquire 3,752cash deposits and letters of credit of $10.5 million and $6.7 million, respectively, at risk associated with 2,957 lots under Option Contracts.
In compliance with ASC 810, the Company analyzes its Option Contracts
- 16 -
M.D.C. HOLDINGS, INC.
Notes to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that as of March 31, 2011 it was not the primary beneficiary of any VIEs from which it is purchasing land under land option contracts.Unaudited Consolidated Financial Statements (Continued)
Other Comprehensive Loss |
Total other comprehensive loss includes net loss and unrealized holding gains or losses on the Company’s available-for-sale marketable securities. The following table sets forth the Company’s other comprehensive loss during the three and six months ended March 31,June 30, 2011 and 2010 (in thousands).
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss | $ | (19,879 | ) | $ | (20,873 | ) | ||
Unrealized holding gains | 3,303 | 1,154 | ||||||
Total other comprehensive loss | $ | (16,576 | ) | $ | (19,719 | ) | ||
15
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss | $ | (27,980 | ) | $ | (3,684 | ) | $ | (47,859 | ) | $ | (24,557 | ) | ||||
Unrealized holding (loss) gain | (1,971 | ) | (2,448 | ) | 1,332 | (1,294 | ) | |||||||||
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Total other comprehensive loss | $ | (29,951 | ) | $ | (6,132 | ) | $ | (46,527 | ) | $ | (25,851 | ) | ||||
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Subsequent Events |
On April 28,In July 2011, the Company enteredcompleted a debt tender offer purchasing $63.7 million of its 7% Senior Notes due 2012 and $173.3 million of its 5 1/2% Senior Notes due 2013. The Company paid $256.7 million, including interest and fees, for the Seattle/Tacoma market through the purchase of substantially allacquired notes and, as a result of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired include approximately 280 vacant residential lots and homes in various stages of construction, spread throughout 11 communities. Additionally, through this acquisition,tender, the Company took controlwill record an $18.6 million charge associated with the extinguishment of approximately 230 additional lots in six communities through option contracts.debt during the 2011 third quarter.
In July 2011, the Company sold $100 million of marketable securities, which it previously accounted for as held-to-maturity securities, at a gain of $1.2 million.
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 subsidiaries of the Company.
M.D.C. Land Corporation
RAH of Florida, Inc.
Richmond American Construction, Inc.
Richmond American Homes of Arizona, Inc.
Richmond American Homes of Colorado, Inc.
Richmond American Homes of Delaware, Inc.
Richmond American Homes of Florida, LP
Richmond American Homes of Illinois, Inc.
Richmond American Homes of Maryland, Inc.
Richmond American Homes of Nevada, Inc.
Richmond American Homes of New Jersey, Inc.
Richmond American Homes of Pennsylvania, Inc.
Richmond American Homes of Utah, Inc.
Richmond American Homes of Virginia, Inc.
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.
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 Subsidiaries is presented.
16- 17 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Balance Sheet
March 31,June 30, 2011
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 549,746 | $ | 2,941 | $ | 36,356 | $ | - | $ | 589,043 | $ | 718,010 | $ | 3,022 | $ | 34,803 | $ | - | $ | 755,835 | ||||||||||||||||||||
Marketable securities | 836,787 | - | 29,285 | - | 866,072 | 615,892 | - | 31,003 | - | 646,895 | ||||||||||||||||||||||||||||||
Restricted cash | - | 419 | - | - | 419 | - | 604 | - | - | 604 | ||||||||||||||||||||||||||||||
Receivables | 21,118 | 10,493 | 2,927 | (2,657 | ) | 31,881 | 8,572 | 5,666 | 4,877 | (2,657 | ) | 16,458 | ||||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | - | - | 37,697 | - | 37,697 | - | - | 39,200 | - | 39,200 | ||||||||||||||||||||||||||||||
Inventories, net | $ | - | - | - | ||||||||||||||||||||||||||||||||||||
Housing completed or under construction | - | 345,554 | - | - | 345,554 | - | 319,951 | 16,563 | - | 336,514 | ||||||||||||||||||||||||||||||
Land and land under development | - | 488,887 | - | - | 488,887 | |||||||||||||||||||||||||||||||||||
Land and land underdevelopment | - | 514,634 | 9,600 | - | 524,234 | |||||||||||||||||||||||||||||||||||
Investment in subsidiaries | 99,113 | - | - | (99,113 | ) | - | 122,483 | - | - | (122,483 | ) | - | ||||||||||||||||||||||||||||
Other assets, net | 50,042 | 42,043 | 3,061 | (160 | ) | 94,986 | 48,334 | 42,106 | 11,223 | (1,099 | ) | 100,564 | ||||||||||||||||||||||||||||
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Total Assets | $ | 1,556,806 | $ | 890,337 | $ | 109,326 | $ | (101,930 | ) | $ | 2,454,539 | $ | 1,513,291 | $ | 885,983 | $ | 147,269 | $ | (126,239 | ) | $ | 2,420,304 | ||||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and related party liabilities | $ | 2,756 | $ | 22,770 | $ | 411 | $ | (2,657 | ) | $ | 23,280 | $ | 2,768 | $ | 26,106 | $ | 3,008 | $ | (2,657 | ) | $ | 29,225 | ||||||||||||||||||
Accrued liabilities | 85,254 | 61,726 | 63,233 | (160 | ) | 210,053 | 85,099 | 56,992 | 64,632 | (1,099 | ) | 205,624 | ||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | (745,674 | ) | 739,264 | 6,410 | - | - | (751,043 | ) | 744,688 | 6,355 | - | - | ||||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 6,736 | - | 6,736 | - | - | 8,988 | - | 8,988 | ||||||||||||||||||||||||||||||
Senior notes, net | 1,243,062 | - | - | - | 1,243,062 | 1,243,273 | - | - | - | 1,243,273 | ||||||||||||||||||||||||||||||
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Total Liabilities | 585,398 | 823,760 | 76,790 | (2,817 | ) | 1,483,131 | 580,097 | 827,786 | 82,983 | (3,756 | ) | 1,487,110 | ||||||||||||||||||||||||||||
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Stockholders’ Equity | 971,408 | 66,577 | 32,536 | (99,113 | ) | 971,408 | 933,194 | 58,197 | 64,286 | (122,483 | ) | 933,194 | ||||||||||||||||||||||||||||
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Total Liabilities and Stockholders’ Equity | $ | 1,556,806 | $ | 890,337 | $ | 109,326 | $ | (101,930 | ) | $ | 2,454,539 | $ | 1,513,291 | $ | 885,983 | $ | 147,269 | $ | (126,239 | ) | $ | 2,420,304 | ||||||||||||||||||
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17- 18 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Balance Sheet
December 31, 2010
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 535,035 | $ | 4,287 | $ | 32,903 | $ | - | $ | 572,225 | $ | 535,035 | $ | 4,287 | $ | 32,903 | $ | - | $ | 572,225 | ||||||||||||||||||||
Marketable securities | 938,471 | - | 30,258 | - | 968,729 | 938,471 | - | 30,258 | - | 968,729 | ||||||||||||||||||||||||||||||
Restricted cash | - | 420 | - | - | 420 | - | 420 | - | - | 420 | ||||||||||||||||||||||||||||||
Receivables | 14,402 | 8,071 | 194 | (2,657 | ) | 20,010 | 14,402 | 8,071 | 194 | (2,657 | ) | 20,010 | ||||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | - | - | 65,114 | - | 65,114 | - | - | 65,114 | - | 65,114 | ||||||||||||||||||||||||||||||
Inventories, net | ||||||||||||||||||||||||||||||||||||||||
Housing completed or under construction | - | 372,422 | - | - | 372,422 | - | 372,422 | - | - | 372,422 | ||||||||||||||||||||||||||||||
Land and land under development | - | 415,237 | - | - | 415,237 | |||||||||||||||||||||||||||||||||||
Land and land underdevelopment | - | 415,237 | - | - | 415,237 | |||||||||||||||||||||||||||||||||||
Investment in subsidiaries | 110,065 | - | - | (110,065 | ) | - | 110,065 | - | - | (110,065 | ) | - | ||||||||||||||||||||||||||||
Other assets, net | 88,267 | 42,288 | 3,057 | - | 133,612 | 88,267 | 42,288 | 3,057 | - | 133,612 | ||||||||||||||||||||||||||||||
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|
| ||||||||||||||||||||||||||||||||||||
Total Assets | $ | 1,686,240 | $ | 842,725 | $ | 131,526 | $ | (112,722 | ) | $ | 2,547,769 | $ | 1,686,240 | $ | 842,725 | $ | 131,526 | $ | (112,722 | ) | $ | 2,547,769 | ||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and related party liabilities | $ | 2,747 | $ | 34,553 | $ | 465 | $ | (2,657 | ) | $ | 35,108 | $ | 2,747 | $ | 34,553 | $ | 465 | $ | (2,657 | ) | $ | 35,108 | ||||||||||||||||||
Accrued liabilities | 130,960 | 65,622 | 64,147 | - | 260,729 | 130,960 | 65,622 | 64,147 | - | 260,729 | ||||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | (673,965 | ) | 671,190 | 2,775 | - | - | (673,965 | ) | 671,190 | 2,775 | - | - | ||||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 25,434 | - | 25,434 | - | - | 25,434 | - | 25,434 | ||||||||||||||||||||||||||||||
Senior notes, net | 1,242,815 | - | - | - | 1,242,815 | 1,242,815 | - | - | - | 1,242,815 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total Liabilities | 702,557 | 771,365 | 92,821 | (2,657 | ) | 1,564,086 | 702,557 | 771,365 | 92,821 | (2,657 | ) | 1,564,086 | ||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Stockholders’ Equity | 983,683 | 71,360 | 38,705 | (110,065 | ) | 983,683 | 983,683 | 71,360 | 38,705 | (110,065 | ) | 983,683 | ||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 1,686,240 | $ | 842,725 | $ | 131,526 | $ | (112,722 | ) | $ | 2,547,769 | $ | 1,686,240 | $ | 842,725 | $ | 131,526 | $ | (112,722 | ) | $ | 2,547,769 | ||||||||||||||||||
Total Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
18- 19 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Statements of Operations
Three Months Ended March 31,June 30, 2011
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | |||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||
Home sales revenue | $ | - | $ | 165,897 | $ | - | $ | (2,514 | ) | $ | 163,383 | $ | - | $ | 193,554 | $ | 13,783 | $ | (1,174 | ) | $ | 206,163 | ||||||||||||||||||
Land sales and other revenue | - | 661 | 5,703 | - | 6,364 | - | 2,730 | 6,792 | - | 9,522 | ||||||||||||||||||||||||||||||
Equity in (loss) income of subsidiaries | (6,052 | ) | - | - | 6,052 | - | (13,221 | ) | - | - | 13,221 | - | ||||||||||||||||||||||||||||
Total Revenue | (6,052 | ) | 166,558 | 5,703 | 3,538 | 169,747 | ||||||||||||||||||||||||||||||||||
Total revenue | (13,221 | ) | 196,284 | 20,575 | 12,047 | 215,685 | ||||||||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||||||||||
Home cost of sales | - | 143,495 | - | (2,514 | ) | 140,981 | - | 168,000 | 12,271 | (1,174 | ) | 179,097 | ||||||||||||||||||||||||||||
Asset impairments | - | 279 | - | - | 279 | - | 9,119 | - | - | 9,119 | ||||||||||||||||||||||||||||||
Marketing and commission expenses | - | 15,600 | - | - | 15,600 | - | 16,487 | 866 | - | 17,353 | ||||||||||||||||||||||||||||||
General and administrative and other expenses | 14,768 | 15,757 | 4,698 | - | 35,223 | 16,251 | 18,672 | 5,530 | - | 40,453 | ||||||||||||||||||||||||||||||
Total Operating Costs and Expenses | 14,768 | 175,131 | 4,698 | (2,514 | ) | 192,083 | ||||||||||||||||||||||||||||||||||
Total operating costs and expenses | 16,251 | 212,278 | 18,667 | (1,174 | ) | 246,022 | ||||||||||||||||||||||||||||||||||
(Loss) income from Operations | (20,820 | ) | (8,573 | ) | 1,005 | 6,052 | (22,336 | ) | ||||||||||||||||||||||||||||||||
(Loss) income from operations | (29,472 | ) | (15,994 | ) | 1,908 | 13,221 | (30,337 | ) | ||||||||||||||||||||||||||||||||
Other (expense) income | (2,191 | ) | 42 | 781 | - | (1,368 | ) | (337 | ) | 41 | 830 | - | 534 | |||||||||||||||||||||||||||
(Loss) income before income taxes | (23,011 | ) | (8,531 | ) | 1,786 | 6,052 | (23,704 | ) | (29,809 | ) | (15,953 | ) | 2,738 | 13,221 | (29,803 | ) | ||||||||||||||||||||||||
Benefit from (provision for) income taxes | 3,132 | 1,376 | (683 | ) | - | 3,825 | 1,829 | 1,208 | (1,214 | ) | - | 1,823 | ||||||||||||||||||||||||||||
Net (Loss) Income | $ | (19,879 | ) | $ | (7,155 | ) | $ | 1,103 | $ | 6,052 | $ | (19,879 | ) | |||||||||||||||||||||||||||
Net (loss) income | $ | (27,980 | ) | $ | (14,745 | ) | $ | 1,524 | $ | 13,221 | $ | (27,980 | ) | |||||||||||||||||||||||||||
19- 20 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Statements of Operations
Three Months Ended March 31,June 30, 2010
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | |||||||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||||||
Home sales revenue | $ | - | $ | 143,846 | $ | - | $ | (2,903 | ) | $ | 140,943 | $ | - | $ | 316,809 | $ | - | $ | (5,533 | ) | $ | 311,276 | ||||||||||||||||||
Land sales and other revenue | - | 514 | 5,621 | - | 6,135 | - | 5,910 | 9,144 | - | 15,054 | ||||||||||||||||||||||||||||||
Equity in (loss) income of subsidiaries | 2,354 | - | - | (2,354 | ) | - | 15,307 | - | - | (15,307 | ) | - | ||||||||||||||||||||||||||||
Total Revenue | 2,354 | 144,360 | 5,621 | (5,257 | ) | 147,078 | ||||||||||||||||||||||||||||||||||
Total revenue | 15,307 | 322,719 | 9,144 | (20,840 | ) | 326,330 | ||||||||||||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||||||||||||||
Home cost of sales | - | 112,311 | (18 | ) | (2,903 | ) | 109,390 | - | 260,614 | (19 | ) | (5,533 | ) | 255,062 | ||||||||||||||||||||||||||
Asset impairments | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Marketing and commission expenses | - | 12,189 | - | - | 12,189 | - | 23,086 | - | - | 23,086 | ||||||||||||||||||||||||||||||
General and administrative and other expenses | 18,182 | 18,623 | 4,089 | - | 40,894 | 18,607 | 25,828 | 5,656 | - | 50,091 | ||||||||||||||||||||||||||||||
Total Operating Cost s and Expenses | 18,182 | 143,123 | 4,071 | (2,903 | ) | 162,473 | ||||||||||||||||||||||||||||||||||
Total operating costs and expenses | 18,607 | 309,528 | 5,637 | (5,533 | ) | 328,239 | ||||||||||||||||||||||||||||||||||
(Loss) income from Operations | (15,828 | ) | 1,237 | 1,550 | (2,354 | ) | (15,395 | ) | ||||||||||||||||||||||||||||||||
Other income (expense) | (6,208 | ) | 48 | 313 | - | (5,847 | ) | |||||||||||||||||||||||||||||||||
(Loss) income from operations | (3,300 | ) | 13,191 | 3,507 | (15,307 | ) | (1,909 | ) | ||||||||||||||||||||||||||||||||
Other (expense) income | (2,422 | ) | 28 | 604 | - | (1,790 | ) | |||||||||||||||||||||||||||||||||
(Loss) income before income taxes | (22,036 | ) | 1,285 | 1,863 | (2,354 | ) | (21,242 | ) | (5,722 | ) | 13,219 | 4,111 | (15,307 | ) | (3,699 | ) | ||||||||||||||||||||||||
Benefit from (provision for) income taxes | 1,163 | 22 | (816 | ) | - | 369 | 2,038 | (245 | ) | (1,778 | ) | - | 15 | |||||||||||||||||||||||||||
Net (Loss) Income | $ | (20,873 | ) | $ | 1,307 | $ | 1,047 | $ | (2,354 | ) | $ | (20,873 | ) | |||||||||||||||||||||||||||
Net (loss) income | $ | (3,684 | ) | $ | 12,974 | $ | 2,333 | $ | (15,307 | ) | $ | (3,684 | ) | |||||||||||||||||||||||||||
20- 21 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Statements of Cash FlowsOperations
ThreeSix Months Ended March 31,June 30, 2011
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | (19,469 | ) | $ | (71,781 | ) | $ | 24,840 | $ | 8,709 | $ | (57,701 | ) | |||||||
Net cash used in investing activities | 104,104 | (11 | ) | 948 | - | 105,041 | ||||||||||||||
Financing activities | ||||||||||||||||||||
Payments from (advances to) subsidiaries | (58,100 | ) | 70,446 | (3,637 | ) | (8,709 | ) | - | ||||||||||||
Proceeds from issuance of senior notes, net | - | - | - | - | - | |||||||||||||||
Mortgage repurchase facility | - | - | (18,698 | ) | - | (18,698 | ) | |||||||||||||
Dividend payments | (11,824 | ) | - | - | - | (11,824 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (69,924 | ) | 70,446 | (22,335 | ) | (8,709 | ) | (30,522 | ) | |||||||||||
Net (decrease) increase in cash and cash equivalents | 14,711 | (1,346 | ) | 3,453 | - | 16,818 | ||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 535,035 | 4,287 | 32,903 | - | 572,225 | |||||||||||||||
End of period | $ | 549,746 | $ | 2,941 | $ | 36,356 | $ | - | $ | 589,043 | ||||||||||
Revenue | MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | |||||||||||||||
