Certain statements on the Site, including statements regarding the MDC Companies' business, financial condition, results of operation, cash flows, strategies and prospects, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the MDC Companies to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Additional information about the risks and uncertainties applicable to the MDC Companies' business is contained in MDC's filings with the Securities and Exchange Commission, including MDC's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. The MDC Companies undertake no duty to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in MDC's subsequent filings with the Securities and Exchange Commission, press releases and/or presentations should be considered.
mdc20170630_10q.htm 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 June 30, 2017

 

OR

 

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

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

84-0622967

(State or other jurisdiction

 

(I.R.S. employer

of incorporation or organization)

 

identification no.)

 

4350 South Monaco Street, Suite 500

 

80237

Denver, Colorado

 

(Zip code)

(Address of principal executive offices)

   

 

(303) 773-1100

(Registrant's telephone number, including area code)

 

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

 

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

 

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

             

Large Accelerated Filer

  

  

Accelerated Filer

  

Non-Accelerated Filer

  

  (Do not check if a smaller reporting company)

  

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 July 31, 2017, 51,877,619 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

 

INDEX

 

 

 

 

Page
No.

       

Part I. Financial Information:

 

       

 

Item 1.

Unaudited Consolidated Financial Statements:

 

       

 

 

Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

1

       

 

 

Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2017 and 2016

2

       

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

3

       

 

 

Notes to Unaudited Consolidated Financial Statements

4

       

 

Item 2.

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

27

       

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

       

 

Item 4.

Controls and Procedures

43

   

Part II. Other Information:

 

       

 

Item 1.

Legal Proceedings

44

       

 

Item 1A.

Risk Factors

44

       

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

       

 

Item 6.

Exhibits

46

     

 

Signature

46

 

 

PART I

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets.

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands, except

 
   

per share amounts)

 
   

(Unaudited)

         
ASSETS                
                 
Homebuilding:                

Cash and cash equivalents

  $ 314,814     $ 259,087  

Marketable securities

    65,268       59,770  

Restricted cash

    5,027       3,778  

Trade and other receivables

    37,747       42,492  

Inventories:

               

Housing completed or under construction

    909,911       874,199  

Land and land under development

    846,825       884,615  

Total inventories

    1,756,736       1,758,814  

Property and equipment, net

    27,194       28,041  

Deferred tax asset, net

    62,446       74,888  

Metropolitan district bond securities (related party)

    31,864       30,162  

Prepaid and other assets

    67,009       60,463  

Total homebuilding assets

    2,368,105       2,317,495  

Financial Services:

               

Cash and cash equivalents

    23,162       23,822  

Marketable securities

    38,666       36,436  

Mortgage loans held-for-sale, net

    95,283       138,774  

Other assets

    11,195       12,062  

Total financial services assets

    168,306       211,094  

Total Assets

  $ 2,536,411     $ 2,528,589  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 48,327     $ 42,088  

Accrued liabilities

    148,199       144,566  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    842,232       841,646  

Total homebuilding liabilities

    1,053,758       1,043,300  

Financial Services:

               

Accounts payable and accrued liabilities

    49,873       50,734  

Mortgage repurchase facility

    69,127       114,485  

Total financial services liabilities

    119,000       165,219  

Total Liabilities

    1,172,758       1,208,519  

Stockholders' Equity

               

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding

    -       -  

Common stock, $0.01 par value; 250,000,000 shares authorized; 51,862,230 and 51,485,090 issued and outstanding at June 30, 2017 and December 31, 2016, respectively

    519       515  

Additional paid-in-capital

    992,870       983,532  

Retained earnings

    344,263       313,952  

Accumulated other comprehensive income

    26,001       22,071  

Total Stockholders' Equity

    1,363,653       1,320,070  

Total Liabilities and Stockholders' Equity

  $ 2,536,411     $ 2,528,589  

 

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

 

 
- 1 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands, except per share amounts)

 
   

(Unaudited)

 

Homebuilding:

                               

Home sale revenues

  $ 647,620     $ 571,195     $ 1,211,099     $ 965,615  

Land sale revenues

    1,351       316       1,598       2,640  

Total home and land sale revenues

    648,971       571,511       1,212,697       968,255  

Home cost of sales

    (539,077 )     (475,836 )     (1,008,019 )     (805,862 )

