Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

 (Mark One)

 

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

For the quarterly period ended March31, 20120920

 

OR

 

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

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

84-0622967

(State or other jurisdiction

(I.R.S. employer

of incorporation or organization)

identification no.)

 

4350 South Monaco Street, Suite 500

80237

Denver, Colorado

(Zip code)

Denver, Colorado(Address of principal executive offices)

(Zip code)

(Address of principal executive offices)

(303) 773-1100 

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

552676108

New York Stock Exchange

6% Senior Notes due January 2043

552676AQ1

New York Stock Exchange

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes    No  

 

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

 

Large Accelerated Filer

  

  

Accelerated Filer

  

Non-Accelerated Filer

  

  

  

Smaller Reporting Company

  

Emerging growth company

  

 

    

 

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

 

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

 

As of April29May 1, 20120920, 61,520,89063,054,495 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019 31, 2020

 

INDEX

7

 

 

 

Page

No.

Part I. Financial Information:

 

    

 

Item 1.

Unaudited Consolidated Financial Statements:

 

    

 

 

Consolidated Balance Sheets at March 31, 20192020 and December 31, 20182019

1

    

 

 

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 20192020 and 20182019

2

    
  

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 20192020 and 20182019

         3

    

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 20192020 and 20182019

4

    

 

 

Notes to Unaudited Consolidated Financial Statements

5

    

 

Item 2.

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

2728

    

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4142

    

 

Item 4.

Controls and Procedures

4243

  

Part II. Other Information:

 

    

 

Item 1.

Legal Proceedings

4344

    

 

Item 1A.

Risk Factors

4344

    

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

4344

Item 6.

Exhibits

      45

    

 

        Item 6.

ExhibitsSignature

      4445

 

Signature

      44

 

(i)


 

 

PART I

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

 

 

March 31,

  

December 31,

  

March 31,

 

December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands, except per

  

(Dollars in thousands, except

 
 

share amounts)

  

per share amounts)

 
ASSETS      

Homebuilding:

            

Cash and cash equivalents

 $416,374  $414,724  $386,704  $424,186 

Restricted cash

  8,136   6,363  15,762  14,279 

Trade and other receivables

  67,960   52,982  69,301  65,829 

Inventories:

         

Housing completed or under construction

  950,274   952,436  1,215,214  1,036,191 

Land and land under development

  1,198,824   1,180,558   1,301,433   1,330,384 

Total inventories

  2,149,098   2,132,994  2,516,647  2,366,575 

Property and equipment, net

  59,765   58,167  62,316  60,414 

Operating lease right-of-use asset

  32,604   - 

Deferred tax asset, net

  34,504   37,178  20,660  21,768 

Prepaid and other assets

  42,545   45,794   78,002   78,358 

Total homebuilding assets

  2,810,986   2,748,202  3,149,392  3,031,409 

Financial Services:

            

Cash and cash equivalents

  51,556   49,052  22,159  35,747 

Marketable securities

  45,767   40,879  43,985  56,747 

Mortgage loans held-for-sale, net

  110,810   149,211  133,921  197,021 

Other assets

  15,800   13,733   24,255   17,432 

Total financial services assets

  223,933   252,875   224,320   306,947 

Total Assets

 $3,034,919  $3,001,077  $3,373,712  $3,338,356 

LIABILITIES AND EQUITY

            

Homebuilding:

            

Accounts payable

 $58,570  $50,505  $97,980  $87,364 

Accrued liabilities

  185,131   196,247 

Operating lease liability

  33,460   - 

Accrued and other liabilities

 233,034  245,940 

Revolving credit facility

  15,000   15,000  15,000  15,000 

Senior notes, net

  988,322   987,967   1,036,900   989,422 

Total homebuilding liabilities

  1,280,483   1,249,719  1,382,914  1,337,726 

Financial Services:

            

Accounts payable and accrued liabilities

  58,874   58,543  70,977  68,529 

Mortgage repurchase facility

  84,856   116,815   108,744   149,616 

Total financial services liabilities

  143,730   175,358   179,721   218,145 

Total Liabilities

  1,424,213   1,425,077  1,562,635  1,555,871 

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; 61,520,890 and 56,615,352 issued and outstanding at March 31, 2019 and December 31, 2018, respectively

  615   566 

Common stock, $0.01 par value; 250,000,000 shares authorized; 63,052,495 and 62,574,961 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 631  626 

Additional paid-in-capital

  1,318,726   1,168,442  1,361,362  1,348,733 

Retained earnings

  291,365   406,992   449,084   433,126 

Total Stockholders' Equity

  1,610,706   1,576,000   1,811,077   1,782,485 

Total Liabilities and Stockholders' Equity

 $3,034,919  $3,001,077  $3,373,712  $3,338,356 

 

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

 

- 1 -


 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands, except per share amounts)

  

(Dollars in thousands, except per

share amounts)

 

Homebuilding:

                

Home sale revenues

 $647,278  $607,688  $697,085  $647,278 

Home cost of sales

  (524,552)  (496,632) (558,647) (524,552)

Inventory impairments

  (610)  (550)  -   (610)

Total cost of sales

  (525,162)  (497,182)  (558,647)  (525,162)

Gross profit

  122,116   110,506  138,438  122,116 

Selling, general and administrative expenses

  (82,261)  (71,341) (89,321) (82,261)

Interest and other income

  2,391   1,859  1,889  2,391 

Other expense

  (1,191)  (563)  (1,337)  (1,191)

Homebuilding pretax income

  41,055   40,461   49,669   41,055 
         

Financial Services:

                

Revenues

  17,404   19,035  21,886  17,404 

Expenses

  (8,957)  (8,831) (10,929) (8,957)

Interest and other income

  1,264   1,020 

Net gain (loss) on marketable equity securities

  4,840   (1,153)

Financial services pretax income

  14,551   10,071 

Other income (expense), net

  (12,064)  6,104 

Financial services pretax income (loss)

  (1,107)  14,551 
         

Income before income taxes

  55,606   50,532  48,562  55,606 

Provision for income taxes

  (15,056)  (11,768)  (11,802)  (15,056)

Net income

 $40,550  $38,764  $36,760  $40,550 
             

Other comprehensive income

  -   - 

Comprehensive income

 $40,550  $38,764  $36,760  $40,550 
         

Earnings per share:

             

Basic

 $0.66  $0.64  $0.58  $0.66 

Diluted

 $0.64  $0.63  $0.56  $0.64 
         

Weighted average common shares outstanding:

             

Basic

  60,939,364   60,340,774  62,491,238  60,939,364 

Diluted

  62,708,334   61,447,563  64,931,225  62,708,334 
         

Dividends declared per share

 $0.30  $0.28  $0.33  $0.30 

 

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

 

- 2 -


 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)

 

 

Three-Month Period Ended March 31, 2019

  

Three-Month Period Ended March 31, 2020

 
                 

Accumulated

      
         

Additional

      

Other

          

Additional

     
 

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

      

Common Stock

 

Paid-in

 

Retained

   
 

Shares

  

Amount

  

Capital

  

Earnings

  

Income

  

Total

  

Shares

  

Amount

  

Capital

  

Earnings

  

Total

 

Balance at December 31, 2018

  56,615,352  $566  $1,168,442  $406,992  $-  $1,576,000 

Balance at December 31, 2019

 62,574,961  $626  $1,348,733  $433,126  $1,782,485 

Cumulative effect of newly adopted accounting standards (Note 2)

  -   -   -   (67)  -   (67)  -   -   -   (34)  (34)

Balance at January 1, 2019

  56,615,352   566   1,168,442   406,925   -   1,575,933 

Balance at January 1, 2020

  62,574,961   626   1,348,733   433,092   1,782,451 

Net Income

  -   -   -   40,550   -   40,550  -  -  -  36,760  36,760 

Shares issued upon exercise of stock options and awards of restricted stock

  372,344   4   7,083   -   -   7,087 

Shares issued under stock-based compensation programs, net

 477,582  5  8,189  -  8,194 

Cash dividends declared

  -   -   -   (17,019)  -   (17,019) -  -  -  (20,768) (20,768)

Stock dividend declared

  4,534,908   45   138,950   (139,091)      (96)

Stock-based compensation expense

  -   -   4,251   -   -   4,251  -  -  4,440  -  4,440 

Forfeiture of restricted stock

  (1,714)  -   -   -   -   -   (48)  -   -   -   - 

Balance at March 31, 2019

  61,520,890  $615  $1,318,726  $291,365  $-  $1,610,706 

Balance at March 31, 2020

  63,052,495  $631  $1,361,362  $449,084  $1,811,077 

 

 

Three-Month Period Ended March 31, 2018

  

Three-Month Period Ended March 31, 2019

 
                 

Accumulated

      
         

Additional

      

Other

          

Additional

     
 

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

      

Common Stock

 

Paid-in

 

Retained

   
 

Shares

  

Amount

  

Capital

  

Earnings

  

Income

  

Total

  

Shares

  

Amount

  

Capital

  

Earnings

  

Total

 

Balance at December 31, 2017

  56,123,228  $561  $1,144,570  $258,164  $3,992  $1,407,287 

Balance at December 31, 2018

 56,615,352  $566  $1,168,442  $406,992  $1,576,000 

Cumulative effect of newly adopted accounting standards

  -   -   -   5,766   (3,992)  1,774   -   -   -   (67)  (67)

Balance at January 1, 2018

  56,123,228   561   1,144,570   263,930   -   1,409,061 

Balance at January 1, 2019

  56,615,352   566   1,168,442   406,925   1,575,933 

Net Income

  -   -   -   38,764   -   38,764  -  -  -  40,550  40,550 

Shares issued upon exercise of stock options and awards of restricted stock

  97,783   1   281   -   -   282 

Shares issued under stock-based compensation programs, net

 372,344  4  7,083  -  7,087 

Cash dividends declared

  -   -   -   (16,865)  -   (16,865) -  -  -  (17,019) (17,019)

Stock dividend declared

 4,534,908  45  138,950  (139,091) (96)

Stock-based compensation expense

  -   -   1,251   -   -   1,251  -  -  4,251  -  4,251 

Forfeiture of restricted stock

  (1,368)  -   -   -   -   -   (1,714)  -   -   -   - 

Balance at March 31, 2018

  56,219,643  $562  $1,146,102  $285,829  $-  $1,432,493 

Balance at March 31, 2019

  61,520,890  $615  $1,318,726  $291,365  $1,610,706 

 

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

 

- 3 -


 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash FlowsFlows

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Operating Activities:

                

Net income

 $40,550  $38,764  $36,760  $40,550 

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

             

Stock-based compensation expense

  4,251   1,251  4,440  4,251 

Depreciation and amortization

  4,878   4,636  5,152  4,878 

Inventory impairments

  610   550  -  610 

Net (gain) loss on marketable equity securities

  (4,840)  1,153  13,268  (4,840)

Amortization of discount / premiums on marketable debt securities, net

  -   (182)

Deferred income tax expense

  2,696   423  1,131  2,696 

Net changes in assets and liabilities:

             

Trade and other receivables

  (13,771)  (3,261) (1,611) (13,771)

Mortgage loans held-for-sale, net

  38,401   24,956  63,100  38,401 

Housing completed or under construction

  2,137   (65,378) (178,873) 2,137 

Land and land under development

  (18,496)  (71,552) 29,051  (18,496)

Prepaid and other assets

  1,085   389  (8,460) 1,085 

Accounts payable and accrued liabilities

  (3,153)  6,765   (1,131)  (3,153)

Net cash provided by (used in) operating activities

  54,348   (61,486)  (37,173)  54,348 
         

Investing Activities:

                

Purchases of marketable securities

  (4,785)  (8,761) (9,782) (4,785)

Sales of marketable securities

  4,737   8,700  9,276  4,737 

Purchases of property and equipment

  (6,386)  (6,316)  (6,512)  (6,386)

Net cash used in investing activities

  (6,434)  (6,377)  (7,018)  (6,434)
         

Financing Activities:

                

Payments on mortgage repurchase facility, net

  (31,959)  (22,214) (40,872) (31,959)

Repayment of senior notes

 (250,000) - 

Proceeds from issuance of senior notes

 298,050  - 

Dividend payments

  (17,115)  (16,865) (20,768) (17,115)

Proceeds from exercise of stock options

  7,087   282 

Issuance of shares under stock-based compensation programs, net

  8,194   7,087 

Net cash used in financing activities

  (41,987)  (38,797)  (5,396)  (41,987)
         

Net increase (decrease) in cash, cash equivalents and restricted cash

  5,927   (106,660) (49,587) 5,927 

Cash, cash equivalents and restricted cash:

             

Beginning of period

  470,139   514,240   474,212   470,139 

End of period

 $476,066  $407,580  $424,625  $476,066 
         

Reconciliation of cash, cash equivalents and restricted cash:

                

Homebuilding:

             

Cash and cash equivalents

 $416,374  $352,868  $386,704  $416,374 

Restricted cash

  8,136   6,198  15,762  8,136 

Financial Services:

             

Cash and cash equivalents

  51,556   48,514   22,159   51,556 

Total cash, cash equivalents and restricted cash

 $476,066  $407,580  $424,625  $476,066 

 

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

 

- 4 -


 

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2019 2020 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K10-K for the year ended December 31, 2018.

On January 28, 2019, MDC’s board of directors declared an 8% stock dividend that was distributed on February 28, 2019 to shareholders of record on February 14, 2019. In accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any periods or dates prior to the stock dividend record date.

 

Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,“may,“will,“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q10-K, 10-Q and 8-K8-K should be considered.

 

Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

 

 

2.

Recently Issued Accounting Standards

 

Adoption of New Accounting Standards

 

Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”) is codified in ASC 842, Leases (“ASC 842”). ASC 842 supersedes current lease guidance in ASC 840 and requires a lessee to recognize a right-of-use asset and a corresponding lease liability for substantially all leases. The lease liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be similarly calculated and then adjusted for initial direct costs. In addition, ASC 842 expands the disclosure requirements to increase the transparency and comparability of the amount, timing and uncertainty of cash flows arising from leases. On January 1, 2019, we adopted ASC 842 using the modified retrospective transition method. We elected available practical expedients permitted under the transition guidance within the new standard, which among other items, allowed the Company to carry forward its historical lease classification and not reassess existing leases under the new definition of a lease in ASC 842. In addition, we will account for lease and non-lease components as a single lease component.

Adoption of ASC 842 resulted in the recording of additional net lease assets and lease liabilities of $34.2 million and $34.3 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings. The standard did not materially impact our consolidated statements of operations and comprehensive income or consolidated cash flows.

