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EX-31.1 - EXHIBIT 31.1 - MDC HOLDINGS INCex31-1.htm
EX-32.1 - EXHIBIT 32.1 - MDC HOLDINGS INCex32-1.htm
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EX-32.2 - EXHIBIT 32.2 - MDC HOLDINGS INCex32-2.htm


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

84-0622967

(State or other jurisdiction

(I.R.S. employer

of incorporation or organization)

identification no.)

 

4350 South Monaco Street, Suite 500

80237

Denver, Colorado

(Zip code)

(Address of principal executive offices)

 

 

(303) 773-1100

(Registrant's telephone number, including area code)

 

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

 

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

 

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

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

  (Do not check if a smaller reporting company)

Smaller Reporting Company

 

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

 

As of October 23, 2015, 48,886,424 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 
 

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

INDEX

 

 

 

 

Page
No.

Part I. Financial Information:

 

 
         

 

Item 1.

Unaudited Consolidated Financial Statements:

 

 
         

 

 

Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

1

 
         

 

 

Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014

2

 
         

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

3

 
         

 

 

Notes to Unaudited Consolidated Financial Statements

4

 
         

 

Item 2.

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

26

 
         

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 
         

 

Item 4.

Controls and Procedures

44

 
         
Part II. Other Information:    
         

 

Item 1.

Legal Proceedings

45

 
         

 

Item 1A.

Risk Factors

45

 
         

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 
         
 

Item 3.

Defaults Upon Senior Securities

46

 
         
 

Item 4.

Mine Safety Disclosures

46

 
         

 

Item 5.

Other Information

46

 
         

 

Item 6.

Exhibits

47

 
       

 

Signature

47

 

 

 
(i)

 

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

(Unaudited)

         
ASSETS                
Homebuilding:                

Cash and cash equivalents

  $ 85,074     $ 122,642  

Marketable securities

    89,479       140,878  

Restricted cash

    4,800       2,816  

Trade and other receivables

    28,588       28,555  

Inventories:

               

Housing completed or under construction

    821,667       732,692  

Land and land under development

    957,695       935,268  

Total inventories

    1,779,362       1,667,960  

Property and equipment, net

    28,499       30,491  

Deferred tax asset, net

    115,145       140,486  

Metropolitan district bond securities (related party)

    24,074       18,203  

Prepaid and other assets

    72,448       67,996  

Total homebuilding assets

    2,227,469       2,220,027  

Financial Services:

               

Cash and cash equivalents

    37,921       31,183  

Marketable securities

    10,939       15,262  

Mortgage loans held-for-sale, net

    68,633       88,392  

Other assets

    5,906       3,574  

Total financial services assets

    123,399       138,411  

Total Assets

  $ 2,350,868     $ 2,358,438  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 41,514     $ 35,445  

Accrued liabilities

    106,918       115,117  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    846,907       846,450  

Total homebuilding liabilities

    1,010,339       1,012,012  

Financial Services:

               

Accounts payable and accrued liabilities

    54,164       57,268  

Mortgage repurchase facility

    43,755       60,822  

Total financial services liabilities

    97,919       118,090  

Total Liabilities

    1,108,258       1,130,102  

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; 48,886,424 and 48,831,639 issued and outstanding at September 30, 2015 and December 31, 2014, respectively

    489       488  

Additional paid-in-capital

    916,975       909,974  

Retained earnings

    313,969       307,419  

Accumulated other comprehensive income

    11,177       10,455  

Total Stockholders' Equity

    1,242,610       1,228,336  

Total Liabilities and Stockholders' Equity

  $ 2,350,868     $ 2,358,438  

 

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

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands, except per share amounts)

 
   

(Unaudited)

 

Homebuilding:

                               

Home sale revenues

  $ 454,740     $ 405,051     $ 1,293,457     $ 1,154,328  

Land sale revenues

    906       2,653       1,816       3,171  

Total home and land sale revenues

    455,646       407,704       1,295,273       1,157,499  

Home cost of sales

    (375,948 )     (338,037 )     (1,079,609 )     (953,690 )

Land cost of sales

    (819 )     (1,985 )     (1,944 )     (2,507 )

Inventory impairments

    (4,351 )     -       (4,701 )     (850 )

Total cost of sales

    (381,118 )     (340,022 )     (1,086,254 )     (957,047 )

