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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - M.D.C. HOLDINGS, INC.dex311.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - M.D.C. HOLDINGS, INC.dex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - M.D.C. HOLDINGS, INC.dex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - M.D.C. HOLDINGS, INC.dex321.htm
EXCEL - IDEA: XBRL DOCUMENT - M.D.C. HOLDINGS, INC.Financial_Report.xls
EX-12 - RATIO OF EARNINGS TO FIXED CHARGES SCHEDULE - M.D.C. HOLDINGS, INC.dex12.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

 

x

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

For the quarterly period ended March 31, 2011

OR

 

¨

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

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   84-0622967

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. employer

identification no.)

4350 South Monaco Street, Suite 500

Denver, Colorado

  80237
(Address of principal executive offices)   (Zip code)

(303) 773-1100

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of April 30, 2011 47,296,720 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

 


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

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2011

INDEX

 

     Page
No.
 
Part I.  

Financial Information:

  
  Item 1.  

Unaudited Consolidated Financial Statements:

  
   

Consolidated Balance Sheets at March 31, 2011 and December 31, 2010

     1   
   

Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010

     2   
   

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010

     3   
   

Notes to Unaudited Consolidated Financial Statements

     4   
  Item 2.  

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

     23   
  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     43   
  Item 4.  

Controls and Procedures

     43   
Part II.  

Other Information:

  
  Item 1.  

Legal Proceedings

     44   
  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.  

(Removed and Reserved)

     46   
  Item 5.  

Other Information

     46   
  Item 6.  

Exhibits

     47   
 

Signatures

     48   


ITEM 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

     March 31,
2011
    December 31,
2010
 

Assets

    

Cash and cash equivalents

   $ 589,043      $ 572,225   

Marketable securities

     866,072        968,729   

Restricted cash

     419        420   

Receivables

    

Home sales receivables

     10,051        8,530   

Income taxes receivable

     13,442        2,048   

Other receivables

     8,388        9,432   

Mortgage loans held-for-sale, net

     37,697        65,114   

Inventories, net

    

Housing completed or under construction

     345,554        372,422   

Land and land under development

     488,887        415,237   

Property and equipment, net

     39,711        40,826   

Deferred tax asset, net of valuation allowance of $239,012 and $231,379 at March 31, 2011 and December 31, 2010, respectively

     -        -   

Related party assets

     7,393        7,393   

Prepaid expenses and other assets, net

     47,882        85,393   
                

Total Assets

   $ 2,454,539      $ 2,547,769   
                

Liabilities

    

Accounts payable

   $ 23,173      $ 35,018   

Accrued liabilities

     210,053        260,729   

Related party liabilities

     107        90   

Mortgage repurchase facility

     6,736        25,434   

Senior notes, net

     1,243,062        1,242,815   
                

Total Liabilities

     1,483,131        1,564,086   
                

Commitments and Contingencies

    

Stockholders’ Equity

    

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

     -        -   

Common stock, $0.01 par value; 250,000,000 shares authorized; 47,351,000 and 47,295,000 issued and outstanding, respectively, at March 31, 2011 and 47,198,000
and 47,142,000 issued and outstanding, respectively, at December 31, 2010

     474        472   

Additional paid-in-capital

     836,360        820,237   

Retained earnings

     127,046        158,749   

Accumulated other comprehensive income

     8,187        4,884   

Treasury stock, at cost; 56,000 shares at March 31, 2011 and December 31, 2010

     (659     (659
                

Total Stockholders’ Equity

     971,408        983,683   
                

Total Liabilities and Stockholders’ Equity

   $ 2,454,539      $ 2,547,769   
                

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

 

1


M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
March 31,
 
     2011     2010  

Revenue

    

Home sales revenue

   $ 163,383      $ 140,943   

Land sales revenue

     204        15   

Other revenue

     6,160        6,120   
                

Total Revenue

     169,747        147,078   
                

Costs and expenses

    

Home cost of sales

     140,981        109,390   

Land cost of sales

     17        191   

Asset impairments

     279        -   

Marketing expenses

     9,833        7,060   

Commission expenses

     5,767        5,129   

General and administrative expenses

     36,752        40,203   

Other operating (income) expenses

     (1,550     491   

Related party expenses

     4        9   
                

Total operating costs and expenses

     192,083        162,473   
                

Loss from operations

     (22,336     (15,395

Other income (expense)

    

Interest income

     7,326        4,428   

Interest expense

     (8,730     (10,374

Gain on sale of other assets

     36        99   
                

Loss before income taxes

     (23,704     (21,242

Benefit from income taxes, net

     3,825        369   
                

Net loss

   $ (19,879   $ (20,873
                

Loss per share

    

Basic

   $ (0.43   $ (0.45
                

Diluted

   $ (0.43   $ (0.45
                

Dividends declared per share

   $ 0.25      $ 0.25   
                

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

 

2


M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Three Months Ended March 31,  
     2011     2010  

Operating Activities

    

Net loss

   $ (19,879   $ (20,873

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

    

Stock-based compensation expense

     3,121        4,056   

Amortization of deferred marketing costs

     2,139        1,667   

Depreciation and amortization of long-lived assets

     1,590        1,265   

Write-offs of land option deposits and pre-acquisition costs

     782        383   

(Gain) loss on sale of assets, net

     (187     175   

Other non-cash (income) expenses

     962        466   

Net changes in assets and liabilities:

    

Restricted cash

     1        (118

Home sales and other receivables

     (477     (5,952

Income taxes receivable

     (305     141,991   

Mortgage loans held-for-sale

     27,417        25,611   

Housing completed or under construction

     26,868        (139,282

Land and land under development

     (73,463     (13,318

Prepaid expenses and other assets

     (1,295     (7,350

Accounts payable

     (11,845     27,768   

Accrued liabilities and related party liabilities

     (13,130     (4,973
                

Net cash (used in) provided by operating activities

     (57,701     11,516   
                

Investing Activities

    

Maturities of held-to-maturity debt securities

     146,000        48,662   

Sales of available-for-sale securities

     84,030        5,294   

Purchases of available-for-sale debt securities

     (84,506     (101,973

Purchases of held-to-maturity debt securities

     (40,000     (453,323

Purchase of property and equipment

     (483     (2,105

Settlement of unsettled trades

     -        1,678   
                

Net cash provided by (used in) investing activities

     105,041        (501,767
                

Financing Activities

    

Payment on mortgage repurchase facility

     (25,434     (29,119

Advances on mortgage repurchase facility

     6,736        4,718   

Dividend payments

     (11,824     (11,784

Proceeds from issuance of senior notes

     -        242,288   

Proceeds from exercise of stock options

     -        35   
                

Net cash (used in) provided by financing activities

     (30,522     206,138   
                

Net increase (decrease) in cash and cash equivalents

     16,818        (284,113

Cash and cash equivalents

    

Beginning of period

     572,225        1,234,252   
                

End of period

   $      589,043      $     950,139   
                

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” or the “Company,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2011 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 10, 2011.

The Consolidated Statements of Operations for the three months ended March 31, 2011 and Consolidated Statements of Cash Flows for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year. Refer to the economic conditions described under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and “Risk Factors Relating to our Business” in Item 1A of the Company’s December 31, 2010 Annual Report on Form 10-K.

 

2.

Fair Value Measurements

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

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

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

Marketable Securities.  The Company’s marketable securities consist of both held-to-maturity and available-for-sale securities. The Company’s held-to-maturity marketable securities consist of both fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; and (2) deposit securities, which may include, among others, certificates of deposit and time deposits. For those debt securities that the Company has both the ability and intent to hold to their maturity dates, the Company classifies such debt securities as held-to-maturity. The Company’s held-to-maturity debt securities are reported at amortized cost in the Consolidated Balance Sheets.

The following table sets forth the Company’s carrying and fair values of its held-to-maturity marketable securities by both security type and maturity date (in thousands). The fair values of the Company’s marketable securities are based upon Level 1 and Level 2 fair value inputs.

 

     March 31, 2011      December 31, 2010  
     Recorded
Amount
     Estimated Fair
Value
     Recorded
Amount
     Estimated Fair
Value
 

Held-to-Maturity

           

Debt securities - maturity less than 1 year

   $ 368,074       $ 368,299       $ 469,318       $ 469,956   

Debt securities - maturity 1 to 5 years

     114,874         116,054         120,078         121,406   
                                   

Total held-to-maturity securities

   $      482,948       $      484,353       $      589,396       $      591,362   
                                   

Included in the Company’s March 31, 2011 held-to-maturity investment balances are $482.9 million of debt securities that were in a gross unrealized gain position of $1.4 million.

 

4


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

For certain debt securities, primarily corporate debt that the Company does not have the intent to hold until maturity, the Company classifies such debt securities as available-for-sale. The Company’s available-for-sale securities also include holdings in a fund that invests predominantly in fixed income securities. The Company records all of its available-for-sale marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets.