Accounting Standards Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments—Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-132016-13 eliminate the probable threshold for initial recognition of a credit loss in currentlegacy GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning On January 1, 2020, and is to be appliedwe adopted ASU 2016-13 using athe modified retrospective transition method. Earlier adoption is permitted. We do method, resulting in a cumulative effect adjustment that decreased the opening balance of retained earnings by less than $0.1 million. The standard did not plan to early adopt ASU 2016-13 materially impact our consolidated statements of operations and with our current holdings of financial instruments that are subject to credit losses, we do not believe adoption of this guidance will be material to our financial statements.comprehensive income or consolidated cash flows.

- 5 -

Table of Contents

 

 

3.

Segment Reporting

 

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

 

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

 

 

West (Arizona, California, Nevada, WashingtonOregon and Oregon)Washington)

 

Mountain (Colorado and Utah)

Mountain (Colorado and Utah)

 

East (mid-Atlantic, which includes Maryland and Virginia, and Maryland, and Florida)

 

- 5 -

Our financial services business consists of the operations of the following operating segments: (1)(1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2)(2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3)(3) StarAmerican Insurance Ltd. (“StarAmerican”) (collectively our “Insurance Entities”); (4)(4) American Home Insurance Agency, Inc.; and (5)(5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one1 reportable segment (“other”) because they do not individually exceed 10 percent of: (1)(1) consolidated revenue; (2)(2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3)(3) consolidated assets.

 

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

 

On a periodic basis, we assess our Corporate cost allocation estimates. Our most recent assessment resulted in increases in Corporate cost allocations to both our homebuilding and financial services segments beginning January 1, 2020, to reflect the use of centralized administrative functions. Applying the most recent cost allocation estimate to the three months ended March 31, 2019 would have resulted in decreased pretax income for our homebuilding and financial services segments of approximately $2.7 million and $0.4 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three months ended March 31, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.0 million with a corresponding increase in our Corporate segment pretax income.

The following table summarizes revenues for our homebuilding and financial services operations:

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 

 

(Dollars in thousands)

  

(Dollars in thousands)

 
Homebuilding           

West

 $369,558  $319,509  $405,498  $369,558 

Mountain

  209,192   208,632  222,858  209,192 

East

  68,528   79,547   68,729   68,528 

Total homebuilding revenues

 $647,278  $607,688  $697,085  $647,278 
             

Financial Services

                

Mortgage operations

 $10,174  $12,696  $14,625  $10,174 

Other

  7,230   6,339   7,261   7,230 

Total financial services revenues

 $17,404  $19,035  $21,886  $17,404 

 

- 6 -

 

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

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 

 

(Dollars in thousands)

  

(Dollars in thousands)

 
Homebuilding           

West

 $33,200  $24,373  $36,576  $33,200 

Mountain

  21,714   24,185  21,512  21,714 

East

  1,473   3,375  900  1,473 

Corporate

  (15,332)  (11,472)  (9,319)  (15,332)

Total homebuilding pretax income

 $41,055  $40,461  $49,669  $41,055 
             

Financial Services

                

Mortgage operations

 $4,993  $7,520  $8,243  $4,993 

Other

  9,558   2,551   (9,350)  9,558 

Total financial services pretax income

 $14,551  $10,071 

Total financial services pretax income (loss)

 $(1,107) $14,551 
             

Total pretax income

 $55,606  $50,532  $48,562  $55,606 

 

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

 

 

March 31,

  

December 31,

  

March 31,

 

December 31,

 
 

2019

  

2018

  

2020

  

2019

 

 

(Dollars in thousands)

  

(Dollars in thousands)

 
Homebuilding assets           

West

 $1,307,761  $1,301,374  $1,559,410  $1,461,645 

Mountain

  818,451   793,150  907,727  869,665 

East

  170,670   169,485  216,063  194,592 

Corporate

  514,104   484,193   466,192   505,507 

Total homebuilding assets

 $2,810,986  $2,748,202  $3,149,392  $3,031,409 
             

Financial services assets

                

Mortgage operations

 $123,139  $159,677  $154,546  $209,946 

Other

  100,794   93,198   69,774   97,001 

Total financial services assets

 $223,933  $252,875  $224,320  $306,947 
             

Total assets

 $3,034,919  $3,001,077  $3,373,712  $3,338,356 

 

- 7 -

 

 

4.

Earnings Per Share

 

Accounting Standards Codification (“ASC”) Topic 260,Earnings per Share (“ASC 260260”) requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-classtwo-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-classtwo-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-classtwo-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations.

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands, except per

  

(Dollars in thousands, except per

 

 

share amounts)

  

share amounts)

 
Numerator           

Net income

 $40,550  $38,764  $36,760  $40,550 

Less: distributed earnings allocated to participating securities

  (111)  (105) (135) (111)

Less: undistributed earnings allocated to participating securities

  (139)  (124)  (96)  (139)

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

  40,300   38,535   36,529   40,300 

Add back: undistributed earnings allocated to participating securities

  139   124  96  139 

Less: undistributed earnings reallocated to participating securities

  (136)  (122)  (93)  (136)

Numerator for diluted earnings per share under two class method

 $40,303  $38,537  $36,532  $40,303 
             

Denominator

                

Weighted-average common shares outstanding

  60,939,364   60,340,774  62,491,238  60,939,364 

Add: dilutive effect of stock options

  1,217,846   1,106,789  1,862,619  1,217,846 

Add: dilutive effect of performance stock units

  551,124   -   577,368   551,124 

Denominator for diluted earnings per share under two class method

  62,708,334   61,447,563   64,931,225   62,708,334 
             
     

Basic Earnings Per Common Share

 $0.66  $0.64  $0.58  $0.66 

Diluted Earnings Per Common Share

 $0.64  $0.63  $0.56  $0.64 

 

Diluted EPS for the three months ended March 31, 2019 2020 and 20182019 excluded options to purchase approximately 0.50.4 million and 0.10.5 million shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive.

 

- 8 -

5.

Accumulated Other Comprehensive Income

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

  

Three Months Ended

 
  

March 31,

 
  

2019

  

2018

 
  

(Dollars in thousands)

 

Beginning balance 1

 $-  $3,992 

Adoption of accounting standards

  -   (3,992)

Ending balance

 $-  $- 

(1) Amounts net-of-tax.

During the first quarter of 2018, an election was made to reclassify the income tax effects of the Tax Cuts and Jobs Act related to net unrealized gains on equity investments from accumulated other comprehensive income to retained earnings.

 

 

65.

Fair Value Measurements

 

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

 

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

 

   

Fair Value

    

Fair Value

 

Financial Instrument

 

Hierarchy

 

March 31,

2019

  

December 31,

2018

  

Hierarchy

 

March 31,

2020

  

December 31,

2019

 
   

(Dollars in thousands)

 

Cash and cash equivalents

          

Debt securities (available-for-sale)

 

Level 1

 $34,860  $34,866 
             

(Dollars in thousands)

 

Marketable securities

                  

Equity securities

 

Level 1

 $45,767  $40,879  

Level 1

 $43,985  $56,747 
                  

Mortgage loans held-for-sale, net

 

Level 2

 $110,810  $149,211  

Level 2

 $133,921  $197,021 

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2019 2020 and December 31, 2018.2019.

 

Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

 

Equity securities. Our equity securities consist of holdings in common stock and exchange traded funds. As of March 31, 2019 2020 and December 31, 2018, 2019, all of our equity securities were recorded at fair value with all changes in fair value recorded to other income (expense), net gain (loss) on marketable equity securities in the financial services section of our consolidated statements of operations and comprehensive income.

 

Debt securities. Our debt securities consist of U.S. government securities. As of March 31, 2019 and December 31, 2018, all of our debt securities were treated as available-for-sale investments and, as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if any unrealized loss, if applicable, is other-than-temporary.

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

  

March 31, 2019

 
  

Amortized

Cost Basis

  

OTTI

  

Net Amortized

Cost

  

Fair Value

 

 

 

(Dollars in thousands)

 
Financial Services   

Cash and cash equivalents

                

Debt securities

 $34,860  $-  $34,860  $34,860 

  

December 31, 2018

 
  

Amortized

Cost Basis

  

OTTI

  

Net Amortized

Cost

  

Fair Value

 

Financial Services

                

Cash and cash equivalents

                

Debt securities

 $34,866  $-  $34,866  $34,866 

The following table reconciles the net gain (loss) recognized during the three months ended March 31, 2019 2020 and 20182019 on equity securities to the unrealized gain (loss) recognized during the periods on equity securities still held at the reporting date.

 

  

Three Months Ended

 
  

March 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Net gain (loss) recognized during the period on equity securities

 $(13,268) $4,840 

Less: Net gain (loss) recognized during the period on equity securities sold during the period

  609   (237)

Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date

 $(13,877) $4,603 

  

Three Months Ended

 
  

March 31,

 
  

2019

  

2018

 
         

Net gain (loss) recognized during the period on equity securities

 $4,840  $(1,153)

Less: Net gain recognized during the period on equity securities sold during the period

  (237)  (96)

Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date

 $4,603  $(1,057)

 

Mortgage loans held-for-sale, net.  Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1)(1) mortgage loans held-for-sale that are under commitments to sell and (2)(2) mortgage loans held-for-sale that are not under commitments to sell. At March 31, 2019 2020 and December 31, 2018, 2019, we had $96.2$88.1 million and $130.8$136.8 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At March 31, 2019 2020 and December 31, 2018, 2019, we had $14.6$45.8 million and $18.5$60.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.

 

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three months ended March 31, 2019, 2020, we recorded net gains on the sales of mortgage loans of $11.7$16.7 million, compared to $9.0$11.7 million for the same period in the prior year.

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 1918 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

 

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

 

  

March 31, 2019

  

December 31, 2018

 
  

Carrying
Amount

  

Fair Value

  

Carrying
Amount

  

Fair Value

 
  

(Dollars in thousands)

 

$250 Million 5⅝% Senior Notes due February 2020, net

 $249,109  $254,304  $248,850  $253,413 

$250 Million 5½% Senior Notes due January 2024, net

  248,841   258,479   248,789   242,983 

$500 Million 6% Senior Notes due January 2043, net

  490,372   434,117   490,328   386,552 

Total

 $988,322  $946,900  $987,967  $882,948 
  

March 31, 2020

  

December 31, 2019

 
  

Carrying
Amount

  

Fair Value

  

Carrying
Amount

  

Fair Value

 
  

(Dollars in thousands)

 

$250 Million 5.625% Senior Notes due February 2020, net

 $-  $-  $249,909  $250,400 

$250 Million 5.500% Senior Notes due January 2024, net

  249,060   228,750   249,005   272,083 

$300 Million 3.850% Senior Notes due January 2030, net

  297,285   270,750   -   - 

$500 Million 6.000% Senior Notes due January 2043, net

  490,555   466,250   490,508   528,542 

Total

 $1,036,900  $965,750  $989,422  $1,051,025 

 

- 1110 -

 

 

76.

Inventories

 

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

 

 

March 31,

  

December 31,

  March 31, December 31, 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Housing completed or under construction:

             

West

 $516,900  $521,960  $699,039  $589,040 

Mountain

  356,177   347,738  411,077  358,370 

East

  77,197   82,738   105,098   88,781 

Subtotal

  950,274   952,436   1,215,214   1,036,191 

Land and land under development:

             

West

  699,704   705,591  760,606  772,189 

Mountain

  420,155   402,657  448,492  468,718 

East

  78,965   72,310   92,335   89,477 

Subtotal

  1,198,824   1,180,558   1,301,433   1,330,384 

Total inventories

 $2,149,098  $2,132,994  $2,516,647  $2,366,575 

 

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

 

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

 

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

estimated future undiscounted cash flows and Operating Margin;

forecasted Operating Margin for homes in backlog;

actual and trending net home orders;

homes available for sale;

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

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

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

estimated future undiscounted cash flows and Operating Margin;

forecasted Operating Margin for homes in backlog;

actual and trending net home orders;

homes available for sale;

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

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

 

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

 

 

If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

 

Impairments of homebuilding inventory by segment for the three months ended March 31, 2019 2020 and 20182019 are shown in the table below.

 

 

Three Months Ended

  Three Months Ended 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

 $-  $375  $-  $- 

Mountain

  400   175  -  400 

East

  210   -   -   210 

Total inventory impairments

 $610  $550  $-  $610 

 

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

 

 

Impairment Data

  

Quantitative Data

  

Impairment Data

  

Quantitative Data

 

Three Months Ended

 

Total
Subdivisions
Tested

  

Inventory
Impairments

  

Fair Value of
Inventory

After

Impairments

  

Number of
Subdivisions
Impaired

  

Discount Rate

  

Inventory
Impairments

  

 

Fair Value of
Inventory After

Impairments

  

Number of
Subdivisions
Impaired

  

Discount Rate

 
 

(Dollars in thousands)

              

March 31, 2019

  16  $610  $10,476   2   N/A  $610  $10,476  2  N/A 

March 31, 2018

  24  $550  $5,223   2   12%

 

 

8.7.

Capitalization of Interest

 

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

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Homebuilding interest incurred

 $16,031  $15,625  $16,534  $16,031 

Less: Interest capitalized

  (16,031)  (15,625)  (16,534)  (16,031)

Homebuilding interest expensed

 $-  $-  $-  $- 
             

Interest capitalized, beginning of period

 $54,845  $57,541  $55,310  $54,845 

Plus: Interest capitalized during period

  16,031   15,625  16,534  16,031 

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

  (13,929)  (14,428)

Less: Previously capitalized interest included in home cost of sales

  (12,767)  (13,929)

Interest capitalized, end of period

 $56,947  $58,738  $59,077  $56,947 

 

- 1312 -

 

 

9.8.

Leases

 

We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

 

Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters, and are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and nodo not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.

 

The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.

 

Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:

 

  

Three Months Ended

 
  

March 31, 2019

 
  

(Dollars in thousands)

 

Operating lease cost 1

 $1,980 

Less: Sublease income (Note 20)

  (37)

Net lease cost

 $1,943 
_________________________________________
1 Includes variable lease costs, which are immaterial.
  