Gross margin

    74,528       67,682       209,019       200,452  

Selling, general and administrative expenses

    (57,444 )     (50,512 )     (162,757 )     (148,652 )

Interest and other income

    838       5,926       5,412       24,088  

Interest expense

    -       -       -       (685 )

Other expense

    (350 )     (841 )     (2,539 )     (2,534 )

Loss on early extinguishment of debt

    -       -       -       (9,412 )

Other-than-temporary impairment of marketable securities

    (2,176 )     (4,293 )     (2,176 )     (4,293 )

Homebuilding pretax income

    15,396       17,962       46,959       58,964  
                                 

Financial Services:

                               

Revenues

    12,841       10,699       34,852       31,413  

Expenses

    (5,464 )     (5,643 )     (15,830 )     (16,182 )

Interest and other income

    885       906       2,885       2,395  

Financial services pretax income

    8,262       5,962       21,907       17,626  
                                 

Income before income taxes

    23,658       23,924       68,866       76,590  

Provision for income taxes

    (8,880 )     (8,466 )     (25,670 )     (28,086 )

Net income

  $ 14,778     $ 15,458     $ 43,196     $ 48,504  
                                 

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

    (226 )     (2,484 )     722       (4,203 )

Comprehensive income

  $ 14,552     $ 12,974     $ 43,918     $ 44,301  
                                 

Earnings per share:

                               

Basic

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

Diluted

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  
                                 

Weighted average common shares outstanding

                               

Basic

    48,785,973       48,625,685       48,756,265       48,607,425  

Diluted

    49,070,291       48,830,790       48,982,975       48,824,871  
                                 

Dividends declared per share

  $ 0.25     $ 0.25     $ 0.75     $ 0.75  

  

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

 

 
- 2 -

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Nine Months Ended

 
   

September 30,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 
   

(Unaudited)

 

Operating Activities:

               

Net income

  $ 43,196     $ 48,504  

Adjustments to reconcile net income to net cash used in operating activities:

               

Loss on early extinguishment of debt

    -       9,412  

Stock-based compensation expense

    6,589       4,754  

Depreciation and amortization

    3,084       2,928  

Inventory impairments

    4,701       850  

Other-than-temporary impairment of marketable securities

    2,176       4,293  

Loss (gain) on sale of marketable securities

    126       (7,622 )

Amortization of discount / premiums on marketable debt securities, net

    100       501  

Deferred income tax expense

    24,782       28,363  

Net changes in assets and liabilities:

               

Restricted cash

    (1,984 )     (839 )

Trade and other receivables

    (575 )     (5,821 )

Mortgage loans held-for-sale

    19,759       34,446  

Housing completed or under construction

    (89,841 )     (200,408 )

Land and land under development

    (25,805 )     (79,465 )

Prepaid expenses and other assets

    (8,072 )     (14,084 )

Accounts payable and accrued liabilities

    (4,722 )     932  

Net cash used in operating activities

    (26,486 )     (173,256 )
                 

Investing Activities:

               

Purchases of marketable securities

    (46,886 )     (409,846 )

Maturities of marketable securities

    1,510       165,089  

Sales of marketable securities

    94,910       372,301  

Purchases of property and equipment

    (830 )     (1,919 )

Net cash provided by investing activities

    48,704       125,625  
                 

Financing Activities:

               

Payments on mortgage repurchase facility, net

    (17,067 )     (31,292 )

Proceeds from issuance of senior notes

    -       248,375  

Repayment of senior notes

    -       (259,118 )

Advances on revolving credit facility

    -       10,000  

Dividend payments

    (36,646 )     (36,616 )

Proceeds from exercise of stock options

    665       63  

Net cash used in financing activities

    (53,048 )     (68,588 )
                 

Net decrease in cash and cash equivalents

    (30,830 )     (116,219 )

Cash and cash equivalents:

               

Beginning of period

    153,825       199,338  

End of period

  $ 122,995     $ 83,119  

  

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

 

 
- 3 -

 

  

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at September 30, 2015 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

2.

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We do not plan to early adopt the guidance and are currently evaluating the method of adoption and impact the pronouncement will have on our consolidated financial statements and related disclosures.