The following table sets forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities (in thousands).

 

     March 31, 2011      December 31, 2010  
      Amortized Cost      Estimated Fair
Value
     Amortized Cost      Estimated Fair
Value
 

Available-for-Sale

           

Equity security

   $ 103,956       $ 107,411       $ 103,189       $ 105,304   

Debt securities

     270,981         275,713         271,260         274,029   
                                   

Total available-for-sale securities

   $      374,937       $      383,124       $      374,449       $      379,333   
                                   

Mortgage Loans Held-for-Sale, Net.  As of March 31, 2011, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At March 31, 2011 and December 31, 2010, the Company had $23.6 million and $56.9 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon a Level 2 input being the quoted market prices for those mortgage loans. At March 31, 2011 and December 31, 2010, the Company had $14.1 million and $8.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell and, as such, their fair value was based upon Level 2 fair value inputs, primarily estimated market price received from an outside party.

Inventories.  The Company records its homebuilding inventory (housing completed or under construction and land and land under development) at fair value only when the undiscounted future cash flow of a subdivision is less than its carrying value. The Company determines the estimated fair value of each subdivision by calculating the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. These estimates are dependent on specific market or sub-market conditions for each subdivision. Local market-specific conditions that may impact these estimates for a subdivision include, among other things: (1) forecasted base selling prices and home sales incentives; (2) estimated land development costs and home cost of construction; (3) the current sales pace for active subdivisions; (4) changes by management in the sales strategy of a given subdivision; and (5) the level of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors. The estimated fair values of impaired subdivisions are based upon Level 3 cash flow inputs. The Company’s asset impairments were not material during the three months ended March 31, 2011.

Related Party Assets.  The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The Company used a 15% discount rate in determining the present value of the estimated future cash flows from the bonds. The estimated cash flows from the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. The estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

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

 

5


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Senior Notes.  The estimated fair values of the senior notes in the following table are based on Level 2 fair value inputs, including market prices of bonds in the homebuilding sector (in thousands).

 

     March 31, 2011      December 31, 2010  
     Recorded
Amount
     Estimated Fair
Value
     Recorded
Amount
     Estimated Fair
Value
 

7% Senior Notes due 2012

   $ 149,700       $ 159,278       $ 149,650       $ 160,493   

5 1/2% Senior Notes due 2013

     349,775         362,355         349,748         362,198   

5 3/8% Medium Term Senior Notes due 2014

     249,308         263,163         249,266         255,683   

5 3/8% Medium Term Senior Notes due 2015

     249,830         257,863         249,821         251,450   

5 3/8% Senior Notes due 2020

     244,449         247,138         244,330         244,400   
                                   

Total

   $   1,243,062       $   1,289,797       $   1,242,815       $   1,274,224   
                                   

 

3.

Derivative Financial Instruments

The Company utilizes certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline) and forward sales of mortgage-backed securities commitments, both of which typically are short-term in nature. Forward sales securities commitments and private investor sales commitments are utilized to hedge changes in fair value of mortgage loan inventory and commitments to originate mortgage loans. At March 31, 2011, the Company had $97.7 million in interest rate lock commitments and $84.0 million in forward sales of mortgage-backed securities.

The Company records its mortgage loans held-for-sale at fair value to achieve matching of the changes in the fair value of its derivative instruments with the changes in fair values of the loans it is hedging, without having to designate its derivatives as hedging instruments. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, the Company records the fair value of the derivatives in other revenue in the Consolidated Statements of Operations with an offset to either prepaid and other assets or accrued liabilities in the Consolidated Balance Sheets, depending on the nature of the change. The changes in fair value of the Company’s derivatives were not material during the three months ended March 31, 2011 and 2010.

 

4.

Balance Sheet Components

The following table sets for information relating to prepaid expenses and other assets, net (in thousands).

 

     March 31,
2011
     December 31,
2010
 

Deferred marketing costs

   $ 23,723       $ 22,736   

Land option deposits

     11,579         11,606   

Deferred debt issue costs, net

     4,751         5,021   

Prepaid expenses

     3,886         5,935   

IRS deposit (See Note 12)

     -         35,562   

Other

     3,943         4,533   
                 

Total

   $      47,882       $      85,393   
                 

 

6


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

The following table sets forth information relating to accrued liabilities (in thousands).

 

     March 31,
2011
     December 31,
2010
 

Accrued liabilities

     

Insurance reserves (see Note 8)

   $ 52,031       $ 52,901   

Warranty reserves (see Note 7)

     33,615         34,704   

Accrued interest payable

     21,722         17,822   

Accrued executive deferred compensation

     21,711         20,956   

Liability for unrecognized tax benefits (see Note 13)

     14,546         55,850   

Legal accruals (see Note 10)

     12,750         14,230   

Land development and home construction accruals

     12,090         12,450   

Accrued compensation and related expenses

     10,992         22,659   

Mortgage loan loss reserves (see Note 10)

     7,636         6,881   

Customer and escrow deposits

     5,099         4,523   

Other accrued liabilities

     17,861         17,753   
                 

Total accrued liabilities

   $ 210,053       $ 260,729   
                 

 

5.

Loss Per Share

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

 

     Three Months Ended March 31,  
     2011     2010  

Basic and Diluted Loss Per Common Share

    

Net loss

   $         (19,879   $       (20,873

Less: distributed and undistributed earnings allocated to participating securities

     (159     (124
                

Net loss attributable to common stockholders

   $ (20,038   $ (20,997
                

Basic and diluted weighted-average shares outstanding

     46,716        46,613   

Basic Loss Per Common Share

   $ (0.43   $ (0.45
                

Dilutive Loss Per Common Share

   $ (0.43   $ (0.45
                

Diluted EPS includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Common stock equivalents include stock options and unvested restricted stock. Diluted EPS for the three months ending March 31, 2011 and 2010 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share. Using the treasury stock method, the weighted-average common stock equivalents excluded from diluted EPS were 0.8 million shares and 0.5 million shares during the three months ended March 31, 2011 and 2010, respectively.

 

7


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

6.

Interest Activity

The Company capitalizes interest on its senior notes associated with its qualifying assets, which includes land and land under development that is actively being developed and housing completed or under construction through the completion of construction of a home. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. The Company expensed $8.7 million and $10.3 million of interest that was incurred on its senior notes during the three months ended March 31, 2011 and 2010, respectively, that could not be capitalized.

Interest activity is shown below (in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Total Interest Incurred

    

Corporate and homebuilding segments

   $ 18,186      $ 16,931   

Financial Services and Other

     63        79   
                

Total interest incurred

   $ 18,249      $ 17,010   
                

Total Interest Capitalized

    

Interest capitalized, beginning of period

   $ 38,446      $ 28,339   

Interest capitalized

     9,519        6,636   

Previously capitalized interest included in home cost of sales

     (4,203     (3,202
                

Interest capitalized, end of period

   $        43,762      $        31,773   
                

 

7.

Warranty Reserves

The Company records expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. The establishment of warranty reserves is primarily based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, the Company’s trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring. Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an adjustment to the historical warranty reserve should be recorded.

The following table summarizes the warranty reserve activity for the three months ended March 31, 2011 and 2010 (in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Balance at beginning of year

   $ 34,704      $ 59,022   

Expense provisions

     841        990   

Cash payments

     (1,499     (2,029

Adjustments

     (431     (3,929
                

Balance at end of period

   $        33,615      $        54,054   
                

The favorable warranty adjustments that were recorded as a reduction to home cost of sales in the Consolidated Statements of Operations during the three months ended March 31, 2011 and 2010 were primarily the result of a continued favorable trend in the amount of warranty payments incurred on previously closed homes.

 

8


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

8.

Insurance Reserves

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

The following table summarizes the insurance reserve activity for the three months ended March 31, 2011 and 2010 (in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Balance at beginning of year

   $ 52,901      $ 51,606   

Expense provisions

     480        583   

Cash payments

     (1,350     (799

Adjustments

     -        -   
                

Balance at end of period

   $        52,031      $        51,390   
                

 

9.

Information on Business Segments

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

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

 

  (1)

West (Arizona, California and Nevada)

 

  (2)

Mountain (Colorado and Utah)

 

  (3)

East (Delaware Valley, Maryland and Virginia)

 

  (4)

Other Homebuilding (Florida and Illinois)

The Company’s Financial Services and Other reportable segment consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant; (3) StarAmerican; (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. These operating segments have been aggregated into one reportable segment because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (A) the combined reported profit of all operating segments that did not report a loss or (B) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets. The Company’s Corporate reportable segment incurs general and administrative expenses that are not identifiable specifically to another operating segment, earns interest income on its cash, cash equivalents and marketable securities, and incurs interest expense on its senior notes.