Three Months Ended

 
  

March 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Operating lease cost 1

 $2,046  $1,980 

Less: Sublease income (Note 19)

  (38)  (37)

Net lease cost

 $2,008  $1,943 

        

1 Includes variable lease costs, which are immaterial.

        

 

Supplemental cash flow information related to leases was as follows:

 

 

Three Months Ended

 
 

Three Months Ended

  

March 31,

 
 

March 31, 2019

  

2020

  

2019

 

 

(Dollars in thousands)

  

(Dollars in thousands)

 
Cash paid for amounts included in the measurement of lease liabilities:           

Operating cash flows from operating leases

 $1,771  $1,906  $1,771 

Leased assets obtained in exchange for new operating lease liabilities

 $1,477  $2,645  $1,477 

 

Supplemental cash flow information related to non-cash transactions also includes the recognition of operating lease right-of-use assets of $33.5 million and operating lease liabilities of $34.3 million upon adoption of ASC 842.

 

Weighted-average remaining lease term and discount rate for operating leases were as follows:

 

  

March 31, 2019

2020

 

Weighted-average remaining lease term (in years)

  6.86.0 

Weighted-average discount rate

 5.55.5%%

               

 

Maturities of operating lease liabilities were as follows:

 

 

Year Ended

  

Year Ended

 
 

December 31,

  

December 31,

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

2019 (excluding the three months ended March 31, 2019)

 $5,315 

2020

  6,317 

2020 (excluding the three months ended March 31, 2020)

 $5,112 

2021

  6,066  7,009 

2022

  5,752  6,670 

2023

  5,148  5,718 

2024

 5,307 

Thereafter

  13,118   9,529 

Total operating lease payments 1

 $41,716 

Total operating lease payments

 $39,345 
       

Less: Interest

  7,133   6,073 

Present value of operating lease liabilities 2

 $34,583 

Present value of operating lease liabilities 1

 $33,272 

__________________________________________________

1 Operating lease payments exclude $0.6 million of legally binding lease payments for leases signed but not yet commenced.

2 FinancialHomebuilding and financial services operating lease liabilities of $32.2 million and $1.1 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services section of our consolidated balance sheet at March 31, 2019.2020.

 

 

109.

Homebuilding Prepaid and Other Assets

 

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

 

  

March 31,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Operating lease right-of-use asset (Note 8)

 $31,619  $30,277 

Land option deposits

  27,126   27,361 

Prepaid expenses

  6,997   7,294 

Goodwill

  6,008   6,008 

Deferred debt issuance costs on revolving credit facility, net

  5,746   6,130 

Other

  506   1,288 

Total

 $78,002  $78,358 

  

March 31,

  

December 31,

 
  

2019

  

2018

 
  

(Dollars in thousands)

 

Land option deposits

 $21,951  $23,805 

Goodwill

  6,008   6,008 

Prepaid expenses

  6,614   7,324 

Deferred debt issuance costs on revolving credit facility, net

  7,279   7,662 

Other

  693   995 

Total

 $42,545  $45,794 
- 14 -

 

 

110.

Homebuilding Accrued and Other Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

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

 

 

March 31,

  

December 31,

  

March 31,

 

December 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Customer and escrow deposits

 $36,986  $34,463  $43,342  $39,001 

Warranty accrual

  29,992   28,262  30,887  31,386 

Accrued compensation and related expenses

  22,438   39,459  26,333  45,003 

Lease liability (Note 8)

 32,182  30,830 

Accrued interest

  13,281   27,734  14,018  27,734 

Construction defect claim reserves

  8,367   8,464  8,318  8,196 

Land development and home construction accruals

  9,064   8,683  8,862  9,750 

Income taxes payable

  18,337   6,245 

Other accrued liabilities

  46,666   42,937   69,092   54,040 

Total accrued liabilities

 $185,131  $196,247  $233,034  $245,940 

 

 

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

 

  

March 31,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Insurance reserves

 $53,132  $52,219 

Accounts payable and other accrued liabilities

  17,845   16,310 

Total accounts payable and accrued liabilities

 $70,977  $68,529 

  

March 31,

  

December 31,

 
  

2019

  

2018

 
  

(Dollars in thousands)

 

Insurance reserves

 $47,852  $46,844 

Accounts payable and other accrued liabilities

  11,022   11,699 

Total accounts payable and accrued liabilities

 $58,874  $58,543 
- 15 -

 

 

121.

Warranty Accrual

 

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

 

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

 

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three months ended March 31, 2019 2020 and 2018. For the three months ended March 31, 2019 and 2018, we recorded adjustments to increase our warranty accrual by $0.9 million and $3.1 million, respectively. The adjustments recorded during the three months ended March 31, 2019 related to homes with structural related issues, while the adjustments recorded during the three months ended March 31, 2018 were due to higher than expected general warranty related expenditures.2019.

  

Three Months Ended

 
  

March 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Balance at beginning of period

 $31,386  $28,262 

Expense provisions

  3,165   3,348 

Cash payments

  (3,664)  (2,493)

Adjustments

  -   875 

Balance at end of period

 $30,887  $29,992 

 

  

Three Months Ended

 
  

March 31,

 
  

2019

  

2018

 
  

(Dollars in thousands)

 

Balance at beginning of period

 $28,262  $21,909 

Expense provisions

  3,348   2,598 

Cash payments

  (2,493)  (2,500)

Adjustments

  875   3,106 

Balance at end of period

 $29,992  $25,113 

- 16 -

 

 

132.

Insurance and Construction Defect Claim Reserves

 

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

 

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

 

The table set forth below summarizes our insurance and construction defect claim reserves activity for the three months ended March 31, 2019 2020 and 2018.2019. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in either the financial services andor homebuilding sections of the consolidated balance sheets.sheets, respectively.

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Balance at beginning of period

 $55,308  $52,686  $60,415  $55,308 

Expense provisions

  2,465   2,304  2,918  2,465 

Cash payments, net of recoveries

  (1,554)  (1,595)  (1,883)  (1,554)

Balance at end of period

 $56,219  $53,395  $61,450  $56,219 

 

In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three months ended March 31, 2019 2020 and 20182019 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

 

143.

Income Taxes

 

Our overall effective income tax rates were 27.1%24.3% and 23.3%27.1% for the three months ended March 31, 2019 2020 and 2018,2019, respectively, resulting in income tax expense of $15.1$11.8 million and $11.8$15.1 million for the same periods, respectively. The year-over-year increasedecrease in our effective tax rate for the three months ended March 31, 2019 2020 was due toprimarily impacted by a $1.2 million benefit fromwindfall on non-qualifying stock options exercised and lapsed restricted stock awards during the three months ended March 31, 2020 as well as energy tax credits which reduced our 2018 first quarter tax rate. Itrelated to homes closed during the quarter. These benefits were partially offset by a decrease in the amount of executive compensation that is currently uncertain as to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was recorded for the 2019 first quarter.deductible under Internal Revenue Code Section 162(m).

 

At March 31, 2019 2020 and December 31, 2018 2019, we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $34.5$20.7 million and $37.2$21.8 million, respectively. The valuation allowances were primarily related to various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods coupled with minimal operating activity that exists in certain states.

 

 

- 17 -

 

 

154.

Senior Notes

 

The carrying valuevalues of our senior notes as of March 31, 2019 2020 and December 31, 2018, 2019, net of any unamortized debt issuance costs or discount, were as follows:

 

  

March 31,

  

December 31,

 
  

2019

  

2018

 
  

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

 $249,109  $248,850 

5½% Senior Notes due January 2024, net

  248,841   248,789 

6% Senior Notes due January 2043, net

  490,372   490,328 

Total

 $988,322  $987,967 
  

March 31,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

5.625% Senior Notes due February 2020, net

 $-  $249,909 

5.500% Senior Notes due January 2024, net

  249,060   249,005 

3.850% Senior Notes due January 2030, net

  297,285   - 

6.000% Senior Notes due January 2043, net

  490,555   490,508 

Total

 $1,036,900  $989,422 

 

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.

 

 

165.

Stock-Based Compensation

 

We account for share-based awards in accordance with ASC Topic 718 Compensation–Stock Compensation (“ASC 718”), which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three months ended March 31, 2019 2020 and 2018:2019, which is included as a component of selling general and administrative expenses and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively:

 

 

Three Months Ended

  

Three Months Ended

 
 

March 31,

  

March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Stock option grants expense

 $255  $56  $495  $255 

Restricted stock awards expense

  911   744  1,517  911 

Performance share units expense

  3,085   451   2,428   3,085 

Total stock based compensation

 $4,251  $1,251 

Total stock-based compensation

 $4,440  $4,251 

 

- 18 -

 

On August 5, 2019, May 23, 2018, June 20, 2017 and July 25, 2016, the Company granted long term performance stockshare unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs will beare earned based upon the Company’s performance, over a three year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales (excluding impairments) of at least fifteen percent (15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10%, 50% of the Target Goals will be earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%, 200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017,2018 and 2018,2019, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for each grant has been provided in the table below.

 

           

Threshold Goal

 

Target Goal

 

Maximum Goal

     

 

 

Awardee

 

Date of

Award

 

Performance

Period

 

Base

Period

 

Base

Period

Revenues

  

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

Fair Value

per Share

  

Maximum

Potential

Expense to be Recognized*

 

CEO

 

 

 

July 1, 2016

 

July 1, 2015

 

 

   61,236 

 

  122,472 

 

  244,944 

 

     $4,815 

COO

 

July 25, 2016

  to to $1.975 billion   61,236 $2.074 billion  122,472 $2.173 billion  244,944  $2.370 billion $19.66   4,815 

CFO

   June 30, 2019 June 30, 2016      15,309    30,618    61,236        1,204 
                              $10,834 
                                 

CEO

 

 

 

April 1, 2017

 

April 1, 2016

 

 

   64,152 

 

  128,304 

 

  256,608 

 

     $7,142 

COO

 June 20, 2017  to to $2.426 billion    64,152 $2.547 billion   128,304 $2.669 billion   256,608 $2.911 billion $27.83   7,142 

CFO

   March 31, 2020  March 31, 2017      16,038    32,076    64,152        1,786 
                              $16,070 
                                 

CEO

 

 

 

April 1, 2018

 

April 1, 2017

 

 

   64,800 

 

  129,600 

 

  259,200 

 

     $6,629 

COO

 May 23, 2018 to to $2.543 billion    64,800 $2.670 billion   129,600 $2.797 billion  259,200 $3.052 billion $25.57   6,629 

CFO

   March 31, 2021  March 31, 2018      16,200    32,400    64,800        1,657 

_______________________

                    $14,915 

        

Threshold Goal

 

Target Goal

 

Maximum Goal

     

Maximum

  

Maximum

 

Date of

Award

 

Performance

Period

 

Base

Period

 

Base

Period

Revenues

 

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

Fair Value

per Share

  

Potential

Expense

to be

Recognized*

  

Remaining

Expense

to be

Recognized*

 
                               
July 25, 2016 

July 1, 2016 to

June 30, 2019

 

July 1, 2015 to

June 30, 2016

 $1.975 billion 137,781 $2.074 billion 275,562 $2.173 billion 551,124 $2.370 billion $19.66  $10,834  $- 
                               

June 20, 2017

 

April 1, 2017 to

March 31, 2020

 

April 1, 2016 to

March 31, 2017

 

$2.426 billion

 144,342 

$2.547 billion

 288,684 

$2.669 billion

 577,368 

$2.911 billion

 $27.83  $16,070  $- 
                               

May 23, 2018

 

April 1, 2018 to

March 31, 2021

 

April 1, 2017 to

March 31, 2018

 

$2.543 billion

 145,800 

$2.670 billion

 291,600 

$2.797 billion

 583,200 

$3.052 billion

 $25.57  $14,915  $7,641 
                               

August 5, 2019

 

January 1, 2019 to

December 31, 2021

 

January 1, 2018 to

December 31, 2018

 

$2.982 billion

 135,000 

$3.131 billion

 270,000 

$3.280 billion

 540,000 

$3.578 billion

 $32.60  $17,604  $17,604 

* Dollars in thousands

 

In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance-based stock awards until achievement of the performance targets are probable of occurring.

 

2016 PSU Grants. AsThe 2016 PSU awards vested on August 7, 2019 at the Maximum Goal following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved. For the three months ended March 31, 2019 the Company recorded share-based award expense of $0.9 million related to these awards.

2017 PSU Grants. As of March 31, 2020, the Company determined that achievement of the Maximum Goals for these awards was probable and, as such, the Company recorded share- award expense related to the awards of $1.4 million for the three months ended March 31, 2020. For the three months ended March 31, 2019, the Company recorded share-based award expense of $2.2 million related to these awards.

2018 PSU Grants. As of March 31, 2020, the Company determined that achievement between the Target and Maximum Goals for these awards was probable and, as such, the Company recorded share-based award expense related to the awards of $0.9$1.0 million for the three months ended March 31, 2019. As of March 31, 2018, the Company had concluded that achievement of the Target Goals was probable and, as such, recorded share-based award expense related to the awards of $0.5 million for the three months ended March 31, 2018.

2017 PSU Grants. As of 2020. At March 31, 2019, the Company determined that achievement of the Target Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $2.2 million for the three months ended March 31, 2019. As of March 31, 2018, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense, and as such, no0 expense related to the grant of these awards had been recognized as of March 31, 2018.2019.

 

2018 2019PSU Grants. For the PSUs granted in May August of 2018,2019, the Company concluded that achievement of any of the performance metrics has not met the level of probability required to record compensation expense and, as such, no0 expense related to these awards has been recognized as of March 31, 2019.2020.

 

- 19 -

 

 

176.

Commitments and Contingencies

 

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2019, 2020, we had outstanding surety bonds and letters of credit totaling $245.5$284.0 million and $89.3$96.6 million, respectively, including $61.7$70.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $126.6$152.4 million and $51.2 million, respectively. All letters of credit as of March 31, 2019, 2020, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 1918 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

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

 

Litigation.Litigation. Due to the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

 

Lot Option Contracts. In the ordinary course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At March 31, 2019, 2020, we had cash deposits and letters of credit totaling $19.3$21.4 million and $4.8$8.2 million, respectively, at risk associated with the option to purchase 6,3688,533 lots.

Coronavirus/COVID-19 Pandemic. While the response to the pandemic continues to rapidly evolve, many state and local governments had extended and expanded on restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. Certain markets in which we do business stopped our construction and sales of homes and others limited the operations of sales centers and model homes. We continue to market and sell homes in all markets, but economic uncertainty and shelter in place requirements have caused a significant decline in traffic at our sales centers and model homes, and we have seen a significant increase in our cancellation rate. The impact of the decreased traffic and increased cancellation rate was evident in our net new orders for the month of April, which fell 53% year-over-year. While the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, the pandemic and its associated impact on the U.S. economy and consumer confidence could have a material impact to the Company’s future results of operations, financial condition and cash flows.

- 20 -

 

 

187.