 

In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures ("ASU 2014-11"), which makes limited amendments to Accounting Standards Codification (“ASC”) Topic 860, "Transfers and Servicing." ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets. The only changes in ASU 2014-11 that are applicable to our consolidated financial statements are the disclosures for repurchase agreements effective for our fiscal periods beginning January 1, 2015 and interim periods beginning April 1, 2015. This guidance did not have a material impact on our consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends the consolidation requirements in ASC 810, primarily related to limited partnerships and variable interest entities. ASU 2015-02 is effective for our interim and annual reporting periods beginning January 1, 2016. Early adoption is permitted. This guidance is not expected to have a material impact on our consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs related to a recognized debt liability in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for our interim and annual reporting periods beginning January 1, 2016. Additionally, since ASU 2015-03 did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30) (“ASU 2015-15”) in August 2015. Under ASU 2015-15, an entity may present debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The guidance under these ASUs is not expected to have a material impact on our consolidated financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements (“ASU 2015-10”), which amends previously issued guidance on several topics. ASU 2015-10 is effective for our interim and annual reporting periods beginning January 1, 2016. The amendments in ASU 2015-10 are not expected to have a material impact on our consolidated financial statements.

 

 
- 4 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

3.

Segment Reporting

 

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

 

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

 

 

West (Arizona, California, Nevada and Washington)

 

Mountain (Colorado and Utah)

 

East (Virginia, Florida and Maryland, which includes Pennsylvania and New Jersey)

 

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

 

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance and treasury, information technology, insurance and risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services 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 homebuilding operations.

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

 

 

(Dollars in thousands)

 
Homebuilding                                

West

  $ 229,743     $ 184,627     $ 624,261     $ 510,710  

Mountain

    147,166       144,442       428,080       392,052  

East

    78,737       78,635       242,932       254,737  

Total home and land sale revenues

  $ 455,646     $ 407,704     $ 1,295,273     $ 1,157,499  
                                 

Financial Services

                               

Mortgage operations

  $ 7,999     $ 6,416     $ 21,752     $ 18,887  

Other

    4,842       4,283       13,100       12,526  

Total financial services revenues

  $ 12,841     $ 10,699     $ 34,852     $ 31,413  

 

 
- 5 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 
Homebuilding                                

West

  $ 16,708     $ 12,402     $ 40,808     $ 41,747  

Mountain

    12,849       11,031       35,239       30,572  

East

    (691 )     1,138       (1,093 )     9,095  

Corporate

    (13,470 )     (6,609 )     (27,995 )     (22,450 )

Total homebuilding pretax income

  $ 15,396     $ 17,962     $ 46,959     $ 58,964  
                                 

Financial Services

                               

Mortgage operations

  $ 5,354     $ 3,327     $ 12,243     $ 10,387  

Other

    2,908       2,635       9,664       7,239  

Total financial services pretax income

  $ 8,262     $ 5,962     $ 21,907     $ 17,626  
                                 

Total pretax income

  $ 23,658     $ 23,924     $ 68,866     $ 76,590  

 

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 cash and cash equivalents, marketable securities and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 
Homebuilding assets      

West

  $ 977,257     $ 893,970  

Mountain

    548,454       516,971  

East

    349,354       343,718  

Corporate

    352,404       465,368  

Total homebuilding assets

  $ 2,227,469     $ 2,220,027  
                 

Financial services assets

               

Mortgage operations

  $ 78,651     $ 94,265  

Other

    44,748       44,146  

Total financial services assets

  $ 123,399     $ 138,411  
                 

Total assets

  $ 2,350,868     $ 2,358,438  

 

4.

Earnings Per Share     

 

A company that has participating securities (for example, holders of unvested restricted stock that has nonforfeitable dividend rights) is required to utilize the two-class method to calculate earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings 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). Currently, we have one class of security and we have participating security holders consisting of shareholders of unvested restricted stock. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding. The following table shows basic and diluted EPS calculations:

 

 
- 6 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands, except per share amounts)

 

Numerator

                               

Net income

  $ 14,778     $ 15,458     $ 43,196     $ 48,504  

Less: distributed earnings allocated to participating securities

    (25 )     (48 )     (73 )     (150 )

Less: undistributed earnings allocated to participating securities

    (6 )     (13 )     (15 )     (51 )

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

    14,747       15,397       43,108       48,303  

Add back: undistributed earnings allocated to participating securities

    6       13       15       51  

Less: undistributed earnings reallocated to participating securities

    (6 )     (13 )     (15 )     (51 )