 

9


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

The following table summarizes revenue for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the revenue table below relate to Mortgage Loan Origination fees paid by the Company’s homebuilding subsidiaries to HomeAmerican on behalf of homebuyers.

 

     Three Months Ended March 31,  
     2011     2010  

Homebuilding

    

West

   $ 42,483      $ 57,137   

Mountain

     71,124        46,682   

East

     43,092        31,505   

Other Homebuilding

     9,859        9,036   
                

Total Homebuilding

     166,558        144,360   

Financial Services and Other

     5,703        5,621   

Corporate

     -        -   

Intercompany adjustments

     (2,514     (2,903
                

Consolidated

   $      169,747      $      147,078   
                

The following table summarizes (loss) income before income taxes for each of the Company’s six reportable segments (in thousands). Inter-company supervisory fees (“Supervisory Fees”), which are included in (loss) income before income taxes for each reportable segment in the table below, are charged by the Company’s Corporate segment to the homebuilding segments and the Financial Services and Other segment. Supervisory Fees represent costs incurred by the Company’s Corporate segment associated with certain resources that support the Company’s other reportable segments. Transfers, if any, between operating segments are recorded at cost.

 

     Three Months Ended March 31,  
     2011     2010  

Homebuilding

    

West

   $ (4,560   $ 2,354   

Mountain

     (1,232     1,170   

East

     (1,956     (1,519

Other Homebuilding

     (776     (519
                

Total Homebuilding

     (8,524     1,486   

Financial Services and Other

     1,780        1,846   

Corporate

     (16,960     (24,574
                

Consolidated

   $      (23,704   $      (21,242
                

 

10


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

The following table summarizes total assets for each of the Company’s six reportable segments (in thousands). Inter-company adjustments noted in the table below relate to loans from the Company’s Financial Services and Other segment to its Corporate segment. The assets in the Company’s Corporate segment primarily include cash, cash equivalents and marketable securities.

 

     March 31,
2011
    December 31,
2010
 

Homebuilding

    

West

   $ 328,225      $ 300,652   

Mountain

     315,103        311,833   

East

     205,502        188,693   

Other Homebuilding

     39,138        40,554   
                

Total Homebuilding

     887,968        841,732   

Financial Services and Other

     110,206        135,286   

Corporate

     1,459,182        1,573,408   

Intercompany adjustments

     (2,817     (2,657
                

Consolidated

   $   2,454,539      $   2,547,769   
                

The following table summarizes depreciation and amortization of long-lived assets and amortization of deferred marketing costs for each of the Company’s six reportable segments (in thousands).

 

     Three Months Ended March 31,  
     2011      2010  

Homebuilding

     

West

   $ 880       $ 1,074   

Mountain

     833         463   

East

     444         312   

Other Homebuilding

     210         161   
                 

Total Homebuilding

     2,367         2,010   

Financial Services and Other

     173         169   

Corporate

     1,189         753   
                 

Consolidated

   $          3,729       $          2,932   
                 

 

10.

Commitments and Contingencies

The Company often is required to obtain bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues and start-up expenses, warranty work, contractor license fees and earnest money deposits. At March 31, 2011 the Company had issued and outstanding performance bonds and letters of credit totaling $71.7 million and $20.8 million, respectively, including $7.2 million in letters of credit issued by HomeAmerican. In the event any such bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Mortgage Loan Loss Reserves.  In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. During the 2011 first quarter, HomeAmerican reached a settlement associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily as a result of this settlement, the Company increased its estimated mortgage loan loss

 

11


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

reserve by $1.0 million during the three months ended March 31, 2011. The Company’s mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations.

The following table summarizes the mortgage loan loss reserve activity for the three months ended March 31, 2011 and 2010 (in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Balance at beginning of year

   $ 6,881      $ 9,641   

Expense provisions

     -        -   

Cash payments

     (207     (1,400

Adjustments

     962        -   
                

Balance at end of period

   $      7,636      $      8,241   
                

Legal Accruals. Litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.

On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011 the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.

On March 31, 2011 the West Virginia Supreme Court of Appeals declined to enter a writ of prohibition with respect to the trial court’s re-entry of its judgment of default stating that the issues presented are more properly presented on appeal after full development of the record in the lower court.

 

12


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:

Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This litigation was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.

MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.

Additionally, in the normal course of business, the Company is a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from the Company under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes.

The Company has accrued for losses that may be incurred with respect to legal claims based upon information provided to it by its legal counsel, including counsels’ on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals. The Company had legal accruals of $12.8 million and $14.2 million at March 31, 2011 and December 31, 2010, respectively.

 

11.

Line of Credit and Total Debt Obligations

Mortgage Lending.  HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”), which may include other banks that become parties to the Mortgage Repurchase Facility (collectively with USBNA, the “Buyers”). The Mortgage Repurchase Facility has a maximum aggregate commitment of $70 million and includes an accordion feature that permits the maximum aggregate commitment to be increased to $150 million, subject to the availability of additional commitments. The Mortgage Repurchase Facility is accounted for as a debt financing arrangement. Accordingly, at March 31, 2011 and December 31, 2010, amounts advanced under the Mortgage Repurchase Facility, which were used to finance mortgage loan originations, have been reported as a liability in Mortgage Repurchase Facility in the Consolidated Balance Sheets. At March 31, 2011 and December 31, 2010, the Company had $6.7 million and $25.4 million, respectively, of mortgage loans that it was obligated to repurchase under the Mortgage Repurchase Facility.

The Company’s senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of its homebuilding segment subsidiaries.

The Company’s debt obligations at March 31, 2011 and December 31, 2010 are as follows (in thousands):

 

     March 31,
2011
     December 31,
2010
 

7% Senior Notes due 2012

   $ 149,700       $ 149,650   

5 1/2% Senior Notes due 2013

     349,775         349,748   

5 3/8% Medium-Term Senior Notes due 2014

     249,308         249,266   

5 3/8% Medium-Term Senior Notes due 2015

     249,830         249,821   

5 3/8% Senior Notes due 2020

     244,449         244,330   
                 

Total Senior Notes, net

   $ 1,243,062       $ 1,242,815   

Mortgage repurchase facility

     6,736         25,434   
                 

Total Debt

   $   1,249,798       $   1,268,249   
                 

 

13


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

12.

Income Taxes

The Company is required, at the end of each interim period, to estimate its annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, the Company had an income tax benefit of $3.8 million, or 16.1%, during the three months ended March 31, 2011, compared with $0.4 million, or 1.7%, during the three months ended March 31, 2010. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The increase in the income tax benefit during the 2011 first quarter, compared with the same period during 2010, resulted primarily from the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns.

The Company is required to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. Any difference between the income tax return position and the benefit recognized in the financial statements results in a liability for unrecognized tax benefits. The Company’s liability for unrecognized tax benefits decreased from $55.9 million at December 31, 2010 to $14.6 million at March 31, 2011. The $41.3 million decrease during the 2011 first quarter resulted primarily from the Company’s 2011 first quarter settlement with the IRS on the audit of its 2004 and 2005 federal income tax returns.

In addition to the above, the Company’s 2011 first quarter settlement with the IRS resulted in an increase of $13.0 million to additional paid-in-capital in the Company’s Consolidated Statements of Stockholders’ Equity. Finally, since the Company settled for an amount less than the $35.6 million deposit the Company made with the IRS during 2008, the settlement resulted in an increase of $11.1 million to income taxes receivable in the Company’s Consolidated Balance Sheets.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The increase in the Company’s total deferred tax asset at March 31, 2011 (per the table below) resulted primarily from an increase in the Company’s federal net operating loss carry forward, offset by a decrease in the Company’s asset impairment charges.

A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. The Company had a valuation allowance of $239.0 million and $231.4 million at March 31, 2011 and December 31, 2010, respectively, resulting in a net deferred tax asset of zero. The Company’s future realization of its deferred tax assets ultimately depends upon the existence of sufficient taxable income in the carryback or carryforward periods under the tax laws. The Company will continue analyzing, in subsequent reporting periods, the positive and negative evidence in determining the expected realization of its deferred tax assets.

 

14


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows (in thousands).