Home sales revenue | $ | - | $ | 359,451 | $ | 13,783 | $ | (3,688 | ) | $ | 369,546 | |||||||||
Land sales and other revenue | - | 3,391 | 12,495 | - | 15,886 | |||||||||||||||
Equity in (loss) income of subsidiaries | (19,273 | ) | - | - | 19,273 | - | ||||||||||||||
Total revenue | (19,273 | ) | 362,842 | 26,278 | 15,585 | 385,432 | ||||||||||||||
Costs and Expenses | ||||||||||||||||||||
Home cost of sales | - | 311,495 | 12,271 | (3,688 | ) | 320,078 | ||||||||||||||
Asset impairments | - | 9,398 | - | - | 9,398 | |||||||||||||||
Marketing and commission expenses | - | 32,087 | 866 | - | 32,953 | |||||||||||||||
General and administrative and other expenses | 31,019 | 34,429 | 10,228 | - | 75,676 | |||||||||||||||
Total operating costs and expenses | 31,019 | 387,409 | 23,365 | (3,688 | ) | 438,105 | ||||||||||||||
(Loss) income from operations | (50,292 | ) | (24,567 | ) | 2,913 | 19,273 | (52,673 | ) | ||||||||||||
Other (expense) income | (2,528 | ) | 83 | 1,611 | - | (834 | ) | |||||||||||||
(Loss) income before income taxes | (52,820 | ) | (24,484 | ) | 4,524 | 19,273 | (53,507 | ) | ||||||||||||
Benefit from (provision for) income taxes | 4,961 | 2,584 | (1,897 | ) | - | 5,648 | ||||||||||||||
Net (loss) income | $ | (47,859 | ) | $ | (21,900 | ) | $ | 2,627 | $ | 19,273 | $ | (47,859 | ) | |||||||
21- 22 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (continued)(Continued)
Supplemental Condensed Combining Statements of Operations
Six Months Ended June 30, 2010
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | ||||||||||||||||
Revenue | ||||||||||||||||||||
Home sales revenue | $ | - | $ | 460,655 | $ | - | $ | (8,436 | ) | $ | 452,219 | |||||||||
Land sales and other revenue | - | 6,424 | 14,765 | - | 21,189 | |||||||||||||||
Equity in (loss) income of subsidiaries | 17,661 | - | - | (17,661 | ) | - | ||||||||||||||
Total revenue | 17,661 | 467,079 | 14,765 | (26,097 | ) | 473,408 | ||||||||||||||
Costs and Expenses | ||||||||||||||||||||
Home cost of sales | - | 372,925 | (37 | ) | (8,436 | ) | 364,452 | |||||||||||||
Asset impairments | - | - | - | - | - | |||||||||||||||
Marketing and commission expenses | - | 35,275 | - | - | 35,275 | |||||||||||||||
General and administrative and other expenses | 36,789 | 44,451 | 9,745 | - | 90,985 | |||||||||||||||
Total operating costs and expenses | 36,789 | 452,651 | 9,708 | (8,436 | ) | 490,712 | ||||||||||||||
(Loss) income from operations | (19,128 | ) | 14,428 | 5,057 | (17,661 | ) | (17,304 | ) | ||||||||||||
Other (expense) income | (8,630 | ) | 76 | 917 | - | (7,637 | ) | |||||||||||||
(Loss) income before income taxes | (27,758 | ) | 14,504 | 5,974 | (17,661 | ) | (24,941 | ) | ||||||||||||
Benefit from (provision for) income taxes | 3,201 | (223 | ) | (2,594 | ) | - | 384 | |||||||||||||
Net (loss) income | $ | (24,557 | ) | $ | 14,281 | $ | 3,380 | $ | (17,661 | ) | $ | (24,557 | ) | |||||||
- 23 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Supplemental Condensed Combining Statements of Cash Flows
ThreeSix Months Ended March 31,June 30, 2011
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | ||||||||||||||||
Net cash (used in) provided by operating activities | $ | (25,813 | ) | $ | (83,489 | ) | $ | 20,772 | $ | 19,273 | $ | (69,257 | ) | |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash provided by (used in) investing activities | 321,930 | (11 | ) | (28,960 | ) | - | 292,959 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Financing activities | ||||||||||||||||||||
(Advances to) payments from subsidiaries | (89,496 | ) | 82,235 | 26,534 | (19,273 | ) | - | |||||||||||||
Mortgage repurchase facility | - | - | (16,446 | ) | - | (16,446 | ) | |||||||||||||
Dividend payments | (23,692 | ) | - | - | - | (23,692 | ) | |||||||||||||
Proceeds from exercise of stock options | 46 | - | - | - | 46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net cash (used in) provided by 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
- 24 -
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Supplemental Condensed Combining Statements of Cash Flows
Six Months Ended June 30, 2010
(In thousands)
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | ||||||||||||||||
Net cash provided by operating activities | $ | 76,099 | $ | (128,646 | ) | $ | 66,417 | $ | (2,354 | ) | $ | 11,516 | ||||||||
Net cash provided by (used in) investing activities | (501,747 | ) | (20 | ) | - | - | (501,767 | ) | ||||||||||||
Financing activities | ||||||||||||||||||||
Payments from (advances to) subsidiaries | (131,470 | ) | 128,249 | 867 | 2,354 | - | ||||||||||||||
Proceeds from issuance of senior notes, net | 242,288 | - | - | - | 242,288 | |||||||||||||||
Mortgage repurchase facility | - | - | (24,401 | ) | - | (24,401 | ) | |||||||||||||
Dividend payments | (11,784 | ) | - | - | - | (11,784 | ) | |||||||||||||
Proceeds from exercise of stock options | 35 | - | - | - | 35 | |||||||||||||||
Net cash provided by (used in) financing activities | 99,069 | 128,249 | (23,534 | ) | 2,354 | 206,138 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | (326,579 | ) | (417 | ) | 42,883 | - | (284,113 | ) | ||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 1,210,123 | 3,258 | 20,871 | - | 1,234,252 | |||||||||||||||
End of period | $ | 883,544 | $ | 2,841 | $ | 63,754 | $ | - | $ | 950,139 | ||||||||||
MDC | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminating Entries | Consolidated MDC | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | 71,574 | $ | (225,398 | ) | $ | (7,449 | ) | $ | (17,661 | ) | $ | (178,934 | ) | ||||||
Net cash used in investing activities | (588,283 | ) | (454 | ) | (29,410 | ) | - | (618,147 | ) | |||||||||||
Financing activities | ||||||||||||||||||||
(Advances to) payments from subsidiaries | (256,944 | ) | 228,079 | 11,204 | 17,661 | - | ||||||||||||||
Proceeds from issuance of senior notes, net | 242,288 | - | - | - | 242,288 | |||||||||||||||
Mortgage repurchase facility | - | - | 36,190 | - | 36,190 | |||||||||||||||
Dividend payments | (23,570 | ) | - | - | - | (23,570 | ) | |||||||||||||
Proceeds from exercise of stock options | 53 | - | - | - | 53 | |||||||||||||||
Net cash (used in) provided by financing activities | (38,173 | ) | 228,079 | 47,394 | 17,661 | 254,961 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | (554,882 | ) | 2,227 | 10,535 | - | (542,120 | ) | |||||||||||||
Cash and cash equivalents | ||||||||||||||||||||
Beginning of period | 1,210,123 | 3,258 | 20,871 | - | 1,234,252 | |||||||||||||||
End of period | $ | 655,241 | $ | 5,485 | $ | 31,406 | $ | - | $ | 692,132 | ||||||||||
22- 25 -
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, 2010 and this Quarterly Report on Form 10-Q.
INTRODUCTION
M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this AnnualQuarterly Report on Form 10-K,10-Q, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California, Nevada and Nevada)Washington); (2) Mountain (Colorado and Utah); (3) East (Maryland, which includes Maryland, Pennsylvania, Delaware and New Jersey, and Virginia, which includes Virginia and West Virginia); and (4) Other Homebuilding (Florida and Illinois).
Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides insurance coverage primarily to its customers, primarily our homebuilding subsidiaries and certain subcontractors of these homebuilding subsidiaries, products and completed operations coverage onfor homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC which beginning in June 2004, re-insures allis a re-insurer of Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits.claims.
EXECUTIVE SUMMARY
During the first quartersix months of 2011, we continued to be faced with challenges in the homebuilding industry including: (1) high levels of existing home inventories; (2) significant competition for new home orders and acquisition of finished lots; (3) low consumer confidence; and (4) high unemployment levels. These conditions reflect a further extension of the housing market downturn and it is difficult to predict when and at what rate these negative conditions will improve, or when the homebuilding industry will experience a sustainable recovery. As a result of these difficult market conditions and without the benefit of a federal homebuyer tax credit (which required the sale of homes to be completed by April 30, 2010), we experienced a 24%9% reduction in net home orders during the six months ended June 30, 2011 first quarter compared with the same period during 2010. Additionally,However, despite the challenging 2011 homebuilding environment, we did experience a 5% increase in sold homes during the three months ended June 30, 2011, compared with the same period in 2010, primarily attributable to increased subdivisions and results from a sales promotion that took place during the 2011 second quarter. The difficulties in the homebuilding market during the three and six months ended June 30, 2011 also contributed to a sharp reduction in our Home Gross Margins (as defined below), we and $9.4 million of asset impairments during the first six months of 2011, which contributed to our reported a loss before income taxes during the three and six months ended March 31,June 30, 2011 of $23.7$28.0 million and $47.9 million, respectively, compared with a loss of $21.2$3.7 million and $24.6 million during the same periodperiods in 2010.
Our Home Gross Margins decreased to 13.7% during the first quarter of 2011 from 22.4% during the first quarter of 201013.1% and excluding the impact of interest expense in cost of sales and warranty adjustments, our Home Gross Margins were 16.0% and 21.9%13.4% during the three and six months ended March 31,June 30, 2011, respectively, from 18.1% and 19.4% during the three and six months ended June 30, 2010, respectively. (See reconciliation of home cost of sales excluding warranty adjustment and interest set forth below.) Contributing to the declinedeclines in Home Gross Margins was the impact of acceptingvery competitive pricing for new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction.velocity. During the first quartersix months of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined
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below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. Therefore, during the 2011 first quarter,six months of 2011, we focused on selling and closing unsold homes under construction, which decreased to 674496 units at March 31,June 30, 2011 down 29% from 944 units at December 31, 2010. We continue to believe that a limited level of unsold homes is appropriate for most of our subdivisions, provided that construction is held at the drywall stage to allow buyers to personalize their homes. Our Home Gross Margins were also negatively impacted by an increase in our land costs, as the demandmarket for acquiring finished residential lots has beenremained very competitive despite the continuing overall weakness in the market for new homes.
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On the expense side of our business, we incurred asset impairments of $9.4 million during the first six months of 2011, with $9.1 million coming during the 2011 second quarter. These asset impairments resulted from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets. We saw an increasea decrease of $2.8$5.7 million and $2.3 million in marketing and commission expenses during the three and six months ended June 30, 2011, first quarter, compared with the same periods in 2010, generally attributable to closing fewer homes during the 2010 first quarter as2011 periods. Additionally, we sought to increase trafficexperienced an $8.4 million and sales through our increased community count. We experienced a $3.5$11.8 million decrease in our general and administrative expenses during the three and six months ended June 30, 2011, compared with the same periods in 2010, primarily due to lower costs associated with legal-related matters.matters and employee compensation related costs. During the three months ended June 30, 2011, first quarter, ourwe had net interest income of $0.5 million compared to net interest expense decreased to $1.4 million from $5.9of $1.9 million during the same period in 2010 as we were able2010. We had net interest expense of $0.9 million during the six months ended June 30, 2011, compared to achieve a$7.8 million during the same period in 2010. The improvement during the 2011 periods primarily related to obtaining better returnreturns on our marketable securities. Additionally, other operating expenses decreased by $2.0 millionsecurities and capitalizing interest incurred to our inventory during the 2011 first quarter,six months of 2011 compared with the same period in 2010, primarily reflecting a tax settlement during the quarter.2010.
During the first six months of 2011 first quarter we have been focused on two primary strategic goals:on: (1) decreasing expenses, including general and administrative costs and interest costs; (2) market share expansion; and (2)(3) new market entry. After increasing revenuesWe added to our 2010 fourth quarter efforts to reduce general and administrative expenses by 7% in 2010,reducing our headcount by approximately 10% during the 2011 second quarter. On July 7, 2011, we completed a debt tender offer extinguishing $237.0 million of our senior notes. Also, we took further steps in the first quarter of 2011 to facilitate further revenue growth, primarily through additional investments in our homebuilding operations designed to increase market share in existing markets. During the quarter, we took control of lotsmarkets through additional investments in 15 new subdivisions, adding to the 130 communities we had in 2010. Based on our acquisition activity in 2011 we increased our active subdivision (as defined below) count to 162 at March 31, 2011, a 9% increase from December 31, 2010. We also have an additional 60 subdivisions that we expect will be active in the near term, partially offset by 35 currently active subdivisions that we expect to be inactive in the near term.
homebuilding operations. On April 28, 2011, we entered the Seattle/Tacoma market through the purchase of substantially all of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired includeincluded approximately 280 owned lots in various stages of construction, in 11 communities andcommunities. Based on our acquisition activity in 2011 we increased our active subdivision (as defined below) count to 176 at June 30, 2011, a 19% increase from December 31, 2010. We also have an additional 230 lots under option45 subdivisions that we expect will be active in 3 communities where lots were already owned and 3 new communities.the near term, partially offset by 30 currently active subdivisions that we expect to be inactive in the near term.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. Additionally, using different estimates or assumptions in our critical accounting estimates and policies could have a material impact to our consolidated financial statements. See “Forward-Looking Statements” below.
Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.
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Results of Operations
The following discussion compares results for the three and six months ended March 31,June 30, 2011 with the three and six months ended March 31,June 30, 2010.
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Home Sales Revenue.Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican) and interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of base sales price and any purchased options and upgrades, less any of the foregoing incentives, for each closed home constitutes the selling price of our closed homes.
Our home sales revenue can be impacted by changes in our home closing levels and changes in the average selling prices of closed homes. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing.
The table below summarizes home sales revenue by reportable segment (dollars in thousands).