Derivative Financial Instruments

 

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

 

At March 31, 2019, 2020, we had interest rate lock commitments with an aggregate principal balance of $149.4$221.0 million. Additionally, we had $14.1$43.7 million of mortgage loans held-for-sale at March 31, 2019 2020 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $121.0$162.0 million at March 31, 2019.2020.

 

For the three months ended March 31, 2019 2020 and 2018,2019, we recorded net gains on derivatives of $1.0 million and $0.9 million, respectively, in revenues in the financial services section of our consolidated statements of operations and $1.5 million, respectively, on our derivatives.comprehensive income.

- 20 -

.

 

198.

Lines of Credit

 

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on November 1, 2018 to (1)(1) extend the Revolving Credit Facility maturity to December 18, 2023, (2)(2) increase the aggregate commitment from $700 million to $1.0 billion (the “Commitment”) and (3)(3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1)(1) 0.0%, (2)(2) a prime rate, (3)(3) a federal funds effective rate plus 1.50%, and (4)(4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

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

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of March 31, 2019.2020.

 

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 2019 2020 and December 31, 2018, 2019, there were $27.6$25.7 million and $27.8$23.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We had $15.0 million outstanding under the Revolving Credit Facility as of March 31, 2019 2020 and December 31, 2018. 2019. As of March 31, 2019, 2020, availability under the Revolving Credit Facility was approximately $957.4$959.3 million.

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 9, 2018, May 23, 2019, the Mortgage Repurchase Facility was amended to extend its termination date to August 8, 2019. May 21, 2020. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on March 27, 2019 30, 2020 from $75$75 million to $100$110 million and was effective through April 24, 2019. 27, 2020. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130$150 million on December 27, 2018 and was 24, 2019 effective through January 25, 2019. 22, 2020. At March 31, 2019 2020 and December 31, 2018, 2019, HomeAmerican had $84.9$108.7 million and $116.8$149.6 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is based on a LIBOR rate or successor benchmark rate.

 

The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2019.2020.

- 21 -

 

 

2019.

Related Party Transactions

 

We contributed $0.5$1.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the three months ended March 31, 2019. 2020. The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section 501(c)(3)501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at March 31, 2019, 2020, all of whom serve without compensation:

 

Name

 

MDC Title

Larry A. Mizel

 

Chairman and CEO

David D. Mandarich

 

President and COO

 

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

 

The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and will continue through October 31, 2021, with an option to extend to October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the initial term from $26.50 to $28.68 per rentable square foot per year, and increasing over the extension term from $29.26 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.

 

 

210.

Supplemental Guarantor Information

 

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

 

M.D.C. Land Corporation

 

M.D.C. Land CorporationRAH of Florida, Inc.

 

RAH of Florida,Richmond American Construction, Inc.

 

Richmond American Construction,Homes of Arizona, Inc.

 

Richmond American Homes of Arizona,Colorado, Inc.

 

Richmond American Homes of Colorado, Inc.Florida, LP

 

Richmond American Homes of Florida, LPIllinois, Inc.

 

Richmond American Homes of Illinois,Maryland, Inc.

 

Richmond American Homes of Maryland,Nevada, Inc.

 

Richmond American Homes of Nevada,New Jersey, Inc.

 

Richmond American Homes of New Jersey,Oregon, Inc.

 

Richmond American Homes of Oregon,Pennsylvania, Inc.

 

Richmond American Homes of Pennsylvania,Utah, Inc.

 

Richmond American Homes of Utah,Virginia, Inc.

 

Richmond American Homes of Virginia, Inc.

Richmond American Homes of Washington, Inc.

 

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

 

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

 

 

Supplemental Condensed Combining Balance Sheet

 

 

March 31, 2019

  

March 31, 2020

 
         

Non-

              

Non-

     
     

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

    

Guarantor

 

Guarantor

 

Eliminating

 

Consolidated

 
 

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 

 

(Dollars in thousands)

  

(Dollars in thousands)

 
ASSETS              

Homebuilding:

                                        

Cash and cash equivalents

 $411,750  $4,624  $-  $-  $416,374  $380,318  $6,386  $-  $-  $386,704 

Restricted cash

  -   8,136   -   -   8,136  -  15,762  -  -  15,762 

Trade and other receivables

  589   67,371   -   -   67,960  694  68,607  -  -  69,301 

Inventories:

                               

Housing completed or under construction

  -   950,274   -   -   950,274  -  1,215,214  -  -  1,215,214 

Land and land under development

  -   1,198,824   -   -   1,198,824   -   1,301,433   -   -   1,301,433 

Total inventories

  -   2,149,098   -   -   2,149,098  -  2,516,647  -  -  2,516,647 
                    

Intercompany receivables

  1,939,500   6,509   -   (1,946,009)  -  2,265,553  5,919  -  (2,271,472) - 

Investment in subsidiaries

  272,420   -   -   (272,420)  -  279,593  -  -  (279,593) - 

Property and equipment, net

  23,608   36,157   -   -   59,765  23,033  39,283  -  -  62,316 

Operating lease right-of-use asset

  32,604   -   -   -   32,604 

Deferred tax asset, net

  34,513   -   -   (9)  34,504  18,962  -  -  1,698  20,660 

Prepaid and other assets

  11,050   31,495   -   -   42,545   32,961   45,041   -   -   78,002 

Total homebuilding assets

  2,726,034   2,303,390   -   (2,218,438)  2,810,986   3,001,114   2,697,645   -   (2,549,367)  3,149,392 
                     

Financial Services:

                                        

Cash and cash equivalents

  -   -   51,556   -   51,556  -  -  22,159  -  22,159 

Marketable securities

  -   -   45,767   -   45,767  -  -  43,985  -  43,985 

Intercompany receivables

  -   -   21,713   (21,713)  -  -  -  64,666  (64,666) - 

Mortgage loans held-for-sale, net

  -   -   110,810   -   110,810  -  -  133,921  -  133,921 

Other assets

  -   -   15,791   9   15,800   -   -   25,953   (1,698)  24,255 

Total financial services assets

  -   -   245,637   (21,704)  223,933   -   -   290,684   (66,364)  224,320 

Total Assets

 $2,726,034  $2,303,390  $245,637  $(2,240,142) $3,034,919  $3,001,114  $2,697,645  $290,684  $(2,615,731) $3,373,712 
                     

LIABILITIES AND EQUITY

                                        
                    

Homebuilding:

                                        

Accounts payable

 $39  $58,531  $-  $-  $58,570  $515  $97,465  $-  $-  $97,980 

Accrued liabilities

  50,285   132,666   -   2,180   185,131 

Operating lease liabilities

  33,460   -   -   -   33,460 

Accrued and other liabilities

 67,874  162,742  -  2,418  233,034 

Advances and notes payable to parent and subsidiaries

  28,222   1,930,727   296   (1,959,245)  -  69,748  2,254,742  -  (2,324,490) - 

Revolving credit facility

  15,000   -   -   -   15,000  15,000  -  -  -  15,000 

Senior notes, net

  988,322   -   -   -   988,322   1,036,900   -   -   -   1,036,900 

Total homebuilding liabilities

  1,115,328   2,121,924   296   (1,957,065)  1,280,483   1,190,037   2,514,949   -   (2,322,072)  1,382,914 
                               

Financial Services:

                                        

Accounts payable and other liabilities

  -   -   61,054   (2,180)  58,874  -  -  73,395  (2,418) 70,977 

Advances and notes payable to parent and subsidiaries

  -   -   8,477   (8,477)  -  -  -  11,648  (11,648) - 

Mortgage repurchase facility

  -   -   84,856   -   84,856   -   -   108,744   -   108,744 

Total financial services liabilities

  -   -   154,387   (10,657)  143,730   -   -   193,787   (14,066)  179,721 

Total Liabilities

  1,115,328   2,121,924   154,683   (1,967,722)  1,424,213   1,190,037   2,514,949   193,787   (2,336,138)  1,562,635 
                     

Equity:

                                        

Total Stockholders' Equity

  1,610,706   181,466   90,954   (272,420)  1,610,706   1,811,077   182,696   96,897   (279,593)  1,811,077 

Total Liabilities and Stockholders' Equity

 $2,726,034  $2,303,390  $245,637  $(2,240,142) $3,034,919  $3,001,114  $2,697,645  $290,684  $(2,615,731) $3,373,712 

 

 

Supplemental CondensedCondensed Combining Balance Sheet

 

 

December 31, 2018

  

December 31, 2019

 
         

Non-

              

Non-

     
     

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

    

Guarantor

 

Guarantor

 

Eliminating

 

Consolidated

 
 

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 

 

(Dollars in thousands)

  

Dollars in thousands

 
ASSETS                       

Homebuilding:

                                        

Cash and cash equivalents

 $410,127  $4,597  $-  $-  $414,724  $418,822  $5,364  $-  $-  $424,186 

Restricted cash

  -   6,363   -   -   6,363  -  14,279  -  -  14,279 

Trade and other receivables

  758   52,224   -   -   52,982  624  65,205  -  -  65,829 

Inventories:

                               

Housing completed or under construction

  -   952,436   -   -   952,436  -  1,036,191  -  -  1,036,191 

Land and land under development

  -   1,180,558   -   -   1,180,558   -   1,330,384   -   -   1,330,384 

Total inventories

  -   2,132,994   -   -   2,132,994  -  2,366,575  -  -  2,366,575 
                    

Intercompany receivables

  1,735,342   7,369   -   (1,742,711)  -  1,936,075  6,370  -  (1,942,445) - 

Investment in subsidiaries

  455,848   -   -   (455,848)  -  488,993  -  -  (488,993) - 

Property and equipment, net

  23,896   34,271   -   -   58,167  23,192  37,222  -  -  60,414 

Deferred tax assets, net

  36,168   -   -   1,010   37,178  22,508  -  -  (740) 21,768 

Metropolitan district bond securities (related party)

  -   -   -   -   - 

Other assets

  12,234   33,560   -   -   45,794   34,728   43,630   -   -   78,358 

Total Homebuilding Assets

  2,674,373   2,271,378   -   (2,197,549)  2,748,202   2,924,942   2,538,645   -   (2,432,178)  3,031,409 
                     

Financial Services:

                                        

Cash and cash equivalents

  -   -   49,052   -   49,052  -  -  35,747  -  35,747 

Marketable securities

  -   -   40,879   -   40,879  -  -  56,747  -  56,747 

Intercompany receivables

  -   -   22,346   (22,346)  -  -  -  47,753  (47,753) - 

Mortgage loans held-for-sale, net

  -   -   149,211   -   149,211  -  -  197,021  -  197,021 

Other assets

  -   -   14,743   (1,010)  13,733   -   -   16,692   740   17,432 

Total Financial Services Assets

  -   -   276,231   (23,356)  252,875   -   -   353,960   (47,013)  306,947 

Total Assets

 $2,674,373  $2,271,378  $276,231  $(2,220,905) $3,001,077  $2,924,942  $2,538,645  $353,960  $(2,479,191) $3,338,356 
                     

LIABILITIES AND EQUITY

                                        
                    

Homebuilding:

                                        

Accounts payable

 $-  $50,505  $-  $-  $50,505  $289  $87,075  $-  $-  $87,364 

Accrued liabilities

  65,691   125,387   -   5,169   196,247 

Accrued and other liabilities

 84,088  156,652  -  5,200  245,940 

Advances and notes payable to parent and subsidiaries

  29,715   1,727,248   295   (1,757,258)  -  53,658  1,912,969  -  (1,966,627) - 

Revolving credit facility

  15,000   -   -   -   15,000  15,000  -  -  -  15,000 

Senior notes, net

  987,967   -   -   -   987,967   989,422   -   -   -   989,422 

Total Homebuilding Liabilities

  1,098,373   1,903,140   295   (1,752,089)  1,249,719   1,142,457   2,156,696   -   (1,961,427)  1,337,726 
                     

Financial Services:

                                        

Accounts payable and accrued liabilities

  -   -   63,712   (5,169)  58,543  -  -  73,729  (5,200) 68,529 

Advances and notes payable to parent and subsidiaries

  -   -   7,799   (7,799)  -  -  -  23,571  (23,571) - 

Mortgage repurchase facility

  -   -   116,815   -   116,815   -   -   149,616   -   149,616 

Total Financial Services Liabilities

  -   -   188,326   (12,968)  175,358   -   -   246,916   (28,771)  218,145 

Total Liabilities

  1,098,373   1,903,140   188,621   (1,765,057)  1,425,077   1,142,457   2,156,696   246,916   (1,990,198)  1,555,871 
                     

Equity:

                                        

Total Stockholders' Equity

  1,576,000   368,238   87,610   (455,848)  1,576,000   1,782,485   381,949   107,044   (488,993)  1,782,485 

Total Liabilities and Stockholders' Equity

 $2,674,373  $2,271,378  $276,231  $(2,220,905) $3,001,077  $2,924,942  $2,538,645  $353,960  $(2,479,191) $3,338,356 

 

 

Supplemental Condensed Combining Statement of Operations

 

  

Three Months Ended March 31, 2019

 
          

Non-

         
      

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

 
  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 

 

 

(Dollars in thousands)

 
Homebuilding:   

Revenues

 $-  $647,278  $-  $-  $647,278 

Cost of sales

  -   (524,552)  -   -   (524,552)

Inventory impairments

  -   (610)  -   -   (610)

Gross margin

  -   122,116   -   -   122,116 

Selling, general, and administrative expenses

  (17,438)  (64,701)  -   (122)  (82,261)

Equity income of subsidiaries

  52,165   -   -   (52,165)  - 

Interest and other income

  2,409   155   -   (173)  2,391 

Other expense

  7   (1,198)  -   -   (1,191)

Homebuilding pretax income (loss)

  37,143   56,372   -   (52,460)  41,055 

Financial Services:

                    

Financial services pretax income

  -   -   14,256   295   14,551 

Income before income taxes

  37,143   56,372   14,256   (52,165)  55,606 

(Provision) benefit for income taxes

  3,407   (15,264)  (3,199)  -   (15,056)

Net income

 $40,550  $41,108  $11,057  $(52,165) $40,550 

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

  -   -   -   -   - 

Comprehensive income

 $40,550  $41,108  $11,057  $(52,165) $40,550 

 

 

Three Months Ended March 31, 2018

 
         

Non-

          

Three Months Ended March 31, 2020

 
     

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

      

Non-

     
 

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

    

Guarantor

 

Guarantor

 

Eliminating

 

Consolidated

 

 

(Dollars in thousands)

  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 
Homebuilding:    

(Dollars in thousands)

 