 

     March 31,
2011
    December 31,
2010
 

Deferred tax assets

    

Federal net operating loss carryforward

   $        84,745      $        73,189   

State net operating loss carryforward

     48,196        47,041   

Asset impairment charges

     41,502        46,118   

Warranty, litigation and other reserves

     26,341        27,635   

Stock-based compensation expense

     23,913        22,777   

Alternative minimum tax and other tax credit carryforwards

     10,296        10,296   

Accrued liabilities

     10,066        9,789   

Inventory, additional costs capitalized for tax purposes

     5,368        5,368   

Property, equipment and other assets, net

     1,795        1,773   

Charitable contribution on carryforward

     945        938   

Deferred revenue

     364        326   
                

Total deferred tax assets

     253,531        245,250   

Valuation allowance

     (239,012     (231,379
                

Total deferred tax assets, net of valuation allowance

     14,519        13,871   
                

Deferred tax liabilities

    

Deferred revenue

     5,788        6,401   

Unrealized gain

     3,152        1,880   

Accrued liabilities

     698        713   

Inventory, additional costs capitalized for financial statement purposes

     590        604   

Other, net

     4,291        4,273   
                

Total deferred tax liabilities

     14,519        13,871   
                

Net deferred tax asset

   $ -      $ -   
                

 

13.

Variable Interest Entities

In the normal course of business, the Company enters into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company’s capital and financial commitments, including interest and other carrying costs, and minimizes the amount of the Company’s land inventories on its consolidated balance sheets. The Company’s obligation with respect to Option Contracts generally is limited to forfeiture of the related non-refundable cash deposits and/or letters of credit, which totaled approximately $10.3 million and $5.3 million, respectively, at March 31, 2011. At March 31, 2011, the Company had the right to acquire 3,752 lots under Option Contracts.

In compliance with ASC 810, the Company analyzes its Option Contracts to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the optioned land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. As a result of its analyses, the Company determined that as of March 31, 2011 it was not the primary beneficiary of any VIEs from which it is purchasing land under land option contracts.

 

14.

Other Comprehensive Loss

Total other comprehensive loss includes net loss and unrealized holding gains or losses on the Company’s available-for-sale marketable securities. The following table sets forth the Company’s other comprehensive loss during the three months ended March 31, 2011 and 2010 (in thousands).

 

     Three Months Ended March 31,  
     2011     2010  

Net loss

   $ (19,879   $ (20,873

Unrealized holding gains

     3,303        1,154   
                

Total other comprehensive loss

   $ (16,576   $ (19,719
                

 

15


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

15.

Subsequent Events

On April 28, 2011, the Company entered the Seattle/Tacoma market through the purchase of substantially all of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired include approximately 280 vacant residential lots and homes in various stages of construction, spread throughout 11 communities. Additionally, through this acquisition, the Company took control of approximately 230 additional lots in six communities through option contracts.

 

16.

Supplemental Guarantor Information

The Company’s senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the “Guarantor Subsidiaries”), which are 100%-owned subsidiaries of the Company.

 

   

M.D.C. Land Corporation

   

RAH of Florida, Inc.

   

Richmond American Construction, Inc.

   

Richmond American Homes of Arizona, Inc.

   

Richmond American Homes of Colorado, Inc.

   

Richmond American Homes of Delaware, Inc.

   

Richmond American Homes of Florida, LP

   

Richmond American Homes of Illinois, Inc.

   

Richmond American Homes of Maryland, Inc.

   

Richmond American Homes of Nevada, Inc.

   

Richmond American Homes of New Jersey, Inc.

   

Richmond American Homes of Pennsylvania, Inc.

   

Richmond American Homes of Utah, Inc.

   

Richmond American Homes of Virginia, Inc.

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

 

   

American Home Insurance

   

American Home Title

   

HomeAmerican

   

StarAmerican

   

Allegiant

   

Richmond American Homes of West Virginia, Inc.

The Company has determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor Subsidiaries is presented.

 

16


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Balance Sheet

March 31, 2011

(In thousands)

 

     MDC     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated
MDC
 

Assets

            

Cash and cash equivalents

   $ 549,746      $ 2,941       $ 36,356       $ -      $ 589,043   

Marketable securities

     836,787        -         29,285         -        866,072   

Restricted cash

     -        419         -         -        419   

Receivables

     21,118        10,493         2,927         (2,657     31,881   

Mortgage loans held-for-sale, net

     -        -         37,697         -        37,697   

Inventories, net

   $ -           -         -     

Housing completed or under construction

     -        345,554         -         -        345,554   

Land and land under development

     -        488,887         -         -        488,887   

Investment in subsidiaries

     99,113        -         -         (99,113     -   

Other assets, net

     50,042        42,043         3,061         (160     94,986   
                                          

Total Assets

   $ 1,556,806      $ 890,337       $ 109,326       $ (101,930   $ 2,454,539   
                                          

Liabilities

            

Accounts payable and related party liabilities

   $ 2,756      $ 22,770       $ 411       $ (2,657   $ 23,280   

Accrued liabilities

     85,254        61,726         63,233         (160     210,053   

Advances and notes payable to parent and subsidiaries

     (745,674     739,264         6,410         -        -   

Mortgage repurchase facility

     -        -         6,736         -        6,736   

Senior notes, net

     1,243,062        -         -         -        1,243,062   
                                          

Total Liabilities

     585,398        823,760         76,790         (2,817     1,483,131   
                                          

Stockholders’ Equity

     971,408        66,577         32,536         (99,113     971,408   
                                          

Total Liabilities and Stockholders’ Equity

   $   1,556,806      $      890,337       $      109,326       $     (101,930   $     2,454,539   
                                          

 

17


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Balance Sheet

December 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminating
Entries
    Consolidated
MDC
 

Assets

            

Cash and cash equivalents

   $ 535,035      $ 4,287       $ 32,903       $ -      $ 572,225   

Marketable securities

     938,471        -         30,258         -        968,729   

Restricted cash

     -        420         -         -        420   

Receivables

     14,402        8,071         194         (2,657     20,010   

Mortgage loans held-for-sale, net

     -        -         65,114         -        65,114   

Inventories, net

            

Housing completed or under construction

     -        372,422         -         -        372,422   

Land and land under development

     -        415,237         -         -        415,237   

Investment in subsidiaries

     110,065        -         -         (110,065     -   

Other assets, net

     88,267        42,288         3,057         -        133,612   
                                          

Total Assets

   $ 1,686,240      $ 842,725       $ 131,526       $ (112,722   $ 2,547,769   
                                          

Liabilities

            

Accounts payable and related party liabilities

   $ 2,747      $ 34,553       $ 465       $ (2,657   $ 35,108   

Accrued liabilities

     130,960        65,622         64,147         -        260,729   

Advances and notes payable to parent and subsidiaries

     (673,965     671,190         2,775         -        -   

Mortgage repurchase facility

     -        -         25,434         -        25,434   

Senior notes, net

     1,242,815        -         -         -        1,242,815   
                                          

Total Liabilities

     702,557        771,365         92,821         (2,657     1,564,086   
                                          

Stockholders’ Equity

     983,683        71,360         38,705         (110,065     983,683   
                                          

Total Liabilities and Stockholders’ Equity

   $      1,686,240      $      842,725       $      131,526       $     (112,722   $   2,547,769   
                                          

 

18


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Statements of Operations

Three Months Ended March 31, 2011

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Revenue

          

Home sales revenue

   $ -      $ 165,897      $ -      $ (2,514   $ 163,383   

Land sales and other revenue

     -        661        5,703        -        6,364   

Equity in (loss) income of subsidiaries

     (6,052     -        -        6,052        -   
                                        

Total Revenue

     (6,052     166,558        5,703        3,538        169,747   
                                        

Costs and Expenses

          

Home cost of sales

     -        143,495        -        (2,514     140,981   

Asset impairments

     -        279        -        -        279   

Marketing and commission expenses

     -        15,600        -        -        15,600   

General and administrative and other expenses

     14,768        15,757        4,698        -        35,223   
                                        

Total Operating Costs and Expenses

     14,768        175,131        4,698        (2,514     192,083   
                                        

(Loss) income from Operations

     (20,820     (8,573     1,005        6,052        (22,336

Other (expense) income

     (2,191     42        781        -        (1,368
                                        

(Loss) income before income taxes

     (23,011     (8,531     1,786        6,052        (23,704

Benefit from (provision for) income taxes

     3,132        1,376        (683     -        3,825   
                                        

Net (Loss) Income

   $         (19,879   $        (7,155   $         1,103      $         6,052      $         (19,879
                                        

 

19


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Statements of Operations

Three Months Ended March 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Revenue

           

Home sales revenue

   $ -      $ 143,846       $ -      $ (2,903   $ 140,943   

Land sales and other revenue

     -        514         5,621        -        6,135   

Equity in (loss) income of subsidiaries

     2,354        -         -        (2,354     -   
                                         

Total Revenue

     2,354        144,360         5,621        (5,257     147,078   
                                         

Costs and Expenses

           

Home cost of sales

     -        112,311         (18     (2,903     109,390   

Asset impairments

     -        -         -        -        -   

Marketing and commission expenses

     -        12,189         -        -        12,189   

General and administrative and other expenses

     18,182        18,623         4,089        -        40,894   
                                         

Total Operating Cost s and Expenses

     18,182        143,123         4,071        (2,903     162,473   
                                         

(Loss) income from Operations

     (15,828     1,237         1,550        (2,354     (15,395

Other income (expense)