Numerator for diluted earnings per share under two class method

  $ 14,747     $ 15,397     $ 43,108     $ 48,303  
                                 

Denominator

                               

Weighted-average common shares outstanding

    48,785,973       48,625,685       48,756,265       48,607,425  

Add: dilutive effect of stock options

    284,318       205,105       226,710       217,446  

Denominator for diluted earnings per share under two class method

    49,070,291       48,830,790       48,982,975       48,824,871  
                                 

Basic Earnings Per Common Share

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

Diluted Earnings Per Common Share

  $ 0.30     $ 0.32     $ 0.88     $ 0.99  

 

Diluted EPS for the three and nine months ended September 30, 2015 excluded options to purchase approximately 3.4 million and 3.9 million shares, respectively, of common stock because the effect of their inclusion would be anti-dilutive. For the same periods in 2014, diluted EPS excluded options to purchase approximately 4.3 million and 4.5 million shares, respectively.

 

5.

Accumulated Other Comprehensive Income

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Unrealized gains (losses) on available-for-sale marketable securities 1 :

                               

Beginning balance

  $ 1,589     $ 5,346     $ 2,775     $ 7,655  

Other comprehensive income (loss) before reclassifications

    (2,853 )     (4,836 )     (3,753 )     (3,236 )

Amounts reclassified from AOCI 2

    1,714       1,862       1,428       (2,047 )

Ending balance

  $ 450     $ 2,372     $ 450     $ 2,372  
                                 

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

                               

Beginning balance

  $ 9,814     $ 4,510     $ 7,680     $ 3,920  

Other comprehensive income before reclassifications

    913       490       3,047       1,080  

Amounts reclassified from AOCI

    -       -       -       -  

Ending balance

  $ 10,727     $ 5,000     $ 10,727     $ 5,000  
                                 

Total ending AOCI

  $ 11,177     $ 7,372     $ 11,177     $ 7,372  

       
 

(1)

All amounts net-of-tax.

 

(2)

See separate table below for details about these reclassifications which include gains or losses on sales of available-for-sale securities sold as well as any other-than-temporary impairments taken on available-for-sale securities during the period.

 

 
- 7 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

Affected Line Item in the Statements of Operations

 

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Homebuilding interest and other income

  $ (620 )   $ 1,167     $ (495 )   $ 7,528  

Other-than-temporary impairment of marketable securities

    (2,176 )     (4,293 )     (2,176 )     (4,293 )

Financial services interest and other income

    31       99       368       94  

Income before income taxes

    (2,765 )     (3,027 )     (2,303 )     3,329  

Provision for income taxes

    1,051       1,165       875       (1,282 )

Net income

  $ (1,714 )   $ (1,862 )   $ (1,428 )   $ 2,047  

 

6.

Fair Value Measurements

 

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

 

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

 

       

Fair Value

 

Financial Instrument

 

Hierarchy

 

September 30, 2015

   

December 31, 2014

 
       

(Dollars in thousands)

 

Marketable securities (available-for-sale)

                   

Equity securities

 

Level 1

  $ 100,418     $ 129,560  

Debt securities - maturity less than 1 year

 

Level 2

    -       1,511  

Debt securities - maturity 1 to 5 years

 

Level 2

    -       7,643  

Debt securities - maturity greater than 5 years

 

Level 2

    -       17,426  

Total available-for-sale marketable securities

  $ 100,418     $ 156,140  
                     

Mortgage loans held-for-sale, net

 

Level 2

  $ 68,633     $ 88,392  
                     

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

 

Level 3

  $ 24,074     $ 18,203  

 

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

 

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, and accrued liabilities. Fair value approximates carrying value.

 

Marketable Securities.  We have marketable debt and equity securities.  Our equity securities consist of holdings in corporate equities and holdings in mutual fund securities, which are primarily invested in debt securities. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. We measure the fair value of our debt securities using a third party pricing service that either provides quoted prices in less active markets for identical or similar securities or uses observable inputs for their pricing, both of which are level 2 inputs. As of September 30, 2015 and December 31, 2014, all of our marketable securities were treated as available-for-sale investments and, as such, we have recorded all of our marketable securities at fair value with changes in fair value being recorded as a component of AOCI.

