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EX-31.2 - EXHIBIT 31.2 - Taylor Morrison Home Corptmhc-063016xex312q2.htm
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EX-32.1 - EXHIBIT 32.1 - Taylor Morrison Home Corptmhc-063016xex321q2.htm
EX-31.1 - EXHIBIT 31.1 - Taylor Morrison Home Corptmhc-063016xex311q2.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-35873
 
 
TAYLOR MORRISON HOME CORPORATION
(Exact name of Registrant as specified in its Charter)
 
Delaware
 
90-0907433
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4900 N. Scottsdale Road, Suite 2000
Scottsdale, Arizona
 
85251
(Address of principal executive offices)
 
(Zip Code)
(480) 840-8100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)  
 
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  ý    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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
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  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding as of August 3, 2016
Class A common stock, $0.00001 par value
  
30,353,885
Class B common stock, $0.00001 par value
  
89,106,748
 



TAYLOR MORRISON HOME CORPORATION
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TAYLOR MORRISON HOME CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)

 
 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
 
Cash and cash equivalents
 
$
131,879

 
$
126,188

Restricted cash
 
1,300

 
1,280

Real estate inventory:
 
 
 
 
Owned inventory
 
3,242,308

 
3,118,866

Real estate not owned under option agreements
 
612

 
7,921

Total real estate inventory
 
3,242,920

 
3,126,787

Land deposits
 
38,615

 
34,113

Mortgage loans held for sale
 
145,963

 
201,733

Prepaid expenses and other assets, net
 
83,294

 
75,295

Other receivables, net
 
126,566

 
120,729

Investments in unconsolidated entities
 
149,844

 
128,448

Deferred tax assets, net
 
234,457

 
233,488

Property and equipment, net
 
6,334

 
7,387

Intangible assets, net
 
3,718

 
4,248

Goodwill
 
66,198

 
57,698

Total assets
 
$
4,231,088

 
$
4,117,394

Liabilities
 
 
 
 
Accounts payable
 
$
151,083

 
$
151,861

Accrued expenses and other liabilities
 
175,284

 
191,452

Income taxes payable
 
15,608

 
37,792

Customer deposits
 
139,830

 
92,319

Senior notes, net
 
1,236,332

 
1,235,157

Loans payable and other borrowings
 
158,244

 
134,824

Revolving credit facility borrowings, net
 
210,705

 
109,947

Mortgage warehouse borrowings
 
118,099

 
183,444

Liabilities attributable to real estate not owned under option agreements
 
612

 
7,921

Total liabilities
 
2,205,797

 
2,144,717

COMMITMENTS AND CONTINGENCIES (Note 18)
 

 

Stockholders’ Equity
 
 
 
 
Class A common stock, $0.00001 par value, 400,000,000 shares authorized,
33,172,189 and 33,158,855 shares issued, 30,566,122 and 32,224,421 shares outstanding as of June 30, 2016 and December 31, 2015, respectively
 

 

Class B common stock, $0.00001 par value, 200,000,000 shares authorized,
89,106,748 and 89,108,569 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively
 
1

 
1

Preferred stock, $0.00001 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2016 and December 31, 2015
 

 

Additional paid-in capital
 
378,781

 
376,898

Treasury stock at cost; 2,606,067 and 934,434 shares as of June 30, 2016 and December 31, 2015, respectively
 
(39,691
)
 
(14,981
)
Retained earnings
 
194,495

 
175,997

Accumulated other comprehensive loss
 
(18,115
)
 
(17,997
)
Total stockholders’ equity attributable to Taylor Morrison Home Corporation
 
515,471

 
519,918

Non-controlling interests – joint ventures
 
6,614

 
6,398

Non-controlling interests – Principal Equityholders
 
1,503,206

 
1,446,361

Total stockholders’ equity
 
2,025,291

 
1,972,677

Total liabilities and stockholders’ equity
 
$
4,231,088

 
$
4,117,394


See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

2


TAYLOR MORRISON HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Home closings revenue, net
 
$
829,882

 
$
682,387

 
$
1,458,969

 
$
1,175,980

Land closings revenue
 
10,936

 
8,743

 
17,540

 
16,931

Mortgage operations revenue
 
13,498

 
9,843

 
23,136

 
17,478

Total revenues
 
854,316

 
700,973

 
1,499,645

 
1,210,389

Cost of home closings
 
679,685

 
553,652

 
1,194,217

 
958,757

Cost of land closings
 
6,686

 
4,566

 
12,318

 
9,232

Mortgage operations expenses
 
8,193

 
6,096

 
14,717

 
11,158

Total cost of revenues
 
694,564

 
564,314

 
1,221,252

 
979,147

Gross margin
 
159,752

 
136,659

 
278,393

 
231,242

Sales, commissions and other marketing costs
 
59,182

 
47,022

 
107,023

 
83,242

General and administrative expenses
 
31,710

 
24,204

 
61,134

 
44,908

Equity in income of unconsolidated entities
 
(2,305
)
 
(1,225
)
 
(3,087
)
 
(1,527
)
Interest income, net
 
(15
)
 
(82
)
 
(102
)
 
(132
)
Other expense, net
 
3,412

 
3,463

 
6,666

 
9,232

Loss on extinguishment of debt
 

 
33,317

 

 
33,317

Gain on foreign currency forward
 

 

 

 
(29,983
)
Income from continuing operations before income taxes
 
67,768

 
29,960

 
106,759

 
92,185

Income tax provision
 
22,104

 
9,939

 
34,991

 
31,981

Net income from continuing operations
 
45,664

 
20,021

 
71,768

 
60,204

Discontinued operations:
 
 
 
 
 
 
 
 
Transaction expenses from discontinued operations
 

 

 

 
(9,043
)
Gain on sale of discontinued operations
 

 

 

 
80,205

Income tax expense from discontinued operations
 

 

 

 
(14,500
)
Net income from discontinued operations
 

 

 

 
56,662

Net income before allocation to non-controlling interests
 
45,664

 
20,021

 
71,768

 
116,866

Net income attributable to non-controlling interests — joint ventures
 
(296
)
 
(920
)
 
(480
)
 
(1,289
)
Net income before non-controlling interests — Principal Equityholders
 
45,368

 
19,101

 
71,288

 
115,577

Net income from continuing operations attributable to non-controlling interests — Principal Equityholders
 
(33,683
)
 
(14,024
)
 
(52,790
)
 
(43,157
)
Net income from discontinued operations attributable to non-controlling interests — Principal Equityholders
 

 

 

 
(41,381
)
Net income available to Taylor Morrison Home Corporation
 
$
11,685

 
$
5,077

 
$
18,498

 
$
31,039

Earnings per common share — basic:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.48

Income from discontinued operations — net of tax
 
$

 
$

 
$

 
$
0.46

Net income available to Taylor Morrison Home Corporation
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.94

Earnings per common share — diluted:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.48

Income from discontinued operations — net of tax
 
$

 
$

 
$

 
$
0.46

Net income available to Taylor Morrison Home Corporation
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.94

Weighted average number of shares of common stock:
 
 
 
 
 
 
 
 
Basic
 
31,574

 
33,076

 
31,742

 
33,071

Diluted
 
121,052

 
122,409

 
121,217

 
122,382



3


See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

4


TAYLOR MORRISON HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Income before non-controlling interests, net of tax
 
$
45,664

 
$
20,021

 
$
71,768

 
$
116,866

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
 

 
199

 

 
(27,214
)
Post-retirement benefits adjustments, net of tax
 

 

 
(447
)
 
1,757

Other comprehensive income (loss), net of tax
 

 
199

 
(447
)
 
(25,457
)
Comprehensive income
 
45,664

 
20,220

 
71,321

 
91,409

Comprehensive income attributable to non-controlling interests — joint ventures
 
(296
)
 
(920
)
 
(480
)
 
(1,289
)
Comprehensive income attributable to non-controlling interests — Principal Equityholders
 
(33,683
)
 
(14,219
)
 
(52,461
)
 
(66,017
)
Comprehensive income available to Taylor Morrison Home Corporation
 
$
11,685

 
$
5,081

 
$
18,380

 
$
24,103


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

5


TAYLOR MORRISON HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data, unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Stockholders' Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Shares
 
Amount
 
Retained
Earnings
 
Accumulated 
Other
Comprehensive
Income (Loss)
 