Three Months | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
West | $ | 42,393 | $ | 56,727 | $ | (14,334 | ) | -25% | $ | 66,951 | $ | 117,752 | $ | (50,801 | ) | -43 | % | |||||||||||||||
Mountain | 70,748 | 46,599 | 24,149 | 52% | 78,415 | 110,072 | (31,657 | ) | -29 | % | ||||||||||||||||||||||
East | 42,910 | 31,486 | 11,424 | 36% | 51,049 | 72,622 | (21,573 | ) | -30 | % | ||||||||||||||||||||||
Other Homebuilding | 9,846 | 9,034 | 812 | 9% | 10,922 | 16,362 | (5,440 | ) | -33 | % | ||||||||||||||||||||||
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Total Homebuilding | 165,897 | 143,846 | 22,051 | 15% | 207,337 | 316,808 | (109,471 | ) | -35 | % | ||||||||||||||||||||||
Intercompany adjustments | (2,514 | ) | (2,903 | ) | 389 | 13% | ||||||||||||||||||||||||||
Intercompany | (1,174 | ) | (5,532 | ) | 4,358 | 79 | % | |||||||||||||||||||||||||
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Consolidated | $ | 163,383 | $ | 140,943 | $ | 22,440 | 16% | $ | 206,163 | $ | 311,276 | $ | (105,113 | ) | -34 | % | ||||||||||||||||
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Six Months | ||||||||||||||||||||||||||||||||
Ended June 30, | Change | |||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
West | $ | 109,344 | $ | 174,479 | $ | (65,135 | ) | -37 | % | |||||||||||||||||||||||
Mountain | 149,163 | 156,671 | (7,508 | ) | -5 | % | ||||||||||||||||||||||||||
East | 93,959 | 104,108 | (10,149 | ) | -10 | % | ||||||||||||||||||||||||||
Other Homebuilding | 20,768 | 25,396 | (4,628 | ) | -18 | % | ||||||||||||||||||||||||||
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Total Homebuilding | 373,234 | 460,654 | (87,420 | ) | -19 | % | ||||||||||||||||||||||||||
Intercompany | (3,688 | ) | (8,435 | ) | 4,747 | 56 | % | |||||||||||||||||||||||||
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Consolidated | $ | 369,546 | $ | 452,219 | $ | (82,673 | ) | -18 | % | |||||||||||||||||||||||
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The decreasedecline in home sales revenue in our West segment was due to closing 61 fewer homes during the three months ended March 31,June 30, 2011 whichfor our West segment was primarily driven by closing 291 fewer homes in the Arizona, California and Nevada markets of this segment as this resulted in a decrease of $11.9 million in home sales revenue decreasing by $56.5 million and declines of $34,600 and $23,700$8.1 million associated with the decrease in the average selling prices of closed homes in our California and Arizonathe markets of this segment, respectively. The increaseprimarily California. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue during the 2011 second quarter. In our Mountain segment, the impact of closing 129 fewer homes resulted in a $36.8 million reduction in home sales revenuerevenue. This was partially offset by a $29,000 increase in our Mountain segment was due to closing 60 more homes during the three months ended March 31, 2011, which resulted in an increase of $17.9 million. Additionally, the average selling pricesprice of closed homes in the Colorado market of this segment increased by $37,000, which contributed $6.1 million to the total increasemarket.
The decline in home sales revenue for this segment.
The increase in home sales revenue in our East segment was due to closing 30 more homes during the three months ended March 31,June 30, 2011 whichfor our East segment was primarily driven by closing 38 fewer homes in the Maryland market of this segment as this resulted in an increase of $12.6 million. Partially offsetting this was a $47,800 declinehome sales revenue decreasing by $17.6 million and $5.9 million associated with the decrease in the average selling prices of closed homes in the Virginia marketmarkets of this segment. In our Other Homebuilding segment, the impact of closing 23 fewer homes resulted in a $5.5 million reduction in home sales revenue.
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The increasedecline in home sales revenue during the six months ended June 30, 2011 for our West segment was primarily driven by closing 352 fewer homes in our Other Homebuildingthe Arizona, California and Nevada markets of this segment as this resulted from an $8,700 increasein home sales revenue decreasing by $68.2 million and $10.7 million associated with the decrease in the average selling prices of homes, primarily from the California market. This was partially offset by the impact of closing 51 homes in our new Washington market, which generated $13.8 million of home sales revenue. In our Mountain segment, the impact of closing 69 fewer homes resulted in an $18.7 million reduction in home sales revenue. This was partially offset by a $32,300 increase in the average selling price of closed homes in the FloridaColorado market.
The decline in home sales revenue during the six months ended June 30, 2011 for our East segment was primarily driven primarily by an $8.5 million decrease associated with the declines in the average selling prices of homes in the markets of this segment. In our Other Homebuilding segment, the impact of closing 21 fewer homes resulted in a $4.9 million reduction in home sales revenue.
Home Gross Margins.We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue.
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The following table sets forth our Home Gross Margins by reportable segment.
Three Months | ||||||||||||||||||||||||
Three Months Ended March 31, | Ended June 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||
West | 18.6% | 26.4% | -7.8% | 15.5 | % | 20.0 | % | -4.5 | % | |||||||||||||||
Mountain | 11.8% | 18.7% | -6.9% | 12.9 | % | 15.6 | % | -2.7 | % | |||||||||||||||
East | 10.7% | 18.0% | -7.3% | 10.4 | % | 16.9 | % | -6.5 | % | |||||||||||||||
Other Homebuilding | 15.8% | 24.2% | -8.4% | 11.4 | % | 19.9 | % | -8.5 | % | |||||||||||||||
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Consolidated | 13.1 | % | 18.1 | % | -5.0 | % | ||||||||||||||||||
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Six Months | ||||||||||||||||||||||||
Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||
West | 16.7 | % | 22.1 | % | -5.4 | % | ||||||||||||||||||
Mountain | 12.4 | % | 16.5 | % | -4.1 | % | ||||||||||||||||||
East | 10.6 | % | 17.2 | % | -6.6 | % | ||||||||||||||||||
Other Homebuilding | 13.5 | % | 21.4 | % | -7.9 | % | ||||||||||||||||||
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Consolidated | 13.7% | 22.4% | -8.7% | 13.4 | % | 19.4 | % | -6.0 | % | |||||||||||||||
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Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments to our warranty reserves. During the three and six months ended March 31,June 30, 2011 and 2010, we continued to experience lower warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we recorded adjustments to reduce our warranty reserve of $0.4$1.8 million and $3.9$2.3 million during the three and six months ended March 31,June 30, 2011, respectively, and 2010, respectively.
Home Gross Margins are also impacted by interest included in home cost of sales. During$1.7 million and $5.6 million during the three and six months ended March 31, 2011 andJune 30, 2010, interest in home cost of sales was 2.6% and 2.3% percent of home sales revenue, respectively.
The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in home cost of sales during the three and six months ended March 31,June 30, 2011 and 2010.
Three Months Ended March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
West | 20.9% | 24.2% | -3.3% | |||||||||
Mountain | 14.1% | 19.3% | -5.2% | |||||||||
East | 13.2% | 19.5% | -6.3% | |||||||||
Other | 17.0% | 21.7% | -4.7% | |||||||||
Consolidated | 16.0% | 21.9% | -5.9% | |||||||||
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Three Months | ||||||||||||
Ended June 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
West | 16.7 | % | 21.8 | % | -5.1 | % | ||||||
Mountain | 14.2 | % | 17.9 | % | -3.7 | % | ||||||
East | 13.9 | % | 19.2 | % | -5.3 | % | ||||||
Other | 11.7 | % | 20.8 | % | -9.1 | % | ||||||
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Consolidated | 14.9 | % | 20.2 | % | -5.3 | % | ||||||
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Ended June 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
West | 18.3 | % | 22.6 | % | -4.3 | % | ||||||
Mountain | 14.2 | % | 18.4 | % | -4.2 | % | ||||||
East | 13.6 | % | 19.3 | % | -5.7 | % | ||||||
Other | 14.2 | % | 21.1 | % | -6.9 | % | ||||||
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Consolidated | 15.4 | % | 20.7 | % | -5.3 | % | ||||||
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Home Gross Margins, excluding warranty and interest, decreased on a consolidated basis during the three and six months ended June 30, 2011 primarily due to: (1) accepting new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction; and (2) an increase in our land costs as the demand for finished residential lots has been very competitive despite the continuing overall weakness in the market for new homes. During the first quarter of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. As a result of our effort to reduce the number of unsold homes under construction, 73%a higher percentage of our closed2011 homes during the 2011 first quarterclosed were homes under construction, up from 57% duringcompared with the same periodperiods in 2010. Generally homes sold as a dirt start yield a higher Home Gross Margin than homes under construction.
Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) increases in the costs of finished lots; (3) continued and/or increases in home foreclosure levels; (4) on-going tightening of mortgage loan origination requirements; (5) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (6) deterioration in the demand for new homes in our markets; (7) fluctuating energy costs,
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including oil and gasoline; (8) increases in the costs of subcontracted labor, finished lots, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (9) increases in interest expense included in home cost of sales; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See“Forward-Looking Statements” above.
The following table sets forth by reportable segment a reconciliation of our home cost of sales, as reported, to home cost of sales excluding warranty adjustments and interest in home cost of sales, which is used in the calculation of Home Gross Margins, excluding warranty adjustments and interest in home cost of sales (dollars in thousands).
Home Sales Revenue - As reported | Home Cost of Sales - As reported | Warranty Adjustments | Interest in Cost of Sales | Home Cost of Sales - Excluding Warranty Adjustments and Interest | Home Gross Margins - Excluding Warranty Adjustments and Interest | |||||||||||||||||||
Three Months Ended March, 31, 2011 | ||||||||||||||||||||||||
West | $ | 42,393 | $ | 34,521 | $ | (203 | ) | $ | 1,170 | $ | 33,554 | 20.9% | ||||||||||||
Mountain | 70,748 | 62,376 | (180 | ) | 1,813 | 60,743 | 14.1% | |||||||||||||||||
East | 42,910 | 38,311 | (17 | ) | 1,070 | 37,258 | 13.2% | |||||||||||||||||
Other | 9,846 | 8,287 | (31 | ) | 150 | 8,168 | 17.0% | |||||||||||||||||
Intercompany adjustments | (2,514 | ) | (2,514 | ) | - | - | (2,514 | ) | N/A | |||||||||||||||
Consolidated | $ | 163,383 | $ | 140,981 | $ | (431 | ) | $ | 4,203 | $ | 137,209 | 16.0% | ||||||||||||
Three Months Ended March, 31, 2010 | ||||||||||||||||||||||||
West | $ | 56,727 | $ | 41,745 | $ | (2,572 | ) | $ | 1,328 | $ | 42,989 | 24.2% | ||||||||||||
Mountain | 46,599 | 37,879 | (800 | ) | 1,074 | 37,605 | 19.3% | |||||||||||||||||
East | 31,486 | 25,817 | (196 | ) | 657 | 25,356 | 19.5% | |||||||||||||||||
Other | 9,034 | 6,852 | (361 | ) | 143 | 7,070 | 21.7% | |||||||||||||||||
Intercompany adjustments | (2,903 | ) | (2,903 | ) | - | - | (2,903 | ) | N/A | |||||||||||||||
Consolidated | $ | 140,943 | $ | 109,390 | $ | (3,929 | ) | $ | 3,202 | $ | 110,117 | 21.9% | ||||||||||||
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Three Months Ended June 30, 2011 | Home Sales Revenue - As reported | Home Cost of Sales - As reported | Warranty Adjustments | Interest in Cost of Sales | Home Cost of Sales - Excluding Warranty Adjustments and Interest | Home Gross Margins - Excluding Warranty Adjustments and Interest | ||||||||||||||||||
West | $ | 66,951 | $ | 56,592 | $ | (1,015 | ) | $ | 1,830 | $ | 55,777 | 16.7 | % | |||||||||||
Mountain | 78,415 | 68,276 | (919 | ) | 1,913 | 67,282 | 14.2 | % | ||||||||||||||||
East | 51,049 | 45,725 | 260 | 1,520 | 43,945 | 13.9 | % | |||||||||||||||||
Other | 10,922 | 9,678 | (158 | ) | 191 | 9,645 | 11.7 | % | ||||||||||||||||
Intercompany | (1,174 | ) | (1,174 | ) | — | — | (1,174 | ) | N/A | |||||||||||||||
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Consolidated | $ | 206,163 | $ | 179,097 | $ | (1,832 | ) | $ | 5,454 | $ | 175,475 | 14.9 | % | |||||||||||
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Three Months Ended June 30, 2010 | ||||||||||||||||||||||||
West | $ | 117,752 | $ | 94,218 | $ | (1,255 | ) | $ | 3,387 | $ | 92,086 | 21.8 | % | |||||||||||
Mountain | 110,072 | 92,926 | 119 | 2,492 | 90,315 | 17.9 | % | |||||||||||||||||
East | 72,622 | 60,339 | (374 | ) | 2,004 | 58,709 | 19.2 | % | ||||||||||||||||
Other | 16,362 | 13,111 | (167 | ) | 319 | 12,959 | 20.8 | % | ||||||||||||||||
Intercompany | (5,532 | ) | (5,532 | ) | — | — | (5,532 | ) | N/A | |||||||||||||||
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Consolidated | $ | 311,276 | $ | 255,062 | $ | (1,677 | ) | $ | 8,202 | $ | 248,537 | 20.2 | % | |||||||||||
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Six Months Ended June 30, 2011 | Home Sales Revenue - As reported | Home Cost of Sales - As reported | Warranty Adjustments | Interest in Cost of Sales | Home Cost of Sales -Excluding Warranty Adjustments and Interest | Home Gross Margins - Excluding Warranty Adjustments and Interest | ||||||||||||||||||
West | $ | 109,344 | $ | 91,113 | $ | (1,218 | ) | $ | 3,000 | $ | 89,331 | 18.3 | % | |||||||||||
Mountain | 149,163 | 130,652 | (1,099 | ) | 3,726 | 128,025 | 14.2 | % | ||||||||||||||||
East | 93,959 | 84,036 | 243 | 2,590 | 81,203 | 13.6 | % | |||||||||||||||||
Other | 20,768 | 17,965 | (189 | ) | 341 | 17,813 | 14.2 | % | ||||||||||||||||
Intercompany | (3,688 | ) | (3,688 | ) | — | — | (3,688 | ) | N/A | |||||||||||||||
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Consolidated | $ | 369,546 | $ | 320,078 | $ | (2,263 | ) | $ | 9,657 | $ | 312,684 | 15.4 | % | |||||||||||
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Six Months Ended June 30, 2010 | ||||||||||||||||||||||||
West | $ | 174,479 | $ | 135,963 | $ | (3,827 | ) | $ | 4,715 | $ | 135,075 | 22.6 | % | |||||||||||
Mountain | 156,671 | 130,805 | (681 | ) | 3,566 | 127,920 | 18.4 | % | ||||||||||||||||
East | 104,108 | 86,156 | (570 | ) | 2,661 | 84,065 | 19.3 | % | ||||||||||||||||
Other | 25,396 | 19,963 | (528 | ) | 462 | 20,029 | 21.1 | % | ||||||||||||||||
Intercompany | (8,435 | ) | (8,435 | ) | — | — | (8,435 | ) | N/A | |||||||||||||||
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Consolidated | $ | 452,219 | $ | 364,452 | $ | (5,606 | ) | $ | 11,404 | $ | 358,654 | 20.7 | % | |||||||||||
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Home Gross Margins excluding the impact of warranty adjustments and interest in home cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustments and interest have on our Home Gross Margins.
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Land Sales Revenue. Land sales revenue was not material during the three and six months ended March 31, 2011 or 2010.June 30, 2011. Land sales revenue during the three and six months ended June 30, 2010 was $5.7 million and related to the sale of 106 lots, primarily in our West segment.
Other Revenue. Gains on the sale of mortgage loans primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties. Insurance revenue primarily represents premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes. Title and other revenue primarily consist of forfeitures of homebuyer deposits on home sales contracts and revenue associated with our American Home Title operations and our broker origination fees, which represent fees that HomeAmerican earns upon brokering a mortgage loan for a home closing.operations.
27
The table below sets forth the components of other revenue (dollars in thousands).