Land cost of sales

    (1,202 )     (216 )     (1,413 )     (1,879 )

Inventory impairments

    -       (1,600 )     (4,850 )     (1,600 )

Total cost of sales

    (540,279 )     (477,652 )     (1,014,282 )     (809,341 )

Gross margin

    108,692       93,859       198,415       158,914  

Selling, general and administrative expenses

    (70,709 )     (64,440 )     (137,007 )     (120,717 )

Interest and other income

    2,847       2,553       5,174       3,489  

Other expense

    (666 )     (278 )     (1,017 )     (905 )

Other-than-temporary impairment of marketable securities

    (1 )     (288 )     (51 )     (719 )

Homebuilding pretax income

    40,163       31,406       65,514       40,062  
                                 

Financial Services:

                               

Revenues

    19,073       15,823       37,052       26,840  

Expenses

    (8,500 )     (7,543 )     (16,398 )     (13,784 )

Interest and other income

    1,238       772       2,217       1,613  

Other-than-temporary impairment of marketable securities

    (80 )     -       (131 )     -  

Financial services pretax income

    11,731       9,052       22,740       14,669  
                                 

Income before income taxes

    51,894       40,458       88,254       54,731  

Provision for income taxes

    (18,023 )     (13,545 )     (32,134 )     (18,255 )

Net income

  $ 33,871     $ 26,913     $ 56,120     $ 36,476  
                                 

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

    1,944       895       3,930       2,843  

Comprehensive income

  $ 35,815     $ 27,808     $ 60,050     $ 39,319  
                                 

Earnings per share:

                               

Basic

  $ 0.65     $ 0.52     $ 1.09     $ 0.71  

Diluted

  $ 0.64     $ 0.52     $ 1.07     $ 0.71  
                                 

Weighted average common shares outstanding

                               

Basic

    51,514,309       51,293,917       51,428,079       51,281,643  

Diluted

    52,444,123       51,304,829       52,065,968       51,291,359  
                                 

Dividends declared per share

  $ 0.25     $ 0.24     $ 0.50     $ 0.48  

 

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

 

 
- 2 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Six Months Ended

 
   

June 30,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 
   

(Unaudited)

 

Operating Activities:

               

Net income

  $ 56,120     $ 36,476  

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

               

Stock-based compensation expense

    2,038       6,163  

Depreciation and amortization

    2,704       2,367  

Inventory impairments

    4,850       1,600  

Other-than-temporary impairment of marketable securities

    182       719  

Gain on sale of marketable securities

    (1,758 )     (262 )

Deferred income tax expense

    10,033       7,873  

Net changes in assets and liabilities:

               

Restricted cash

    (1,249 )     (196 )

Trade and other receivables

    5,419       (26,235 )

Mortgage loans held-for-sale

    43,491       (3,029 )

Housing completed or under construction

    (39,707 )     (186,805 )

Land and land under development

    37,521       122,701  

Prepaid expenses and other assets

    (7,602 )     (2,975 )

Accounts payable and accrued liabilities

    8,845       19,517  

Net cash provided by (used in) operating activities

    120,887       (22,086 )
                 

Investing Activities:

               

Purchases of marketable securities

    (12,043 )     (15,426 )

Sales of marketable securities

    11,450       50,765  

Purchases of property and equipment

    (1,364 )     (3,117 )

Net cash provided by (used in) investing activities

    (1,957 )     32,222  
                 

Financing Activities:

               

Advances (payments) on mortgage repurchase facility, net

    (45,358 )     4,686  

Dividend payments

    (25,809 )     (24,504 )

Proceeds from exercise of stock options

    7,304       -  

Net cash used in financing activities

    (63,863 )     (19,818 )
                 

Net increase (decrease) in cash and cash equivalents

    55,067       (9,682 )

Cash and cash equivalents:

               

Beginning of period

    282,909       180,988  

End of period

  $ 337,976     $ 171,306  

 

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

 

 
- 3 -

Table of Contents
 

  

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “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 June 30, 2017 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, 2016.

 

On November 21, 2016, MDC’s board of directors declared a 5% stock dividend that was distributed on December 20, 2016 to shareholders of record on December 6, 2016. 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,” “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-Q and 8-K should be considered.