Non-controlling
Interest - Joint
Venture
 
Non-controlling
Interest - Principal
Equityholders
 
Total
Stockholders’
Equity
Balance – December 31, 2015
 
32,224,421

 
$

 
89,108,569

 
$
1

 
$
376,898

 
934,434

 
$
(14,981
)
 
$
175,997

 
$
(17,997
)
 
$
6,398

 
$
1,446,361

 
$
1,972,677

Net income
 

 

 

 

 

 

 

 
18,498

 

 
480

 
52,790

 
71,768

Other comprehensive loss
 

 

 

 

 

 

 

 

 
(118
)
 

 
(329
)
 
(447
)
Cancellation of forfeited New TMM Units and corresponding number of Class B Common Stock
 

 

 
(1,821
)
 

 

 

 

 

 

 

 

 

Issuance of restricted stock units
 
13,334

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock
 
(1,671,633
)
 

 

 

 

 
1,671,633

 
(24,710
)
 

 

 

 

 
(24,710
)
Share based compensation
 

 

 

 

 
1,533

 

 

 

 

 

 
4,384

 
5,917

Contributions from/(Distributions to) non-controlling interests of consolidated joint ventures
 

 

 

 

 
350

 

 

 

 

 
(264
)
 

 
86

Balance – June 30, 2016
 
30,566,122

 
$

 
89,106,748

 
$
1

 
$
378,781

 
2,606,067

 
$
(39,691
)
 
$
194,495

 
$
(18,115
)
 
$
6,614

 
$
1,503,206

 
$
2,025,291


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

6


TAYLOR MORRISON HOME CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

 
 
Six Months Ended June 30,
 
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income before allocation to non-controlling interests
 
$
71,768

 
$
116,866

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
Equity in income of unconsolidated entities
 
(3,087
)
 
(1,527
)
Stock compensation expense
 
5,917

 
3,596

Loss on extinguishment of debt
 

 
33,317

Distributions of earnings from unconsolidated entities
 
1,673

 
1,437

Depreciation and amortization
 
1,974

 
1,852

Debt issuance costs amortization
 
1,933

 
2,527

Net income from discontinued operations
 

 
(56,662
)
Gain on foreign currency forward
 

 
(29,983
)
Contingent consideration
 
2,349

 
6,705

Deferred income taxes
 
(969
)
 
6,798

Changes in operating assets and liabilities:
 
 
 
 
Real estate inventory and land deposits
 
(62,906
)
 
(391,680
)
Mortgages held for sale, prepaid expenses and other assets
 
43,734

 
23,728

Customer deposits
 
47,049

 
28,597

Accounts payable, accrued expenses and other liabilities
 
(21,584
)
 
(17,617
)
Income taxes payable
 
(22,185
)
 
(20,862
)
Net cash provided by (used in) operating activities
 
65,666

 
(292,908
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchase of property and equipment
 
(187
)
 
(1,499
)
Payments for business acquisitions
 
(52,819
)
 
(62,440
)
Distribution from unconsolidated entities
 
1,656

 
6,857

Change in restricted cash
 
(20
)
 
655

Investments of capital into unconsolidated entities
 
(21,638
)
 
(24,950
)
Proceeds from sale of discontinued operations
 

 
268,853

Proceeds from settlement of foreign currency forward
 

 
29,983

Net cash (used in) provided by investing activities
 
(73,008
)
 
217,459

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Increase in loans payable and other borrowings
 
36,631

 

Repayments of loans payable and other borrowings
 
(30,529
)
 
(24,449
)
Borrowings on revolving credit facility
 
240,000

 
115,000

Payments on revolving credit facility
 
(140,000
)
 
(50,000
)
Borrowings on mortgage warehouse
 
527,027

 
354,812

Repayment on mortgage warehouse
 
(592,372
)
 
(444,077
)
Proceeds from the issuance of senior notes
 

 
350,000

Repayments on senior notes
 

 
(513,608
)
Repurchase of common stock
 
(24,710
)
 

Payment of deferred financing costs
 

 
(4,538
)
Payment of contingent consideration
 
(3,100
)
 
(3,050
)
Contributions from (distributions to) non-controlling interests of consolidated joint ventures, net
 
86

 
(1,373
)
Net cash provided by (used in) financing activities
 
13,033

 
(221,283
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
 

 
(19,927
)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
 
$
5,691

 
$
(316,659
)
CASH AND CASH EQUIVALENTS — Beginning of period (1)
 
126,188

 
462,205

CASH AND CASH EQUIVALENTS — End of period
 
$
131,879

 
$
145,546

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Income taxes paid, net
 
$
(58,144
)
 
$
(59,810
)
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in loans payable issued to sellers in connection with land purchase contracts
 
$
22,708

 
$
(28,554
)
Accrual of contingent consideration
 
$
380

 
$
3,200

Non-cash portion of loss on debt extinguishment
 
$

 
$
5,102

(1) Cash and cash equivalents shown here includes the cash of Monarch Corporation. At December 31, 2014, cash held at Monarch was $227,988.

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

7


TAYLOR MORRISON HOME CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Organization and Description of the Business - Taylor Morrison Home Corporation (“TMHC”) and its subsidiaries (collectively, referred to herein as “we,” “our,” the “Company” and “us”), through its divisions and segments, owns and operates a residential homebuilding business and is a developer of lifestyle communities. We currently operate in Arizona, California, Colorado, Florida, Georgia, Illinois, North Carolina and Texas. Our Company serves a wide array of consumer groups from coast to coast, including first time, move-up, luxury and 55 plus buyers. Our homebuilding business operates under our Taylor Morrison and Darling Homes brands. Our business has multiple homebuilding operating divisions, and a mortgage operations and title services division, which are organized into multiple reportable segments. The communities in our homebuilding business offer single family attached and detached homes. We are the general contractors for all real estate projects and retain subcontractors for home construction and site development. Our Mortgage Operations reportable segment provides mortgage services to customers through our wholly owned mortgage subsidiary, Taylor Morrison Home Funding, LLC (“TMHF”), and title services through our wholly owned title services subsidiary, Inspired Title Services, LLC (“Inspired Title”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation — The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2015 Annual Report on Form 10-K. In the opinion of management, the accompanying Condensed Consolidated Financial Statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full fiscal year.

Unless otherwise stated, amounts are shown in U.S. dollars. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded to accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity.

Discontinued Operations –As a result of our decision in December 2014 to divest of Monarch Corporation (“Monarch”), our former Canadian operating segment, the operating results and financial position of the Monarch business are presented as discontinued operations for the three and six months ended June 30, 2015.

Non-controlling interests –In connection with a series of transactions consummated at the time of the Company’s IPO (the “Reorganization Transactions”), the Company became the sole owner of the general partner of TMM Holdings II Limited Partnership (“New TMM”). As the general partner of New TMM, the Company exercises exclusive and complete control over New TMM. Consequently, the Company consolidates New TMM and records a non-controlling interest in the Condensed Consolidated Balance Sheets for the economic interests in New TMM, that are directly or indirectly held by a consortium comprised of affiliates of TPG Global, LLC (the “TPG Entities” or “TPG”), investment funds managed by Oaktree Capital Management, L.P. (“Oaktree”) or their respective subsidiaries (the “Oaktree Entities”), and affiliates of JH Investments, Inc. (“JH” and together with the TPG Entities and Oaktree Entities, the “Principal Equityholders”) or by members of management and the Board of Directors.

Joint Ventures - We consolidate certain joint ventures in accordance with Accounting Standards Codification (“ASC) Topic 810, “Consolidation.” The income from the percentage of the joint venture not owned by us is presented as “Net income attributable to non-controlling interests - joint ventures” on the Condensed Consolidated Statements of Operations.

Reclassifications - Prior period amounts related to debt issuance costs have been reclassified to conform with current period financial statement presentation as a result of adopting Accounting Standards Update (“ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. Approximately $19.9 million of such costs as of December 31, 2015 have been reclassified from prepaid expenses and other assets to their respective debt liability.


8


Business Combinations — Acquisitions are accounted for in accordance with ASC Topic 805-10, Business Combinations. In connection with our acquisitions, we determined we obtained control of a business and its inputs, processes and outputs in exchange for cash and other consideration. All material assets and liabilities, including contingent consideration, were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price paid, which resulted in goodwill for each transaction. Refer to Note 3 - Business Combinations for further information regarding the purchase price allocation and related acquisition accounting.