Revenues

 $-  $607,688  $-  $-  $607,688  $-  $697,085  $-  $-  $697,085 

Cost of sales

  -   (496,632)  -   -   (496,632) -  (558,647) -  -  (558,647)

Inventory impairments

  -   (550)  -   -   (550)  -   -   -   -   - 

Gross margin

  -   110,506   -   -   110,506 

Gross profit

  -   138,438   -   -   138,438 

Selling, general, and administrative expenses

  (12,808)  (58,329)  -   (204)  (71,341) (10,782) (78,408) -  (131) (89,321)

Equity income of subsidiaries

  47,169   -   -   (47,169)  -  43,236  -  -  (43,236) - 

Interest and other income

  1,773   318   2   (234)  1,859  1,783  291  -  (185) 1,889 

Other expense

  7   (570)  -   -   (563)  8   (1,345)  -   -   (1,337)

Homebuilding pretax income (loss)

  36,141   51,925   2   (47,607)  40,461   34,245   58,976   -   (43,552)  49,669 

Financial Services:

                                        

Financial services pretax income

  -   -   9,633   438   10,071   -   -   (1,423)  316   (1,107)

Income before income taxes

  36,141   51,925   9,635   (47,169)  50,532  34,245  58,976  (1,423) (43,236) 48,562 

(Provision) benefit for income taxes

  2,623   (12,092)  (2,299)  -   (11,768)  2,515   (14,333)  16   -   (11,802)

Net income

 $38,764  $39,833  $7,336  $(47,169) $38,764  $36,760  $44,643  $(1,407) $(43,236) $36,760 

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

  -   -   -   -   -   -   -   -   -   - 

Comprehensive income

 $38,764  $39,833  $7,336  $(47,169) $38,764  $36,760  $44,643  $(1,407) $(43,236) $36,760 

 

  

Three Months Ended March 31, 2019

 
          

Non-

         
      

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

 
  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 

Homebuilding:

 

(Dollars in thousands)

 

Revenues

 $-  $647,278  $-  $-  $647,278 

Cost of sales

  -   (524,552)  -   -   (524,552)

Inventory impairments

  -   (610)  -   -   (610)

Gross profit

  -   122,116   -   -   122,116 

Selling, general, and administrative expenses

  (17,438)  (64,701)  -   (122)  (82,261)

Equity income of subsidiaries

  52,165   -   -   (52,165)  - 

Interest and other income

  2,409   155   -   (173)  2,391 

Other expense

  7   (1,198)  -   -   (1,191)

Homebuilding pretax income (loss)

  37,143   56,372   -   (52,460)  41,055 

Financial Services:

                    

Financial services pretax income

  -   -   14,256   295   14,551 

Income before income taxes

  37,143   56,372   14,256   (52,165)  55,606 

(Provision) benefit for income taxes

  3,407   (15,264)  (3,199)  -   (15,056)

Net income

 $40,550  $41,108  $11,057  $(52,165) $40,550 

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

  -   -   -   -   - 

Comprehensive income

 $40,550  $41,108  $11,057  $(52,165) $40,550 

 

Supplemental Condensed Combining Statement of Cash Flows

 

 

Three Months Ended March 31, 2019

  

Three Months Ended March 31, 2020

 
         

Non-

              

Non-

     
     

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

    

Guarantor

 

Guarantor

 

Eliminating

 

Consolidated

 
 

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

 $(18,145) $31,508  $40,985  $-  $54,348  $(13,287) $(89,277) $65,391  $-  $(37,173)

Net cash provided by (used in) investing activities

  29,796   (6,094)  (93)  (30,043)  (6,434)  (60,693)  (6,384)  (506)  60,565   (7,018)

Financing activities:

                               

Payments from (advances to) subsidiaries

  -   (23,614)  (6,429)  30,043   -  -  98,166  (37,601) (60,565) - 

Mortgage repurchase facility

  -   -   (31,959)  -   (31,959) -  -  (40,872) -  (40,872)

Proceeds from issuance of senior notes

 298,050  -  -  -  298,050 

Repayment of senior notes

 (250,000) -  -  -  (250,000)

Dividend payments

  (17,115)  -   -   -   (17,115) (20,768) -  -  -  (20,768)

Proceeds from exercise of stock options

  7,087   -   -   -   7,087 

Issuance of shares under stock-based compensation programs, net

  8,194   -   -   -   8,194 

Net cash provided by (used in) financing activities

  (10,028)  (23,614)  (38,388)  30,043   (41,987)  35,476   98,166   (78,473)  (60,565)  (5,396)
                     

Net increase (decrease) in cash and cash equivalents

  1,623   1,800   2,504   -   5,927  (38,504)�� 2,505  (13,588) -  (49,587)

Cash and cash equivalents:

                               

Beginning of period

  410,127   10,960   49,052   -   470,139   418,822   19,643   35,747   -   474,212 

End of period

 $411,750  $12,760  $51,556  $-  $476,066  $380,318  $22,148  $22,159  $-  $424,625 

  

Three Months Ended March 31, 2019

 
          

Non-

         
      

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

 
  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 
  

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

 $(18,145) $31,508  $40,985  $-  $54,348 

Net cash provided by (used in) investing activities

  29,796   (6,094)  (93)  (30,043)  (6,434)

Financing activities:

                    

Payments from (advances to) subsidiaries

  -   (23,614)  (6,429)  30,043   - 

Mortgage repurchase facility

  -   -   (31,959)  -   (31,959)

Dividend payments

  (17,115)  -   -   -   (17,115)

Issuance of shares under stock-based compensation programs, net

  7,087   -   -   -   7,087 

Net cash provided by (used in) financing activities

  (10,028)  (23,614)  (38,388)  30,043   (41,987)
                     

Net increase (decrease) in cash and cash equivalents

  1,623   1,800   2,504   -   5,927 

Cash and cash equivalents:

                    

Beginning of period

  410,127   10,960   49,052   -   470,139 

End of period

 $411,750  $12,760  $51,556  $-  $476,066 

 

  

Three Months Ended March 31, 2018

 
          

Non-

         
      

Guarantor

  

Guarantor

  

Eliminating

  

Consolidated

 
  

MDC

  

Subsidiaries

  

Subsidiaries

  

Entries

  

MDC

 
  

(Dollars in thousands)

 

Net cash provided by (used in) operating activities

 $(8,950) $(79,547) $27,011  $-  $(61,486)

Net cash provided by (used in) investing activities

  (94,576)  (6,250)  (60)  94,509   (6,377)

Financing activities:

                    

Payments from (advances to) subsidiaries

  -   83,203   11,306   (94,509)  - 

Mortgage repurchase facility

  -   -   (22,214)  -   (22,214)

Dividend payments

  (16,865)  -   -   -   (16,865)

Proceeds from the exercise of stock options

  282   -   -   -   282 

Net cash provided by (used in) financing activities

  (16,583)  83,203   (10,908)  (94,509)  (38,797)
                     

Net increase (decrease) in cash and cash equivalents

  (120,109)  (2,594)  16,043   -   (106,660)

Cash and cash equivalents:

                    

Beginning of period

  468,718   13,051   32,471   -   514,240 

End of period

 $348,609  $10,457  $48,514  $-  $407,580 

- 2627 -

 

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

 

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management’s experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 20182019 and this Quarterly Report on Form 10-Q.

Specifically, as a result of the Coronavirus/COVID-19 pandemic, we experienced increasingly adverse business conditions, especially iTn the latter half of March 2020, whe Company distributedhich negatively impacted our operating results. an 8% stock dividend onThese adverse business conditions have continued into the 2020 second quarter. February28, 2019 to shareholders of record on February14, 2019. In accordance with Accounting Standards Codification 260, “Earnings per Share,” basic and diluted earnings per share amounts, weighted-average shares outstanding, and dividends declared per share have been restated for all periods presented to reflect the effect of this stock dividend.It is unclear how long these adverse conditions will persist or how they will impact our results in future periods.

 

 

Three Months Ended

 
 

March 31,

  

Three Months Ended

 
 

2019

  

2018

  

March 31,

 

 

(Dollars in thousands, except per share amounts)

  

2020

  

2019

 
Homebuilding:    

(Dollars in thousands, except per share amounts)

 

Home sale revenues

 $647,278  $607,688  $697,085  $647,278 

Home cost of sales

  (524,552)  (496,632) (558,647) (524,552)

Inventory impairments

  (610)  (550)  -   (610)

Total cost of sales

  (525,162)  (497,182)  (558,647)  (525,162)

Gross profit

  122,116   110,506   138,438   122,116 

Gross margin

  18.9%  18.2%  19.9%  18.9%

Selling, general and administrative expenses

  (82,261)  (71,341) (89,321) (82,261)

Interest and other income

  2,391   1,859  1,889  2,391 

Other expense

  (1,191)  (563)  (1,337)  (1,191)

Homebuilding pretax income

  41,055   40,461   49,669   41,055 
         

Financial Services:

                

Revenues

  17,404   19,035  21,886  17,404 

Expenses

  (8,957)  (8,831) (10,929) (8,957)

Interest and other income

  1,264   1,020 

Net gain (loss) on marketable equity securities

  4,840   (1,153)

Financial services pretax income

  14,551   10,071 

Other income (expense), net

  (12,064)  6,104 

Financial services pretax income (loss)

  (1,107)  14,551 
         

Income before income taxes

  55,606   50,532  48,562  55,606 

Provision for income taxes

  (15,056)  (11,768)  (11,802)  (15,056)

Net income

 $40,550  $38,764  $36,760  $40,550 
         

Earnings per share:

             

Basic

 $0.66  $0.64  $0.58  $0.66 

Diluted

 $0.64  $0.63  $0.56  $0.64 
         

Weighted average common shares outstanding:

             

Basic

  60,939,364   60,340,774  62,491,238  60,939,364 

Diluted

  62,708,334   61,447,563  64,931,225  62,708,334 
         

Dividends declared per share

 $0.30  $0.28  $0.33  $0.30 
         

Cash provided by (used in):

             

Operating Activities

 $54,348  $(61,486) $(37,173) $54,348 

Investing Activities

 $(6,434) $(6,377) $(7,018) $(6,434)

Financing Activities

 $(41,987) $(38,797) $(5,396) $(41,987)

 

 

Overview

 

Industry Conditions

During the first quarter of 2020, the new Coronavirus/COVID-19 pandemic emerged as a threat to global health and economic conditions. Starting in March 2020, the pandemic dramatically changed the everyday lives of individuals throughout much of the United States. For example, stay at home and shelter in place orders were issued by many state and local governments, including the required closure of non-essential businesses in many areas, which have had a significant impact on not only our industry, but the overall economy. Some state and local governments did not identify residential construction as an essential business, which has impacted our ability to physically construct homes, while others limited the operations of sales centers and model homes. While certain of these restrictions have started to lapse during the second quarter, the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, which are highly uncertain and cannot be predicted at this time.

Our first priority with regard to the pandemic is to address the health and safety of our employees, customers, subcontractors and suppliers, as well as the communities in which we operate. We have implemented work-from-home arrangements for employees where practical, increased sanitization procedures in offices and subdivisions, imposed significant business travel restrictions and otherwise promoted social distancing measures. We have implemented virtual processes for key operational activities that have traditionally been done in-person, such as model home tours, Home Gallery appointments, and pre-closing walk-throughs. While we have continued to see some demand for new housing, overall we have experienced a significant decline in traffic and net home orders during the second half of March and continuing into the second quarter. The decline in activity to start the second quarter was evident in our net new orders for the month of April, which fell 53% year-over-year.

Three Months EndedMonths Ended March 31, 2019 31, 2020

 

For the three months ended March 31, 2019,2020, our homebuilding operations generated pretax income of $49.7 million, which was a 21% increase compared to $41.1 million for the same period in the prior year. The increase was the result of an improvement in gross margin from home sales as well as an increase in home sale revenues year-over-year. Gross margin from home sales for the first quarter of 2020 rose 100 basis points to 19.9% compared to 18.9% in the prior year. Home sale revenues increased 8% from $647.3 million in the prior year period to $697.1 million in the first quarter of 2020.

Our financial services business incurred a pretax loss of $1.1 million for the three months ended March 31, 2020 compared to pretax income of $14.6 million for the same period in the prior year. This decrease was the result of unrealized losses on equity securities during the first quarter of 2020 totaling $13.9 million as compared to unrealized gains of $4.6 million during the first quarter of 2019. These equity securities form part of the investment portfolio held by our Insurance Entities and the holding period of these investments is intended to align with the longer-term nature of the underlying insurance reserves held by these entities.

For the three months ended March 31, 2020, we reported net income was $40.6of $36.8 million, or $0.64$0.56 per diluted share, a 5% increase9% decrease compared to net income of $38.8$40.6 million, or $0.63$0.64 per diluted share, for the same period in the prior year. The increaseThis decrease was primarily the result of a $4.5 million increase in our pretax income from financial services resulting from $4.8 million of net gainsthe losses incurred on equity securities for the three months ended March 31, 2019 as compared to $1.2 million of net losses on equity securities for the same period in the prior year. Our pretax income from homebuilding increased by only $0.6 million year-over-year, as an $11.6 million increase in homebuilding gross profit was mostly offset by higher selling, general and administrative costs. The increases in financial services and homebuilding pretax incomeinvestment portfolio discussed above, which were partially offset by a higher effectivethe growth in homebuilding pretax income as well as tax rate that was mostly duebenefits recognized during the first quarter of 2020 related to federalvested share-based awards and energy tax credits, which reduced our 2018 first quarter income tax expense by $1.2 million. It is currently uncertain as to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was recorded for the 2019 first quarter.

Home sale revenues were up from $607.7 million in the 2018 first quarter to $647.3 million in the 2019 first quarter. The $39.6 million year-over-year improvement was the result of a 7% increase in the number of homes delivered during the quarter.

The dollar value of our net new home orders decreased 1% from the prior year period driven by a 4% decrease in the average selling price, consistent with our ongoing focus on offering more affordable home plans. The decrease in the average selling price was also caused by a shift in the mix of home orders to our more affordable markets. However, the average selling price decrease was almost entirely offset by a 3% increase in the number of net new orders, resulting from a 15% increase in average active subdivisions that more than offset an 11% decrease in our monthly sales absorption pace.credits.

 

Industry Conditions and Outlook for MDC*

 

We have experienced steadily improving net new order activityremain confident in our ability to startmanage through the year as monthly absorption rates remain healthy, albeit down from recent peak levels experienced in 2018. Overall, we believe industry conditions remain strong as we continueduncertainty created by the pandemic, even though the extent to see a positive economic environment driven by factors such as low unemployment, increasing wages, controlled inventory levels and low interest rates throughout the first quarter of 2019.