 

 
- 8 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

Each quarter we assess all of our securities in an unrealized loss position for potential other-than-temporary impairment (“OTTI”). Our assessment includes a consideration of many factors, both qualitative and quantitative, including the amount of the unrealized loss, the period of time the security has been in a loss position, the financial condition of the issuer and whether we have the intent and ability to hold the securities, among other factors. During the three and nine months ended September 30, 2015 and 2014, we recorded pretax OTTIs of $2.2 million and $4.3 million, respectively, for certain of our mutual funds that were in a loss position as of the end of each respective period. The OTTIs are included in other-than-temporary impairment of marketable securities in the homebuilding section of our consolidated statements of operations.

 

The following table sets forth the amortized cost and estimated fair value of our available-for-sale marketable securities:

 

 

   

September 30, 2015

 
       
   

Amortized

Cost

   

OTTI

   

Net Amortized Cost

   

Fair Value

 

 

 

(Dollars in thousands)

 
Homebuilding:                                

Equity securities

  $ 89,841     $ (2,176 )   $ 87,665     $ 89,479  

Debt securities

    -       -       -       -  

Total homebuilding available-for-sale marketable securities

  $ 89,841     $ (2,176 )   $ 87,665     $ 89,479  
                                 

Financial Services:

                               

Equity securities

  $ 12,026       -     $ 12,026     $ 10,939  

Debt securities

    -       -       -       -  

Total financial services available-for-sale marketable securities

  $ 12,026     $ -     $ 12,026     $ 10,939  
                                 

Total available-for-sale marketable securities

  $ 101,867     $ (2,176 )   $ 99,691     $ 100,418  

 

   

December 31, 2014

 
       
   

Amortized

Cost

   

OTTI

   

Net Amortized Cost

   

Fair Value

 
    (Dollars in thousands)  

Homebuilding:

                               

Equity securities

  $ 116,009     $ -     $ 116,009     $ 120,274  

Debt securities

    20,660       -       20,660       20,604  

Total homebuilding available-for-sale marketable securities

  $ 136,669     $ -     $ 136,669     $ 140,878  
                                 

Financial Services:

                               

Equity securities

  $ 9,028     $ -     $ 9,028     $ 9,286  

Debt securities

    5,930       -       5,930       5,976  

Total financial services available-for-sale marketable securities

  $ 14,958     $ -     $ 14,958     $ 15,262  
                                 

Total available-for-sale marketable securities

  $ 151,627     $ -     $ 151,627     $ 156,140  

 

 

As of September 30, 2015 and December 31, 2014, our marketable securities were in a net unrealized loss position totaling $1.4 million, before recognition of the OTTIs, and a net unrealized gain position totaling $4.5 million, respectively. Our marketable securities that were in unrealized loss positions, excluding those that were impaired as part of the OTTIs, aggregated to unrealized losses of $3.0 million and $3.1 million as of September 30, 2015 and December 31, 2014, respectively. The table below sets forth the aggregated unrealized losses for individual debt and equity securities that were in unrealized loss positions but did not have OTTIs recognized. We do not believe the decline in the value of these marketable securities as of September 30, 2015 is other-than-temporary.

 

 
- 9 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

   

September 30, 2015

   

December 31, 2014

 
   

Number of Securities in a Loss Position

   

Aggregate Loss Position

   

Aggregate Fair Value of Securities in a Loss Position

   

Number of Securities in a Loss Position

   

Aggregate Loss Position

   

Aggregate Fair Value of Securities in a Loss Position

 
   

(Dollars in thousands)

 
Type of Investment                                                

Debt

    -     $ -     $ -       52     $ (359 )   $ 14,536  

Equity

    13       (2,989 )     24,755       6       (2,738 )     74,999  

Total

    13     $ (2,989 )   $ 24,755       58     $ (3,097 )   $ 89,535  

  

The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities, which were included in either interest and other income in the homebuilding section or interest and other income in the financial services section of our consolidated statements of operations:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

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

                               

Equity securities

  $ 980     $ 979     $ 1,855     $ 6,496  

Debt securities

    42       466       413       2,386  

Total

  $ 1,022     $ 1,445     $ 2,268     $ 8,882  
                                 

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

                               

Equity securities

  $ (1,604 )   $ (92 )   $ (2,161 )   $ (801 )

Debt securities

    (6 )     (87 )     (233 )     (459 )

Total

  $ (1,610 )   $ (179 )   $ (2,394 )   $ (1,260 )
                                 

Net realized gain (loss) on sales of available-for-sale securities

  $ (588 )   $ 1,266     $ (126 )   $ 7,622  

 

Mortgage Loans Held-for-Sale, Net.  As of September 30, 2015, the primary components of our mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At September 30, 2015 and December 31, 2014, we had $47.3 million and $74.2 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon Level 2 inputs, which were the quoted market prices for those mortgage loans. At September 30, 2015 and December 31, 2014, we had $21.3 million and $14.2 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.