Three Months Ended March 31, | Change | Three Months | ||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | Ended June 30, | Change | |||||||||||||||||||||||||||
Gains on sales of mortgage loans and broker origination fees, net | $ | 4,323 | $ | 4,010 | $ | 313 | 8% | |||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
Gains on sales of mortgage loans | $ | 4,292 | $ | 6,593 | $ | (2,301 | ) | -35 | % | |||||||||||||||||||||||
Insurance revenue | 988 | 1,289 | (301 | ) | -23% | 1,992 | 1,888 | 104 | 6 | % | ||||||||||||||||||||||
Title and other revenue | 849 | 821 | 28 | 3% | 673 | 874 | (201 | ) | -23 | % | ||||||||||||||||||||||
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Total other revenue | $ | 6,160 | $ | 6,120 | $ | 40 | 1% | $ | 6,957 | $ | 9,355 | $ | (2,398 | ) | -26 | % | ||||||||||||||||
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Six Months | ||||||||||||||||||||||||||||||||
Ended June 30, | Change | |||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
Gains on sales of mortgage loans | $ | 8,615 | $ | 10,603 | $ | (1,988 | ) | -19 | % | |||||||||||||||||||||||
Insurance revenue | 2,980 | 3,177 | (197 | ) | -6 | % | ||||||||||||||||||||||||||
Title and other revenue | 1,522 | 1,695 | (173 | ) | -10 | % | ||||||||||||||||||||||||||
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Total other revenue | $ | 13,117 | $ | 15,475 | $ | (2,358 | ) | -15 | % | |||||||||||||||||||||||
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Gains on sales of mortgage loans decreased during the three and broker origination fees increasedsix months ended June 30, 2011 primarily due to closing 31 more426 and 395 fewer homes, during the three months ended March 31, 2011.respectively.
Home Cost of Sales. Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), specific construction costs of each home, warranty costs and finance and closing costs, including Closing Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-partythird-party).
Our home cost of sales can be impacted primarily from changes in our home closing levels and changes in the cost of land acquisition, development, construction cost of homes and changes in our estimated costs for warranty repairs.
The table below sets forth the home cost of sales by reportable segment (dollars in thousands).
Three Months Ended March 31, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 34,521 | $ | 41,745 | $ | (7,224 | ) | -17% | ||||||||
Mountain | 62,376 | 37,879 | 24,497 | 65% | ||||||||||||
East | 38,311 | 25,817 | 12,494 | 48% | ||||||||||||
Other Homebuilding | 8,287 | 6,852 | 1,435 | 21% | ||||||||||||
Total Homebuilding | 143,495 | 112,293 | 31,202 | 28% | ||||||||||||
Intercompany adjustments | (2,514 | ) | (2,903 | ) | 389 | 13% | ||||||||||
Consolidated | $ | 140,981 | $ | 109,390 | $ | 31,591 | 29% | |||||||||
On a consolidated basis,- 32 -
Three Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 56,592 | $ | 94,218 | $ | (37,626 | ) | -40 | % | |||||||
Mountain | 68,276 | 92,926 | (24,650 | ) | -27 | % | ||||||||||
East | 45,725 | 60,339 | (14,614 | ) | -24 | % | ||||||||||
Other Homebuilding | 9,678 | 13,111 | (3,433 | ) | -26 | % | ||||||||||
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Total Homebuilding | 180,271 | 260,594 | (80,323 | ) | -31 | % | ||||||||||
Intercompany adjustments | (1,174 | ) | (5,532 | ) | 4,358 | 79 | % | |||||||||
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Consolidated | $ | 179,097 | $ | 255,062 | $ | (75,965 | ) | -30 | % | |||||||
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Six Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 91,113 | $ | 135,963 | $ | (44,850 | ) | -33 | % | |||||||
Mountain | 130,652 | 130,805 | (153 | ) | 0 | % | ||||||||||
East | 84,036 | 86,156 | (2,120 | ) | -2 | % | ||||||||||
Other Homebuilding | 17,965 | 19,963 | (1,998 | ) | -10 | % | ||||||||||
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Total Homebuilding | 323,766 | 372,887 | (49,121 | ) | -13 | % | ||||||||||
Intercompany adjustments | (3,688 | ) | (8,435 | ) | 4,747 | 56 | % | |||||||||
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Consolidated | $ | 320,078 | $ | 364,452 | $ | (44,374 | ) | -12 | % | |||||||
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Home cost of sales in the West segment decreased during the three and six months ended June 30, 2011 primarily resulting from closing 240 and 301 fewer homes, respectively. The decrease associated with the decline in closings was partially offset by an increase to home cost of sales increased by $31.6 million during the three months ended March 31, 2011 primarily resulting from the following increases: (1) $11.4 million associated with an increase in home construction cost per closed home largely due to a shift in product to slightly larger homes, particularly in our Mountain segment; (2) $8.9 million associated with higher lot costs per closed home; (3) $6.5 million associated with closing 31 more homes during the 2011 first quarter; and (4) $4.5 million associated with warranty expense and interest in costnew Washington market of sales.this segment.
In our Westthe Mountain segment home cost of sales decreased by $10.1 millionduring the three months ended June 30, 2011 primarily due to closing 61129 fewer homes and $2.2 million associated with a decreasehomes. This was partially offset by an increase in home constructionthe cost per closed home largely due to a shift in product to slightly smaller homes. Partially offsettingwithin this decline was an increase of $3.4 millionsegment associated with higher lot costsa change in the mix of closed homes. Home cost of sales during the six months ended June 30, 2011 remained relatively flat as the decrease associated with closing 69 fewer homes during the first six months of 2011 was offset by increases in the cost per closed home and the impact of adjustments to reduce our warranty reserves. During the 2010 first quarter, we incurred adjustments of $2.6 million to reduce our warranty reserves compared with $0.2 million during the 2011 first quarter. home.
In our Mountain segment,East and Other Homebuilding segments, home cost of sales increased by $14.2 million associated with closing 60 more homes, $6.6 million associated with an increase in home construction cost per closed homedecreased during the three and $2.4 million associated with higher lot costs per closed home.
28
In our East segment, the $12.5 million increase in home cost of salessix months ended June 30, 2011 primarily resultedresulting from closing 30 morefewer homes which made up $11.1 million ofduring the total increase to home cost of sales. In our Other Homebuilding segment, home cost of sales increased primarily due to a shift in product to slightly larger homes.2011 periods.
Land Cost of Sales. Sales. Land cost of sales werewas not material during the three and six months ended March 31,June 30, 2011. Land cost of sales during the three and six months ended June 30, 2010 was $5.0 million and $5.2 million, respectively, and related to the sale of 106 lots, primarily in our West segment.
Asset Impairments.We recorded $9.1 million and $9.4 million of asset impairments during the three and six months ended June 30, 2011 or 2010.resulting from a decline in the market value of land and homes primarily in our California, Nevada and Utah markets.
Marketing Expenses.Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).
Three Months Ended March 31, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 4,180 | $ | 3,069 | $ | 1,111 | 36% | |||||||||
Mountain | 3,196 | 2,179 | 1,017 | 47% | ||||||||||||
East | 1,590 | 1,264 | 326 | 26% | ||||||||||||
Other Homebuilding | 867 | 548 | 319 | 58% | ||||||||||||
Consolidated | $ | 9,833 | $ | 7,060 | $ | 2,773 | 39% | |||||||||
- 33 -
Three Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 4,345 | $ | 5,179 | $ | (834 | ) | -16 | % | |||||||
Mountain | 3,094 | 3,467 | (373 | ) | -11 | % | ||||||||||
East | 1,859 | 2,030 | (171 | ) | -8 | % | ||||||||||
Other Homebuilding | 599 | 799 | (200 | ) | -25 | % | ||||||||||
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Consolidated | $ | 9,897 | $ | 11,475 | $ | (1,578 | ) | -14 | % | |||||||
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Six Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 8,525 | $ | 8,248 | $ | 277 | 3 | % | ||||||||
Mountain | 6,290 | 5,646 | 644 | 11 | % | |||||||||||
East | 3,449 | 3,294 | 155 | 5 | % | |||||||||||
Other Homebuilding | 1,466 | 1,347 | 119 | 9 | % | |||||||||||
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Consolidated | $ | 19,730 | $ | 18,535 | $ | 1,195 | 6 | % | ||||||||
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Marketing expenses decreased during the three months ended June 30, 2011 in each of our homebuilding segments primarily resulting from a reduction of $1.2 million in amortization of deferred marketing costs associated with closing fewer homes in each segment and a $0.5 million decrease in product advertising expenses.
Marketing expenses increased for each of our homebuilding segments during the threesix months ended March 31,June 30, 2011 despite a 24%9% decline in net orders for homes during the 2011 first quarter.period. Contributing to these increased costs was the impact of an increase in total subdivisions and a 17% increase in model homes at March 31, 2011 compared with March 31, 2010.subdivisions. As a result of this increase in marketing activity, we experienced an increaseincreases of $1.1 million in product advertising, $0.6$0.8 million in sales office/showroom expense, $0.7 million in product advertising and a $0.2$0.3 million increase in employee compensation and other employee-related benefit costs. Additionally, we had an increaseThese items were partially offset by a decrease of $0.5$0.7 million in amortization of deferred marketing costs primarily resulting from increases in model home cost per closing and a 6% increase in closed395 fewer homes.
Commission Expenses. Commission expenses include direct incremental commissions paid for closed homes. The following table summarizes our commission expenses by reportable segment (in thousands).
Three Months | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | 1,484 | $ | 2,139 | $ | (655 | ) | -31% | $ | 2,463 | $ | 4,526 | $ | (2,063 | ) | -46 | % | |||||||||||||||
Mountain | 2,473 | 1,572 | 901 | 57% | 2,702 | 3,901 | (1,199 | ) | -31 | % | ||||||||||||||||||||||
East | 1,354 | 1,105 | 249 | 23% | 1,793 | 2,420 | (627 | ) | -26 | % | ||||||||||||||||||||||
Other Homebuilding | 456 | 313 | 143 | 46% | 498 | 764 | (266 | ) | -35 | % | ||||||||||||||||||||||
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Consolidated | $ | 5,767 | $ | 5,129 | $ | 638 | 12% | $ | 7,456 | $ | 11,611 | $ | (4,155 | ) | -36 | % | ||||||||||||||||
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Six Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 3,947 | $ | 6,665 | $ | (2,718 | ) | -41 | % | |||||||
Mountain | 5,175 | 5,473 | (298 | ) | -5 | % | ||||||||||
East | 3,147 | 3,525 | (378 | ) | -11 | % | ||||||||||
Other Homebuilding | 954 | 1,077 | (123 | ) | -11 | % | ||||||||||
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Consolidated | $ | 13,223 | $ | 16,740 | $ | (3,517 | ) | -21 | % | |||||||
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Commission expense in our West segment was lowerdecreased during the three and six months ended March 31,June 30, 2011 for each of our homebuilding segments due to closing 61426 and 395 fewer homes. In the Mountain, East and Other Homebuilding segments, commission expense increased during the 2011 first quarter primarily due to closing more homes, in each segment.respectively.
29
General and Administrative Expenses.The following table summarizes our general and administrative expenses by reportable segment (in thousands).
Three Months | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | 6,118 | $ | 7,340 | $ | (1,222 | ) | -17% | $ | 7,702 | $ | 7,980 | $ | (278 | ) | -3 | % | |||||||||||||||
Mountain | 4,246 | 3,724 | 522 | 14% | 3,762 | 4,748 | (986 | ) | -21 | % | ||||||||||||||||||||||
East | 3,602 | 4,836 | (1,234 | ) | -26% | 3,386 | 6,402 | (3,016 | ) | -47 | % | |||||||||||||||||||||
Other Homebuilding | 993 | 1,826 | (833 | ) | -46% | 972 | 1,359 | (387 | ) | -28 | % | |||||||||||||||||||||
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Total Homebuilding | 14,959 | 17,726 | (2,767 | ) | -16% | 15,822 | 20,489 | (4,667 | ) | -23 | % | |||||||||||||||||||||
Financial Services and Other | 4,699 | 4,088 | 611 | 15% | 4,432 | 5,658 | (1,226 | ) | -22 | % | ||||||||||||||||||||||
Corporate | 17,094 | 18,389 | (1,295 | ) | -7% | 15,983 | 18,441 | (2,458 | ) | -13 | % | |||||||||||||||||||||
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Consolidated | $ | 36,237 | $ | 44,588 | $ | (8,351 | ) | -19 | % | |||||||||||||||||||||||
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Six Months | ||||||||||||||||||||||||||||||||
Ended June 30, | Change | |||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | 13,820 | $ | 15,320 | $ | (1,500 | ) | -10 | % | |||||||||||||||||||||||
Mountain | 8,008 | 8,472 | (464 | ) | -5 | % | ||||||||||||||||||||||||||
East | 6,988 | 11,238 | (4,250 | ) | -38 | % | ||||||||||||||||||||||||||
Other Homebuilding | 1,965 | 3,185 | (1,220 | ) | -38 | % | ||||||||||||||||||||||||||
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Total Homebuilding | 30,781 | 38,215 | (7,434 | ) | -19 | % | ||||||||||||||||||||||||||
Financial Services and Other | 9,131 | 9,746 | (615 | ) | -6 | % | ||||||||||||||||||||||||||
Corporate | 33,077 | 36,830 | (3,753 | ) | -10 | % | ||||||||||||||||||||||||||
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Consolidated | $ | 36,752 | $ | 40,203 | $ | (3,451 | ) | -9% | $ | 72,989 | $ | 84,791 | $ | (11,802 | ) | -14 | % | |||||||||||||||
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Three Months Ended June 30, 2011
Our consolidated general and administrative expenses decreased $3.5 million. Contributing$8.4 million during the three months ended June 30, 2011. Our salary related costs decreased by $5.0 million driven in part by the headcount reductions during the 2011 second quarter and 2010 fourth quarter and stock-based compensation expense as certain stock options became fully vested during the 2010 fourth quarter.
- 35 -
Also contributing to this decline was the impact of expenses incurred on legal related matters during the 2011 firstsecond quarter, which were $2.7$1.6 million lower than during the 2010 firstsecond quarter. We experienced a $1.2 million decline in expenses associated with homeowner association dues as well during the 2011 second quarter. Insurance expenses declined by $0.6 million driven in part by a 38% reduction in homes closed during the 2011 second quarter. Additionally, stock-based compensation expenseoffice-related expenses decreased by $0.9$0.6 million driven in part by lower rent expense and efforts to limit general office expenses. These declines in general and administrative expenses were slightly offset by $1.2 million in severance expense incurred as a result of headcount reductions during the quarter.
In our West segment, general and administrative expenses decreased by $0.3 million during the three months ended March 31,June 30, 2011 primarily related to the reduction in homeowner association dues. In our Mountain segment, general and administrative expenses decreased by $1.0 million during the three months ended June 30, 2011 driven primarily by homeowner association dues and employee compensation related costs.
In our East segment, general and administrative expenses were $3.0 million lower during the three months ended June 30, 2011 due to lower fees incurred associated with legal-related matters.
In our Financial Services and Other segment, general and administrative expenses decreased by $1.2 million during the three months ended June 30, 2011 primarily relating to declines of $0.7 million in salary related costs and $0.6 million in insurance expenses. In our Corporate segment, general and administrative expenses decreased $2.5 million during the three months ended June 30, 2011 primarily driven by our salary related costs partially offset by an increase in severance expense.
Six Months Ended June 30, 2011
Our consolidated general and administrative expenses decreased by $11.8 million during the six months ended June 30, 2011. Our salary related costs decreased by $6.8 million driven in part from the headcount reductions during 2011 second quarter and 2010 fourth quarter and stock-based compensation expense associated with stock options, which became fully vested during the 2010 fourth quarter. Also contributing to this decline was the impact of expenses incurred on legal related matters during 2011, which were $4.2 million lower than during 2010. We also made changeshad a $1.7 million decline in our headcount, primarily during the 2010 fourth quarter and, based upon these steps, the headcount for our general and administrative departments totaled approximately 670 employees at March 31, 2011, compared with approximately 770 at March 31, 2010. As a result, we experienced a decrease of $0.6 millionexpenses associated with salary related costshomeowner association dues as well during the 2011 first quarter.
2011. Insurance expenses declined by $0.8 million driven in part by a 24% reduction in homes closed during 2011. Additionally, office-related expenses decreased by $1.1 million driven in part by lower rent expense and efforts to limit general office expenses. These decreasesdeclines in general and administrative expenses partially were slightly offset by a $1.0$1.3 million increase in mortgage loan loss reserves as HomeAmerican reachedand a settlement associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily$1.4 million increase in severance expense incurred as a result of this settlement, we increased our estimated mortgage loan loss reserve by $1.0 millionheadcount reductions during the threefirst six months ended March 31,of 2011. We experienced an increase of $0.7 million in consulting related costs during the three months ended March 31, 2011, which is mostly attributable to our on-going implementation of our enterprise resource planning (“ERP”) system. Additionally, we experienced an increase of $0.3 million in depreciation expense during the 2011 first quarter primarily associated with our enterprise resource planning system.