Use of Estimates — The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Significant estimates include real estate development costs to complete, valuation of real estate, valuation of acquired assets, valuation of goodwill, valuation of equity awards, valuation allowance on deferred tax assets and reserves for warranty and self-insured risks. Actual results could differ from those estimates.

Non-controlling Interests – Principal Equityholders — Immediately prior to our IPO, as part of the Reorganization Transactions, the existing holders of limited partnership interests of TMM Holdings Limited Partnership (“TMM Holdings”) exchanged their limited partnership interests for limited partnership interests of New TMM (“New TMM Units”). For each New TMM Unit received in the exchange, the holders of New TMM Units also received a corresponding number of shares of our Class B Common Stock (the “Class B Common Stock”). Our Class B Common Stock has voting rights but no economic rights. One share of Class B Common Stock, together with one New TMM Unit, is exchangeable into one share of our Class A Common Stock in accordance with the terms of the Exchange Agreement, dated as of April 9, 2013, among the Company, New TMM and the holders of Class B Common Stock and New TMM Units.

Real Estate Inventory — Inventory consists of raw land, land under development, land held for future development, homes under construction, completed homes and model homes. Inventory is carried at cost, less impairment, if applicable. In addition to direct carrying costs, we also capitalize interest, real estate taxes, and related development costs that benefit the entire community, such as field construction supervision and direct overhead. Home construction costs are accumulated and charged to cost of sales at home closing using the specific identification method. All other overhead costs are allocated to closed homes using the relative sales value method. These costs are capitalized to inventory from the point development begins to the point construction is completed. Changes in estimated costs to be incurred in a community (cost to complete) are generally allocated to the remaining homes on a prospective basis. For those communities that have been temporarily closed or where development has been discontinued, costs are expensed as incurred until operations resume.

We review our real estate inventory for indicators of impairment by community on a quarterly basis. In conducting our impairment analysis, we evaluate the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. If indicators of impairment are present for a community, we perform an additional analysis to determine if the carrying value of the assets in that community exceeds the undiscounted cash flows estimated to be generated by those assets. If the carrying value of the assets does exceed their estimated undiscounted cash flows, the assets are deemed to be impaired and are recorded at fair value as of the assessment date. An impairment charge is taken in the period with a charge to cost of home closings. For the three and six months ended June 30, 2016 and 2015, no impairment charges were recorded.

In certain cases, we may elect to cease development and/or marketing of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow for market conditions to improve. The decision may be based on financial and/or operational metrics as determined by management. If we decide to cease developing a project, we will evaluate the project for impairment and then cease future development and marketing activity until such a time when we believe that market conditions have improved and economic performance can be maximized.

In the ordinary course of business, we enter into various specific performance agreements to acquire lots. Real estate not owned under these agreements is consolidated into real estate inventory with a corresponding liability in liabilities attributable to real estate not owned under option agreements in the Condensed Consolidated Balance Sheets.

Land Deposits — We provide deposits related to land options and land purchase contracts, which are capitalized when paid and classified as land deposits until the associated property is purchased. To the extent the deposits are non-refundable, they are charged to expense if the land acquisition process is terminated or no longer determined probable. We review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate inventory impairment analysis. Non-refundable deposits are recorded as a component of real estate inventory in the accompanying Condensed Consolidated Balance Sheets at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements.

9




Investments in Consolidated and Unconsolidated Entities

Consolidated Joint Ventures — In the ordinary course of business, we participate in strategic land development and homebuilding joint ventures with third parties. The use of these entities, in some instances, enables us to acquire land to which we could not otherwise obtain access, or could not obtain access on terms that are as favorable. Some of these joint ventures develop land for the sole use of the venture participants and others develop land for sale to the venture participants and to unrelated builders. In addition, we are involved with third parties who are involved in land development and homebuilding activities, including home sales. We review such contracts to determine whether they are a variable interest entity ("VIE"). In accordance with ASC Topic 810, “Consolidation,” for each VIE, we assess whether we are the primary beneficiary by first determining if we have the ability to control the activities of the VIE that most significantly affect its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with us; and the ability to change or amend the existing option contract with the VIE. If we are not able to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we continue our analysis to determine if we are expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will potentially benefit from a significant amount of the VIE’s expected returns. For these entities in which we are expected to absorb the losses or benefits, we consolidate the results in the accompanying Condensed Consolidated Financial Statements.

Unconsolidated Joint Ventures — We use the equity method of accounting for entities over which we exercise significant influence but do not have a controlling interest over the operating and financial policies of the investee. For unconsolidated entities in which we function as the managing member, we have evaluated the rights held by our joint venture partners and determined that they have substantive participating rights that preclude the presumption of control. For joint ventures accounted for using the equity method, our share of net earnings or losses is included in equity in income of unconsolidated entities when earned and distributions are credited against our investment in the joint venture when received. These joint ventures are recorded in investments in unconsolidated entities on the Condensed Consolidated Balance Sheets.

We evaluate our investments in unconsolidated entities for indicators of impairment quarterly. A series of operating losses of an investee or other factors may indicate that a decrease in value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. Additionally, we consider various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, stage in its life cycle, intent and ability for us to recover our investment in the entity, financial condition and long-term prospects of the entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded. We did not record any impairment charges for the three and six months ended June 30, 2016 and 2015, respectively.

Goodwill — The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC Topic 350, “Intangibles — Goodwill and Other” (“ASC 350”).
ASC 350 requires that goodwill and intangible assets that do not have finite lives not be amortized, but rather assessed for impairment at least annually or more frequently if certain impairment indicators are present. We perform our annual impairment test during the fourth quarter or whenever impairment indicators are present.

Stock Based Compensation — We have stock options, performance-based restricted stock units and non-performance based restricted stock units which we account for in accordance with ASC Topic 718-10, “Compensation — Stock Compensation.” The fair value for stock options is measured and estimated on the date of grant using the Black-Scholes option pricing model and recognized evenly over the vesting period of the options. Performance-based restricted stock units are measured using the closing price on the date of grant and expensed using a probability of attainment calculation which determines the likelihood of achieving the performance targets. Non-performance based restricted stock units are time based awards and measured using the closing price on the date of grant and are expensed over the vesting period on a straight-line basis.

Treasury Stock — We account for treasury stock in accordance with ASC Topic 505-30, “Equity - Treasury Stock.” Repurchased shares are reflected as a reduction in Stockholders’ Equity and subsequent sale of repurchased shares are recognized as a change in Equity. When factored into our weighted average calculations for purposes of earnings per share, the number of repurchased shares is based on the trade date.

10



Revenue Recognition

Home closings revenue, net — Home closings revenue is recorded using the completed-contract method of accounting at the time each home is delivered, title and possession are transferred to the buyer, we have no significant continuing involvement with the home, risk of loss has transferred, the buyer has demonstrated sufficient investment in the property, and the receivable, if any, from the homeowner or escrow agent is not subject to future subordination.

We typically grant our homebuyers certain sales incentives, including cash discounts, incentives on options included in the home, option upgrades, and seller-paid financing or closing costs. Incentives and discounts are accounted for as a reduction in the sales price of the home and home closings revenue is shown net of discounts. We also receive rebates from certain vendors and these rebates are accounted for as a reduction to cost of home closings.

Land closings revenue — Revenue from land sales are recognized when title is transferred to the buyer, there is no significant continuing involvement, and the buyer has demonstrated sufficient investment in the property sold. If the buyer has not made an adequate investment in the property, the profit on such sales is deferred until these conditions are met.

Mortgage operations revenue — Loan origination fees (including title fees, points, closing costs) are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. All of the loans TMHF originates are sold to third party investors within a short period of time, on a non-recourse basis. Gains and losses from the sale of mortgages are recognized in accordance with ASC Topic 860-20, “Sales of Financial Assets.” TMHF does not have continuing involvement with the transferred assets, therefore we derecognize the mortgage loans at time of sale, based on the difference between the selling price and carrying value of the related loans upon sale, recording a gain/loss on sale in the period of sale.

Recently Issued Accounting Pronouncements — In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to simplify several areas of stock compensation including its tax consequences, liability vs. equity classification, and statement of cash flows presentation. ASU 2016-09 will be effective for us in our fiscal year beginning January 1, 2017. We are currently evaluating the impact the adoption of ASU 2016-09 will have on our condensed consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 primarily impacts off-balance sheet operating leases and will require such leases, with the exception of short-term leases, to be recorded on the balance sheet. Lessor accounting is not significantly impacted by the new guidance, however certain updates were made to align lessee and lessor treatment. ASU 2016-02 will be effective for us in our fiscal year beginning January 1, 2019. We are currently evaluating the impact the adoption of ASU 2016-02 will have on our condensed consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in ASC Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In doing so, entities will generally need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 has been deferred and will be effective beginning January 1, 2018 and, at that time, we will adopt the new standard under either the full retrospective approach or the modified retrospective approach. We are currently evaluating the method and impact the adoption of ASU 2014-09 will have on our condensed consolidated financial statements and disclosures.