 

Metropolitan District Bond Securities (Related Party).  The Metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our accompanying consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District, which are generally received in the fourth quarter, and are supported by an annual levy on the taxable assessed value of real estate and personal property within the Metro District’s boundaries. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments in perpetuity until the unpaid principal and accrued interest is paid in full. Since 2007 and through the first quarter of 2013, we accounted for these securities under the cost recovery method and they were not carried at fair value in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).

 

 
- 10 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

In the second quarter of 2013, we determined that these securities no longer were required to be accounted for under the cost recovery method due to an increase in the number of new homes delivered in the community coupled with improvements in property values within the Metro District. In accordance with ASC 310-30, we adjust the bond principal balance using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we update its fair value on a quarterly basis, with the adjustment being recorded through AOCI. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as they drive increases to the tax paying base for the Metro District, (2) the forecasted assessed value of those closed homes and (3) the discount rate. Cash receipts, which are typically only received in the fourth quarter, reduce the carrying value of the Metro Bonds. The table below provides quantitative data, as of September 30, 2015, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

 

  

   

Quantitative Data

 

Sensitivity Analysis

Unobservable Input

 

Range

   

Weighted Average

 

Movement in

Fair Value from

Increase in Input

 

Movement in

Fair Value from

Decrease in Input

Number of homes closed per year

    0 to 122       94  

Increase

 

Decrease

Average sales price

    $350K to $1.2 million       $400K  

Increase

 

Decrease

Discount rate

    5% to 12%       8.1 %

Decrease

 

Increase

 

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

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 22,259     $ 14,291     $ 18,203     $ 12,729  

Increase in fair value (recorded in other comprehensive income)

    1,472       798       4,815       1,757  

Change due to accretion of principal

    343       290       1,056       893  

Cash receipts

    -       -       -       -  

Balance at end of period

  $ 24,074     $ 15,379     $ 24,074     $ 15,379  

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates or at fixed 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, including market prices of other homebuilder bonds.

  

   

September 30, 2015

   

December 31, 2014

 
   

Carrying

Amount

   

Fair Value

   

Carrying

Amount

   

Fair Value

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 246,907     $ 260,225     $ 246,450     $ 257,950  

5½% Senior Notes due January 2024

    250,000       284,258       250,000       242,608  

6% Senior Notes due January 2043

    350,000       254,033       350,000       296,555  

Total

  $ 846,907     $ 798,516     $ 846,450     $ 797,113  

 

 
- 11 -

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

7.

Inventories

 

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

  

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Housing Completed or Under Construction:

               

West

  $ 417,403     $ 343,134  

Mountain

    272,727       220,489  

East

    131,537       169,069  

Subtotal

    821,667       732,692  

Land and Land Under Development:

               

West

    511,000       507,252  

Mountain

    251,943       277,583  

East

    194,752       150,433  

Subtotal

    957,695       935,268  

Total Inventories

  $ 1,779,362     $ 1,667,960  

 

 

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and speculative homes (defined as homes under construction without a sales contract and also referred to as “spec homes”). Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins. Included in land and land under development at September 30, 2015 was $6.9 million of land held for sale. We did not have any land held for sale at December 31, 2014.

 

In accordance with ASC 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 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 direct incremental costs associated with the home closing, including sales commissions) for homes closed;

 

estimated future undiscounted cash flows and Operating Margin;

 

forecasted Operating Margin for homes in backlog;

 

actual and trending net and gross home orders;

 

base sales price and home sales incentive information for homes closed, homes in backlog and 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 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 estimated fair value, which is determined using Level 3 inputs. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. The primary unobservable input used in our discounted cash flow model is the discount rate.