 

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") and created ASC Topic 606 (“ASC 606”), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We expect to adopt the new standard under the modified retrospective approach in the 2018 first quarter. Although we are still in the process of evaluating our contracts and updating our accounting policies, we do not believe the adoption of ASU 2014-09 will have a material impact on the amount or timing of our recognition of revenues. While we are still evaluating the accounting for marketing costs under ASC 606, there is a possibility that the adoption of ASU 2014-09 will impact the timing of recognition and classification in our consolidated financial statements of certain marketing costs we incur to obtain sales contracts from our customers. For example, there are various marketing costs that we currently capitalize and amortize with each home delivered in a community. Under the new guidance, these costs may need to be expensed immediately. We are continuing to evaluate the exact impact ASU 2014-09 will have on recording revenue and our marketing costs in our consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which makes a number of changes to the current GAAP model, including changes to the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under ASU 2016-01, we will primarily be impacted by the changes to accounting for equity instruments with readily determinable fair values as they will no longer be permitted to be classified as available-for-sale (changes in fair value reported through other comprehensive income) and instead, all changes in fair value will be reported in earnings. ASU 2016-01 is effective for our interim and annual reporting periods beginning January 1, 2018 and is to be applied using a modified retrospective transition method. Early adoption of the applicable guidance from ASU 2016-01 is not permitted. Given the significant amount of our investments in equity securities, and assuming we have a similar level of investments when this guidance is adopted, we would expect that the impact to our consolidated statements of operations and comprehensive income from this update could be material. Furthermore, depending on trends in the stock market, we may see increased volatility in our consolidated statements of operations and comprehensive income.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which requires a lessee to recognize a right-of-use asset and a corresponding lease liability for virtually all leases. The liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees. Upon adoption, we will be required to record a lease asset and lease liability related to our operating leases. ASU 2016-02 is effective for our interim and annual reporting periods beginning January 1, 2019 and is to be applied using a modified retrospective transition method. Early adoption is permitted. We do not plan to early adopt the guidance and we are currently evaluating the impact the update will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718, Compensation – Stock Compensation (“ASC 718”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 became effective for us in the 2017 first quarter. The primary impact from this guidance, on a prospective basis, will be to our provision for income taxes line item on our consolidated statements of operations and comprehensive income. Any excess tax benefits or deficiencies from (1) the exercise or expiration of options or (2) the vesting of stock awards will now be recognized through our income tax provision as opposed to additional paid-in capital (to the extent we had a sufficient pool of windfall tax benefits). As a result of exercises of stock options and vesting of stock awards during the three and six months ended June 30, 2017, $0.1 million in excess tax benefits were recognized in our tax provision for each period. Furthermore, as of June 30, 2017, we had options covering approximately 567,000 shares (1) with exercise prices above the MDC closing share price at June 30, 2017 and (2) that will have their ability to exercise expire at some point during the 2017 fourth quarter. If the exercise price continues to be greater than the share price of MDC throughout 2017, these options will likely expire unexercised and as a result, we could recognize approximately $2.6 million in additional expense in our provision for income taxes line item on our consolidated statements of operations and comprehensive income in 2017. Another provision of ASU 2016-09 that is relevant to the Company is the classification of excess tax benefits on the statement of cash flows, which was adopted on a prospective basis. This provision did not have a material effect on the statement of cash flows and is not expected to have a material impact on the statement of cash flows in future quarterly or annual filings. Adoption of ASU 2016-09 was not material to our statement of cash flows for the periods presented and we do not anticipate it will be material in 2017.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning January 1, 2021, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-13 and with our current holdings of financial instruments that are subject to credit losses, we do not believe adoption of this guidance will be material to our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which amends ASC Topic 230, Statement of Cash Flows, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments in ASU 2016-15 are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-15 and do not believe the guidance will have a material impact on our financial statements upon adoption.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”), which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the statement of cash flows. ASU 2016-18 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-18 and do not believe the guidance will have a material impact on our financial statements upon adoption.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

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 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)

 

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

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Homebuilding

 

(Dollars in thousands)

 