3. BUSINESS COMBINATIONS

On January 8, 2016, we acquired Acadia Homes, an Atlanta based homebuilder, for total consideration of $83.6 million (including $19.7 million of seller financing and holdbacks and contingent consideration). We acquired JEH Homes, an Atlanta based homebuilder, on April 30, 2015 and three divisions of Orleans Homes in Charlotte, Raleigh and Chicago on July 21, 2015 for combined total consideration of $233.7 million (including seller financing and contingent consideration). In

11


accordance with ASC Topic 805, Business Combinations, all material assets and liabilities, including contingent consideration were measured and recognized at fair value as of the date of the acquisition to reflect the purchase price paid, which resulted in goodwill for each transaction.

We determined the estimated fair value of real estate inventory on a community-by-community basis primarily using the sales comparison and income approaches. The sales comparison approach was used for all inventory in process. The income approach derives a value using a discounted cash flow for income-producing real property. This approach was used exclusively for finished lots. The income approach using discounted cash flows was also used to value lot option contracts acquired. These estimated cash flows and ultimate valuation are significantly affected by the discount rate, estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, overhead costs and may vary significantly between communities.

2016 Acquisition

The Company has completed an allocation of purchase price as of the acquisition date and expects to finalize the allocation within one year from the date of acquisition. The following is a summary of the fair value of assets acquired, liabilities assumed, and liabilities created (in thousands):
 
Acadia Homes
Acquisition Date
January 8, 2016
Assets acquired
 
Real estate inventory
$
76,152

Land deposits
984

Prepaid expenses and other assets
816

Property and equipment
204

Goodwill (1)
8,500

Total assets
$
86,656

 
 
Less liabilities assumed
 
Accrued expenses and other liabilities
$
2,562

Customer deposits
463

Net assets acquired
$
83,631

(1) Goodwill is fully deductible for tax purposes. The goodwill was allocated to our East homebuilding segment.



2015 Acquisitions

The Company performed an allocation of purchase price as of each acquisition date. The following is a summary of the fair value of assets acquired, liabilities assumed, and liabilities created (in thousands):
 
JEH Homes
 
Orleans Homes
 
Total
Acquisition Date
April 30, 2015
 
July 21, 2015
 
 
Assets Acquired
 
 
 
 
 
Real estate inventory
$
55,559

 
$
140,602

 
$
196,161

Land deposits

 
2,236

 
2,236

Prepaid expenses and other assets
1,301

 
2,436

 
3,737

Property and equipment
395

 
623

 
1,018

Goodwill(1)
9,125

 
25,198

 
34,323

Total assets
$
66,380

 
$
171,095

 
$
237,475

 
 
 
 
 
 
Less Liabilities Assumed
 
 
 
 
 
Accrued expenses and other liabilities
$

 
$
2,700

 
$
2,700

Customer deposits

 
1,081

 
1,081

Net assets acquired
$
66,380

 
$
167,314

 
$
233,694


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(1) Goodwill is fully deductible for tax purposes. We allocated $27.8 million and $6.5 million of goodwill to our East and West homebuilding segments, respectively.


4. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income available to TMHC by the weighted average number of shares of Class A Common Stock outstanding during the period. Diluted earnings per share gives effect to the potential dilution that could occur if all shares of Class B Common Stock and their corresponding New TMM Units were exchanged for shares of Class A Common Stock and if all outstanding equity awards to issue shares of Class A Common Stock were exercised or settled.
The following is a summary of the components of basic and diluted earnings per share (in thousands, except per share amounts):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income available to TMHC – basic
 
$
11,685

 
$
5,077

 
$
18,498

 
$
31,039

Income from discontinued operations, net of tax
 

 

 

 
56,662

Income from discontinued operations, net of tax attributable to non-controlling interest – Principal Equityholders
 

 

 

 
(41,381
)
Net income from discontinued operations – basic
 
$

 
$

 
$

 
$
15,281

Net income from continuing operations – basic
 
$
11,685

 
$
5,077

 
$
18,498

 
$
15,758

Net income from continuing operations – basic
 
$
11,685

 
$
5,077

 
$
18,498

 
$
15,758

Net income from continuing operations attributable to non-controlling interest – Principal Equityholders
 
33,683

 
14,024

 
52,790

 
43,157

Loss fully attributable to public holding company
 
100

 
110

 
173

 
229

Net income from continuing operations – diluted
 
$
45,468

 
$
19,211

 
$
71,461

 
$
59,144

Net income from discontinued operations – diluted
 
$

 
$

 
$

 
$
56,662

Denominator:
 
 
 
 
 
 
 
 
Weighted average shares – basic (Class A)
 
31,574

 
33,076

 
31,742

 
33,071

Weighted average shares – Principal Equityholders’ non-controlling interest (Class B)
 
89,107

 
89,200

 
89,107

 
89,203

Restricted stock units
 
366

 
133

 
367

 
108

Stock Options
 
5

 

 
1

 

Weighted average shares – diluted
 
121,052

 
122,409

 
121,217

 
122,382

Earnings per common share – basic:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.48

Income from discontinued operations, nets of tax
 
$

 
$

 
$

 
$
0.46

Net income available to Taylor Morrison Home Corporation
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.94

Earnings per common share – diluted:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.48

Income from discontinued operations, net of tax
 
$

 
$

 
$

 
$
0.46

Net income available to Taylor Morrison Home Corporation
 
$
0.37

 
$
0.15

 
$
0.58

 
$
0.94

We excluded a total weighted average of 1,602,935 and 1,580,186 stock options and unvested restricted stock units (“RSUs”) and 2,361,178 and 1,546,380 stock options and unvested RSUs from the calculation of earnings per share for the three and six months ended June 30, 2016 and 2015, respectively, as their inclusion would be anti-dilutive.
The shares of Class B Common Stock have voting rights but do not have economic rights or rights to dividends or distributions on liquidation and therefore are not participating securities. Accordingly, Class B Common Stock is not included in basic earnings per share.
5. DISCONTINUED OPERATIONS

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In connection with the decision to sell Monarch in December 2014, which closed in January 2015, the operating results of the Monarch business are classified as discontinued operations – net of applicable taxes in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

No revenues or expenses related to the operations of Monarch were recorded in 2015, however, the recorded activity for the six months ended June 30, 2015, consists of post-closing transaction expenses, including administrative costs, legal fees, and stock based compensation charges. The gain on sale of discontinued operations was determined using the purchase price of Monarch, less related costs and taxes. There were no assets and liabilities of discontinued operations at June 30, 2016 and December 31, 2015. For the six months ended June 30, 2016, there was no activity recorded related to Monarch or its operations.

6. DERIVATIVE FINANCIAL INSTRUMENT
In December 2014, we entered into a derivative financial instrument in the form of a foreign currency forward. The derivative financial instrument hedged our exposure to the Canadian dollar in conjunction with the disposition of the Monarch business. The final settlement of the derivative financial instrument occurred on January 30, 2015, and a gain in the amount of $30.0 million was recorded to gain on foreign currency forward in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2015. There was no activity related to derivative financial instruments for the three and six months ended June 30, 2016.

7. REAL ESTATE INVENTORY AND LAND DEPOSITS
Inventory consists of the following (in thousands):
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
Real estate developed and under development
 
$
2,184,842

 
$
2,167,771

Real estate held for development or held for sale (1)
 
187,869

 
173,448

Operating communities (2)
 
758,534

 
672,499

Capitalized interest
 
111,063

 
105,148

Total owned inventory
 
3,242,308

 
3,118,866

Real estate not owned under option agreements
 
612

 
7,921

Total real estate inventory
 
$
3,242,920

 
$
3,126,787

(1) Real estate held for development or held for sale includes properties which are not in active production. This includes raw land recently purchased or awaiting entitlement, future phases of current projects that will be developed as prior phases sell out, and mothball communities.
(2) Operating communities consists of all vertical construction costs relating to homes in progress and completed homes for all active production of inventory.