     (6,208     48         313        -        (5,847
                                         

(Loss) income before income taxes

     (22,036     1,285         1,863        (2,354     (21,242

Benefit from (provision for) income taxes

     1,163        22         (816     -        369   
                                         

Net (Loss) Income

   $        (20,873   $         1,307       $          1,047      $        (2,354   $        (20,873
                                         

 

20


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Statements of Cash Flows

Three Months Ended March 31, 2011

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Net cash provided by (used in) operating activities

   $ (19,469   $ (71,781   $ 24,840      $ 8,709      $ (57,701
                                        

Net cash used in investing activities

     104,104        (11     948        -        105,041   
                                        

Financing activities

          

Payments from (advances to) subsidiaries

     (58,100     70,446        (3,637     (8,709     -   

Proceeds from issuance of senior notes, net

     -        -        -        -        -   

Mortgage repurchase facility

     -        -        (18,698     -        (18,698

Dividend payments

     (11,824     -        -        -        (11,824
                                        

Net cash provided by (used in) financing activities

     (69,924     70,446        (22,335     (8,709     (30,522
                                        

Net (decrease) increase in cash and cash equivalents

     14,711        (1,346     3,453        -        16,818   

Cash and cash equivalents

          

Beginning of period

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

End of period

   $     549,746      $         2,941      $       36,356      $                 -      $     589,043   
                                        

 

21


M.D.C. HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements (continued)

 

Supplemental Condensed Combining Statements of Cash Flows

Three Months Ended March 31, 2010

(In thousands)

 

     MDC     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
MDC
 

Net cash provided by operating activities

   $ 76,099      $ (128,646   $ 66,417      $ (2,354   $ 11,516   
                                        

Net cash provided by (used in) investing activities

     (501,747     (20     -        -        (501,767
                                        

Financing activities

          

Payments from (advances to) subsidiaries

     (131,470     128,249        867        2,354        -   

Proceeds from issuance of senior notes, net

     242,288        -        -        -        242,288   

Mortgage repurchase facility

     -        -        (24,401     -        (24,401

Dividend payments

     (11,784     -        -        -        (11,784

Proceeds from exercise of stock options

     35        -        -        -        35   
                                        

Net cash provided by (used in) financing activities

     99,069        128,249        (23,534     2,354        206,138   
                                        

Net increase (decrease) in cash and cash equivalents

     (326,579     (417     42,883        -        (284,113

Cash and cash equivalents

          

Beginning of period

     1,210,123        3,258        20,871        -        1,234,252   
                                        

End of period

   $     883,544      $         2,841      $       63,754      $                 -      $     950,139   
                                        

 

 

22


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

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in “Item 1A: Risk Factors Relating to our Business” of our Annual Report on Form 10-K for the year ended December 31, 2010 and this Quarterly Report on Form 10-Q.

INTRODUCTION

M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this Annual Report on Form 10-K, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California and Nevada); (2) Mountain (Colorado and Utah); (3) East (Maryland, which includes Maryland, Pennsylvania, Delaware and New Jersey, and Virginia, which includes Virginia and West Virginia); and (4) Other Homebuilding (Florida and Illinois).

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides to its customers, primarily our homebuilding subsidiaries and certain subcontractors of these homebuilding subsidiaries, products and completed operations coverage on homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC, which beginning in June 2004, re-insures all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits.

EXECUTIVE SUMMARY

During the first quarter of 2011, we continued to be faced with challenges in the homebuilding industry including: (1) high levels of existing home inventories; (2) significant competition for new home orders and acquisition of finished lots; (3) low consumer confidence; and (4) high unemployment levels. These conditions reflect a further extension of the housing market downturn and it is difficult to predict when and at what rate these negative conditions will improve, or when the homebuilding industry will experience a sustainable recovery. As a result of these difficult market conditions and without the benefit of a federal homebuyer tax credit (which required the sale of homes to be completed by April 30, 2010), we experienced a 24% reduction in net home orders during the 2011 first quarter compared with the same period during 2010. Additionally, with a sharp reduction in our Home Gross Margins (as defined below), we reported a loss before income taxes during the three months ended March 31, 2011 of $23.7 million compared with a loss of $21.2 million during the same period in 2010.

Our Home Gross Margins decreased to 13.7% during the first quarter of 2011 from 22.4% during the first quarter of 2010 and, excluding the impact of interest expense in cost of sales and warranty adjustments, our Home Gross Margins were 16.0% and 21.9% during the three months ended March 31, 2011 and 2010, respectively. (See reconciliation of home cost of sales excluding warranty adjustment and interest set forth below.) Contributing to the decline in Home Gross Margins was the impact of accepting new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction. During the first quarter of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. Therefore, during the 2011 first quarter, we focused on selling and closing unsold homes under construction, which decreased to 674 units at March 31, 2011, down 29% from 944 units at December 31, 2010. We continue to believe that a limited level of unsold homes is appropriate for most of our subdivisions, provided that construction is held at the drywall stage to allow buyers to personalize their homes. Our Home Gross Margins were also negatively impacted by an increase in our land costs as the demand for finished residential lots has been very competitive despite the continuing overall weakness in the market for new homes.

 

23


On the expense side of our business, we saw an increase of $2.8 million in marketing expenses during the 2011 first quarter, compared to the 2010 first quarter as we sought to increase traffic and sales through our increased community count. We experienced a $3.5 million decrease in our general and administrative expenses primarily due to lower costs associated with legal-related matters. During the 2011 first quarter, our net interest expense decreased to $1.4 million from $5.9 million during the same period in 2010 as we were able to achieve a better return on our marketable securities. Additionally, other operating expenses decreased by $2.0 million during the 2011 first quarter, compared with the same period in 2010, primarily reflecting a tax settlement during the quarter.

During the 2011 first quarter we have been focused on two primary strategic goals: (1) market share expansion; and (2) new market entry. After increasing revenues by 7% in 2010, we took further steps in the first quarter of 2011 to facilitate further revenue growth, primarily through additional investments in our homebuilding operations designed to increase market share in existing markets. During the quarter, we took control of lots in 15 new subdivisions, adding to the 130 communities we had in 2010. Based on our acquisition activity in 2011 we increased our active subdivision (as defined below) count to 162 at March 31, 2011, a 9% increase from December 31, 2010. We also have an additional 60 subdivisions that we expect will be active in the near term, partially offset by 35 currently active subdivisions that we expect to be inactive in the near term.

On April 28, 2011, we entered the Seattle/Tacoma market through the purchase of substantially all of the homebuilding assets of SDC Homes and certain affiliated entities. Assets acquired include approximately 280 owned lots in 11 communities and an additional 230 lots under option in 3 communities where lots were already owned and 3 new communities.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

24


Results of Operations

The following discussion compares results for the three months ended March 31, 2011 with the three months ended March 31, 2010.

Home Sales Revenue. Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican) and interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of base sales price and any purchased options and upgrades, less any of the foregoing incentives, for each closed home constitutes the selling price of our closed homes.

Our home sales revenue can be impacted by changes in our home closing levels and changes in the average selling prices of closed homes. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing.

The table below summarizes home sales revenue by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,     Change  
     2011     2010     Amount     %  

West

   $ 42,393      $ 56,727      $ (14,334     -25%   

Mountain

     70,748        46,599        24,149        52%   

East

     42,910        31,486        11,424        36%   

Other Homebuilding

     9,846        9,034        812        9%   
                          

Total Homebuilding

     165,897        143,846        22,051        15%   

Intercompany adjustments

     (2,514     (2,903     389        13%   
                          

Consolidated

   $      163,383      $      140,943      $      22,440        16%   
                          

The decrease in home sales revenue in our West segment was due to closing 61 fewer homes during the three months ended March 31, 2011, which resulted in a decrease of $11.9 million in home sales revenue, and declines of $34,600 and $23,700 in the average selling prices of closed homes in our California and Arizona markets of this segment, respectively. The increase in home sales revenue in our Mountain segment was due to closing 60 more homes during the three months ended March 31, 2011, which resulted in an increase of $17.9 million. Additionally, the average selling prices of closed homes in the Colorado market of this segment increased by $37,000, which contributed $6.1 million to the total increase in home sales revenue for this segment.

The increase in home sales revenue in our East segment was due to closing 30 more homes during the three months ended March 31, 2011, which resulted in an increase of $12.6 million. Partially offsetting this was a $47,800 decline in the average selling prices of closed homes in the Virginia market of this segment. The increase in home sales revenue in our Other Homebuilding segment resulted from an $8,700 increase in the average selling prices of closed homes in the Florida market.