West

  $ 323,758     $ 270,031     $ 632,837     $ 461,406  

Mountain

    224,356       190,334       397,492       328,158  

East

    100,857       111,146       182,368       178,691  

Total homebuilding revenues

  $ 648,971     $ 571,511     $ 1,212,697     $ 968,255  
                                 

Financial Services

                               

Mortgage operations

  $ 12,697     $ 10,702     $ 24,880     $ 17,572  

Other

    6,376       5,121       12,172       9,268  

Total financial services revenues

  $ 19,073     $ 15,823     $ 37,052     $ 26,840  

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Homebuilding

 

(Dollars in thousands)

 

West

  $ 21,134     $ 15,740     $ 36,589     $ 25,438  

Mountain

    24,541       20,748       42,771       30,832  

East

    4,734       4,500       7,376       5,867  

Corporate

    (10,246 )     (9,582 )     (21,222 )     (22,075 )

Total homebuilding pretax income

  $ 40,163     $ 31,406     $ 65,514     $ 40,062  
                                 

Financial Services

                               

Mortgage operations

  $ 7,670     $ 6,445     $ 15,236     $ 9,768  

Other

    4,061       2,607       7,504       4,901  

Total financial services pretax income

  $ 11,731     $ 9,052     $ 22,740     $ 14,669  
                                 

Total pretax income

  $ 51,894     $ 40,458     $ 88,254     $ 54,731  

 

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

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 

Homebuilding assets

 

(Dollars in thousands)

 

West

  $ 1,005,590     $ 1,035,033  

Mountain

    630,621       571,139  

East

    230,096       256,816  

Corporate

    501,798       454,507  

Total homebuilding assets

  $ 2,368,105     $ 2,317,495  
                 

Financial services assets

               

Mortgage operations

  $ 107,904     $ 153,182  

Other

    60,402       57,912  

Total financial services assets

  $ 168,306     $ 211,094  
                 

Total assets

  $ 2,536,411     $ 2,528,589  

 

 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

4.

Earnings Per Share     

 

ASC 260 requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and 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, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potential dilutive stock options outstanding. The following table shows our basic and diluted EPS calculations:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands, except per share amounts)

 

Numerator

                               

Net income

  $ 33,871     $ 26,913     $ 56,120     $ 36,476  

Less: distributed earnings allocated to participating securities

    (61 )     (39 )     (128 )     (79 )

Less: undistributed earnings allocated to participating securities

    (98 )     (47 )     (140 )     (36 )

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

    33,712       26,827       55,852       36,361  

Add back: undistributed earnings allocated to participating securities

    98       47       140       36  

Less: undistributed earnings reallocated to participating securities

    (96 )     (47 )     (138 )     (36 )

Numerator for diluted earnings per share under two class method

  $ 33,714     $ 26,827     $ 55,854     $ 36,361  
                                 

Denominator

                               

Weighted-average common shares outstanding

    51,514,309       51,293,917       51,428,079       51,281,643  

Add: dilutive effect of stock options

    929,814       10,912       637,889       9,716  

Denominator for diluted earnings per share under two class method

    52,444,123       51,304,829       52,065,968       51,291,359  
                                 

Basic Earnings Per Common Share

  $ 0.65     $ 0.52     $ 1.09     $ 0.71  

Diluted Earnings Per Common Share

  $ 0.64     $ 0.52     $ 1.07     $ 0.71  

 

Diluted EPS for the three and six months ended June 30, 2017 excluded options to purchase approximately 0.9 million and 1.4 million shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive. For the same periods in 2016, diluted EPS excluded options to purchase approximately 6.4 million and 6.5 million shares, respectively. The year-over-year decreases for the three and six months ended June 30, 2017 in anti-dilutive shares and the year-over-year increases in dilutive shares were primarily the result of year-over-year increases in the average price of MDC stock.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

5.