In our West and EastMountain segments, general and administrative expenses decreased primarily due to settlementsa decline in homeowner association dues and fees incurred associated with legal-related matters while legal-related expenses decreasedsalary-related costs. The decline in our Mountain segment.East segment was primarily due to lower legal-related expenses. In our Other Homebuilding segment the decline in general and administrative expenses were primarily driven by a decline in consulting expenses.
In our Financial Services and Other segment, general and administrative expenses were higherdown primarily due to the foregoing increase of $1.0a $0.8 million reduction in our mortgage loan loss reserve.
In our Corporate segment, employee compensation and other employee-related benefit costs and a $0.7 million decrease in insurance expense associated with closing fewer homes. These items partially were offset by a $1.3 million increase in our mortgage loan loss reserve. During the six months ending June 30, 2011 general and administrative expenses in our Corporate segment decreased by $1.2$3.8 million, during the 2011 first quarter with $0.9primarily resulting from a $3.3 million of thisdecline in employee compensation and other employee-related benefit costs and a $0.6 million decrease attributable to lower stock-based compensation expense. We experienced a decrease of $0.4 million in office-related expenses primarily attributable to consolidating our corporate offices into one facility versus the two office facilities we had during the 2010 first quarter. Additionally, we had a decline of $0.3 million associated with employee recruiting costs and costs associated with the homebuilding line of credit, which was terminated during the second half of 2010.expenses.
Other Operating Income (Expense)Expense. We had otherOther operating income of $1.6expenses increased by $1.9 million during the three months ended March 31,June 30, 2011 primarily due to $2.1 million in write-offs of land option deposits and pre-acquisition costs associated with lot option contracts that we elected not to exercise. Other operating expenses decreased during the six months ended June 30, 2011 as we incurred $2.9 million write-offs of land option deposits and pre-acquisition costs and $0.6 million in due diligence costs associated with our acquisition of substantially all of the assets of SDC and related entities partially offset by the release of a $2.7 million employment tax contingency reserve as a result of the finalization of an IRS examination. This item was partially offset by $1.1 million in other operating expenses, primarily write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise and due diligence costs associated with our acquisition of SDC.
- 36 -
Other Income (Expense). Other income (expense) primarily includes interest and dividend income on our cash, cash equivalents and marketable securities, interest expense primarily on our senior notes, and gain or loss on the sale of other assets. Interest income was $7.3$7.9 million and $4.4$15.2 million during the three and six months ended March 31,June 30, 2011, respectively, compared with $7.5 million and $12.0 million during the three and six months ended June 30, 2010, respectively. The increase isThese increases are attributable to an increase in our available-for-sale marketable securities
30
during the 2011 first quarterperiods compared with the 2010 first quarter.periods. Our available-for-sale marketable securities include certain debt securities, primarily corporate debt and holdings in a fund that invests predominantly in fixed income securities. These marketableequity securities totaled $383.1 million and $379.3 million at March 31, 2011 and December 31, 2010, respectively.mutual funds. We increased our holdings of these marketable securities during 2010,2011, primarily due to our efforts to achieve an appropriate rate of return.
Interest expense during the three and six months ended March 31,June 30, 2011 decreased $1.6 million.$2.0 million and $3.7 million, respectively. We capitalize interest on our senior notes associated with our qualifying assets. We have determined that inventory is a qualifying asset during the period of active development of our land and through the completion of construction of a home. When construction of a home is complete, suchthe home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. During the three months ended March 31, 2011, we incurred $18.2 million of interest, an increase of $1.3 million from the three months ended March 31, 2010. This increase resulted from the issuance of our 2020 Senior Notes in January of 2010. Additionally, asAs a result of the increase in our inventory levels from March 31,the first six months of 2010, we capitalized $9.5$10.8 million and $20.3 million of interest incurred during the three and six months ended June 30, 2011, respectively, an increase of $2.9$1.9 million and $4.8 million from the same periodperiods during 2010.2010, respectively.
(Loss)/Income Before Income Taxes. The table below summarizes our (loss)/income before income taxes by reportable segment (dollars in thousands).
Three Months | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | (4,560 | ) | $ | 2,354 | $ | (6,914 | ) | 294% | $ | (11,837 | ) | $ | 6,357 | $ | (18,194 | ) | 286 | % | |||||||||||||
Mountain | (1,232 | ) | 1,170 | (2,402 | ) | 205% | (1,204 | ) | 4,962 | (6,166 | ) | 124 | % | |||||||||||||||||||
East | (1,956 | ) | (1,519 | ) | (437 | ) | -29% | (2,345 | ) | 1,455 | (3,800 | ) | 261 | % | ||||||||||||||||||
Other Homebuilding | (776 | ) | (519 | ) | (257 | ) | -50% | (916 | ) | 295 | (1,211 | ) | 411 | % | ||||||||||||||||||
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Total Homebuilding | (8,524 | ) | 1,486 | (10,010 | ) | 674% | (16,302 | ) | 13,069 | (29,371 | ) | 225 | % | |||||||||||||||||||
Financial Services and Other | 1,780 | 1,846 | (66 | ) | -4% | 3,089 | 4,089 | (1,000 | ) | -24 | % | |||||||||||||||||||||
Corporate | (16,960 | ) | (24,574 | ) | 7,614 | 31% | (16,590 | ) | (20,857 | ) | 4,267 | 20 | % | |||||||||||||||||||
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| ||||||||||||||||||||||||||||||
Consolidated | $ | (29,803 | ) | $ | (3,699 | ) | $ | (26,104 | ) | -706 | % | |||||||||||||||||||||
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| ||||||||||||||||||||||||||||||
Six Months | ||||||||||||||||||||||||||||||||
Ended June 30, | Change | |||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | (16,397 | ) | $ | 8,711 | $ | (25,108 | ) | 288 | % | ||||||||||||||||||||||
Mountain | (2,436 | ) | 6,132 | (8,568 | ) | 140 | % | |||||||||||||||||||||||||
East | (4,301 | ) | (64 | ) | (4,237 | ) | -6620 | % | ||||||||||||||||||||||||
Other Homebuilding | (1,692 | ) | (224 | ) | (1,468 | ) | -655 | % | ||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||
Total Homebuilding | (24,826 | ) | 14,555 | (39,381 | ) | 271 | % | |||||||||||||||||||||||||
Financial Services and Other | 4,869 | 5,935 | (1,066 | ) | -18 | % | ||||||||||||||||||||||||||
Corporate | (33,550 | ) | (45,431 | ) | 11,881 | 26 | % | |||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||
Consolidated | $ | (23,704 | ) | $ | (21,242 | ) | $ | (2,462 | ) | -12% | $ | (53,507 | ) | $ | (24,941 | ) | $ | (28,566 | ) | -115 | % | |||||||||||
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- 37 -
Three Months Ended June 30, 2011
In our West segment, we had a loss before income taxes of $4.6$11.8 million during the three months ended March 31,June 30, 2011 compared with income before income taxes of $2.4$6.4 million during the same period in 2010. This decline primarily resulted from $6.9 million of inventory impairments, a 450 basis point decline in Home Gross Margins and closing 291 fewer homes in the Arizona, California and Nevada markets of this segment. These items were partially offset by a combined decrease of $3.2 million in marketing, commission and general and administrative expenses. In our Mountain segment, we had a loss before income taxes of $1.2 million during the three months ended June 30, 2011 compared with income before income taxes of $5.0 million during the same period in 2010. This decline primarily resulted from $1.5 million of inventory impairments, a 270 basis point decline in Home Gross Margins and closing 129 fewer homes in this segment. These items were partially offset by a combined decrease of $2.6 million in marketing, commission and general and administrative expenses.
In our East segment, we had a loss before income taxes of $2.3 million during the three months ended June 30, 2011 compared with income before income taxes of $1.5 million during the same period in 2010. This decline primarily resulted from a 780650 basis point decline in Home Gross Margins, closing 6134 fewer homes during the 2011 first quarter,in this segment and a $1.1$0.3 million increase in marketing expenses.of inventory impairments. These items were partially were offset by a combined decrease of $1.9 million in commission and general and administrative expenses. Despite an increase in home sales revenue of $24.1 million during the 2011 first quarter in our Mountain segment, we incurred a loss before income taxes of $1.2 million during the three months ended March 31, 2011 compared with income before income taxes of $1.2 million during the same period in 2010. The decline primarily resulted from a 690 basis point reduction in Home Gross Margins and a combined increase of $2.4$3.8 million in marketing, commission and general and administrative expenses. These items partially were offset by closing 60 more homes during the 2011 first quarter.
In our EastOther Homebuilding segment, ourwe had a loss before income taxes was slightly higherof $0.9 million during the three months ended March 31, 2011. Contributing toJune 30, 2011 compared with income before income taxes of $0.3 million during the increasesame period in loss was a 7302010. This decline primarily resulted from an 850 basis point decline in Home Gross Margins and a combined increase of $0.6 millionclosing 23 fewer homes in commission and marketing expenses.this segment. These items were partially were offset by a reductioncombined decrease of $1.2$0.9 million in general and administrative expenses and the impact of closing 30 more homes during the 2011 first quarter. In our Other Homebuilding segment, our loss before income taxes was slightly higher during the three months ended March 31, 2011. Contributing to the increase in loss was an 840 basis point decline in Home Gross Margins and a combined increase of $0.5 million inmarketing, commission and marketing expenses. These items partially were offset by a reduction of $0.8 million in general and administrative expenses.
31
In our Financial Services and Other segment, income before income taxes remained flatdecreased during the three months ended June 30, 2011 first quarter compared with the 2010 first quarter. Despite little changeprimarily due to a $2.3 million decline in gain on sale of mortgage loans, partially offset by a $1.2 million reduction in general and administrative expenses. In our Corporate segment, loss before income taxes came down from $20.9 million during the quarter,three months ended June 30, 2010 to $16.6 million during the results of this segment were impacted by an $0.6three months ended June 30, 2011. This improvement primarily resulted from a $2.5 million increasedecline in general and administrative expenses partially offset by an increaseand a decrease of $2.0 million in interest income of $0.4 million. expense.
Six Months Ended June 30, 2011
In our CorporateWest segment, ourwe had a loss before income taxes was $17.0of $16.4 million during the six months ended June 30, 2011 first quarter, compared to $24.6with income before income taxes of $8.7 million during the same period in 2010. Contributing toThis decline primarily resulted from $6.9 million of inventory impairments, a 540 basis point decline in Home Gross Margins and closing 352 fewer homes in the Arizona, California and Nevada markets of this segment. These items were partially offset by a combined decrease of $4.2 million in commission and general and administrative expenses. In our Mountain segment, we had a loss before income taxes forof $2.4 million during the six months ended June 30, 2011 compared with income before income taxes of $6.1 million during the same period in 2010. This decline primarily resulted from $1.5 million of inventory impairments, a 410 basis point decline in Home Gross Margins and closing 69 fewer homes in this segment wasand a $0.6 million increase in marketing expenses. These items were partially offset by a combined decrease of $4.0$0.8 million in net interest expensecommission and general and administrative expenses.
In our East segment, we had a loss before income taxes of $4.3 million during the six months ended June 30, 2011 first quarter,compared with $0.1 million during the same period in 2010. This decline primarily resulted from a $2.3660 basis point decline in Home Gross Margins and $0.3 million of inventory impairments. These items were partially offset by a combined decrease of $4.6 million in other operating expensescommission and general and administrative expenses. In our Other Homebuilding segment, we had a loss before income taxes of $1.7 million during the six months ended June 30, 2011 compared with $0.2 million during the same period in 2010. This decline primarily resulted from an 790 basis point decline in Home Gross Margins and closing 21 fewer homes in this segment. These items were partially offset by a combined decrease of $1.3 million decreasein commission and general and administrative expenses.
In our Financial Services and Other segment, income before income taxes decreased during the six months ended June 30, 2011 primarily due to a $2.0 million decline in gain on sale of mortgage loans, partially offset by a $0.6 million reduction in general and administrative expenses.expenses and a $0.6 million increase in interest income. In our Corporate segment, loss before income taxes came down from $45.4 million during the six months ended June 30, 2010 to $33.6 million during the six months ended June 30, 2011. This improvement primarily resulted from a $3.8 million decline in general and administrative expenses and a decrease of $3.6 million in interest expense partially offset by a $2.5 million decrease in interest income.
- 38 -
Income Taxes. We are required, at the end of each interim period, to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, the Company had an income tax benefit of $3.8 million, or 16.1%, during the three months ended March 31, 2011, compared with $0.4 million, or 1.7%, during the three months ended March 31, 2010. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The increase in the income tax benefitbenefits of $1.8 million and $5.6 million during the three and six months ended June 30, 2011, first quarter, compared with the same period during 2010,respectively, resulted primarily from our 2011 second quarter settlement of various state income tax matters and our 2011 first quarter settlement with the IRS on theits audit of ourthe 2004 and 2005 federal income tax returns. Our income tax benefits during the three and six months ended June 30, 2010 were not material to our results of operations.
Homebuilding Operating Activities
Orders for Homes, net. The table below sets forth information relating to orders for homes (dollars in thousands).
Three Months | Six Months | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||||||||||
Orders For Homes, net (units) | ||||||||||||||||||||||||||||||||||||||||||||||||
Arizona | 122 | 168 | (46 | ) | -27% | 164 | 184 | (20 | ) | -11 | % | 286 | 352 | (66 | ) | -19 | % | |||||||||||||||||||||||||||||||
California | 77 | 26 | 51 | 196% | 117 | 109 | 8 | 7 | % | 194 | 135 | 59 | 44 | % | ||||||||||||||||||||||||||||||||||
Nevada | 88 | 170 | (82 | ) | -48% | 154 | 195 | (41 | ) | -21 | % | 242 | 365 | (123 | ) | -34 | % | |||||||||||||||||||||||||||||||
Washington | 26 | — | 26 | N/M | 26 | — | 26 | N/M | ||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
West | 287 | 364 | (77 | ) | -21% | 461 | 488 | (27 | ) | -6 | % | 748 | 852 | (104 | ) | -12 | % | |||||||||||||||||||||||||||||||
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Colorado | 181 | 270 | (89 | ) | -33% | 232 | 232 | — | 0 | % | 413 | 502 | (89 | ) | -18 | % | ||||||||||||||||||||||||||||||||
Utah | 67 | 125 | (58 | ) | -46% | 109 | 110 | (1 | ) | -1 | % | 176 | 235 | (59 | ) | -25 | % | |||||||||||||||||||||||||||||||
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Mountain | 248 | 395 | �� | (147 | ) | -37% | 341 | 342 | (1 | ) | 0 | % | 589 | 737 | (148 | ) | -20 | % | ||||||||||||||||||||||||||||||
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Maryland | 46 | 47 | (1 | ) | -2% | 74 | 62 | 12 | 19 | % | 120 | 109 | 11 | 10 | % | |||||||||||||||||||||||||||||||||
Virginia | 68 | 66 | 2 | 3% | 95 | 76 | 19 | 25 | % | 163 | 142 | 21 | 15 | % | ||||||||||||||||||||||||||||||||||
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East | 114 | 113 | 1 | 1% | 169 | 138 | 31 | 22 | % | 283 | 251 | 32 | 13 | % | ||||||||||||||||||||||||||||||||||
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Florida | 51 | 59 | (8 | ) | -14% | 91 | 47 | 44 | 94 | % | 142 | 106 | 36 | 34 | % | |||||||||||||||||||||||||||||||||
Illinois | 5 | - | 5 | N/M | 2 | — | 2 | N/M | 7 | — | 7 | N/M | ||||||||||||||||||||||||||||||||||||
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Other Homebuilding | 56 | 59 | (3 | ) | -5% | 93 | 47 | 46 | 98 | % | 149 | 106 | 43 | 41 | % | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Total | 705 | 931 | (226 | ) | -24% | 1,064 | 1,015 | 49 | 5 | % | 1,769 | 1,946 | (177 | ) | -9 | % | ||||||||||||||||||||||||||||||||
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Estimated Value of Orders for | ||||||||||||||||||||||||||||||||||||||||||||||||
Homes, net | $ | 205,000 | $ | 258,000 | $ | (53,000 | ) | -21% | ||||||||||||||||||||||||||||||||||||||||
Estimated Value of Orders for Homes, net | $ | 302,000 | $ | 281,000 | $ | 21,000 | 7 | % | $ | 507,000 | $ | 539,000 | $ | (32,000 | ) | -6 | % | |||||||||||||||||||||||||||||||
Estimated Average Selling Price of Orders for Homes, net | $ | 290.8 | $ | 277.1 | $ | 13.7 | 5% | $ | 283.8 | $ | 276.8 | $ | 7.0 | 3 | % | $ | 286.6 | $ | 277.0 | $ | 9.6 | 3 | % |
N/M – Not meaningful
32
NetContributing to the increase in our net orders for homes decreased during the three months ended March 31,June 30, 2011 particularlywere: (1) a 31% increase in our Mountain and West segments. Contributing to the decrease in these segments wasactive subdivisions at June 30, 2011 compared with June 30, 2010; (2) the impact offrom a 1,600Company-wide sales promotion which took place during the 2011 second quarter; and 1,000 basis point increase(3) 26 homes being sold in the Cancellation Rate of the Mountain and West segment, respectively. Ourour new Washington market. These items partially were offset as our net orders for homes in the 2011 firstsecond quarter, compared with the 2010 firstsecond quarter, were also negatively impacted through the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010.