Home Gross Margins. We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue.

 

25


The following table sets forth our Home Gross Margins by reportable segment.

 

     Three Months Ended March 31,         
     2011      2010      Change  

Homebuilding

        

West

     18.6%         26.4%         -7.8%   

Mountain

     11.8%         18.7%         -6.9%   

East

     10.7%         18.0%         -7.3%   

Other Homebuilding

     15.8%         24.2%         -8.4%   
                          

Consolidated

                13.7%                    22.4%         -8.7%   
                          

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments to our warranty reserves. During the three months ended March 31, 2011 and 2010, we continued to experience lower warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we recorded adjustments to reduce our warranty reserve of $0.4 million and $3.9 million during the three months ended March 31, 2011 and 2010, respectively.

Home Gross Margins are also impacted by interest included in home cost of sales. During the three months ended March 31, 2011 and 2010, interest in home cost of sales was 2.6% and 2.3% percent of home sales revenue, respectively.

The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in home cost of sales during the three months ended March 31, 2011 and 2010.

 

     Three Months Ended March 31,         
     2011      2010      Change  

West

     20.9%         24.2%         -3.3%   

Mountain

     14.1%         19.3%         -5.2%   

East

     13.2%         19.5%         -6.3%   

Other

     17.0%         21.7%         -4.7%   
                          

Consolidated

              16.0%                    21.9%         -5.9%   
                          

Home Gross Margins, excluding warranty and interest, decreased on a consolidated basis primarily due to: (1) accepting new home orders with lower Home Gross Margins designed to generate sales velocity in order to reduce our excess supply of unsold homes under construction; and (2) an increase in our land costs as the demand for finished residential lots has been very competitive despite the continuing overall weakness in the market for new homes. During the first quarter of 2010, we had increased our supply of unsold inventory under construction at the frame and foundation stage in anticipation of increased demand from the federal homebuyer tax credit. However, following expiration of the federal homebuyer tax credit, sales of new homes significantly deteriorated. Accordingly, and coupled with an increase in the Cancellation Rate (as defined below) during the 2010 fourth quarter, we ended the 2010 year with a significant number of unsold homes under construction. As a result of our effort to reduce the number of unsold homes under construction, 73% of our closed homes during the 2011 first quarter were homes under construction, up from 57% during the same period in 2010. Generally homes sold as a dirt start yield a higher Home Gross Margin than homes under construction.

Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) increases in the costs of finished lots; (3) continued and/or increases in home foreclosure levels; (4) on-going tightening of mortgage loan origination requirements; (5) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (6) deterioration in the demand for new homes in our markets; (7) fluctuating energy costs,

 

26


including oil and gasoline; (8) increases in the costs of subcontracted labor, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (9) increases in interest expense included in home cost of sales; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See “Forward-Looking Statements” above.

The following table sets forth by reportable segment a reconciliation of our home cost of sales, as reported, to home cost of sales excluding warranty adjustments and interest in home cost of sales, which is used in the calculation of Home Gross Margins, excluding warranty adjustments and interest in home cost of sales (dollars in thousands).

 

      Home Sales
Revenue - As
reported
    Home Cost of
Sales - As
reported
    Warranty
Adjustments
    Interest in
Cost of Sales
     Home Cost of
Sales -
Excluding
Warranty
Adjustments and
Interest
    Home Gross
Margins -
Excluding
Warranty
Adjustments and
Interest
 

Three Months Ended March, 31, 2011

             

West

   $ 42,393      $ 34,521      $ (203   $ 1,170       $ 33,554        20.9%   

Mountain

     70,748        62,376        (180     1,813         60,743        14.1%   

East

     42,910        38,311        (17     1,070         37,258        13.2%   

Other

     9,846        8,287        (31     150         8,168        17.0%   

Intercompany adjustments

     (2,514     (2,514     -        -         (2,514     N/A   
                                           

Consolidated

   $ 163,383      $ 140,981      $ (431   $ 4,203       $ 137,209        16.0%   
                                           

Three Months Ended March, 31, 2010

             

West

   $ 56,727      $ 41,745      $ (2,572   $ 1,328       $ 42,989        24.2%   

Mountain

     46,599        37,879        (800     1,074         37,605        19.3%   

East

     31,486        25,817        (196     657         25,356        19.5%   

Other

     9,034        6,852        (361     143         7,070        21.7%   

Intercompany adjustments

     (2,903     (2,903     -        -         (2,903     N/A   
                                           

Consolidated

   $ 140,943      $ 109,390      $ (3,929   $ 3,202       $ 110,117        21.9%   
                                           

Home Gross Margins excluding the impact of warranty adjustments and interest in home cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustments and interest have on our Home Gross Margins.

Land Sales Revenue. Land sales revenue was not material during the three months ended March 31, 2011 or 2010.

Other Revenue. Gains on the sale of mortgage loans primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties. Insurance revenue primarily represents premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes. Title and other revenue primarily consist of forfeitures of homebuyer deposits on home sales contracts, revenue associated with our American Home Title operations and our broker origination fees, which represent fees that HomeAmerican earns upon brokering a mortgage loan for a home closing.

 

27


The table below sets forth the components of other revenue (dollars in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Gains on sales of mortgage loans and broker origination fees, net

   $ 4,323       $ 4,010       $ 313        8%   

Insurance revenue

     988         1,289         (301     -23%   

Title and other revenue

     849         821         28        3%   
                            

Total other revenue

   $        6,160       $        6,120       $        40        1%   
                            

Gains on sales of mortgage loans and broker origination fees increased primarily due to closing 31 more homes during the three months ended March 31, 2011.

Home Cost of Sales.  Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), specific construction costs of each home, warranty costs and finance and closing costs, including Closing Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-party

Our home cost of sales can be impacted primarily from changes in our home closing levels and changes in the cost of land acquisition, development, construction cost of homes and changes in our estimated costs for warranty repairs.

The table below sets forth the home cost of sales by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,     Change  
     2011     2010     Amount     %  

Homebuilding

        

West

   $ 34,521      $ 41,745      $ (7,224     -17%   

Mountain

     62,376        37,879        24,497        65%   

East

     38,311        25,817        12,494        48%   

Other Homebuilding

     8,287        6,852        1,435        21%   
                          

Total Homebuilding

     143,495        112,293        31,202        28%   

Intercompany adjustments

     (2,514     (2,903     389        13%   
                          

Consolidated

   $      140,981      $      109,390      $        31,591        29%   
                          

On a consolidated basis, home cost of sales increased by $31.6 million during the three months ended March 31, 2011 primarily resulting from the following increases: (1) $11.4 million associated with an increase in home construction cost per closed home largely due to a shift in product to slightly larger homes, particularly in our Mountain segment; (2) $8.9 million associated with higher lot costs per closed home; (3) $6.5 million associated with closing 31 more homes during the 2011 first quarter; and (4) $4.5 million associated with warranty expense and interest in cost of sales.

In our West segment, home cost of sales decreased by $10.1 million due to closing 61 fewer homes and $2.2 million associated with a decrease in home construction cost per closed home largely due to a shift in product to slightly smaller homes. Partially offsetting this decline was an increase of $3.4 million associated with higher lot costs per closed home and the impact of adjustments to reduce our warranty reserves. During the 2010 first quarter, we incurred adjustments of $2.6 million to reduce our warranty reserves compared with $0.2 million during the 2011 first quarter. In our Mountain segment, home cost of sales increased by $14.2 million associated with closing 60 more homes, $6.6 million associated with an increase in home construction cost per closed home and $2.4 million associated with higher lot costs per closed home.

 

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In our East segment, the $12.5 million increase in home cost of sales primarily resulted from closing 30 more homes which made up $11.1 million of the total increase to home cost of sales. In our Other Homebuilding segment, home cost of sales increased primarily due to a shift in product to slightly larger homes.

Land Cost of Sales.  Land cost of sales were not material during the three months ended March 31, 2011 or 2010.

Marketing Expenses.  Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount      %  

Homebuilding

           

West

   $ 4,180       $ 3,069       $ 1,111         36%   

Mountain

     3,196         2,179         1,017         47%   

East

     1,590         1,264         326         26%   

Other Homebuilding

     867         548         319         58%   
                             

Consolidated

   $        9,833       $        7,060       $        2,773         39%   
                             

Marketing expenses increased for each of our homebuilding segments during the three months ended March 31, 2011 despite a 24% decline in net orders for homes during the 2011 first quarter. Contributing to these increased costs was the impact of an increase in total subdivisions and a 17% increase in model homes at March 31, 2011 compared with March 31, 2010. As a result of this increase in marketing activity, we experienced an increase of $1.1 million in product advertising, $0.6 million in sales office/showroom expense and a $0.2 million increase in employee compensation and other employee-related benefit costs. Additionally, we had an increase of $0.5 million in amortization of deferred marketing costs primarily resulting from increases in model home cost per closing and a 6% increase in closed homes.