We have positioned ourselves for continued growthwhich it will impact our financial results in the face of a slower monthly absorption pace environment, through achieving a 15% year-over-year increasecoming periods depends on future developments, which are highly uncertain and cannot be predicted at this time (see discussion above and in our active community countRisk Factors below). Our financial position to end the 2020 first quarter of 2019. In addition, our backlog conversion rates have improved year-over-year, benefiting from lower cycle times for our more affordable home plans. The demand for affordable product lines remained strong, duringwith cash and investment balances exceeding $450 million and available borrowing capacity on our Revolving Credit Facility exceeding $950 million, resulting in total liquidity of more than $1.4 billion. We ended the first quarter of 2019, accounting for 60% of our net new orders compared to 44% in the prior year period.

Our dollar valuewith $2.2 billion dollars of homes in backlog, towhich was 31% higher than at the end of the 2019 first quarter was down 12% year-over-yearquarter. However, our ability to $1.65 billion. This decrease is primarilyconvert that backlog into closings has been negatively impacted by a higher rate of cancellations and some limitations that have temporarily been placed on construction and closing activity. We have taken steps to improve cash flow and reduce costs to diminish the resultfuture impacts of the pandemic on our business. We have been successful in extending the closing date of some of our continued focusplanned land purchases and have re-evaluated planned development activities to decrease cash expenditures. Our experienced senior leadership team continues to monitor the impact of the pandemic on more affordable home plans, a shift in the mix of home salesdaily basis adjusting day-to-day business operations and our ongoing operating strategy as necessary to adapt to our more affordable markets and a lower pace of sales over the past six months.current environment.

 

Our liquidity to end the 2019 first quarter was up 27% year-over-year to $1.49 billion, providing us with significant resources to fund continued growth. This increase was in large part due to the $300 million increase in our homebuilding line of credit to $1.0 billion during the fourth quarter of 2018.

 

* See "Forward-Looking Statements" below.

 

Homebuilding

 

Pretax Income:

 

 

Three Months Ended

          

Three Months Ended

     
 

March 31,

  

Change

  

March 31,

  

Change

 
 

2019

  

2018

  

Amount

  

%

  

2020

  

2019

  

Amount

  

%

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

 $33,200  $24,373  $8,827   36% $36,576  $33,200  $3,376  10%

Mountain

  21,714   24,185   (2,471)  (10%) 21,512  21,714  (202) (1)%

East

  1,473   3,375   (1,902)  (56%) 900  1,473  (573) (39)%

Corporate

  (15,332)  (11,472)  (3,860)  (34%)  (9,319)  (15,332)  6,013  39%

Total Homebuilding pretax income

 $41,055  $40,461  $594   1% $49,669  $41,055  $8,614  21%

 

For the three months ended March 31, 2019,

As noted above, we recordedgenerated homebuilding pretax income for the quarter of $41.1$49.7 million, an increase of $0.6$8.6 million from $40.5$41.1 million for the same period in the prior year. The increase was due to a 7% increase in home sale revenues and a 70100 basis point improvement in our gross margin from home sales. However, these improvements were mostly offset by a 100 basis pointsales and an 8% increase in our selling, general and administrative expenses as a percentage of home sale revenues.

 

Our West segment experienced an $8.8a $3.4 million year-over-year improvementincrease in pretax income, primarily due to an improved gross margin from home sales and a 16%10% increase in home sale revenues.sales revenue, which was slightly offset by a $3.4 million increase in general and administrative expenses resulting from a change in our Corporate cost allocation discussed below. Our Mountain segment experienced a $2.5$0.2 million decrease in pretax income from the prior year, period, primarily due to increased selling,as a result of a $1.6 million increase in general and administrative expenses drivendue to a change in our Corporate cost allocation, which was mostly offset by an increased average active community count.a 7% increase in home sales revenue. Our East segment experienced a $1.9$0.6 million decrease in pretax income from the prior year, due primarily to a 14% decrease$0.7 million increase in home sale revenues.general and administrative expenses resulting from a change in our Corporate cost allocation. Our Corporate Segmentsegment experienced a $3.9$6.0 million year-over-year decreaseincrease in pretax income, due mostly to additional stock based compensationthe impact of the change in our Corporate cost allocation.

On a periodic basis, we assess our Corporate cost allocation estimates. Our most recent assessment resulted in increases in Corporate cost allocations to both our homebuilding and financial services segments beginning January 1, 2020, to reflect the use of centralized administrative functions. Applying the most recent cost allocation estimate to the three months ended March 31, 2019 would have resulted in decreased pretax income for our homebuilding and financial services segments of approximately $2.7 million and $0.4 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense ofassociated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three months ended March 31, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.0 million primarily driven by performance-based stock awards.with a corresponding increase in our Corporate segment pretax income.

 

Assets:

 

 

March 31,

  

December 31,

  

Change

  

March 31,

 

December 31,

 

Change

 
 

2019

  

2018

  

Amount

  

%

  

2020

  

2019

  

Amount

  

%

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

 $1,307,761  $1,301,374  $6,387   0% $1,559,410  $1,461,645  $97,765  7%

Mountain

  818,451   793,150   25,301   3% 907,727  869,665  38,062  4%

East

  170,670   169,485   1,185   1% 216,063  194,592  21,471  11%

Corporate

  514,104   484,193   29,911   6%  466,192   505,507   (39,315) (8)%

Total homebuilding assets

 $2,810,986  $2,748,202  $62,784   2% $3,149,392  $3,031,409  $117,983  4%

 

Total homebuilding assets increased 2%4% from December 31, 20182019 to March 31, 2019. The largest increase outside2020. Homebuilding assets increased in each of our Corporate segment was in our Mountain segment and was the result of increases in our inventory balances. These increases were driven by land development spend andoperating segments largely due to a greater number of homes completed or under construction as of period-end. The increaseMarch 31, 2020. However, the funds for the construction activity came from our Corporate segment, causing a decline in our Corporate segment was the result of the adoption of ASC 842 on January 1, 2019, which requires a lessee to recognize a right-of-use asset and a corresponding lease liability for substantially all leases.segment’s assets.

 

New Home Deliveries & Home Sale Revenues:

 

Changes in home sale revenues are impacted by changes in the number of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below. Our backlog conversion rate has been negatively impacted by the pandemic due to a higher rate of cancellations and some limitations that have temporarily been placed on construction activity.

 

 

Three Months Ended March 31,

  

Three Months Ended March 31,

 
 

2019

  

2018

  

% Change

  

2020

  

2019

  

% Change

 
 

Homes

  

Home Sale

Revenues

  

Average

Price

  

Homes

  

Home Sale

Revenues

  

Average

Price

  

Homes

  

Home Sale

Revenues

  

Average

Price

  

Homes

  

Home Sale Revenues

  

Average

Price

  

Homes

  

Home Sale Revenues

  

Average

Price

  

Homes

  

Home Sale Revenues

  

Average

Price

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

  752  $369,558  $491.4   681  $319,509  $469.2   10%  16%  5% 871  $405,498  $465.6  752  $369,558  $491.4  16% 10% (5)%

Mountain

  409   209,192   511.5   416   208,632   501.5   (2%)  0%  2% 435  222,858  512.3  409  209,192  511.5  6% 7% 0%

East

  197   68,528   347.9   177   79,547   449.4   11%  (14%)  (23%)  241   68,729   285.2   197   68,528   347.9  22% 0% (18)%

Total

  1,358  $647,278  $476.6   1,274  $607,688  $477.0   7%  7%  (0%)  1,547  $697,085  $450.6   1,358  $647,278  $476.6  14% 8% (5)%

 

West Segment Commentary

Our West segment experienced a 10% year-over-yearFor the three months ended March 31, 2020, the increase in the number of new homes delivered as ahome deliveries was the result of a 5%33% increase in the number of homes in backlog to startbegin the quarter. Our California markets also benefited from an improved backlog conversion rate as there were a significant number of sales accepted at the end of 2017 that could not be delivered in the first quarter of 2018, which negatively impacted our prior year backlog conversion rate. The 5%period. This increase in average selling price of homes delivered is the result of price increases we implemented across most markets during the 2018 spring selling season, which werewas partially offset by a shift in mix in our California markets to lower priced communities.

Mountain Segment Commentary

While the number of homesdecrease in backlog to start the quarter was down 17% year-over-year, new homes delivered decreased by only 2% due to an improved backlog conversion rate thatrates in most of our markets within this segment. This decrease was driven by (1) shorter average cycle times and (2) a higherlower percentage of homes both sold and delivered in the first quarter of 20192020 as compared to the 20182019 first quarter. Cycle time improvements were primarily driven by our Colorado marketsThe average selling price of homes-delivered decreased as a result of a vendor relateddecline in the percentage of deliveries coming from our higher priced communities in Southern California. In addition, a greater percentage of closings within nearly all of our Western markets during the current period were from our more affordable product defect issueofferings.

Mountain Segment Commentary

For the three months ended March 31, 2020, the increase in new home deliveries was the result of a 16% increase in the number homes in backlog to begin the period. This increase was partially offset by a decrease in backlog conversion rates in our Colorado markets due to a lower percentage of homes in backlog to start the 2020 first quarter that negatively impacted cycle times for thosewere under construction at that time.

East Segment Commentary

For the three months ended March 31, 2020, the increase in new home deliveries was the result of a 53% increase in the number of homes in backlog to begin the period. This increase was partially offset by a decrease in backlog conversion rates in most of our markets within this segment due to (1) a lower percentage of homes in backlog to start the 2020 first quarter that were under construction at that time and (2) a lower percentage of homes both sold and delivered in the first halfquarter of 2018.2020 as compared to the 2019 first quarter. The average selling price of homes delivered increased 2% as a result of price increases implemented in the first half of 2018 in our Colorado markets.

East Segment Commentary

The 23% decrease in the average selling price of homes delivered in our East segment iswas due to a change in mix resulting from (1) a higher percentage of deliveries in this segment coming from communities that offer more affordable home plans and (2) a higher percentage of our deliveries coming from our Florida markets, which have a lower average selling price than our mid-Atlantic market and (2) a higher percentage of deliveries in this segment coming from communities that offer more affordable home plans. The 11% increase in new home deliveries was driven by an increased backlog conversion rate across all markets as a result of (1) a decrease in cancellation rates and (2) a higher percentage of deliveries from our more affordable product offerings, which typically have shorter cycle times than our more traditional products.market.

.

 

Gross Margin from Home Sales:

 

Our gross margin from home sales for the three months ended March 31, 20192020, increased 70100 basis points year-over-year from 18.2%18.9% to 18.9%19.9%. During the three months ended March 31, 2019 and 2018, we recorded inventory impairments of $0.6 million and warranty adjustments of $0.9 million, and $3.1 million of expense to adjust our warranty accrual. The adjustments to our warranty accrualwhich negatively impacted gross margin by 10 basis points and 50 basis points, respectively. Our gross margin from home sales in the 2019 first quarter was positively impacted by a 20 basis point improvement in our capitalized interest in cost of sales as a percentage of home sale revenues, while the 2018 first quarter benefited by 20 basis points due to recoveries from a vendorin the prior year. Gross margins increased in the first quarter of 2020 on both build-to-order and speculative home deliveries driven by price increases implemented across the majority of our communities over the past nine-months. Gross margins were also positively impacted as a result of product defect related issues.a lower percentage of speculative home deliveries in the quarter, which typically have a lower gross margin than our build-to-order deliveries.

Inventory Impairments:

 

Impairments of homebuilding inventory by segment for the three months ended March 31, 20192020 and 20182019 are shown in the table below:

 

 

Three Months Ended March 31,

  

Three Months Ended March 31,

 
 

2019

  

2018

  

2020

  

2019

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

 $-  $375  $-  $- 

Mountain

  400   175  -  400 

East

  210   -   -   210 

Total inventory impairments

 $610  $550  $-  $610 

 

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

 

 

Impairment Data

  

Quantitative Data

  

Impairment Data

  

Quantitative Data

 

Three Months Ended

 

Total
Subdivisions
Tested

  

Inventory
Impairments

  

Fair Value of
Inventory After

Impairments

  

Number of
Subdivisions
Impaired

  

Discount Rate

  

Inventory
Impairments

  

Fair Value of
Inventory After

Impairments

  

Number of
Subdivisions
Impaired

  

Discount Rate

 
 

(Dollars in thousands)

      

March 31, 2019

  16  $610  $10,476   2   N/A  $610  $10,476  2  N/A 

March 31, 2018

  24  $550  $5,223   2   12%

 

 

Selling,Selling, General and Administrative Expenses:

 

 

Three Months Ended March 31,

  

Three Months Ended March 31,

 
 

2019

  

2018

  

Change

  

2020

  

2019

  

Change

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

General and administrative expenses

 $42,572  $35,753  $6,819  $45,089  $42,572  $2,517 

General and administrative expenses as a percentage of home sale revenues

  6.6%  5.9% 

70 bps

  6.5%  6.6%  

(10) bps

 
             

Marketing expenses

 $18,296  $15,571  $2,725  $21,446  $18,296  $3,150 

Marketing expenses as a percentage of home sale revenues

  2.8%  2.6% 

20 bps

  3.1%  2.8%  

30 bps

 
             

Commissions expenses

 $21,393  $20,017  $1,376  $22,786  $21,393  $1,393 

Commissions expenses as a percentage of home sale revenues

  3.3%  3.3% 

0 bps

   3.3%   3.3%  

0 bps

 
             

Total selling, general and administrative expenses

 $82,261  $71,341  $10,920  $89,321  $82,261  $7,060 

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

  12.7%  11.7% 

100 bps

   12.8%   12.7%  

10 bps

 

 

For the three months ended March 31, 2019,2020, the increasesincrease in our generalmarketing expenses was driven by (1) increased sales office expense and product advertising resulting from an increased number of average active subdivisions and (2) increased compensation expense due to a higher average headcount during the quarter.

General and administrative expenses wereincreased for the three months ended March 31, 2020 due to increased compensation-related expenses driven by higher average headcount and additional stock based compensation expense of $3.0 million, primarily caused byduring the performance-based stock awards that were granted in 2017.quarter.

 

Our marketing expenses increased for the three months ended March 31, 2019 due to increased sales office and model home expenses resulting from a 15% increase in active subdivisions as well as increased compensation-related expenses driven by higher average headcount.