- 39 -
During the six months ended June 30, 2011, our net orders for homes decreased, which was driven by a 148 unit decline in the markets of our Mountain segment and 189 unit decline in the Arizona and Nevada markets of our West segment. The decline in these markets was driven primarily from the impact of the expiration of the federal homebuyer tax credit. In certain markets, we did see some increases in net orders for homes, which were primarily the result of higher active subdivision counts.
Homes Closed.The following table sets forth homes closed for each market within our homebuilding segments (in units).
Three Months | Six Months | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||||||||||
Arizona | 77 | 108 | (31 | ) | -29% | 98 | 242 | (144 | ) | -60 | % | 175 | 350 | (175 | ) | -50 | % | |||||||||||||||||||||||||||||||
California | 48 | 46 | 2 | 4% | 62 | 68 | (6 | ) | -9 | % | 110 | 114 | (4 | ) | -4 | % | ||||||||||||||||||||||||||||||||
Nevada | 66 | 98 | (32 | ) | -33% | 80 | 221 | (141 | ) | -64 | % | 146 | 319 | (173 | ) | -54 | % | |||||||||||||||||||||||||||||||
Washington | 51 | — | 51 | N/M | 51 | — | 51 | N/M | ||||||||||||||||||||||||||||||||||||||||
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West | 191 | 252 | (61 | ) | -24% | 291 | 531 | (240 | ) | -45 | % | 482 | 783 | (301 | ) | -38 | % | |||||||||||||||||||||||||||||||
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Colorado | 166 | 108 | 58 | 54% | 182 | 230 | (48 | ) | -21 | % | 348 | 338 | 10 | 3 | % | |||||||||||||||||||||||||||||||||
Utah | 54 | 52 | 2 | 4% | 66 | 147 | (81 | ) | -55 | % | 120 | 199 | (79 | ) | -40 | % | ||||||||||||||||||||||||||||||||
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Mountain | 220 | 160 | 60 | 38% | 248 | 377 | (129 | ) | -34 | % | 468 | 537 | (69 | ) | -13 | % | ||||||||||||||||||||||||||||||||
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Maryland | 57 | 30 | 27 | 90% | 49 | 87 | (38 | ) | -44 | % | 106 | 117 | (11 | ) | -9 | % | ||||||||||||||||||||||||||||||||
Virginia | 43 | 40 | 3 | 8% | 72 | 68 | 4 | 6 | % | 115 | 108 | 7 | 6 | % | ||||||||||||||||||||||||||||||||||
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East | 100 | 70 | 30 | 43% | 121 | 155 | (34 | ) | -22 | % | 221 | 225 | (4 | ) | -2 | % | ||||||||||||||||||||||||||||||||
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Florida | 43 | �� | 41 | 2 | 5% | 48 | 72 | (24 | ) | -33 | % | 91 | 113 | (22 | ) | -19 | % | |||||||||||||||||||||||||||||||
Illinois | - | - | - | 0% | 1 | — | 1 | 0 | % | 1 | — | 1 | 0 | % | ||||||||||||||||||||||||||||||||||
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Other Homebuilding | 43 | 41 | 2 | 5% | 49 | 72 | (23 | ) | -32 | % | 92 | 113 | (21 | ) | -19 | % | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Total | 554 | 523 | 31 | 6% | 709 | 1,135 | (426 | ) | -38 | % | 1,263 | 1,658 | (395 | ) | -24 | % | ||||||||||||||||||||||||||||||||
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The 6% increaseHomes closed during the three and six months ended June 30, 2011 were down in each of our homebuilding segments. Contributing to the decline in home closings was the negative impact from the federal homebuyer tax credit, which expired during the 2011 first quarter resulted from an increase in closings in our Mountain and East homebuilding segments. In our Mountain segment, homes closed increased primarily in the Colorado market of this segment and was attributable mostly to having more homes in Backlog leading into the 2011 first quarter compared with the Backlog leading into the 2010 first quarter. In our East segment, our homes closed increased as we were able to generate more closings through the sale of speculative homes, which resulted in lowering our unsold homes under construction for this segment by 31 units during the 2011 first quarter. These items partially were offset by a decline of 61 closed homes in our West segment, primarily due to having fewer homes in Backlog leading into the 2011 first quarter compared with leading into the 2010 first quarter.2010.
33
Backlog. The following table below sets forth information relating to Backlog for each market within our homebuilding segments (dollars in thousands).
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||
Backlog (units) | ||||||||||||
Arizona | 129 | 84 | 163 | |||||||||
California | 108 | 79 | 56 | |||||||||
Nevada | 98 | 76 | 160 | |||||||||
West | 335 | 239 | 379 | |||||||||
Colorado | 288 | 273 | 369 | |||||||||
Utah | 82 | 69 | 167 | |||||||||
Mountain | 370 | 342 | 536 | |||||||||
Maryland | 115 | 126 | 143 | |||||||||
Virginia | 95 | 70 | 99 | |||||||||
East | 210 | 196 | 242 | |||||||||
Florida | 72 | 64 | 77 | |||||||||
Illinois | 6 | 1 | - | |||||||||
Other Homebuilding | 78 | 65 | 77 | |||||||||
Total | 993 | 842 | 1,234 | |||||||||
Backlog Estimated Sales Value | $ | 312,000 | $ | 269,000 | $ | 381,000 | ||||||
Estimated Average Selling Price of Homes in Backlog | $ | 314.2 | $ | 319.5 | $ | 308.8 | ||||||
- 40 -
June 30, | December 31, | June 30, | ||||||||||
Backlog (units) | 2011 | 2010 | 2010 | |||||||||
Arizona | 195 | 84 | 105 | |||||||||
California | 163 | 79 | 97 | |||||||||
Nevada | 172 | 76 | 134 | |||||||||
Washington | 51 | — | — | |||||||||
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West | 581 | 239 | 336 | |||||||||
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Colorado | 338 | 273 | 371 | |||||||||
Utah | 125 | 69 | 130 | |||||||||
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Mountain | 463 | 342 | 501 | |||||||||
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Maryland | 140 | 126 | 118 | |||||||||
Virginia | 118 | 70 | 107 | |||||||||
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East | 258 | 196 | 225 | |||||||||
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Florida | 115 | 64 | 52 | |||||||||
Illinois | 7 | 1 | — | |||||||||
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Other Homebuilding | 122 | 65 | 52 | |||||||||
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Total | 1,424 | 842 | 1,114 | |||||||||
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Backlog Estimated Sales Value | $ | 433,000 | $ | 269,000 | $ | 351,000 | ||||||
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Estimated Average Selling Price of Homes in Backlog | $ | 304.1 | $ | 319.5 | $ | 315.1 | ||||||
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We define “Backlog” as homes under contract but not yet delivered. The decrease in ourOur Backlog at March 31,June 30, 2011 compared to March 31,with June 30, 2010 is mostly attributable to our Mountain segment. Inhas increased primarily resulting from the Mountain segment, Backlog was lower by 166 units, driven5% increase in part by a decrease of 147 net orders for homeshome sales during the 2011 second quarter and the impact of more of the homes sold during the first quarter comparedsix months of 2010 being closed prior to the 2010 first quarter.June 30, 2010.
Cancellation Rate. We define our home order “Cancellation Rate” as the approximate number of cancelled home order contracts during a reporting period as a percentage of total home order contracts received during such reporting period. The following tables set forth our Cancellation Rate by segment.
Three Months | ||||||||||||||||||||||||
Three Months Ended March 31, | Increase | Ended June 30, | Increase | |||||||||||||||||||||
2011 | 2010 | (Decrease) | 2011 | 2010 | (Decrease) | |||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||
West | 29% | 19% | 10% | 29 | % | 20 | % | 9 | % | |||||||||||||||
Mountain | 37% | 21% | 16% | 31 | % | 31 | % | 0 | % | |||||||||||||||
East | 30% | 28% | 2% | 29 | % | 25 | % | 4 | % | |||||||||||||||
Other Homebuilding | 29% | 32% | -3% | 27 | % | 31 | % | -4 | % | |||||||||||||||
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Consolidated | 32% | 22% | 10% | 29 | % | 25 | % | 4 | % | |||||||||||||||
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- 41 -
Six Months | ||||||||||||
Ended June 30, | Increase | |||||||||||
2011 | 2010 | (Decrease) | ||||||||||
Homebuilding | ||||||||||||
West | 29 | % | 20 | % | 9 | % | ||||||
Mountain | 34 | % | 26 | % | 8 | % | ||||||
East | 30 | % | 26 | % | 4 | % | ||||||
Other Homebuilding | 28 | % | 32 | % | -4 | % | ||||||
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Consolidated | 31 | % | 24 | % | 7 | % | ||||||
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Our consolidated Cancellation RateRates during the three months ended June 30, 2011 increased 1,000 basis points,mostly associated with the change in our West segment. Our consolidated Cancellation Rates during the six months ended June 30, 2011 increased mostly from our West and Mountain segments, and primarily resulted fromsegments. Contributing to these foregoing increases caused bywere the following: (1) our prospective homebuyers having difficulty selling their existing homes; (2) low consumer confidence in the housing market; and (3) difficulties associated with qualifying for mortgage loans.
34
Active Subdivisions. The following table displays the number of our active subdivisions for each market within our homebuilding segments.
June 30, | December 31, | June 30, | ||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | 2011 | 2010 | 2010 | |||||||||||||||||||
Arizona | 29 | 26 | 28 | 30 | 26 | 26 | ||||||||||||||||||
California | 16 | 13 | 3 | 16 | 13 | 6 | ||||||||||||||||||
Nevada | 19 | 18 | 17 | 17 | 18 | 15 | ||||||||||||||||||
Washington | 9 | — | — | |||||||||||||||||||||
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West | 64 | 57 | 48 | 72 | 57 | 47 | ||||||||||||||||||
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Colorado | 42 | 39 | 41 | 40 | 39 | 41 | ||||||||||||||||||
Utah | 18 | 19 | 17 | 21 | 19 | 18 | ||||||||||||||||||
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Mountain | 60 | 58 | 58 | 61 | 58 | 59 | ||||||||||||||||||
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Maryland | 14 | 14 | 9 | 13 | 14 | 10 | ||||||||||||||||||
Virginia | 10 | 8 | 7 | 12 | 8 | 9 | ||||||||||||||||||
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East | 24 | 22 | 16 | 25 | 22 | 19 | ||||||||||||||||||
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Florida | 13 | 11 | 10 | 17 | 11 | 9 | ||||||||||||||||||
Illinois | 1 | - | - | 1 | — | — | ||||||||||||||||||
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Other Homebuilding | 14 | 11 | 10 | 18 | 11 | 9 | ||||||||||||||||||
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| ||||||||||||||||||||||
Total | 162 | 148 | 132 | 176 | 148 | 134 | ||||||||||||||||||
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Our active subdivisions at March 31,June 30, 2011 have increased in each of our homebuilding segments compared with both March 31,June 30, 2010 and December 31, 2010. These increases are the result of our on-going efforts to expand operations and generate more home closings in existing markets. However, as a result of continued uncertainty regarding the homebuilding industry, we have slowed our pace of new asset purchases and opening of new subdivisions during the 2011 second quarter, compared with recent quarters. As of June 30, 2011, we currently have more than 45 subdivisions we expect to become active in the near term and, assuming similar sales paces, we have nearly 30 subdivisions that we expect to become inactive in the near term.
Average Selling Prices Per Home Closed. The average selling price for our closed homes includes the base sales price, any purchased options and upgrades, reduced by any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The following tables set forth our average selling prices per home closed, by market (dollars in thousands).
Three Months Ended March 31, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Arizona | $ | 180.0 | $ | 203.7 | $ | (23.7 | ) | -12% | ||||||||
California | 317.3 | 351.9 | (34.6 | ) | -10% | |||||||||||
Colorado | 336.8 | 299.8 | 37.0 | 12% | ||||||||||||
Florida | 229.0 | 220.3 | 8.7 | 4% | ||||||||||||
Illinois | N/A | N/A | N/A | N/A | ||||||||||||
Maryland | 428.4 | 412.4 | 16.0 | 4% | ||||||||||||
Nevada | 201.5 | 189.3 | 12.2 | 6% | ||||||||||||
Utah | 274.9 | 273.5 | 1.4 | 1% | ||||||||||||
Virginia | 430.0 | 477.8 | (47.8 | ) | -10% | |||||||||||
Average | $ | 294.9 | $ | 269.5 | $ | 25.4 | 9% |
- 42 -
Three Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Arizona | $ | 188.1 | $ | 190.7 | $ | (2.6 | ) | -1 | % | |||||||
California | 320.4 | 444.7 | (124.3 | ) | -28 | % | ||||||||||
Colorado | 332.0 | 303.0 | 29.0 | 10 | % | |||||||||||
Florida | 221.4 | 227.3 | (5.9 | ) | -3 | % | ||||||||||
Illinois | 293.0 | N/A | N/M | N/M | ||||||||||||
Maryland | 414.9 | 462.5 | (47.6 | ) | -10 | % | ||||||||||
Nevada | 185.8 | 187.2 | (1.4 | ) | -1 | % | ||||||||||
Utah | 272.5 | 274.7 | (2.2 | ) | -1 | % | ||||||||||
Virginia | 426.7 | 476.2 | (49.5 | ) | -10 | % | ||||||||||
Washington | 270.3 | N/A | N/M | N/M | ||||||||||||
Average | $ | 290.8 | $ | 274.3 | $ | 16.5 | 6 | % | ||||||||
Six Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||
Arizona | $ | 184.6 | $ | 194.7 | $ | (10.1 | ) | -5 | % | |||||||
California | 319.0 | 407.3 | (88.3 | ) | -22 | % | ||||||||||
Colorado | 334.3 | 302.0 | 32.3 | 11 | % | |||||||||||
Florida | 225.0 | 224.8 | 0.2 | 0 | % | |||||||||||
Illinois | 293.0 | N/A | N/M | N/M | ||||||||||||
Maryland | 422.1 | 449.7 | (27.6 | ) | -6 | % | ||||||||||
Nevada | 192.9 | 187.8 | 5.1 | 3 | % | |||||||||||
Utah | 273.6 | 274.4 | (0.8 | ) | 0 | % | ||||||||||
Virginia | 427.9 | 476.8 | (48.9 | ) | -10 | % | ||||||||||
Washington | 270.3 | N/A | N/M | N/M | ||||||||||||
Average | $ | 292.6 | $ | 272.7 | $ | 19.9 | 7 | % |
N/M – Not Meaningful
The average selling prices in our Colorado, Nevada, Florida and Maryland markets increasedprice of closed homes during the three and six months ended June 30, 2011 first quarterincreased by 6% and 7%, respectively, primarily resulting fromdue to a shift in product to slightly larger homes. Inmix where we closed a higher percentage of our Arizona, Californiahomes in the higher priced markets of Colorado and Virginia and closing fewer homes in our lower priced markets the decreaseof Arizona and Nevada. We did experience declines in the average selling price of closed homes is mostly attributable toin our California market during the three and six months ended June 30, 2011, primarily resulting from closing more of our smaller homes in subdivisions with lower price points and a shiftdeclines in product mix as we closed a higher concentrationthe market value of homes in lowercertain subdivisions of this market. The declines in the average selling prices of closed homes in our Maryland and Virginia market during the three and six months ended June 30, 2011 primarily resulted from mix. In our Colorado market, the average selling price of closed homes increased during the three and six months ended June 30, 2011 primarily driven from closing homes in higher priced subdivisions.