The development status of our land inventory is as follows (dollars in thousands):
 
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
Owned Lots
 
Book Value of Land
and Development
 
Owned Lots
 
Book Value of Land
and Development
Raw
 
7,042

 
$
349,391

 
8,300

 
$
378,081

Partially developed
 
7,942

 
490,327

 
8,904

 
645,276

Finished
 
13,478

 
1,520,755

 
12,294

 
1,305,697

Long-term strategic assets
 
3,105

 
12,238

 
3,105

 
12,165

Total
 
31,567

 
$
2,372,711

 
32,603

 
$
2,341,219


Land Deposits — We provide deposits related to land options and land purchase contracts, which are capitalized when paid and classified as land deposits until the associated property is purchased.


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As of June 30, 2016 and December 31, 2015, we had the right to purchase 9,196 and 8,888 lots under land option purchase contracts, respectively, for an aggregate purchase price of $753.7 million and $710.6 million as of June 30, 2016 and December 31, 2015, respectively. We do not have title to the property and the creditors generally have no recourse against the Company. As of June 30, 2016 and December 31, 2015, our exposure to loss related to our option contracts with third parties and unconsolidated entities consist of non-refundable option deposits totaling $38.6 million and $34.1 million, respectively, in land deposits related to land options and land purchase contracts.

Capitalized Interest — Interest capitalized, incurred and amortized is as follows (in thousands):

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Interest capitalized - beginning of period
 
$
110,962

 
$
103,892

 
$
105,148

 
$
94,880

Interest incurred
 
22,201

 
23,268

 
44,445

 
48,307

Interest amortized to cost of home closings
 
(22,100
)
 
(20,690
)
 
(38,530
)
 
(36,717
)
Interest capitalized - end of period
 
$
111,063

 
$
106,470

 
$
111,063

 
$
106,470

8. INVESTMENTS IN UNCONSOLIDATED ENTITIES
We participate in a number of joint ventures with related and unrelated third parties, with ownership interests up to 50.0%. These entities are generally involved in real estate development, homebuilding and mortgage lending activities.
Summarized, unaudited combined financial information of unconsolidated entities that are accounted for by the equity method is as follows (in thousands):
 
 
As of
 
 
June 30,
2016
 
December 31,
2015
Assets:
 
 
 
 
Real estate inventory
 
$
612,478

 
$
586,359

Other assets
 
170,713

 
119,781

Total assets
 
$
783,191

 
$
706,140

Liabilities and owners’ equity:
 
 
 
 
Debt
 
$
283,845

 
$
273,769

Other liabilities
 
28,544

 
11,239

Total liabilities
 
312,389

 
285,008

Owners’ equity:
 
 
 
 
TMHC
 
149,844

 
128,448

Others
 
320,958

 
292,684

Total owners’ equity
 
470,802

 
421,132

Total liabilities and owners’ equity
 
$
783,191

 
$
706,140


 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
 
2016
 
2015
Revenues
 
$
37,042

 
$
15,777

 
 
$
49,662

 
$
17,473

Costs and expenses
 
(30,110
)
 
(12,859
)
 
 
(40,220
)
 
(14,030
)
Income of unconsolidated entities
 
$
6,932

 
$
2,918

 
 
$
9,442

 
$
3,443

TMHC’s share in income of unconsolidated entities
 
$
2,305

 
$
1,225

 
 
$
3,087

 
$
1,527

Distributions of earnings from unconsolidated entities
 
$
3,218

 
$
7,787

 
 
$
3,329

 
$
8,294


We have investments in, and advances to, a number of joint ventures with related and unrelated parties to develop land and to develop housing communities, including for-sale residential homes. Some of these joint ventures develop land for the sole use of the joint venture participants, including us, and others develop land for sale to the joint venture participants and to unrelated

15


builders. Our share of the joint venture profit relating to lots we purchase from the joint ventures is deferred until homes are delivered by us and title passes to a homebuyer.
9. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):

 
 
As of
June 30, 2016
 
As of
December 31, 2015
Real estate development costs to complete
 
$
13,126

 
$
21,325

Compensation and employee benefits
 
42,541

 
47,674

Self-insurance and warranty reserves
 
44,342

 
43,098

Interest payable
 
17,975

 
18,621

Property and sales taxes payable
 
9,776

 
15,233

Other accruals
 
47,524

 
45,501

Total accrued expenses and other liabilities
 
$
175,284

 
$
191,452


Self-Insurance and Warranty Reserves – We accrue for the expected costs associated with the limited one year warranty, deductibles and self-insured amounts under our various insurance policies within Beneva Indemnity Company ("Beneva") a wholly owned subsidiary. A summary of the changes in our reserves are as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Reserve - beginning of period
 
$
43,195

 
$
42,956

 
$
43,098

 
$
44,595

Additions to reserves
 
5,015

 
4,814

 
10,783

 
7,514

Costs and claims incurred
 
(5,962
)
 
(5,516
)
 
(12,547
)
 
(11,450
)
Change in estimates to pre-existing reserves
 
2,094

 
335

 
3,008

 
1,930

Reserve - end of period
 
$
44,342

 
$
42,589

 
$
44,342

 
$
42,589

10. DEBT
Total debt consists of the following (in thousands):
 
 
As of
 
 
June 30, 2016
 
December 31, 2015
 
 
Principal
 
Unamortized Debt Issuance Costs
 
Carrying Value
 
Principal
 
Unamortized Debt Issuance Costs
 
Carrying Value
5.25% Senior Notes due 2021, unsecured
 
$
550,000

 
$
5,688

 
$
544,312

 
$
550,000

 
$
6,287

 
$
543,713

5.875% Senior Notes due 2023, unsecured
 
350,000

 
3,853

 
346,147

 
350,000

 
4,160

 
345,840

5.625% Senior Notes due 2024, unsecured
 
350,000

 
4,127

 
345,873

 
350,000

 
4,396

 
345,604

Senior Notes subtotal
 
1,250,000

 
13,668

 
1,236,332

 
1,250,000

 
14,843

 
1,235,157

Loans payable and other borrowings
 
158,244

 

 
158,244

 
134,824

 

 
134,824

Revolving Credit Facility
 
215,000

 
4,295

 
210,705

 
115,000

 
5,053

 
109,947

Mortgage warehouse borrowings
 
118,099

 

 
118,099

 
183,444

 

 
183,444

Total Senior Notes and bank financing
 
$
1,741,343

 
$
17,963

 
$
1,723,380

 
$
1,683,268

 
$
19,896

 
$
1,663,372


2021 Senior Notes
On April 16, 2013, we issued $550.0 million aggregate principal amount of 5.25% Senior Notes due 2021 (the “2021 Senior Notes”).

16



The 2021 Senior Notes mature on April 15, 2021. The 2021 Senior Notes are guaranteed by TMM Holdings, Taylor Morrison Holdings, Inc., Taylor Morrison Communities II, Inc. and their homebuilding subsidiaries (collectively, the “Guarantors”), which are all subsidiaries directly or indirectly of TMHC. The 2021 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The indenture for the 2021 Senior Notes contains covenants that limit (i) the making of investments, (ii) the payment of dividends and the redemption of equity and junior debt, (iii) the incurrence of additional indebtedness, (iv) asset dispositions, (v) mergers and similar corporate transactions, (vi) the incurrence of liens, (vii) the incurrence of prohibitions on payments and asset transfers among the issuers and restricted subsidiaries and (viii) transactions with affiliates, among others. The indenture governing the 2021 Senior Notes contains customary events of default. If we do not apply the net cash proceeds of certain asset sales within specified deadlines, we will be required to offer to repurchase the 2021 Senior Notes at par (plus accrued and unpaid interest) with such proceeds. We are also required to offer to repurchase the 2021 Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events.

There are no financial maintenance covenants for the 2021 Senior Notes.

2023 Senior Notes and Redemption of 2020 Senior Notes
On April 16, 2015, we issued $350.0 million aggregate principal amount of 5.875% Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The net proceeds of the offering, together with cash on hand, were used to redeem the entire remaining principal amount of 7.75% Senior Notes due 2020 (the “2020 Senior Notes”) on May 1, 2015, at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. As a result of the redemption of the 2020 Senior Notes, we recorded a loss on extinguishment of debt of $33.3 million during the second quarter of 2015, which included the payment of the redemption premium and write-off of net unamortized deferred financing fees.