 

Other Homebuilding Operating Data

 

Net New Orders and Active Subdivisions:

 

  

Three Months Ended March 31,

 
  

2019

  

2018

  

% Change

 
  

Homes

  

Dollar
Value

  

Average

Price

  

Monthly Absorption

Rate *

  

Homes

  

Dollar

Value

  

Average

Price

  

Monthly Absorption

Rate *

  

Homes

  

Dollar

Value

  

Average

Price

  

Monthly Absorption

Rate

 
  

(Dollars in thousands)

 

West

  965  $433,307  $449.0   3.82   1,033  $458,195  $443.6   4.78   (7%)  (5%)  1%  (20%)

Mountain

  719   336,932   468.6   3.52   667   327,006   490.3   3.92   8%  3%  (4%)  (10%)

East

  272   81,179   298.5   4.17   204   78,459   384.6   2.99   33%  3%  (22%)  39%

Total

  1,956  $851,418  $435.3   3.75   1,904  $863,660  $453.6   4.19   3%  (1%)  (4%)  (11%)

Changes in the dollar value of net new orders are impacted by changes in the number of net new orders and the average selling price of those homes. Commentary for each of our segments on significant changes in these two metrics is provided below. Our monthly absorption rate has been negatively impacted by the pandemic due to a higher rate of cancellations and a decrease in customer traffic resulting from stay at home and shelter in place orders. The negative impact is shown in net new home orders for the month of March, which decreased 27% year-over-year to 611. Furthermore, to start the 2020 second quarter, April net new orders decreased 53% year-over-year to 357.

 

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

             

Average Active Subdivisions

  

Three Months Ended March 31,

 
 

Active Subdivisions

  

Three Months Ended

  

2020

 

2019

 

% Change

 
 

March 31,

  

%

  

March 31,

  

%

  

Homes

 

Dollar
Value

 

Average

Price

 

Monthly Absorption

Rate *

 

Homes

 

Dollar

Value

 

Average

Price

 

Monthly Absorption

Rate *

 

Homes

  

Dollar

Value

  

Average

Price

  

Monthly Absorption

Rate

 
 

2019

  

2018

  

Change

  

2019

  

2018

  

Change

  

(Dollars in thousands)

 

West

  88   73   21%  84   72   17% 1,382 $655,892 $474.6 5.13 965 $433,307 $449.0 3.82 43% 51% 6% 34%

Mountain

  64   58   10%  69   57   21% 693 339,132 489.4 3.54 719  336,932  468.6 3.52 (4)% 1% 4% 1%

East

  26   24   8%  22   23   (4%) 324  97,723  301.6 3.66 272  81,179  298.5 4.17 19% 20% 1% (12)%

Total

  178   155   15%  175   152   15% 2,399 $1,092,747 $455.5 4.33 1,956 $851,418 $435.3 3.75 23% 28% 5% 16%

 

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

           

Average Active Subdivisions

 
  

Active Subdivisions

  

Three Months Ended

 
  

March 31,

  

%

  

March 31,

  

%

 
  

2020

  

2019

  

Change

  

2020

  

2019

  

Change

 

West

 92  88  5% 90  84  7%

Mountain

 64  64  0% 65  69  (6)%

East

 29  26  12% 30  22  36%

Total

 185  178  4% 185  175  6%

West Segment Commentary

For the three months ended March 31, 2019,2020, the dollar value ofincrease in net new orders decreased 5% year-over-year,was driven by increases in both the monthly sales absorption rate and average active subdivisions. Nearly all markets experienced an improvement in their sales pace year-over-year, with our Nevada, Phoenix and California markets all experiencing a 7%sales pace in excess of five net new orders per community per month. The increase in average selling price was due to price increases implemented over the past nine-months within the majority of our communities as well as a shift in mix of homes sold from Nevada to more expensive Southern California markets.

Mountain Segment Commentary

For the three months ended March 31, 2020, the decrease in the number of net new orders. The lower number of net new orders was the result of (1) a 20%slight decrease in the number of average active subdivisions in Colorado and (2) an increased cancellation rate (see further discussion below). The increase in average selling price was the result of price increases implemented across the majority of our communities over the past nine-months.

East Segment Commentary

For the three months ended March 31, 2020, the increase in net new orders was driven by an increase in the number of average active subdivisions in each of our Florida and mid-Atlantic markets. This increase was partially offset by a decrease in the monthly sales absorption rate. While all markets experienced a decline in their sales pace year-over-year, California was the main driver of the decline as a result of:rate due to (1) a smaller relative proportion of affordable product offerings currently availabledecrease in thisclose out communities in our mid-Atlantic market and (2) an increased cancellation rate (see further discussion below). The decline in our sales pace was mostly offset by a 17% increase in average active community count as all markets experienced a double digit percentage increase in average active community count with the exception of Arizona, which was flat year-over-year. Oregon, our newest market, finished the quarter with two active communities compared with none a year ago.

Mountain Segment Commentary

For the three months ended March 31, 2019, the dollar value of net new orders increased 3% from the same period in the prior year primarily due to an 8% increase in our number of net new orders. Our higher number of net new orders was the result of a 21% increase in average active community count as a result of growth in Utah where we continue to see strong potential and have increased our community count accordingly. This increase was partially offset by a 10% decrease in monthly sales absorption pace. Colorado and Utah both experienced a decline in sales pace consistent with industry trends, with Utah further impacted by an increased cancellation rate (see further discussion below).

 

East Segment Commentary

For the three months ended March 31, 2019, our dollar values of net new orders increased 3% from the same period in 2018 as a 39% improvement in our monthly sales absorption rate was largely offset by a 22% decline in our average selling price of net new orders. The improved sales pace was primarily due to an increased offering of more affordable products in our Florida markets, which have realized a higher selling pace. The sales pace in our Florida markets also benefited from a decreased cancellation rate (see further discussion below). Our average active community count was down slightly due to decreased land acquisition activity in the mid-Atlantic region over the past two years where we have invested less because our returns in this market had been lower than expected. However, as noted above, we have recently experienced improving returns in the mid-Atlantic region resulting in our reinvestment in this market. The decrease in the average selling price of net new orders is due to mix as a result of: (1) a higher percentage of our net new orders coming from an expanded offering of more affordable home plans, due to an increasing level of demand for these plans, and (2) a higher percentage of our net new orders coming from our Florida markets, which have a lower average selling price than our mid-Atlantic operations.

Cancellation Rate:

 

 

Cancellations as a Percentage of

Homes in Beginning Backlog

  

Cancellations as a Percentage of Homes in

Beginning Backlog

 
 

Three Months

Ended March 31,

  

Change in

  

Three Months

Ended March 31,

  

Change in

 
 

2019

  

2018

  

Percentage

  

2020

  

2019

  

Percentage

 

West

  14%  14%  0% 15% 14% 1%

Mountain

  14%  11%  3% 22% 14% 8%

East

  11%  23%  (12%) 23% 11% 12%

Total

  14%  14%  0% 18% 14% 4%

 

Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) remained unchanged year-over-year. Our East segment experienced the largest percentage decrease as we saw double digit percentage improvements across allincreased year-over-year in each of our segments, most notably in our Colorado and Florida markets. In addition, thegeneral, we experienced a higher cancellation rate during the month of March due to the pandemic as a result of general economic uncertainty and changes in our homebuyers’ employment status. Additionally, our Florida (East segment) markets benefited from the implementation of additional underwriting procedures prior to the acceptance of new home contracts. Our Utah (Mountain segment) and Southern California (West segment) markets experienced the largest percentage increases year-over-year. The increase in Utahmarket was primarily due toimpacted by a shift in mix to include more first-time homebuyers who have a higher likelihood of cancellation, while the increase in Southern California is largely due to homebuyer uncertaintycancellation. Cancellations as a resultpercentage of affordability concerns.homes in beginning backlog for the month of April were 6.6% compared to 4.3% in the prior year.

Backlog:

 

 

March 31,

  March 31,    
 

2019

  

2018

  

% Change

  

2020

  

2019

  

% Change

 
 

Homes

  

Dollar
Value

  

Average

Price

  

Homes

  

Dollar
Value

  

Average

Price

  

Homes

  

Dollar
Value

  

Average

Price

  

Homes

  

Dollar
Value

  

Average

Price

  

Homes

  

Dollar
Value

  

Average

Price

  

Homes

  

Dollar
Value

  

Average

Price

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

West

  1,736  $830,703  $478.5   1,803  $923,326  $512.1   (4%)  (10%)  (7%) 2,534  $1,227,996  $484.6  1,736  $830,703  $478.5  46% 48% 1%

Mountain

  1,353   690,623   510.4   1,504   766,010   509.3   (10%)  (10%)  0% 1,469  754,155  513.4  1,353  690,623  510.4  9% 9% 1%

East

  445   133,140   299.2   482   190,102   394.4   (8%)  (30%)  (24%)  650   191,972   295.3   445   133,140   299.2  46% 44% (1)%

Total

  3,534  $1,654,466  $468.2   3,789  $1,879,438  $496.0   (7%)  (12%)  (6%)  4,653  $2,174,123  $467.3   3,534  $1,654,466  $468.2  32% 31% (0)%

 

At March 31, 2019,2020, we had 3,5344,653 homes in backlog with a total value of $1.65 billion, representing respective decreases of 7% and 12% from March 31, 2018. The majority of our markets experienced$2.2 billion. This represented a year-over-year decline32% increase in both the number of homes in backlog and a 31% increase in the average selling pricedollar value of those homes to end the quarter.in backlog from March 31, 2019. The decreaseincrease in the number of homes in backlog is primarily a result of the year-over-year decreaseincrease in net new orders induring the fourth quarterlast six-months, offset slightly by improved cycle times across each of 2018 coupled with anour Segments. However, our ability to convert backlog into closings has been negatively impacted by the pandemic due to a higher rate of cancellations and some limitations that have temporarily been placed on construction activity, and therefore the year-over-year increase in backlog conversion rates due to improved cycle times. The decreaseat March 31, 2020 might not result in the average selling price ofa year-over-year increase in closings during future periods. At April 30, 2020, we had 4,487 homes in backlog, is due to a shift in mix to lower priced communities, consistent with our focus on offering more affordable home plans, as well as a shift in geographical mix withrepresenting an increased proportion18% increase from April 30, 2019

 

Homes Completed or Under Construction (WIP lots):

 

 

March 31,

  

%

  

March 31,

  

%

 
 

2019

  

2018

  

Change

  

2020

  

2019

  

Change

 

Unsold:

                   

Completed

  120   86   40% 160  120  33%

Under construction

  177   203   (13%)  216   177  22%

Total unsold started homes

  297   289   3%  376   297  27%

Sold homes under construction or completed

  2,362   2,549   (7%) 3,259  2,362  38%

Model homes under construction or completed

  459   366   25%  502   459  9%

Total homes completed or under construction

  3,118   3,204   (3%)  4,137   3,118  33%

 

Our modelThe increase in sold homes under construction or completed were up 25% despite our active community count being up only 15% year-over-year. This is primarilydue to the increased demand we have experienced in recent periods as a result of models being constructedour increased offering of more affordable home plans. The increase in unsold started homes is due to open new communitiesthe increased cancellation rate experienced during the first quarter of 2020, particularly during the month of March as a result of the pandemic. We believe that the higher rate of cancellations is likely to continue during the second quarter, which could result in a continued increase in the near future as we plan for growth in our active community count.number of unsold started homes.

 

 

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

 

 

March 31, 2019

  

March 31, 2018

      

March 31, 2020

  

March 31, 2019

    
 

Lots

Owned

  

Lots

Optioned

  

Total

  

Lots

Owned

  

Lots

Optioned

  

Total

  

Total %

Change

  

Lots

Owned

  

Lots

Optioned

  

Total

  

Lots

Owned

  

Lots

Optioned

  

Total

  

Total %

Change

 

West

  7,894   2,462   10,356   7,421   2,205   9,626   8% 9,641  2,393  12,034  7,894  2,462  10,356  16%

Mountain

  6,636   2,612   9,248   5,206   3,398   8,604   7% 6,540  4,007  10,547  6,636  2,612  9,248  14%

East

  1,989   1,294   3,283   1,531   1,692   3,223   2%  2,410   2,133   4,543   1,989   1,294   3,283  38%

Total

  16,519   6,368   22,887   14,158   7,295   21,453   7%  18,591   8,533   27,124   16,519   6,368   22,887  19%

 

Our total owned and optioned lots at March 31, 20192020 were 22,887,27,124, up 7%19% from March 31, 2018,2019, but down slightly from 27,386 at December 31, 2019, due to our increaseda slowdown in land acquisition approval activity overduring the past year across all markets.quarter as a result of the pandemic. We believe that our total lot supply, coupled with our planned acquisition activity, can support growth in future periods. However, due to the pandemic, there is also an increased likelihood that planned acquisition activity may be delayed or abandoned. See "Forward-Looking Statements" below.

 

Financial ServicesServices

 

 

Three Months Ended

         
 

March 31,

  

Change

  

Three Months Ended

     
 

2019

  

2018

  

Amount

  

%

  

March 31,

  

Change

 

 

(Dollars in thousands)

  

2020

  

2019

  

Amount

  

%

 
Financial services revenues    

(Dollars in thousands)

 

Mortgage operations

 $10,174  $12,696  $(2,522)  (20%) $14,625  $10,174  $4,451  44%

Other

  7,230   6,339   891   14%  7,261   7,230   31  0%

Total financial services revenues

 $17,404  $19,035  $(1,631)  (9%) $21,886  $17,404  $4,482  26%
                         

Financial services pretax income

                         

Mortgage operations

 $4,993  $7,520  $(2,527)  (34%) $8,243  $4,993  $3,250  65%

Other

  9,558   2,551   7,007   275%  (9,350)  9,558   (18,908) (198)%

Total financial services pretax income

 $14,551  $10,071  $4,480   44%

Total financial services pretax income (loss)

 $(1,107) $14,551  $(15,658) (108)%

 

For the three months ended March 31, 2019,2020, our financial services business incurred a pretax loss of $1.1 million compared to pretax income increased $4.5of $14.6 million or 44%, fromfor the same period in the prior year. The increaseThis decrease was primarily due to our other financial services segment, and was driven by $4.8 million of net gainswhich had unrealized losses on equity securities forduring the first quarter of 2020 totaling $13.9 million as compared to unrealized gains of $4.6 million during the first quarter of 2019.

Based on the size and duration of the liabilities held by our Insurance Entities, as well as regulatory capital requirements, we have historically invested the premiums collected by our Insurance Entities in a portfolio of assets to appropriately match these liabilities in duration and also maintain required levels of capital. Based on our investment policy, this portfolio has historically comprised money market funds, U.S. Government securities and equity securities. Given the expected duration of the underlying insurance liabilities and our current liquidity, we do not anticipate a need to liquidate any investments held by our Insurance Entities in the next twelve months.