35
Inventory. Our inventory consists of housing completed or under construction and land and land under development. Housing completed or under construction in our Consolidated Balance Sheets primarily includes: (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 and permit fees; (4) capitalized interest; and (5) certain indirect fees. Land and land under development on our Consolidated Balance Sheets primarily includes land acquisition costs, land development costs associated with subdivisions for which we have the intent to construct and sell homes and capitalized interest.
- 43 -
The following table shows the carrying value of housing completed or under construction for each market within our homebuilding segments (dollars in thousands).
June 30, | December 31, | June 30, | ||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | 2011 | 2010 | 2010 | |||||||||||||||||||
Arizona | $ | 31,628 | $ | 31,923 | $ | 49,656 | $ | 29,326 | $ | 31,923 | $ | 41,374 | ||||||||||||
California | 46,818 | 49,516 | 38,082 | 46,802 | 49,516 | 39,411 | ||||||||||||||||||
Nevada | 29,317 | 33,377 | 40,681 | 26,264 | 33,377 | 32,495 | ||||||||||||||||||
Washington | 16,563 | — | — | |||||||||||||||||||||
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West | 107,763 | 114,816 | 128,419 | 118,955 | 114,816 | 113,280 | ||||||||||||||||||
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Colorado | 101,507 | 111,397 | 117,612 | 93,200 | 111,397 | 121,558 | ||||||||||||||||||
Utah | 25,377 | 26,372 | 35,836 | 21,234 | 26,372 | 31,826 | ||||||||||||||||||
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Mountain | 126,884 | 137,769 | 153,448 | 114,434 | 137,769 | 153,384 | ||||||||||||||||||
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Maryland | 43,368 | 48,740 | 53,908 | 46,000 | 48,740 | 47,808 | ||||||||||||||||||
Virginia | 44,798 | 45,836 | 42,527 | 36,896 | 45,836 | 45,127 | ||||||||||||||||||
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East | 88,166 | 94,576 | 96,435 | 82,896 | 94,576 | 92,935 | ||||||||||||||||||
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Florida | 21,427 | 24,262 | 21,304 | 18,175 | 24,262 | 23,372 | ||||||||||||||||||
Illinois | 1,314 | 999 | - | 2,054 | 999 | — | ||||||||||||||||||
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Other Homebuilding | 22,741 | 25,261 | 21,304 | 20,229 | 25,261 | 23,372 | ||||||||||||||||||
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| ||||||||||||||||||||||
Total | $ | 345,554 | $ | 372,422 | $ | 399,606 | $ | 336,514 | $ | 372,422 | $ | 382,971 | ||||||||||||
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The table below shows the stage of construction for our homes completed or under construction, number of sold homes under construction and model homes (in units).
June 30, | December 31, | June 30, | ||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | 2011 | 2010 | 2010 | |||||||||||||||||||
Unsold Homes Under Construction - Final | 67 | 119 | 48 | 42 | 119 | 47 | ||||||||||||||||||
Unsold Homes Under Construction - Frame | 570 | 722 | 675 | 353 | 722 | 720 | ||||||||||||||||||
Unsold Homes Under Construction - Foundation | 37 | 103 | 376 | 101 | 103 | 124 | ||||||||||||||||||
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| ||||||||||||||||||||||
Total Unsold Homes Under Construction | 674 | 944 | 1,099 | 496 | 944 | 891 | ||||||||||||||||||
Sold Homes Under Construction | 641 | 609 | 1,002 | 843 | 609 | 865 | ||||||||||||||||||
Model Homes | 246 | 242 | 210 | 231 | 242 | 226 | ||||||||||||||||||
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Homes Completed or Under Construction | 1,561 | 1,795 | 2,311 | 1,570 | 1,795 | 1,982 | ||||||||||||||||||
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Our housing completed and under construction decreased by $26.9$35.9 million, as we decreased the total unsold homes under construction to 674496 at March 31,June 30, 2011 from 944 at December 31, 2010. This decrease primarily resulted from our efforts to sell and close our spec inventory that had increased during 2010 primarily because of an increase in active subdivisions and the anticipation of selling homes prior to the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010 with a closing date by June 30, 2010. (The Homebuyer Assistance and Improvement Act, signed into law July 2, 2010, extended the closing date requirement to September 30, 2010.) However our total unsold homes under construction remained high at December 31, 2010 as a result of the continued low levels of net orders for homes during the year ended December 31, 2010.
36
The following table shows the carrying value of land and land under development for each market within our homebuilding segments (dollars in thousands).
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||
Arizona | $ | 41,557 | $ | 41,892 | $ | 40,033 | ||||||
California | 121,148 | 93,194 | 52,063 | |||||||||
Nevada | 41,121 | 32,605 | 27,324 | |||||||||
West | 203,826 | 167,691 | 119,420 | |||||||||
Colorado | 134,759 | 128,727 | 99,376 | |||||||||
Utah | 33,252 | 30,457 | 16,148 | |||||||||
Mountain | 168,011 | 159,184 | 115,524 | |||||||||
Maryland | 37,525 | 31,782 | 7,908 | |||||||||
Virginia | 65,809 | 44,083 | 25,952 | |||||||||
East | 103,334 | 75,865 | 33,860 | |||||||||
Florida | 10,541 | 9,274 | 4,791 | |||||||||
Illinois | 3,175 | 3,223 | 3,681 | |||||||||
Other Homebuilding | 13,716 | 12,497 | 8,472 | |||||||||
Total | $ | 488,887 | $ | 415,237 | $ | 277,276 | ||||||
37- 44 -
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Arizona | $ | 39,099 | $ | 41,892 | $ | 48,957 | ||||||
California | 115,541 | 93,194 | 87,374 | |||||||||
Nevada | 50,729 | 32,605 | 20,393 | |||||||||
Washington | 9,600 | — | — | |||||||||
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West | 214,969 | 167,691 | 156,724 | |||||||||
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Colorado | 147,643 | 128,727 | 120,748 | |||||||||
Utah | 30,026 | 30,457 | 30,298 | |||||||||
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Mountain | 177,669 | 159,184 | 151,046 | |||||||||
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Maryland | 45,510 | 31,782 | 15,780 | |||||||||
Virginia | 71,640 | 44,083 | 36,071 | |||||||||
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East | 117,150 | 75,865 | 51,851 | |||||||||
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Florida | 11,627 | 9,274 | 7,580 | |||||||||
Illinois | 2,819 | 3,223 | 3,151 | |||||||||
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Other Homebuilding | 14,446 | 12,497 | 10,731 | |||||||||
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Total | $ | 524,234 | $ | 415,237 | $ | 370,352 | ||||||
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The tables below show the total number of lots owned (excluding homes completed or under construction) and lots controlled under option agreements for each market within our homebuilding segments (in units).
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||
Lots Owned | ||||||||||||
Arizona | 1,219 | 1,257 | 1,040 | |||||||||
California | 1,499 | 1,201 | 756 | |||||||||
Nevada | 1,087 | 991 | 894 | |||||||||
West | 3,805 | 3,449 | 2,690 | |||||||||
Colorado | 2,985 | 2,919 | 2,549 | |||||||||
Utah | 619 | 594 | 366 | |||||||||
Mountain | 3,604 | 3,513 | 2,915 | |||||||||
Maryland | 339 | 319 | 158 | |||||||||
Virginia | 599 | 414 | 318 | |||||||||
East | 938 | 733 | 476 | |||||||||
Florida | 232 | 210 | 127 | |||||||||
Illinois | 128 | 130 | 141 | |||||||||
Other Homebuilding | 360 | 340 | 268 | |||||||||
Total | 8,707 | 8,035 | 6,349 | |||||||||
Lots Controlled Under Option | ||||||||||||
Arizona | 241 | 408 | 482 | |||||||||
California | 17 | 222 | 232 | |||||||||
Nevada | 724 | 838 | 429 | |||||||||
West | 982 | 1,468 | 1,143 | |||||||||
Colorado | 845 | 688 | 507 | |||||||||
Utah | 369 | 393 | 145 | |||||||||
Mountain | 1,214 | 1,081 | 652 | |||||||||
Maryland | 822 | 745 | 602 | |||||||||
Virginia | 128 | 132 | 271 | |||||||||
East | 950 | 877 | 873 | |||||||||
Florida | 606 | 733 | 713 | |||||||||
Illinois | — | — | — | |||||||||
Other Homebuilding | 606 | 733 | 713 | |||||||||
Total | 3,752 | 4,159 | 3,381 | |||||||||
Total Lots Owned and Controlled | 12,459 | 12,194 | 9,730 | |||||||||
- 45 -
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Lots Owned | ||||||||||||
Arizona | 1,064 | 1,257 | 1,165 | |||||||||
California | 1,376 | 1,201 | 1,130 | |||||||||
Nevada | 1,184 | 991 | 681 | |||||||||
Washington | 232 | — | — | |||||||||
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West | 3,856 | 3,449 | 2,976 | |||||||||
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Colorado | 3,240 | 2,919 | 2,893 | |||||||||
Utah | 579 | 594 | 569 | |||||||||
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Mountain | 3,819 | 3,513 | 3,462 | |||||||||
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Maryland | 380 | 319 | 199 | |||||||||
Virginia | 589 | 414 | 371 | |||||||||
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East | 969 | 733 | 570 | |||||||||
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Florida | 269 | 210 | 184 | |||||||||
Illinois | 123 | 130 | 134 | |||||||||
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Other Homebuilding | 392 | 340 | 318 | |||||||||
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Total | 9,036 | 8,035 | 7,326 | |||||||||
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Lots Controlled Under Option | ||||||||||||
Arizona | 108 | 408 | 499 | |||||||||
California | — | 222 | 152 | |||||||||
Nevada | 398 | 838 | 570 | |||||||||
Washington | 42 | — | — | |||||||||
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| |||||||
West | 548 | 1,468 | 1,221 | |||||||||
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Colorado | 602 | 688 | 644 | |||||||||
Utah | 298 | 393 | 156 | |||||||||
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| |||||||
Mountain | 900 | 1,081 | 800 | |||||||||
|
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Maryland | 795 | 745 | 655 | |||||||||
Virginia | 234 | 132 | 272 | |||||||||
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| |||||||
East | 1,029 | 877 | 927 | |||||||||
|
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Florida | 480 | 733 | 658 | |||||||||
Illinois | — | — | — | |||||||||
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|
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| |||||||
Other Homebuilding | 480 | 733 | 658 | |||||||||
|
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|
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| |||||||
Total | 2,957 | 4,159 | 3,606 | |||||||||
|
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| |||||||
Total Lots Owned and Controlled | 11,993 | 12,194 | 10,932 | |||||||||
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The table below shows the amount of at risk option deposits (in thousands).
June 30, | December 31, | June 30, | ||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2010 | 2011 | 2010 | 2010 | |||||||||||||||||||
Cash | $ | 10,283 | $ | 9,019 | $ | 9,467 | $ | 10,534 | $ | 9,019 | $ | 7,933 | ||||||||||||
Letters of Credit | 5,264 | 4,467 | 2,084 | 6,716 | 4,467 | 2,727 | ||||||||||||||||||
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| ||||||||||||||||||||||
Total At Risk Option Deposits | $ | 15,547 | $ | 13,486 | $ | 11,551 | $ | 17,250 | $ | 13,486 | $ | 10,660 | ||||||||||||
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- 46 -
Our total lots owned (excluding homes completed or under construction) increased by 6721,001 units from December 31, 2010 as we purchased a combined 993primarily resulting from the purchase of lots during the 2011 first quarter, the majority of which were lots whichthat we controlled under option contracts as of December 31, 2010. Also contributing to the increase in lots owned was the acquisition of substantially all of the assets of SDC and related entities in April 2011 where we have 232 owned lots as of June 30, 2011. The decline in total lots under option primarily resulted from purchasing lots during the quarter partially offset by entering intoand electing not to purchase lots which were under option. As a result of not purchasing lots that were under option, we recorded $2.1 million and $2.9 million of expenses of project write-off costs during the three and six months ended June 30, 2011. We did, however, see an increase in the amount of option deposits at risk primarily attributable to new lot option contracts most notably in the markets of our Colorado and Maryland markets.East segment, where greater option deposits were required by land sellers.
38
HomeAmerican Operating Activities
The following table sets forth information relating to mortgage loans originated by our HomeAmerican operations, mortgage loans brokered and our Capture Rate (dollars in thousands). The “Capture Rate” is defined as the number of mortgage loans originated by HomeAmerican for our homebuyers as a percent of total Company home closings.
Three Months | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, | Change | Ended June 30, | Change | |||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | 2011 | 2010 | Amount | % | |||||||||||||||||||||||||
Principal amount of mortgage loans originated | $ | 115,380 | $ | 108,090 | $ | 7,290 | 7% | $ | 146,275 | $ | 240,693 | $ | (94,418 | ) | -39 | % | ||||||||||||||||
Principal amount of mortgage loans brokered | $ | 719 | $ | 2,856 | $ | (2,137 | ) | -75% | $ | 2,177 | $ | 2,660 | $ | (483 | ) | -18 | % | |||||||||||||||
Capture Rate | 75% | 80% | -5% | 75 | % | 83 | % | -8 | % | |||||||||||||||||||||||
Including brokered loans | 76% | 82% | -6% | 76 | % | 84 | % | -8 | % | |||||||||||||||||||||||
Mortgage products (% of mortgage loans originated) | ||||||||||||||||||||||||||||||||
Fixed rate | 97% | 95% | 2% | 96 | % | 97 | % | -1 | % | |||||||||||||||||||||||
Adjustable rate - other | 3% | 5% | -2% | 4 | % | 3 | % | 1 | % | |||||||||||||||||||||||
Prime loans(1) | 30% | 26% | 4% | 27 | % | 26 | % | 1 | % | |||||||||||||||||||||||
Government loans(2) | 70% | 74% | -4% | 73 | % | 74 | % | -1 | % | |||||||||||||||||||||||
Six Months | ||||||||||||||||||||||||||||||||
Ended June 30, | Change | |||||||||||||||||||||||||||||||
2011 | 2010 | Amount | % | |||||||||||||||||||||||||||||
Principal amount of mortgage loans originated | $ | 261,655 | $ | 348,783 | $ | (87,128 | ) | -25 | % | |||||||||||||||||||||||
Principal amount of mortgage loans brokered | $ | 2,896 | $ | 5,516 | $ | (2,620 | ) | -47 | % | |||||||||||||||||||||||
Capture Rate | 75 | % | 82 | % | -7 | % | ||||||||||||||||||||||||||
Including brokered loans | 76 | % | 83 | % | -7 | % | ||||||||||||||||||||||||||
Mortgage products (% of mortgage loans originated) | ||||||||||||||||||||||||||||||||
Fixed rate | 96 | % | 96 | % | 0 | % | ||||||||||||||||||||||||||
Adjustable rate - other | 4 | % | 4 | % | 0 | % | ||||||||||||||||||||||||||
Prime loans(1) | 29 | % | 25 | % | 4 | % | ||||||||||||||||||||||||||
Government loans(2) | 71 | % | 75 | % | -4 | % |
(1) | Prime loans are defined as loans with Fair, Isaac & Company (“FICO”) scores greater than 620 and which comply with the documentation standards of the government sponsored enterprise guidelines. |
(2) | Government loans are loans either insured by the FHA or guaranteed by the VA. |
- 47 -
The principal amount of mortgage loans originated increaseddecreased during the three and six months ended March 31,June 30, 2011, primarily due to the Company closing 31 more426 and 395 fewer homes, a 6% increase, compared withrespectively, and declines in the three months ended March 31,Capture Rates during the 2011 partially offset by a 500 basis point reduction in our Capture Rate.periods. HomeAmerican’s Capture Rate declined during the three and six months ended March 31,June 30, 2011 primarily resulting from having an increase in the number of homebuyers who paid cash for their homes.