Accumulated Other Comprehensive Income

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Unrealized gains on available-for-sale marketable securities 1 :

                               

Beginning balance

  $ 9,479     $ 5,016     $ 7,730     $ 3,657  

Other comprehensive income before reclassifications

    2,389       880       4,423       1,404  

Amounts reclassified from AOCI 2

    (692 )     (552 )     (977 )     283  

Ending balance

  $ 11,176     $ 5,344     $ 11,176     $ 5,344  
                                 

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

                               

Beginning balance

  $ 14,578     $ 12,647     $ 14,341     $ 12,058  

Other comprehensive income before reclassifications

    247       567       484       1,156  

Amounts reclassified from AOCI

    -       -       -       -  

Ending balance

  $ 14,825     $ 13,214     $ 14,825     $ 13,214  
                                 

Total ending AOCI

  $ 26,001     $ 18,558     $ 26,001     $ 18,558  

                                                                                                      

 

 

(1)

All amounts net-of-tax.

 

(2)

See separate table below for details about these reclassifications

 

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

   

Six Months Ended

 
   

June 30,

   

June 30,

 

Affected Line Item in the Statements of Operations

 

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Homebuilding: Interest and other income

  $ 889     $ 1,177     $ 1,411     $ 262  

Homebuilding: Other-than-temporary impairment of marketable securities

    (1 )     (288 )     (51 )     (719 )

Financial services: Interest and other income

    308       -       347       -  

Financial services: Other-than-temporary impairment of marketable securities

    (80 )     -       (131 )     -  

Income before income taxes

    1,116       889       1,576       (457 )

Provision for income taxes

    (424 )     (337 )     (599 )     174  

Net income

  $ 692     $ 552     $ 977     $ (283 )

 

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.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

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

 

         

Fair Value

 

Financial Instrument

 

Hierarchy

   

June 30,

2017

   

December 31,

2016

 
         

(Dollars in thousands)

 

Marketable equity securities (available-for-sale)

 

Level 1

    $ 103,934     $ 96,206  

Mortgage loans held-for-sale, net

 

Level 2

    $ 95,283     $ 138,774  

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

 

Level 3

    $ 31,864     $ 30,162  

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of June 30, 2017 and December 31, 2016.

 

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

 

Marketable securities.  As of June 30, 2017 and December 31, 2016, we held marketable equity securities, which consist of holdings in corporate equities, preferred stock and exchange traded funds. As of June 30, 2017 and December 31, 2016, all of our equity 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 an unrealized loss, if applicable, is other-than-temporary.

 

Each quarter we assess all of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”). If the unrealized loss is determined to be other-than-temporary, an OTTI is recorded in other-than-temporary impairment of marketable securities in the homebuilding or financial services sections of our consolidated statements of operations and comprehensive income. During the three and six months ended June 30, 2017, we recorded pretax OTTI’s of $0.1 million and $0.2 million, respectively, for certain of our equity securities that were in an unrealized loss position as of the end of each respective period. For the same periods in 2016, we recorded pretax OTTI’s of $0.3 million and $0.7 million, respectively.

 

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

 

   

June 30, 2017

 
   

Cost Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 50,676     $ (556 )   $ 50,120     $ 65,268  

Financial services equity securities

    36,125       (337 )     35,788       38,666  

Total marketable equity securities

  $ 86,801     $ (893 )   $ 85,908     $ 103,934  

 

   

December 31, 2016

 
   

Cost Basis

   

OTTI

   

Net Cost

Basis

   

Fair Value

 
   

(Dollars in thousands)

 

Homebuilding equity securities

  $ 48,910     $ (685 )   $ 48,225     $ 59,770  

Financial services equity securities

    35,885       (373 )     35,512       36,436  

Total marketable equity securities

  $ 84,795     $ (1,058 )   $ 83,737     $ 96,206  

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

As of June 30, 2017 and December 31, 2016, our marketable equity securities were in net unrealized gain positions totaling $18.0 million and $12.5 million, respectively. Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.7 million and $0.5 million as of June 30, 2017 and December 31, 2016, respectively. The table below sets forth the aggregated unrealized losses for individual equity securities that were in unrealized loss positions but did not have OTTIs recognized. We do not believe the decline in the value of these marketable securities as of June 30, 2017 is other-than-temporary.