For the three months ended March 31, 2019 as compared to $1.2 million of net losses on equity securities for the three months ended March 31, 2018. This was partially offset by a decrease in2020, our mortgage operations segment, which sawpretax income increased $3.2 million due to higher interest rate lock volume driven by the year-over-year increase in homes in beginning backlog and to a decreaselesser extent lower interest rates during the quarter.

Our mortgage operations have not yet experienced a significant slowdown in loan originations due to the pandemic, but a reduction in our home sales activity would directly impact our mortgage lending activities. As a result of the government intervention in the capture ratefinancial markets, including the Federal Reserve’s purchase of new home deliveries and an increase in special financing offers year-over-year, both of which negatively impacted pretax income formortgage backed securities, we expect to be able to continue making loans that can be readily sold into the three months ended March 31, 2019.                    secondary mortgage market.

 

 

The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate.

 

 

Three Months Ended

  

% or

 
 

March 31,

  

Percentage

  

Three Months Ended

 

% or

 
 

2019

  

2018

  

Change

  

March 31,

  

Percentage

 
 (Dollars in thousands)  

2020

  

2019

  

Change

 

Total Originations (including transfer loans):

 

 

  

(Dollars in thousands)

 

Loans

  783   807   (3%) 1,029  783  31%

Principal

 $285,525  $298,070   (4%) $379,306  $285,525  33%

Capture Rate Data:

                   

Capture rate as % of all homes delivered

  58%  63%  (5%) 66%  58%  8%

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

  62%  68%  (6%) 69%  62%  7%

Mortgage Loan Origination Product Mix:

                   

FHA loans

  17%  14%  3% 22%  17%  5%

Other government loans (VA & USDA)

  20%  19%  1%  22%   20%  2%

Total government loans

  37%  33%  4% 44%  37%  7%

Conventional loans

  63%  67%  (4%)  56%   63%  (7)%
  100%  100%  0%  100%   100%  0%

Loan Type:

                   

Fixed rate

  96%  97%  (1%) 99%  96%  3%

ARM

  4%  3%  1% 1%  4%  (3)%

Credit Quality:

                   

Average FICO Score

  736   744   (1%) 735  736  (0)%

Other Data:

 

`

  

`

      

`

 

`

   

Average Combined LTV ratio

  81%  81%  0% 85%  81%  4%

Full documentation loans

  100%  100%  0% 100%  100%  0%

Loans Sold to Third Parties:

                   

Loans

  889   873   2% 1,199  889  35%

Principal

 $320,414  $320,753   (0%) $438,101  $320,414  37%

 

Income Taxes

 

Our overall effective income tax rates were 27.1%24.3% and 23.3%27.1% for the three months ended March 31, 20192020 and 2018,2019, respectively, resulting in income tax expense of $15.1$11.8 million and $11.8$15.1 million for the same periods, respectively. The year-over-year increasedecrease in our effective tax rate for the three months ended March 31, 20192020 was due toprimarily impacted by a $1.2 million benefit fromwindfall on non-qualifying stock options exercised and lapsed restricted stock awards during the three months ended March 31, 2020 as well as energy tax credits which reduced our 2018 first quarter tax rate. Itrelated to homes closed during the quarter. These benefits were partially offset by a decrease in the amount of executive compensation that is currently uncertain as to the extent, if any, that energy tax credits will impact our 2019 results, and therefore no benefit was recorded for the 2019 first quarter.deductible under Internal Revenue Code Section 162(m).

 

 

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 

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

 

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We use our liquidity and capital resources to: (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, Revolving Credit Facility and Mortgage Repurchase Facility (both defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.35$2.0 billion. Following the issuance of $300 million of 3.850% senior notes on January 9, 2020, $1.70 billion remains on our effective shelf registration statement.

 

We have marketable equity securities that consist primarily of holdings in common stock and exchange traded funds.

 

Capital Resources

 

Our capital structure is primarily a combination ofof: (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½%5.500% senior notes due 2024, 3.850% senior notes due 2030 and our 6%6.000% senior notes due 2043; (3) our Revolving Credit Facility (defined below); and (4) our Mortgage Repurchase Facility (defined below). Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" below.

 

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

 

 

Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility

 

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

 

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 18, 2023, (2) increase the aggregate commitment from $700 million to $1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

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

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of March 31, 2019.2020.

 

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 20192020 and December 31, 2018,2019, there were $27.6$25.7 million and $27.8$23.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We had $15.0 million outstanding under the Revolving Credit Facility as of March 31, 20192020 and December 31, 2018.2019. As of March 31, 2019,2020, availability under the Revolving Credit Facility was approximately $957.4$959.3 million.

 

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 9, 2018,May 23, 2019, the Mortgage Repurchase Facility was amended to extend its termination date to August 8, 2019.May 21, 2020. We are currently in negotiations to extend the Mortgage Repurchase Facility. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on March 27, 201930, 2020 from $75 million to $100$110 million and was effective through April 24, 2019.27, 2020. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130$150 million on December 27, 2018 and was24, 2019 effective through January 25, 2019.22, 2020. At March 31, 20192020 and December 31, 2018,2019, HomeAmerican had $84.9$108.7 million and $116.8$149.6 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is based on a LIBOR rate or successor benchmark rate.

 

 

The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2019.2020.

 

Dividends

 

During the three months ended March 31, 20192020 and 2018,2019, we paid dividends of $0.30$0.33 per share and $0.28$0.30 per share, respectively.

 

MDC Common Stock Repurchase Program

 

At March 31, 2019,2020, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months ended March 31, 2019.2020.

 

Consolidated Cash Flow

 

During the three months ended March 31, 2019,2020, we generated $54.3used $37.2 million of cash fromfor operating activities primarily due to: 1) net incomecompared with cash provided by operating activities of $40.6$54.3 million 2) a netin the prior year period. Cash used to increase housing completed or under construction was $178.9 million for the three months ended March 31, 2020, as homes in inventory increased by 508 homes from December 31, 2019. Cash provided by the decrease in mortgage loans held-for-sale of $38.4housing completed or under construction was $2.1 million 3) non-cash add-backs to net income related to depreciation and stock-based compensation totaling $9.1 million and 4) ain the prior year period as homes in inventory increased only marginally. Cash provided by the decrease in our net deferred tax assets of $2.7 million. These amounts were partially offset by: 1) a net increase in land and land under development was $29.1 million for the three months ended March 31, 2020, as home starts outnumbered lot acquisitions during the quarter due to the slowdown in land acquisition during the quarter as a result of the pandemic. Cash used to increase land and land under development was $18.5 million 2) a net increase in tradethe prior year period primarily due to increased land development spend. Cash provided from the sale of mortgage loans for the three months ended March 31, 2020 and other receivables of $13.82019, was $63.1 million and 3) net gains on marketable equity securities$38.4 million resulting from increased loan activity during the month of $4.8 million.December.

 

During the three months ended March 31, 2019, we2020, net cash used $6.4 million of cash forin investing activities duewas $7.0 million. This primarily relates to thecash used to purchase of $6.4 million in property and equipment.equipment, which remained consistent year-over-year.

 

During the three months ended March 31, 2019, we2020, net cash used in financing activities was $5.4 compared with cash use of $42.0 million in the prior year period. The primary driver of this decrease in cash forused in financing activities primarily relatedis due to net proceeds from the issuance of senior notes of $48.1 million during the three months ended March 31, 2020. This was slightly offset by an increase in payments on ourthe mortgage repurchase facility driven by the increased proceeds from the sale of $32.0 million andmortgage loans noted above. Cash used to fund dividend payments totaling $17.1 million. These amounts wereincreased slightly offset by proceedsyear-over-year as a result of $7.1 million from the exercise of stock options.10% increase in the cash dividend announced in January 2020.

 

Off-Balance Sheet Arrangements

 

Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At March 31, 2019,2020, we had deposits of $22.0$27.1 million in the form of cash and $5.4$9.3 million in the form of letters of credit that secured option contracts to purchase 6,3688,533 lots for a total estimated purchase price of $463.1$498.5 million.

 

Surety Bonds and Letters of Credit. At March 31, 2019,2020, we had outstanding surety bonds and letters of credit totaling $245.5$284.0 million and $89.3$96.6 million, respectively, including $61.7$70.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $126.6$152.4 million and $51.2 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

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

 

 

IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS

 

The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 20182019 Annual Report on Form 10-K.

 

OTHER

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20182019 and Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Item 3.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

 

We have a cash and investment policy that enables us to achieve an appropriate investment return while preserving principal and managing risk. Under this policy, our cash and cash equivalents may include U.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, and time deposits, with maturities of three months or less. Our marketable securities under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate debt securities.

 

The market value and/or income derived from our equity securities may go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of equity securities may also decline for a number of other reasons that directly relate to the issuer, such as management performance, financial leverage, the issuer’s historical and prospective earnings, the value of its assets and reduced demand for its goods and services. Equity securities generally have greater price volatility than bonds and other debt securities.

 

As of March 31, 2019,2020, our cash and cash equivalents included U.S. government securities, commercial bank deposits, money market funds and time deposits, with maturities of three months or less. As of March 31, 2019,2020, our marketable securities included holdings in common stock and exchange traded funds.

 

We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate lock commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at March 31, 20192020 had an aggregate principal balance of $149.4$221.0 million, all of which were under interest rate lock commitments at an average interest rate of 4.30%3.35%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $107.0$129.5 million at March 31, 2019,2020, of which $14.1$43.7 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.47%3.27%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale which had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $121.0$162.0 million and $65.5$108.5 million at March 31, 20192020 and December 31, 2018,2019, respectively.

 

 

HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 10 and 35 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations and comprehensive income with an offset to either derivative assets or liabilities, depending on the nature of the change.

 

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

 

Item 4.

Item 4.Controls and Procedures

Controls and Procedures

 

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

 

(b)    Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

 

PART II

 

Item 1.Legal Proceedings

Legal Proceedings

 

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

 

Item 1A.Risk Factors

Risk Factors

 

There have been no significant changesIn addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors previously identified as being attendant to our businessthat appeared under Item 1A. Risk Factors in ourthe Company’s 2019 Annual Report on Form 10-K. There are no material changes from the risk factors included within the Company’s 2019 Annual Report on Form 10-K, forother than the year ended December 31, 2018. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2018, which include the following:described below.

 

The recent global Coronavirus/COVID-19 pandemic could harm business and results of operations of the Company.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, availability of financing for homebuyers, interest rates, consumer confidence, wage growth, household formations, levels of new and existing homes for sale, cost of land, labor and construction materials, demographic trends and housing demand. These factors, in particular consumer confidence, can be significantly and adversely affected by a variety of factors beyond our control. In response to the pandemic, many state and local governments have instituted restrictions that have substantially limited the operations of non-essential businesses and the activities of individuals. There is significant uncertainty around the extent and duration of these restrictions as well as their ultimate impact on the U.S. economy and consumer confidence. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments, which are highly uncertain and cannot be predicted at this time, including new information that may emerge concerning the severity of the pandemic and the actions taken to contain or treat the virus. As a result of the pandemic, our sales centers and model homes have experienced a significant decline in traffic and cancellations of sales contracts have increased. If the pandemic continues to cause significant negative impacts to the U.S. economy and consumer confidence, our results of operations, financial condition and cash flows will be significantly and adversely impacted.

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

 

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

 

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

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

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

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

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

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

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

Changes in energy prices or regulations may have an adverse effect on our cost of building homes.

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

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

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

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

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

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

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

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

The interests of certain controlling shareholders may be adverse to other investors.

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company did notfollowing table provides information about our repurchase any sharesof common stock during the three months ended March 31, 2019. Additionally, there were no sales of unregistered equity securities during the period.2020:

Period:

 

Total Number

of Shares

Purchased (1)

  

Average

Price Paid

Per Share

  

Total Number of Shares

Purchased as Part of

Publicly Announced Plan

or Program (2)

  

Maximum Number of

Shares that may yet be

Purchased under the Plan

or Program (2)

 

January 1 to January 31, 2020

  -   N/A   -   4,000,000 

February 1 to February 29, 2020

  14,376  $42.14   -   4,000,000 

March 1 to March 31, 2020

  -   N/A   -   4,000,000 

(1)

Represents shares of common stock withheld by us to cover withholding taxes due, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.

(2)

We are authorized to repurchase up to 4,000,000 shares of our common stock. There were no shares of MDC common stock repurchased under this repurchase program during the three month period ended March 31, 2020.

 

 

Item 6.

Exhibits

 

 4.11

10.1

Restricted Stock Agreement Amendment (Executive Officers) under the 2011 Equity Incentive Plan,Supplemental Indenture (3.850% Senior Notes due 2030), dated as of February 6, 2019.January 9, 2020, among the Company, the guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K filed January 9, 2020). *

 

 31.1

10.2

Stock Option Agreement Amendment (Executive Officers) underCertification of Chief Executive Officer required by 17 CFR 240.13a-14(a), pursuant to Section 302 of the 2011 Equity Incentive Plan, dated asSarbanes-Oxley Act of February 6, 2019.2002.

 

 31.2

10.3

FormCertification of ExecutiveChief Financial Officer Restricted Stock Agreement underrequired by 17 CFR 240.13a-14(a), pursuant to Section 302 of the 2011 Equity Incentive Plan, adopted asSarbanes-Oxley Act of March 18, 2019.2002.

 

10.4

 32.1

Form of Executive Officer Stock Option Agreement under the 2011 Equity Incentive Plan, adopted as of March 18, 2019.

31.1

Certification of Chief Executive Officer required by 17 CFR 240.13a-14(a)240.13a-14(b), pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002.

 

 32.2

31.2

Certification of Chief Financial Officer required by 17 CFR 240.13a-14(a)240.13a-14(b), pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002.

 

32.1

 101

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:Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets as of March 31, 20192020 and December 31, 2018,2019, (ii) Consolidated Statements of Operations for the three months ended March 31, 20192020 and 2018,2019, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 20192020 and 2018,2019, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 20192020 and 2018;2019; and (v) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.

 104

Cover Page Interactive Data File (formatted as Inline XBRL and (v) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.contained in Exhibit 101).

____________________

* Incorporated by reference.

 

SIGNATURE

 

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

 

Date:     April 30, 2019     May 5, 2020

M.D.C. HOLDINGS, INC.

(Registrant)

(Registrant)

By:

/s/ Robert N. Martin

Robert N. Martin

Senior Vice President, Chief Financial Officer and Principal Accounting

Officer (principal financial officer and duly authorized officer)

 

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