Commission Expenses.  Commission expenses include direct incremental commissions paid for closed homes. The following table summarizes our commission expenses by reportable segment (in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Homebuilding

          

West

   $ 1,484       $ 2,139       $ (655     -31%   

Mountain

     2,473         1,572         901        57%   

East

     1,354         1,105         249        23%   

Other Homebuilding

     456         313         143        46%   
                            

Consolidated

   $        5,767       $        5,129       $          638        12%   
                            

Commission expense in our West segment was lower during the three months ended March 31, 2011 due to closing 61 fewer homes. In the Mountain, East and Other Homebuilding segments, commission expense increased during the 2011 first quarter primarily due to closing more homes in each segment.

 

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General and Administrative Expenses.  The following table summarizes our general and administrative expenses by reportable segment (in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Homebuilding

          

West

   $ 6,118       $ 7,340       $ (1,222     -17%   

Mountain

     4,246         3,724         522        14%   

East

     3,602         4,836         (1,234     -26%   

Other Homebuilding

     993         1,826         (833     -46%   
                            

Total Homebuilding

     14,959         17,726         (2,767     -16%   

Financial Services and Other

     4,699         4,088         611        15%   

Corporate

     17,094         18,389         (1,295     -7%   
                            

Consolidated

   $      36,752       $      40,203       $      (3,451     -9%   
                            

Our consolidated general and administrative expenses decreased $3.5 million. Contributing to this decline was the impact of expenses incurred on legal related matters during the 2011 first quarter, which were $2.7 million lower than during the 2010 first quarter. Additionally, stock-based compensation expense decreased by $0.9 million during the three months ended March 31, 2011 primarily due to stock options which became fully vested during the 2010 fourth quarter. We also made changes in our headcount, primarily during the 2010 fourth quarter and, based upon these steps, the headcount for our general and administrative departments totaled approximately 670 employees at March 31, 2011, compared with approximately 770 at March 31, 2010. As a result, we experienced a decrease of $0.6 million associated with salary related costs during the 2011 first quarter.

These decreases in general and administrative expenses partially were offset by a $1.0 million increase in mortgage loan loss reserves as HomeAmerican reached a settlement associated with claims and potential claims to repurchase certain previously sold mortgage loans. Primarily as a result of this settlement, we increased our estimated mortgage loan loss reserve by $1.0 million during the three months ended March 31, 2011. We experienced an increase of $0.7 million in consulting related costs during the three months ended March 31, 2011, which is mostly attributable to our on-going implementation of our enterprise resource planning (“ERP”) system. Additionally, we experienced an increase of $0.3 million in depreciation expense during the 2011 first quarter primarily associated with our enterprise resource planning system.

In our West and East segments, general and administrative expenses decreased primarily due to settlements and fees incurred associated with legal-related matters while legal-related expenses decreased in our Mountain segment.

In our Financial Services and Other segment, general and administrative expenses were higher primarily due to the foregoing increase of $1.0 million in our mortgage loan loss reserve.

In our Corporate segment, employee compensation and other employee-related benefit costs decreased by $1.2 million during the 2011 first quarter with $0.9 million of this decrease attributable to lower stock-based compensation expense. We experienced a decrease of $0.4 million in office-related expenses primarily attributable to consolidating our corporate offices into one facility versus the two office facilities we had during the 2010 first quarter. Additionally, we had a decline of $0.3 million associated with employee recruiting costs and costs associated with the homebuilding line of credit, which was terminated during the second half of 2010.

Other Operating Income (Expense).  We had other operating income of $1.6 million during the three months ended March 31, 2011 primarily due to the release of a $2.7 million employment tax contingency reserve as a result of the finalization of an IRS examination. This item was partially offset by $1.1 million in other operating expenses, primarily write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise and due diligence costs associated with our acquisition of SDC.

Other Income (Expense).  Other income (expense) primarily includes interest and dividend income on our cash, cash equivalents and marketable securities, interest expense primarily on our senior notes, and gain or loss on the sale of other assets. Interest income was $7.3 million and $4.4 million during the three months ended March 31, 2011 and 2010, respectively. The increase is attributable to an increase in our available-for-sale marketable securities

 

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during the 2011 first quarter compared with the 2010 first quarter. Our available-for-sale marketable securities include certain debt securities, primarily corporate debt and holdings in a fund that invests predominantly in fixed income securities. These marketable securities totaled $383.1 million and $379.3 million at March 31, 2011 and December 31, 2010, respectively. We increased our holdings of these marketable securities during 2010, primarily due to our efforts to achieve an appropriate rate of return.

Interest expense during the three months ended March 31, 2011 decreased $1.6 million. We capitalize interest on our senior notes associated with our qualifying assets. We have determined that inventory is a qualifying asset during the period of active development of our land and through the completion of construction of a home. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. During the three months ended March 31, 2011, we incurred $18.2 million of interest, an increase of $1.3 million from the three months ended March 31, 2010. This increase resulted from the issuance of our 2020 Senior Notes in January of 2010. Additionally, as a result of the increase in our inventory levels from March 31, 2010, we capitalized $9.5 million of interest incurred, an increase of $2.9 million from the same period during 2010.

(Loss)/Income Before Income Taxes.  The table below summarizes our (loss)/income before income taxes by reportable segment (dollars in thousands).

 

     Three Months Ended March 31,     Change  
     2011     2010     Amount     %  

Homebuilding

        

West

   $ (4,560   $ 2,354      $ (6,914     294%   

Mountain

     (1,232     1,170        (2,402     205%   

East

     (1,956     (1,519     (437     -29%   

Other Homebuilding

     (776     (519     (257     -50%   
                          

Total Homebuilding

     (8,524     1,486        (10,010     674%   

Financial Services and Other

     1,780        1,846        (66     -4%   

Corporate

     (16,960     (24,574     7,614        31%   
                          

Consolidated

   $    (23,704   $    (21,242   $    (2,462     -12%   
                          

In our West segment, we had a loss before income taxes of $4.6 million during the three months ended March 31, 2011 compared with income before income taxes of $2.4 million during the same period in 2010. This decline primarily resulted from a 780 basis point decline in Home Gross Margins, closing 61 fewer homes during the 2011 first quarter, and a $1.1 million increase in marketing expenses. These items partially were offset by a combined decrease of $1.9 million in commission and general and administrative expenses. Despite an increase in home sales revenue of $24.1 million during the 2011 first quarter in our Mountain segment, we incurred a loss before income taxes of $1.2 million during the three months ended March 31, 2011 compared with income before income taxes of $1.2 million during the same period in 2010. The decline primarily resulted from a 690 basis point reduction in Home Gross Margins and a combined increase of $2.4 million in marketing, commission and general and administrative expenses. These items partially were offset by closing 60 more homes during the 2011 first quarter.

In our East segment, our loss before income taxes was slightly higher during the three months ended March 31, 2011. Contributing to the increase in loss was a 730 basis point decline in Home Gross Margins and a combined increase of $0.6 million in commission and marketing expenses. These items partially were offset by a reduction of $1.2 million in general and administrative expenses and the impact of closing 30 more homes during the 2011 first quarter. In our Other Homebuilding segment, our loss before income taxes was slightly higher during the three months ended March 31, 2011. Contributing to the increase in loss was an 840 basis point decline in Home Gross Margins and a combined increase of $0.5 million in commission and marketing expenses. These items partially were offset by a reduction of $0.8 million in general and administrative expenses.

 

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In our Financial Services and Other segment, income before income taxes remained flat during the 2011 first quarter compared with the 2010 first quarter. Despite little change during the quarter, the results of this segment were impacted by an $0.6 million increase in general and administrative expenses partially offset by an increase in interest income of $0.4 million. In our Corporate segment, our loss before income taxes was $17.0 million during the 2011 first quarter, compared to $24.6 million during the same period in 2010. Contributing to the decrease in loss before income taxes for this segment was a decrease of $4.0 in net interest expense during the 2011 first quarter, a $2.3 million decrease in other operating expenses and a $1.3 million decrease in general and administrative expenses.

Income Taxes. We are required, at the end of each interim period, to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Based on these estimates, the Company had an income tax benefit of $3.8 million, or 16.1%, during the three months ended March 31, 2011, compared with $0.4 million, or 1.7%, during the three months ended March 31, 2010. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2011 and 2010 are not meaningful as the income tax benefit is not directly correlated to the amount of pretax loss. The increase in the income tax benefit during the 2011 first quarter, compared with the same period during 2010, resulted primarily from our 2011 first quarter settlement with the IRS on the audit of our 2004 and 2005 federal income tax returns.