39
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources to (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our balances of cash and cash equivalents, marketable securities and capital resources, our senior notes and Mortgage Repurchase Facility (as defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $750 million.
OurOn July 7, 2011, the Company completed a debt tender offer extinguishing $63.7 million of its 7% Senior Notes due 2012 and $173.3 million of its 5 1/2% Senior Notes due 2013. The Company paid $256.7 million, including interest and fees, for the acquired notes and, as a result of the tender, the Company will record an $18.6 million charge associated with the extinguishment of debt during the 2011 third quarter.
The Company’s marketable securities consist of both held-to-maturity and available-for-sale securities. Our held-to-maturity marketable securities consist of both fixed rate and floating rate interest earning securities, primarilyprimarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt. For those debt securities that we have both the ability and intent to hold to their maturity dates, we classify such debt securities as held-to-maturity. Ourdebt; (2) holdings in held-to-maturitymutual fund equity securities were $482.9 million and $589.4 million at March 31, 2011(3) deposit securities, which may include, among others, certificates of deposit and December 31, 2010, respectively. Our marketable securities also include certain debt securities, primarily corporate debt, which we do not have the intent to hold until maturity, and holdings in a fund that invests predominantly in fixed income securities. These marketable securities are classified as available-for-sale and totaled $383.1 million and $379.3 million at March 31, 2011 and December 31, 2010, respectively.time deposits.
Capital Resources
Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our publicly traded 7% senior notes due 2012, 5 1/2% senior notes due 2013, 5 3/8% medium-term senior notes due 2014 and 2015 and 5 5/8% senior notes due 2020; and (3) our Mortgage Repurchase Facility. Because of our current balance of cash, cash equivalents, marketable securities and available capacity under our Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See“Forward-Looking Statements” above.
Senior Notes and Mortgage Repurchase Facility
Senior Notes. Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries.
Mortgage Lending.HomeAmerican has a Master Repurchase Agreement, which expires September 16, 2011 (the “Mortgage Repurchase Facility”), with U.S. Bank National Association (“USBNA”) and can include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). As of March 31,June 30, 2011, USBNA was the only Buyer under the Mortgage Repurchase Facility. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of eligible mortgage loans to USBNA (as agent for the Buyers) 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 agent for the Buyers and as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. At March 31,June 30, 2011 and December 31, 2010, we had $6.7$9.0 million and $25.4 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%. At HomeAmerican’s option the Balance Funded Rate (equal to 3.75%) may be applied to advances under the Mortgage Repurchase Facility provided the applicable Buyer is holding sufficient Qualifying Balances. The foregoing terms are defined in the Mortgage Repurchase Facility.
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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. Adjusted Tangible Net Worth means the sum of (a) all assets of HomeAmerican less (b) the sum of (i) all Debt and all Contingent Indebtedness of HomeAmerican, (ii) all assets of HomeAmerican that would be classified as intangible assets under generally accepted accounting principles, and (iii) receivables from Affiliates. HomeAmerican’s Adjusted Tangible Net Worth Ratio is the ratio of HomeAmerican’s total liabilities (excluding Permitted Letters of Credit) to the Adjusted Tangible Net Worth. HomeAmerican’s Adjusted Net Income is a rolling twelve consecutive months of net income for HomeAmerican. HomeAmerican’s Liquidity is defined as its unencumbered and unrestricted cash and Cash Equivalents plus the amount by which the aggregate Purchase Value of all Purchased Loans at such time exceeds the aggregate Purchase Price outstanding for all Open Transactions at such time. HomeAmerican’s HUD Compare Ratio is the ratio of (a) the percentage of HomeAmerican’s FHA Mortgage Loan originations that were seriously delinquent or claim terminated in the first two years to (b) the percentage of all such Mortgage Loan originations. The foregoing terms are defined in the Mortgage Repurchase Facility.
Failure to meet the foregoing negative covenants would constitute an event of default. In the event of default, USBNA may, at its option, declare the Repurchase Date for any or all Transactions to be deemed immediately to occur. Upon such event of default, and if USBNA exercises its right to terminate any Transactions, then (a) HomeAmerican’s obligation to repurchase all Purchased Loans in such Transactions will become immediately due and payable; (b) the Repurchase Price for each such Transaction shall be increased by the aggregate amount obtained by daily multiplication of (i) the greater of the Pricing Rate for such Transaction and the Default Pricing Rate by (ii) the Purchase Price for the Transaction as of the Repurchase Date, (c) all Income paid after the event of default will be payable to and retained by USBNA and applied to the aggregate unpaid Repurchase Prices owed by HomeAmerican and (d) HomeAmerican shall deliver any documents relating to Purchased Loans subject to such Transactions to USBNA. Upon the occurrence of an event of default, USBNA may (a) sell any or all Purchased Loans subject to such Transactions on a servicing released or servicing retained basis and apply the proceeds to the unpaid amounts owed by HomeAmerican, (b) give HomeAmerican credit for such Purchased Loans in an amount equal to the Market Value and apply such credit to the unpaid amounts owed by HomeAmerican, (c) replace HomeAmerican as Servicer, (d) exercise its right under the Mortgage Repurchase Facility with respect to the Income Account and Escrow Account, and (e) with notice to HomeAmerican, declare the Termination Date to have occurred. The foregoing terms are defined in the Mortgage Repurchase Facility.
The table below sets forth the actual results of the covenant calculations and covenant requirements under the Mortgage Repurchase Facility at March 31,June 30, 2011.
Covenant Test | Covenant Results | Covenant Test | Covenant Results | |||||||||||||
Adjusted Tangible Net Worth (minimum) | $ | 18,000,000 | $ | 25,284,000 | $ | 18,000,000 | $ | 26,199,000 | ||||||||
Adjusted Tangible Net Worth Ratio (maximum) | 8.0 : 1.0 | 0.7: 1.0 | 8.0 : 1.0 | 0.7: 1.0 | ||||||||||||
Adjusted Net Income (minimum) | $ | 1 | $ | 6,557,000 | $ | 1 | $ | 5,374,000 | ||||||||
Liquidity Test (minimum) | $ | 8,000,000 | $ | 31,252,000 | $ | 8,000,000 | $ | 29,166,000 |
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.
MDC Common Stock Repurchase Program
At March 31,June 30, 2011, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three or six months ended March 31,June 30, 2011 and 2010.
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Consolidated Cash Flow
During the threesix months ended March 31,June 30, 2011, we used $57.7$69.3 million of cash in operating activities, primarily due anto using $107.9 million to increase in our land inventory levels through the purchase of 993 lots during the first six months of 2011. During the six months ended June 30, 2011 we increased our land units by 769, excluding the impact of the 232 lots in our Washington division. This use of cash was partially offset by closing 554 homes. Additionally, we used $13.1generating $51.4 million in cash associated with a reductionthe decrease in our accrued liabilitieshousing completed or under construction as we paid our 2010 bonusesclosed 1,263 homes during the first six months of 2011 first quarter.and reduced our total units of homes completed or under construction by 13% from December 31, 2010.
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During the threesix months ended March 31,June 30, 2010, we generated $11.5used $178.9 million of cash from operating activities, primarily due to collecting $142.0 million of our December 31, 2009 income tax receivable and a $25.6 million decrease in our mortgage loans held-for-sale. These items partially were offset by the increase of our homebuilding inventory, which resulted in the use of $152.6$228.3 million of cash during the 2010 first quartersix months of 2010 as we purchased more than 1,4003,300 lots and increased the total sold and unsold homes under construction from 1,1191,109 at December 31, 2009 to 2,1011,756 at March 31,June 30, 2010. Additionally, we used $85.4 million as a result of an increase in our home sales and other receivable and mortgage loans held-for-sale. These items partially were offset by the reduction of $144.5 million in our income tax receivable.
We generated $105.0$293.0 million in cash from investing activities during the threesix months ended March 31,June 30, 2011, primarily attributable to the maturity and sale of marketable securities that increased our cash by $230.0$726.7 million, partially offset by the purchase of $124.5$404.5 million of marketable securities. Additionally, weWe used $0.5$29.3 million in cash for the purchase of property, equipment and equipment related primarily to our on-going investment in our enterprise resource planning system, which we continued to implement duringother.
During the quarter.
We used $501.8 million in cash from investing activities during the threesix months ended March 31,June 30, 2010, primarily attributable to purchasing $555.3we invested $722.2 million ofinto marketable securities and $2.1spent $5.1 million offor property and equipment relating to our new enterprise resource planning system. Our purchases of marketable securities were made seeking greater returns by purchasing certain securities whose original maturities to the Company were longer than three months. These items partially were offset by the $54.0$109.1 million of marketable securities that matured or were sold or matured during the threesix months ended March 31, 2010 and collected $1.7 million associated with our investments in The Reserve’s Primary Fund.June 30, 2010.
During the threesix months ended March 31,June 30, 2011, we used $30.5$40.1 million in cash for financing activities primarily attributable to $23.7 million associated with cash dividends that were paid during the first six months of 2011 and net payments on our mortgage repurchase facility, which resulted in a use of $18.7$16.4 million of cash during the quarter. Additionally, we used $11.8 million associated with a $0.25 per share cash dividend that was declared during the 2011 first quarter.
period. During the 2010 first quarter,six months of 2010, we generated $206.1$255.0 million in cash from financing activities, primarily due to the issuance of senior notes that raised $242.3 million. Partially offsetting this item was: (1)The proceeds from the useissuance of $24.4 million to pay down borrowings onthe senior notes were used for general corporate purposes. Additionally, we had a net borrowing under our Mortgage Repurchase Facility; and (2) $11.8Facility of $36.2 million. Partially offsetting these items was $23.6 million in dividend payments.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At March 31,June 30, 2011, we had deposits of $10.3$10.5 million in the form of cash and $5.3$6.7 million in the form of letters of credit that were at risk to secure option contracts to purchase lots.
At March 31,June 30, 2011, we had outstanding performance bonds and letters of credit totaling approximately $71.7$74.4 million and $20.8$22.9 million, respectively, including $7.2$9.1 million in letters of credit issued by HomeAmerican, with the remaining bonds and letters of credit issued by third-parties, to secure our performance under various contracts. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.
We have made no material guarantees with respect to third-party obligations.
Contractual Obligations
Our contractual obligations have not changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.
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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2010 Annual Report on Form 10-K.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operation, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors Relating to our Business” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes from the 2010 Annual Report on Form 10-K related to the Company’s exposure to market risk from interest rates.
Item 4. | Controls and Procedures |
(a)Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer and the Chief Accounting Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, concluded that our disclosure controls and procedures were effective at March 31,June 30, 2011.
(b) Changes in internal control over financial reporting - In our California and NevadaFlorida homebuilding divisions,division, we began operating under our new enterprise resource planning (“ERP”) system during the 2011 firstsecond quarter. As a result, our financial and operating transactions in those divisionsthis division is now utilizeutilizing the functionality provided by the new ERP system with oversight as to the completeness and accuracy of the information being performed through the ERP system. The full implementation of the ERP system in the other homebuilding divisions not currently operating under our new ERP system is scheduled to take place over the course of the next several quarters. There was no other change in our internal control over financial reporting that occurred during the 2011 firstsecond quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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M.D.C. HOLDINGS, INC.
FORM 10-Q
Item 1. | Legal Proceedings |
Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
Additionally, litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:
Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.
Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.
Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.
By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.
On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011, the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.
On March 31, 2011 the West Virginia Supreme Court of Appeals declined to enter a writ of prohibition with respect to the trial court’s re-entry of its judgment of default stating that the issues presented are more properly presented on appeal after full development of the record in the lower court.
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Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:
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Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This litigation was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.
MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.
We can give no assurance as to the final outcomes of these cases, or whether they would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. | Risk Factors |
There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2010. For a more complete discussion of other risk factors that affect our business, see “Risk Factors Relating to our Business” in our Form 10-K for the year ended December 31, 2010, which include the following:
• | The homebuilding industry is undergoing a significant downturn, and its duration and ultimate severity are uncertain. A continuation or further deterioration in industry conditions or in the broader economic conditions could have additional adverse effects on our business and financial results. |
• | Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, closings and decreases in the average selling prices of sold and closed homes, which would have a negative impact on our home sales revenue and results of operations. |
• | Further decline in the market value of our homes or carrying value of our land would have a negative impact on our results of operations and financial position. |
• | Our strategies in responding to the adverse conditions in the homebuilding industry and in the U.S. economy have had limited success, and the continued implementation of these and other strategies may not be successful. |
• | Increases in our Cancellation Rate could have a negative impact on our Home Gross Margins and home sales revenue. |
• | If land is not available at reasonable prices, our homes sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market. |
• | If mortgage interest rates rise or if mortgage financing otherwise becomes less affordable, it could adversely affect our sales and business, and the duration and ultimate severity of the effects are uncertain. |
• | We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and continued disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows. |
• | In the ordinary course of business, we are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and/or cash flows. |
• | Further uncertainty in the mortgage lending industry, including repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our results of operations. |
• | Decreases in the market value of our investments in marketable securities could have an adverse impact on our results of operations. |
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• | We are utilizing a new enterprise resource planning (“ERP”) system in four of our homebuilding divisions, our Corporate office and our non-homebuilding subsidiaries and, if we encounter significant problems with this implementation or implementation throughout our remaining homebuilding divisions, it could have an adverse impact on our operating activities and/or financial reporting capabilities. |
• | Our financial services operations have concentration risks that could impact our results of operations. |
• | Our business is subject to numerous federal, local and state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business. |
• | Product liability litigation and warranty claims that arise in the ordinary course of business may be costly. |
• | Our income tax provision or benefit and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position. |
• | The homebuilding industry is cyclical and affected by changes in general economic, real estate or other business conditions that could adversely affect our business or financial results. |
• | Because of the seasonal nature of our business, our quarterly operating results can fluctuate. |
• | Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries. |
• | Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our results of operations. |
• | We are dependent on the services of key employees, and the loss of their services could hurt our business. |
• | The interests of certain controlling shareholders may be adverse to investors. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The Company did not repurchase any shares during the firstsecond quarter of 2011. Additionally, thereIn conjunction with the acquisition of substantially all of the assets of SDC Homes, LLC and certain affiliated entities as of April 28, 2011, the Company issued 176,716 shares of its common stock, valued at $5 million, to Robert Trent, the principal owner of the seller entities. The shares issued to Mr. Trent were no salesunregistered, having been issued in a private placement under Section 4(2) of unregistered equity securities duringthe Securities Act of 1933, and are subject to the terms of a restricted stock agreement. The agreement provides for 25%, 25% and 10% of the shares, respectively, to vest after each of the first quarterthree anniversaries of 2011.the effective date of the agreement, conditioned on Mr. Trent remaining employed. The final 40% of the stock will vest on December 31, 2015, conditioned on Mr. Trent remaining employed. The Company may use any unvested shares to apply against guaranty obligations that Mr. Trent has undertaken.
Item 3. | Defaults Upon Senior Securities |
None.
Item | (Removed and Reserved) |
None.
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Item 5. | Other Information |
On April 27,July 26, 2011, MDC’s Board of Directors declared a quarterly cash dividend of twenty five cents ($0.25) per share. The dividend will be paid on May 25,August 24 2011 to shareowners of record on May 11,August 10, 2011.
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Item 6. | Exhibits |
10.1 | Second Amendment to the M.D.C. Holdings, Inc. | |
10.2 | ||
10.3 | Form of 2011 Stock Option Agreement (2011 Equity Incentive Plan). | |
10.4 | Form of 2011 Restricted Stock Agreement (2011 Equity Incentive Plan). | |
12 | Ratio of Earnings to Fixed Charges Schedule. | |
31.1 | Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of |
|
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | M.D.C. HOLDINGS, INC. | |||||
(Registrant) | ||||||
By: | /s/ Vilia Valentine | |||||
Vilia Valentine, | ||||||
Vice President, Controller and Chief Accounting Officer | ||||||
(principal financial officer and |
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EXHIBIT INDEX
10.1 | Second Amendment to the M.D.C. Holdings, Inc. | |
10.2 | ||
10.3 | Form of 2011 Stock Option Agreement (2011 Equity Incentive Plan). | |
10.4 | Form of 2011 Restricted Stock Agreement (2011 Equity Incentive Plan). | |
12 | Ratio of Earnings to Fixed Charges Schedule. | |
31.1 | Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer required by 17 CFR 240.13a-14(b), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets as of |
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