The 2023 Senior Notes mature on April 15, 2023. The 2023 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 Senior Notes. The indenture governing the 2023 Senior Notes contains covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions. The indenture governing the 2023 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2023 Senior Notes are similar to those contained in the indenture governing the 2021 Senior Notes, but a credit rating downgrade must occur in connection with the change of control before the repurchase offer requirement is triggered for the 2023 Senior Notes.

Prior to January 15, 2023, the 2023 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through January 15, 2023 (plus accrued and unpaid interest). Beginning January 15, 2023, the 2023 Senior Notes are redeemable at par (plus accrued and unpaid interest).

There are no financial maintenance covenants for the 2023 Senior Notes.

2024 Senior Notes
On March 5, 2014, we issued $350.0 million aggregate principal amount of 5.625% Senior Notes due 2024 (the “2024 Senior Notes”). The net proceeds from the issuance of the 2024 Senior Notes were used to repay the outstanding balance under the Revolving Credit Facility and for general corporate purposes.

The 2024 Senior Notes mature on March 1, 2024. The 2024 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 and 2023 Senior Notes. The 2024 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The indenture governing the 2024 Senior Notes contains covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions similar to the 2023 Senior Notes. The indenture governing the 2024 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 and 2023 Senior Notes. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indenture governing the 2023 Senior Notes.

Prior to December 1, 2023, the 2024 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through December 1, 2023 (plus accrued and unpaid interest). Beginning on December 1, 2023, the 2024 Senior Notes are redeemable at par (plus accrued and unpaid interest).

There are no financial maintenance covenants for the 2024 Senior Notes.

17



$500.0 Million Revolving Credit Facility
Our $500.0 million Revolving Credit Facility matures on April 12, 2019. The Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2021, 2023 and 2024 Senior Notes.

The Revolving Credit Facility contains certain “springing” financial covenants, requiring us and our subsidiaries to comply with a maximum debt to capitalization ratio of not more than 0.60 to 1.00 and a minimum consolidated tangible net worth level of at least $1.5 billion. The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the Revolving Credit Facility are outstanding during the last day of such fiscal quarter or on more than five separate days during such fiscal quarter or (b) undrawn letters of credit (except to the extent cash collateralized) issued under the Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Revolving Credit Facility are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter. For purposes of determining compliance with the financial covenants for any fiscal quarter, the Revolving Credit Facility provides that we may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to our capital that will, upon the contribution of such cash to the borrower, be included in the calculation of consolidated tangible net worth and consolidated total capitalization. The equity cure right is exercisable up to twice in any period of four consecutive fiscal quarters and up to five times overall.

The Revolving Credit Facility contains certain restrictive covenants including limitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors, limitations on prepayment of subordinated indebtedness and limitations on fundamental changes. The Revolving Credit Facility contains customary events of default, subject to applicable grace periods, including for nonpayment of principal, interest or other amounts, violation of covenants (including financial covenants, subject to the exercise of an equity cure), incorrectness of representations and warranties in any material respect, cross default and cross acceleration, bankruptcy, material monetary judgments, ERISA events with material adverse effect, actual or asserted invalidity of material guarantees and change of control. As of June 30, 2016, we were in compliance with all of the covenants under the Revolving Credit Facility.


Mortgage Warehouse Borrowings
The following is a summary of our mortgage warehouse borrowings (in thousands):

 
 
As of June 30, 2016
Facility
 
Amount Drawn
 
Facility Amount
 
Interest Rate
 
Expiration Date
 
Collateral (1)
Flagstar
 
$
28,453

 
$
30,000

 
LIBOR + 2.5%
 
30 days written notice
 
Mortgage Loans
Comerica
 
33,161

 
50,000

 
LIBOR + 2.25%
 
November 16, 2016
 
Mortgage Loans
J.P. Morgan
 
56,485

 
100,000

 
LIBOR + 2.375%
 
September 26, 2016
 
Mortgage Loans and Pledged Cash
Total
 
$
118,099

 
$
180,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
Facility
 
Amount Drawn
 
Facility Amount
 
Interest Rate
 
Expiration Date
 
Collateral (1)
Flagstar
 
$
63,210

 
$
75,000

 
LIBOR + 2.5%
 
30 days written notice
 
Mortgage Loans
Comerica
 
18,009

 
50,000

 
LIBOR + 2.25%
 
November 16, 2016
 
Mortgage Loans
J.P. Morgan
 
102,225

 
120,000

 
(2) 
 
September 26, 2016
 
Mortgage Loans and Pledged Cash
Total
 
$
183,444

 
$
245,000

 
 
 
(1) The mortgage warehouse borrowings outstanding as of June 30, 2016 and December 31, 2015, are collateralized by $146.0 million and $201.7 million, respectively, of mortgage loans held for sale, which comprise the balance of mortgage loans held for sale and $1.3 million, for both periods presented, which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheets.

18


(2) Through the date of expiration of September 28, 2015, interest under the J.P. Morgan agreement ranged from 2.50% plus 30-day LIBOR to 2.875% plus 30-day LIBOR or 0.25% (whichever was greater). The agreement was renewed in September 2015 setting the interest rate at 2.375% plus 30-day LIBOR.


Loans Payable and Other Borrowings
Loans payable and other borrowings as of June 30, 2016 and December 31, 2015 consist of project-level debt due to various land sellers and seller financing notes from current and prior year acquisitions. Project-level debt is generally secured by the land that was acquired and the principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. Loans payable bear interest at rates that ranged from 0% to 8% at June 30, 2016 and December 31, 2015. We impute interest for loans with no stated interest rates. The weighted average interest rate on $107.5 million of the loans as of June 30, 2016 was 5.1% per annum, and $50.7 million of the loans were non-interest bearing.

11. FAIR VALUE DISCLOSURES
We have adopted ASC Topic 820, Fair Value Measurements, for valuation of financial instruments. ASC Topic 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:

Level 1 — Fair value is based on quoted prices for identical assets or liabilities in active markets.

Level 2 — Fair value is determined using quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable.

Level 3 — Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as a pricing model, discounted cash flow, or similar technique.

The fair value of our mortgage loans held for sale is derived from negotiated rates with partner lending institutions. The fair value of our mortgage warehouse borrowings and loans payable and other borrowings approximate carrying value due to their short term nature and variable interest rate terms. The fair value of our Senior Notes is derived from quoted market prices by independent dealers in markets that are not active. The fair value of the Revolving Credit Facility is the outstanding borrowing amount, gross of debt issuance cost, due to its short-term nature and variable interest rates. The fair value of the contingent consideration liability related to previous acquisitions was estimated by discounting to present value the contingent payments expected to be made for each acquisition based on a probability-weighted scenario approach. As the measurement of the contingent consideration is based primarily on significant inputs not observable in the market, it represents a Level 3 measurement. The carrying value and fair value of our financial instruments are as follows (in thousands):

 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Level in Fair
Value Hierarchy
 
Carrying
Value
 
Estimated
Fair
Value
 
Carrying
Value
 
Estimated
Fair
Value
Description:
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
 
2
 
$
145,963

 
$
145,963

 
$
201,733

 
$
201,733

Mortgage warehouse borrowings
 
2
 
118,099

 
118,099

 
183,444

 
183,444

Loans payable and other borrowings
 
2
 
158,244

 
158,244

 
134,824

 
134,824

5.25% Senior Notes due 2021 (1)
 
2
 
544,312

 
548,625

 
543,713

 
552,750

5.875% Senior Notes due 2023 (1)
 
2
 
346,147

 
349,125

 
345,840

 
346,500

5.625% Senior Notes due 2024 (1)
 
2
 
345,873

 
341,250

 
345,604

 
336,000

Revolving Credit Facility (1)
 
2
 
210,705

 
215,000

 
109,947

 
115,000

Contingent consideration liability
 
3
 
15,711

 
15,711

 
20,082

 
20,082

(1) Carrying value for Senior Notes and the Revolving Credit Facility, as presented, includes unamortized debt issuance costs. Debt issuance costs are not factored into the fair value calculation for the Senior Notes.

12. INCOME TAXES

19


The effective tax rate for the three and six months ended June 30, 2016 and June 30, 2015 was based on the federal statutory income tax rates, affected by state income taxes, changes in deferred tax assets, changes in valuation allowances, and certain preferential treatment of deductions and credits relating to homebuilding activities.