 

 
- 12 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

Impairments of homebuilding inventory by segment for the three and nine months ended September 30, 2015 and 2014 are shown in the table below. In addition to the impairments shown below, using Level 2 inputs, we recorded $1.1 million of impairments on our land held for sale during the three and nine months ended September 30, 2015. No such impairments were recorded during the same periods in 2014.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

West

  $ -     $ -     $ -     $ -  

Mountain

    250       -       250       -  

East

    2,975       -       3,325       850  

Total Inventory Impairments

  $ 3,225     $ -     $ 3,575     $ 850  

 

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

 

   

Impairment Data

   

Quantitative Data

 
             

Three Months Ended

 

Total

Subdivisions

Tested

   

Inventory

Impairments

   

Fair Value of

Inventory

After

Impairments

   

Number of

Subdivisions

Impaired

   

Discount Rate

 
   

(Dollars in thousands)

 

March 31, 2015

    22     $ 350     $ 3,701       1       8.7 %

June 30, 2015

    22       -       -       -       N/A  

September 30, 2015

    18       3,225       14,836       5       12.0 - 15.0 %

Total

    62     $ 3,575     $ 18,537       6          
                                         

March 31, 2014

    16     $ -     $ -       -       N/A  

June 30, 2014

    16       850       4,285       2       11.0 - 13.8 %

September 30, 2014

    23       -       -       -       N/A  

Total

    55     $ 850     $ 4,285       2          

 

 
- 13 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

8.

Capitalization of Interest

 

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales as related units or lots are sold. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of 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.

 

The homebuilding interest expensed in the table below relates to the portion of interest incurred where our homebuilding debt exceeded our qualified inventory for such periods in accordance with ASC 835.

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)

 

Homebuilding interest incurred

  $ 13,265     $ 16,499     $ 39,821     $ 52,211  

Less: Interest capitalized

    (13,265 )     (16,499 )     (39,821 )     (51,526 )

Homebuilding interest expensed

  $ -     $ -     $ -     $ 685  
                                 

Interest capitalized, beginning of period

  $ 78,857     $ 80,936     $ 79,231     $ 74,155  

Plus: Interest capitalized during period

    13,265       16,499       39,821       51,526  

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

    (12,878 )     (14,966 )     (39,808 )     (43,212 )

Interest capitalized, end of period

  $ 79,244     $ 82,469     $ 79,244     $ 82,469  

 

9.

Homebuilding Prepaid Expenses and Other Assets

 

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

  

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Land option deposits

  $ 14,971     $ 12,895  

Deferred marketing costs

    31,372       29,231  

Prepaid expenses

    5,705       5,104  

Goodwill

    6,008       6,008  

Deferred debt issuance costs, net

    11,757       13,004  

Other

    2,635       1,754  

Total

  $ 72,448     $ 67,996  

 

 

10.

Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

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

 

   

September 30,

2015

   

December 31,

2014

 
   

(Dollars in thousands)

 

Customer and escrow deposits

  $ 24,381     $ 16,728  

Warranty accrual

    16,081       18,346  

Accrued compensation and related expenses

    21,859       27,541  

Accrued interest

    11,031       23,234  

Land development and home construction accruals

    9,723       10,108  

Other accrued liabilities

    23,843       19,160  

Total accrued liabilities

  $ 106,918     $ 115,117  

  

 
- 14 -

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

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

 

   

September 30,

   

December 31,

 
   

2015

   

2014

 
   

(Dollars in thousands)

 

Insurance reserves

  $ 46,685     $ 50,470  

Accounts payable and other accrued liabilities

    7,479       6,798  

Total accounts payable and accrued liabilities

  $ 54,164     $ 57,268  

 

11.

Warranty Accrual

 

Our homes are sold with limited third-party warranties. We record expenses and warranty accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Warranty accruals are established 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 establishment of warranty accruals for closed homes and the evaluation of our warranty accrual balance at period end are both based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

 

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

 

The table set forth below summarizes warranty accrual, payment and adjustment activity for the three and nine months ended September 30, 2015 and 2014. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we reduced our warranty reserve by $0.2 million for the nine months ended September 30, 2015 compared to $0.5 million and $2.6 million, respectively, for the three and nine months ended September 30, 2014. There was no such adjustment for the three months ended September 30, 2015.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 
   

(Dollars in thousands)