Homebuilding Operating Activities

Orders for Homes, net.  The table below sets forth information relating to orders for homes (dollars in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Orders For Homes, net (units)

          

Arizona

     122         168         (46     -27%   

California

     77         26         51        196%   

Nevada

     88         170         (82     -48%   
                            

West

     287         364         (77     -21%   
                            

Colorado

     181         270         (89     -33%   

Utah

     67         125         (58     -46%   
                            

Mountain

     248         395         (147     -37%   
                            

Maryland

     46         47         (1     -2%   

Virginia

     68         66         2        3%   
                            

East

     114         113         1        1%   
                            

Florida

     51         59         (8     -14%   

Illinois

     5         -         5        N/M   
                            

Other Homebuilding

     56         59         (3     -5%   
                            

Total

     705         931         (226     -24%   
                            

Estimated Value of Orders for

          

Homes, net

   $ 205,000       $ 258,000       $ (53,000     -21%   

Estimated Average Selling Price of Orders for Homes, net

   $ 290.8       $ 277.1       $ 13.7        5%   

N/M – Not meaningful

 

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Net orders for homes decreased during the three months ended March 31, 2011, particularly in our Mountain and West segments. Contributing to the decrease in these segments was the impact of a 1,600 and 1,000 basis point increase in the Cancellation Rate of the Mountain and West segment, respectively. Our net orders for homes in the 2011 first quarter, compared with the 2010 first quarter, were also negatively impacted through the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010.

Homes Closed.  The following table sets forth homes closed for each market within our homebuilding segments (in units).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Arizona

     77         108         (31     -29%   

California

     48         46         2        4%   

Nevada

     66         98         (32     -33%   
                            

West

     191         252         (61     -24%   
                            

Colorado

     166         108         58        54%   

Utah

     54         52         2        4%   
                            

Mountain

     220         160         60        38%   
                            

Maryland

     57         30         27        90%   

Virginia

     43         40         3        8%   
                            

East

     100         70         30        43%   
                            

Florida

     43         41         2        5%   

Illinois

     -         -         -        0%   
                            

Other Homebuilding

     43         41         2        5%   
                            

Total

     554         523         31        6%   
                            

The 6% increase in home closings during the 2011 first quarter resulted from an increase in closings in our Mountain and East homebuilding segments. In our Mountain segment, homes closed increased primarily in the Colorado market of this segment and was attributable mostly to having more homes in Backlog leading into the 2011 first quarter compared with the Backlog leading into the 2010 first quarter. In our East segment, our homes closed increased as we were able to generate more closings through the sale of speculative homes, which resulted in lowering our unsold homes under construction for this segment by 31 units during the 2011 first quarter. These items partially were offset by a decline of 61 closed homes in our West segment, primarily due to having fewer homes in Backlog leading into the 2011 first quarter compared with leading into the 2010 first quarter.

 

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Backlog.  The following table below sets forth information relating to Backlog for each market within our homebuilding segments (dollars in thousands).

 

     March 31,
2011
     December 31,
2010
     March 31,
2010
 

Backlog (units)

        

Arizona

     129         84         163   

California

     108         79         56   

Nevada

     98         76         160   
                          

West

     335         239         379   
                          

Colorado

     288         273         369   

Utah

     82         69         167   
                          

Mountain

     370         342         536   
                          

Maryland

     115         126         143   

Virginia

     95         70         99   
                          

East

     210         196         242   
                          

Florida

     72         64         77   

Illinois

     6         1         -   
                          

Other Homebuilding

     78         65         77   
                          

Total

     993         842         1,234   
                          

Backlog Estimated Sales Value

   $ 312,000       $ 269,000       $ 381,000   
                          

Estimated Average Selling Price of Homes in Backlog

   $ 314.2       $ 319.5       $ 308.8   
                          

We define “Backlog” as homes under contract but not yet delivered. The decrease in our Backlog at March 31, 2011 compared to March 31, 2010 is mostly attributable to our Mountain segment. In the Mountain segment, Backlog was lower by 166 units, driven in part by a decrease of 147 net orders for homes during the 2011 first quarter compared to the 2010 first quarter.

Cancellation Rate.  We define our home order “Cancellation Rate” as the approximate number of cancelled home order contracts during a reporting period as a percentage of total home order contracts received during such reporting period. The following tables set forth our Cancellation Rate by segment.

 

     Three Months Ended March 31,      Increase  
     2011      2010      (Decrease)  

Homebuilding

        

West

     29%         19%         10%   

Mountain

     37%         21%         16%   

East

     30%         28%         2%   

Other Homebuilding

     29%         32%         -3%   
                          

Consolidated

     32%         22%         10%   
                          

Our consolidated Cancellation Rate increased 1,000 basis points, mostly from our West and Mountain segments, and primarily resulted from increases caused by the following: (1) our prospective homebuyers having difficulty selling their existing homes; (2) low consumer confidence in the housing market; and (3) difficulties associated with qualifying for mortgage loans.

 

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Active Subdivisions.   The following table displays the number of our active subdivisions for each market within our homebuilding segments.

 

     March 31,
2011
     December 31,
2010
     March 31,
2010
 

Arizona

     29         26         28   

California

     16         13         3   

Nevada

     19         18         17   
                          

West

     64         57         48   
                          

Colorado

     42         39         41   

Utah

     18         19         17   
                          

Mountain

     60         58         58   
                          

Maryland

     14         14         9   

Virginia

     10         8         7   
                          

East

     24         22         16   
                          

Florida

     13         11         10   

Illinois

     1         -         -   
                          

Other Homebuilding

     14         11         10   
                          

Total

     162         148         132   
                          

Our active subdivisions at March 31, 2011 have increased in each of our homebuilding segments compared with both March 31, 2010 and December 31, 2010. These increases are the result of our on-going efforts to expand operations and generate more home closings in existing markets.

Average Selling Prices Per Home Closed. The average selling price for our closed homes includes the base sales price, any purchased options and upgrades, reduced by any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The following tables set forth our average selling prices per home closed, by market (dollars in thousands).

 

     Three Months Ended March 31,      Change  
     2011      2010      Amount     %  

Arizona

   $ 180.0       $ 203.7       $ (23.7     -12%   

California

     317.3         351.9         (34.6     -10%   

Colorado

     336.8         299.8         37.0        12%   

Florida

     229.0         220.3         8.7        4%   

Illinois

     N/A         N/A         N/A        N/A   

Maryland

     428.4         412.4         16.0        4%   

Nevada

     201.5         189.3         12.2        6%   

Utah

     274.9         273.5         1.4        1%   

Virginia

     430.0         477.8         (47.8     -10%   

Average

   $      294.9       $        269.5       $        25.4        9%   

The average selling prices in our Colorado, Nevada, Florida and Maryland markets increased during the 2011 first quarter primarily resulting from a shift in product to slightly larger homes. In our Arizona, California and Virginia markets, the decrease in the average selling price of closed homes is mostly attributable to closing more of our smaller homes and a shift in product mix as we closed a higher concentration of homes in lower priced subdivisions.

 

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Inventory.  Our inventory consists of housing completed or under construction and land and land under development. Housing completed or under construction in our Consolidated Balance Sheets primarily includes: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering and permit fees; (4) capitalized interest; and (5) certain indirect fees. Land and land under development on our Consolidated Balance Sheets primarily includes land acquisition costs, land development costs associated with subdivisions for which we have the intent to construct and sell homes and capitalized interest.

The following table shows the carrying value of housing completed or under construction for each market within our homebuilding segments (dollars in thousands).

 

     March 31,
2011
     December 31,
2010
     March 31,
2010
 

Arizona

   $ 31,628       $ 31,923       $ 49,656   

California

     46,818         49,516         38,082   

Nevada

     29,317         33,377         40,681   
                          

West

     107,763         114,816         128,419   
                          

Colorado

     101,507         111,397         117,612   

Utah

     25,377         26,372         35,836   
                          

Mountain

     126,884         137,769         153,448   
                          

Maryland

     43,368         48,740         53,908   

Virginia

     44,798         45,836         42,527   
                          

East

     88,166         94,576         96,435   
                          

Florida

     21,427         24,262         21,304   

Illinois

     1,314         999         -   
                          

Other Homebuilding

     22,741         25,261         21,304   
                          

Total

   $      345,554       $      372,422       $      399,606   
                          

The table below shows the stage of construction for our homes completed or under construction, number of sold homes under construction and model homes (in units).

 

     March 31,
2011
     December 31,
2010
     March 31,
2010
 

Unsold Homes Under Construction - Final

     67         119         48   

Unsold Homes Under Construction - Frame

     570         722         675   

Unsold Homes Under Construction - Foundation

     37         103         376   
                          

Total Unsold Homes Under Construction

     674         944         1,099