As of June 30, 2016, cumulative gross unrecognized tax benefits were $7.3 million, and all unrecognized tax benefits, if recognized, would favorably affect the effective tax rate. As of December 31, 2015, cumulative gross unrecognized tax benefits were $7.0 million. These amounts are included in deferred tax assets and income taxes payable in the accompanying Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015. None of the unrecognized tax benefits are expected to reverse in the next 12 months.

In accordance with ASC Topic 740-10, Income Taxes, we assess whether a valuation allowance should be established based on the consideration of available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment includes a review of both positive and negative evidence including our earnings history, forecasts and future profitability, assessment of the industry, the length of statutory carry-forward periods, experiences of utilizing net operating losses and built-in losses, and tax planning alternatives.

13. STOCKHOLDERS’ EQUITY
Capital Stock — Holders of Class A Common Stock and Class B Common Stock are entitled to one vote for each share held on all matters submitted to stockholders for their vote or approval. The holders of Class A Common Stock and Class B Common Stock vote together as a single class on all matters submitted to stockholders for their vote or approval, except with respect to the amendment of certain provisions of the amended and restated Certificate of Incorporation that would alter or change the powers, preferences or special rights of the Class B Common Stock so as to affect them adversely. Such amendments must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class, or as otherwise required by applicable law. The voting power of the outstanding Class B Common Stock (expressed as a percentage of the total voting power of all common stock) is equal to the percentage of partnership interests in New TMM not held directly or indirectly by TMHC.

The components and respective voting power of outstanding TMHC Common Stock at June 30, 2016 are as follows:

 
 
Shares
Outstanding
 
Percentage
Class A Common Stock
 
30,566,122

 
25.5
%
Class B Common Stock
 
89,106,748

 
74.5
%
Total
 
119,672,870

 
100
%

Stock Repurchase Program
Our Board of Directors has authorized the repurchase of up to $50.0 million of the Company’s Class A Common Stock through December 31, 2016 in open market purchases, privately negotiated transactions or other transactions. The stock repurchase program is subject to prevailing market conditions and other considerations, including our liquidity, the terms of our debt instruments, planned land investment and development spending, acquisition and other investment opportunities and ongoing capital requirements. During the three and six months ended June 30, 2016, there were an aggregate of 1,333,873 and 1,671,633 shares of Class A Common Stock repurchased for $19.7 million and $24.7 million, respectively. During the quarter and year ended December 31, 2015, there were an aggregate of 934,434 shares of Class A Common Stock repurchased for $15.0 million.


20


14. STOCK BASED COMPENSATION
Equity-Based Compensation
In April 2013, we adopted the Taylor Morrison Home Corporation 2013 Omnibus Equity Award Plan, which was amended and restated in May 2016 (the “Plan”). The Plan provides for the grant of stock options, RSUs and other equity awards based on our common stock. As of June 30, 2016 we had an aggregate of 3,852,036 shares of Class A Common Stock available for future grants under the Plan.

The following table provides information regarding the amount and components of stock-based compensation expense, which except as described in Note 2 below, is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Restricted stock units (RSUs) (1)
 
$
1,755

 
$
818

 
$
3,138

 
$
1,426

Stock options
 
1,061

 
828

 
2,018

 
2,798

New TMM units
 
381

 
393

 
761

 
912

Total stock compensation (2)
 
$
3,197

 
$
2,039

 
$
5,917

 
$
5,136

Income tax expense recognized
 
$
(20
)
 
$
(3
)
 
$
(22
)
 
$
(7
)
(1) Includes compensation expense related to time-based RSUs and performance-based RSUs.
(2) Included in the table above for the six months ended June 30, 2015 is $1.5 million of stock compensation expense related to the acceleration of vesting for equity awards held by Monarch employees. The sale of Monarch triggered a change in control provision provided for in the respective award agreements and plan document. The expense related to the acceleration of awards is included in transaction expenses from discontinued operations in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2015.

At June 30, 2016 and December 31, 2015, the aggregate unrecognized value of all outstanding stock-based compensation awards was approximately $25.7 million and $15.2 million, respectively.

Restricted Stock Units – The following table summarizes the time-based RSU and performance-based RSU activity for the six months ended June 30, 2016:
 
 
Shares
 
Weighted Average
Grant Date Fair
Value
Balance at December 31, 2015
 
441,296

 
$
13.55

Granted
 
1,083,345

 
11.37

Vested
 
(13,334
)
 
19.50

Forfeited
 
(36,824
)
 
13.38

Balance at June 30, 2016
 
1,474,483

 
$
13.38


During the three and six months ended June 30, 2016, we issued time-based RSU awards and performance-based RSU awards to certain employees and members of the Board of Directors of the Company.

Our time-based RSUs consist of units to be settled in shares of Class A Common Stock awarded to our employees and members of our Board of Directors. Vesting of RSUs is subject to continued employment with TMHC or an affiliate, or continued service on the Board of Directors, through the applicable vesting dates. Time-based RSUs granted to employees generally become vested with respect to 33% of the RSUs on the second, third, and fourth anniversaries of the grant date. Time-based RSUs granted to members of the Board of Directors generally become vested on the first anniversary of the grant date.

Additionally, we issued performance-based RSUs to certain employees of the Company. These awards will vest in full based on the achievement of certain performance goals over a three-year performance period, subject to the employee’s continued employment through the last date of the performance period and will be settled in shares of our Class A common stock. The number of shares that may be issued in settlement of the performance-based RSUs to the award recipients may be greater or lesser than the target award amount depending on actual performance achieved as compared to the performance targets set forth in the awards.

Stock Options – The following table summarizes the stock option activity for the six months ended June 30, 2016:

21


 
 
Shares
 
Weighted
Average Exercise
Price Per Share
Outstanding at December 31, 2015
 
1,507,765

 
$
21.07

Granted
 
1,133,642

 
11.54

Canceled/Forfeited
 
(37,790
)
 
13.58

Outstanding at June 30, 2016
 
2,603,617

 
$
17.03

Options exercisable at June 30, 2016
 
623,133

 
$
21.52


Options granted to employees vest and become exercisable ratably on the second, third, fourth and fifth anniversary of the date of grant. Options granted to members of the Board of Directors vest and become exercisable ratably on the first, second and third anniversary of the date of grant. Vesting of the options is subject to continued employment with TMHC or an affiliate, or continued service on the Board of Directors, through the applicable vesting dates and expires within ten years from the date of grant.

New TMM Units – Certain members of management and certain members of the Board of Directors were issued Class M partnership units in TMM Holdings. Those units were subject to both time and performance vesting conditions. In addition, TMM Holdings issued phantom Class M Units to certain employees who resided in Canada, which are treated as Class M Units for the purposes of this description and the financial statements. In connection with the sale of Monarch, all of the phantom Class M Units were settled pursuant to change in control provisions provided for in the award agreement. In the six months ended June 30, 2015, we paid $1.4 million in settlement of these awards; there was no activity for the six months ended June 30, 2016.

Pursuant to the Reorganization Transactions, the time-vesting Class M Units in TMM Holdings were exchanged for New TMM Units with vesting terms substantially the same as the Class M Units surrendered for exchange. One New TMM Unit together with a corresponding share of Class B Common Stock is exchangeable for one share of Class A Common Stock. The shares of Class B Common Stock/New TMM Units held by management and our Board of Directors outstanding as of June 30, 2016 were as follows:
 
 
Class B Shares/New
TMM Units
 
Weighted
Average Grant  Date
Fair Value
Balance at December 31, 2015
 
1,312,874

 
$
5.45

Forfeited (2)
 
(1,821
)
 
10.20

Balance at June 30, 2016
 
1,311,053

 
$
5.83

(1) Exchanges during the period represent the exchange of a vested New TMM Unit along with the corresponding share of Class B Common Stock for a newly issued share of Class A Common Stock.
(2) Awards forfeited during the period represent the unvested portion of New TMM Unit awards for employees who have terminated employment with the Company and for which the New TMM Unit and the corresponding Class B Share have been canceled.
15. RELATED-PARTY TRANSACTIONS
From time to time, we may engage in transactions with entities or persons that are affiliated with us or one or more of the Principal Equityholders. For the three and six months ended June 30, 2016, there were no such transactions. For the three and six months ended June 30, 2015, there were $16.8 million in real estate inventory acquisitions from such affiliates. Such real estate transactions with related parties are in the normal course of operations and are executed at arm’s length, as they are entered into at terms comparable to those entered into with unrelated third parties.


16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below provides the components of accumulated other comprehensive income (loss) (“AOCI”)for the periods presented (in thousands). There was no AOCI activity in the three months ended June 30, 2016, therefore is not presented below.