 

   

June 30, 2017

   

December 31, 2016

 
   

Number of

Securities in a

Loss Position

   

Aggregate

Loss Position

   

Aggregate

Fair Value of

Securities in

a Loss

Position

   

Number of

Securities in a

Loss Position

   

Aggregate

Loss Position

   

Aggregate

Fair Value of

Securities in

a Loss

Position

 
   

(Dollars in thousands)

 

Marketable equity securities

    1     $ (703 )   $ 1,296       5     $ (457 )   $ 6,045  

 

The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities. We record the net amount of these gains and losses to either other expense or interest and other income, dependent upon whether there is a net realized loss or gain, respectively, in the homebuilding section or financial services section of our consolidated statements of operations and comprehensive income.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

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

  $ 1,198     $ 1,379     $ 1,788     $ 1,470  

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

    (1 )     (202 )     (30 )     (1,208 )

Net realized gain on sales of available-for-sale securities

  $ 1,197     $ 1,177     $ 1,758     $ 262  

 

Mortgage loans held-for-sale, net.  Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At June 30, 2017 and December 31, 2016, we had $76.1 million and $96.2 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 June 30, 2017 and December 31, 2016, we had $19.2 million and $42.6 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.    

 

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2017, we recorded net gains on the sales of mortgage loans of $10.2 million and $18.7 million, respectively, compared to $6.9 million and $12.5 million for the same periods in the prior year, respectively.

 

Metropolitan district bond securities (related party).  The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. 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.

 

 
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Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

In accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“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 scheduled to be received in the fourth quarter, reduce the carrying value of the Metro Bonds. The increases in the value of the Metro Bonds during the past two years are primarily based on a larger percentage of future cash flows coming from homes that have closed, which utilize a lower discount rate as those cash flows have a reduced amount of risk. The table below provides quantitative data, as of June 30, 2017, 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

 

Forecasted number of homes closed per year

    0 to 120       107    

Increase

   

Decrease

 

Forecasted assessed value

    $465,000 to $1,200,000       $567,000    

Increase

   

Decrease

 

Discount rates

    5% to 12%       7.5%    

Decrease

   

Increase

 
                                     

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 31,004     $ 27,277     $ 30,162     $ 25,911  

Increase in fair value (recorded in other comprehensive income)

    398       915       780       1,865  

Change due to accretion of principal

    462       412       922       828  

Cash receipts

    -       -       -       -  

Balance at end of period

  $ 31,864     $ 28,604     $ 31,864     $ 28,604  

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 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 which were provided by multiple sources.

 

   

June 30, 2017

   

December 31, 2016

 
   

Carrying
Amount

   

Fair Value

   

Carrying
Amount

   

Fair Value

 
   

(Dollars in thousands)

 

5⅝% Senior Notes due February 2020, net

  $ 247,377     $ 267,406     $ 246,915     $ 265,611  

5½% Senior Notes due January 2024, net

    248,487       266,958       248,391       258,800  

6% Senior Notes due January 2043, net

    346,368       326,285       346,340       297,087  

Total

  $ 842,232     $ 860,649     $ 841,646     $ 821,498  

 

 

 

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:

 

   

June 30,

   

December 31,

 
   

2017

   

2016

 
   

(Dollars in thousands)

 

Housing Completed or Under Construction:

               

West

  $ 464,759     $ 470,503  

Mountain

    308,177       277,922  

East

    136,975       125,774  

Subtotal

    909,911       874,199  

Land and Land Under Development:

               

West

    475,237       499,186  

Mountain

    292,074       271,252  

East

    79,514       114,177  

Subtotal

    846,825       884,615  

Total Inventories

  $ 1,756,736     $ 1,758,814  

 

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) 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.

 

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.

 

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

 

 
- 13 -

Table of Contents
 

 

M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

Impairments of homebuilding inventory by segment for the three and six months ended June 30, 2017 and 2016 are shown in the table below.

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)

 

West

  $ -     $ 1,400     $ 4,100     $ 1,400  

Mountain

    -       -       -       -  

East

    -       200       750       200  

Total Inventory Impairments

  $ -     $ 1,600     $ 4,850     $ 1,600  

 

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, 2017

    33     $ 4,850     $ 19,952       2       12% to 18%

June 30, 2017

    35     $ -     $ -       -         N/A    
                                             

March 31, 2016

    14     $ -     $ -       -       N/A    

June 30, 2016

    17     $ 1,600     $ 6,415       2       12% to 15%

 

8.

Capitalization of Interest

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 
   

(Dollars in thousands)