22


 
 
Six Months Ended June 30, 2016
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
2,305

 
$
(79,927
)
 
$
59,625

 
$
(17,997
)
Other comprehensive loss before reclassifications
 
(447
)
 

 

 
(447
)
Other comprehensive loss, net of tax
 
$
(447
)
 
$

 
$

 
$
(447
)
Gross amounts reclassified within accumulated other comprehensive income
 

 

 
329

 
329

Balance, end of period
 
$
1,858

 
$
(79,927
)
 
$
59,954

 
$
(18,115
)


 
 
Three Months Ended June 30, 2015
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
678

 
$
(79,561
)
 
$
61,033

 
$
(17,850
)
Other comprehensive income before reclassifications
 

 
199

 

 
199

Other comprehensive income, net of tax
 
$

 
$
199

 
$

 
$
199

Gross amounts reclassified within accumulated other comprehensive income
 

 

 
(195
)
 
(195
)
Balance, end of period
 
$
678

 
$
(79,362
)
 
$
60,838

 
$
(17,846
)


 
 
Six Months Ended June 30, 2015
 
 
Total Post-
Retirement
Benefits
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Non-controlling
Interest - Principal
Equityholders
Reclassification
 
Total
Balance, beginning of period
 
$
692

 
$
(52,148
)
 
$
40,546

 
$
(10,910
)
Other comprehensive income/(loss) before reclassifications
 
269

 
(27,214
)
 

 
(26,945
)
Gross amounts reclassified from accumulated other comprehensive income
 
1,488

 

 

 
1,488

Foreign currency translation
 
518

 

 
(518
)
 

Other comprehensive income/(loss), net of tax
 
$
2,275

 
$
(27,214
)
 
$
(518
)
 
$
(25,457
)
Gross amounts reclassified within accumulated other comprehensive (loss)/income
 
(2,289
)
 

 
20,810

 
18,521

Balance, end of period
 
$
678

 
$
(79,362
)
 
$
60,838

 
$
(17,846
)

Reclassifications for the amortization of the employee retirement plans are included in selling, general and administrative expense in the accompanying Condensed Consolidated Statements of Operations.
17. OPERATING AND REPORTING SEGMENTS
As of December 31, 2015, we realigned our homebuilding reporting segments to be the East, Central and West homebuilding operating regions. Among these, we have multiple homebuilding operating divisions which are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes, and providing warranty and customer service. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics. We also have a mortgage and title services segment. We have no inter-segment sales as all sales are to external customers.

Our reporting segments are as follows:
 

23


East
  
Atlanta, Charlotte, North Florida, Raleigh, Southwest Florida and Tampa
Central
 
Austin, Dallas and Houston (which includes a Taylor Morrison division and a Darling Homes division)
West
  
Bay Area, Chicago, Denver, Phoenix, Sacramento and Southern California
Mortgage Operations
  
Taylor Morrison Home Funding and Inspired Title

Management primarily evaluates segment performance based on GAAP gross margin, defined as homebuilding and land revenue less cost of home construction, land development and other land sales costs and other costs incurred by, or allocated to each segment, including impairments. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity.

As a result of our realignment, historical periods in the financial statements have been recast to give effect to the segment changes. Segment information, excluding discontinued operations, is as follows (in thousands):

 
 
Three Months Ended June 30, 2016
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
255,806

 
$
242,010

 
$
343,002

 
$
13,498

 
$

 
$
854,316

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
52,828

 
43,830

 
57,789

 
5,305

 

 
159,752

Selling, general and administrative expenses
 
(25,813
)
 
(23,159
)
 
(22,828
)
 

 
(19,092
)
 
(90,892
)
Equity in income/(loss) of unconsolidated entities
 
308

 
(164
)
 
740

 
1,421

 

 
2,305

Interest and other (expense)/income, net
 
(777
)
 
(394
)
 
(1,131
)
 
10

 
(1,105
)
 
(3,397
)
Income from continuing operations before income taxes
 
$
26,546

 
$
20,113

 
$
34,570

 
$
6,736

 
$
(20,197
)
 
$
67,768


 
 
Three Months Ended June 30, 2015
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
181,847

 
$
263,284

 
$
245,999

 
$
9,843

 
$

 
$
700,973

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
39,844

 
51,233

 
41,835

 
3,747

 

 
136,659

Selling, general and administrative expenses
 
(16,499
)
 
(21,954
)
 
(17,193
)
 

 
(15,580
)
 
(71,226
)
Equity in income/(loss) of unconsolidated entities
 
241

 
471

 
(242
)
 
755

 

 
1,225

Interest and other (expense)/income, net
 
(745
)
 
(3,595
)
 
813

 

 
146

 
(3,381
)
Loss on extinguishment of debt
 

 

 

 

 
(33,317
)
 
(33,317
)
Income from continuing operations before income taxes
 
$
22,841

 
$
26,155


$
25,213


$
4,502


$
(48,751
)

$
29,960

 

24


 
 
Six Months Ended June 30, 2016
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
433,528

 
$
442,511

 
$
600,470

 
$
23,136

 
$

 
$
1,499,645

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
90,658

 
81,296

 
98,020

 
8,419

 

 
278,393

Selling, general and administrative expenses
 
(46,618
)
 
(42,767
)
 
(42,429
)
 

 
(36,343
)
 
(168,157
)
Equity in income/(loss) of unconsolidated entities
 
307

 
(221
)
 
985

 
2,016

 

 
3,087

Interest and other (expense)/income, net
 
(1,955
)
 
(2,060
)
 
(949
)
 
10

 
(1,610
)
 
(6,564
)
Income from continuing operations before income taxes
 
$
42,392

 
$
36,248

 
$
55,627

 
$
10,445

 
$
(37,953
)
 
$
106,759



 
 
Six Months Ended June 30, 2015
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Total revenues
 
$
299,811

 
$
451,075

 
$
442,025

 
$
17,478

 
$

 
$
1,210,389

 
 
 
 
 
 
 
 
 
 
 
 
 
Gross margin
 
66,353

 
86,188

 
72,381

 
6,320

 

 
231,242

Selling, general and administrative expenses
 
(29,206
)
 
(39,627
)
 
(30,812
)
 

 
(28,505
)
 
(128,150
)
Equity in income/(loss) of unconsolidated entities
 
240

 
615

 
(422
)
 
1,094

 

 
1,527

Interest and other (expense)/income, net
 
(1,025
)
 
(7,023
)
 
529

 

 
(1,581
)
 
(9,100
)
Loss on extinguishment of debt
 

 

 

 

 
(33,317
)
 
(33,317
)
Gain on foreign currency forward
 

 

 

 

 
29,983

 
29,983

Income from continuing operations before income taxes
 
$
36,362

 
$
40,153


$
41,676


$
7,414


$
(33,420
)

$
92,185


 
 
As of June 30, 2016
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Real estate inventory and land deposits
 
$
1,056,570

 
$
788,819

 
$
1,436,146

 
$

 
$

 
$
3,281,535

Investments in unconsolidated entities
 
25,233

 
28,779

 
92,617

 
3,215

 

 
149,844

Other assets
 
76,104

 
149,206

 
50,463

 
164,064

 
359,872

 
799,709

Total assets
 
$
1,157,907

 
$
966,804

 
$
1,579,226

 
$
167,279

 
$
359,872

 
$
4,231,088

 
 
 
As of December 31, 2015
 
 
East
 
Central
 
West
 
Mortgage
Operations
 
Corporate
and
Unallocated
 
Total
Real estate inventory and land deposits
 
$
927,359

 
$
757,863

 
$
1,475,678

 
$

 
$

 
$
3,160,900

Investments in unconsolidated entities
 
24,098

 
28,832

 
72,646

 
2,872

 

 
128,448

Other assets
 
52,817

 
164,192

 
74,379

 
237,430

 
299,228

 
828,046

Total assets
 
$
1,004,274

 
$
950,887

 
$
1,622,703

 
$
240,302

 
$
299,228

 
$
4,117,394

18. COMMITMENTS AND CONTINGENCIES
Letters of Credit and Surety Bonds — We are committed, under various letters of credit and surety bonds, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit and surety bonds under these arrangements totaled $404.6 million and $394.8 million as of June 30, 2016 and

25


December 31, 2015, respectively. Although significant development and construction activities have been completed related to these site improvements, the bonds are generally not released until all development and construction activities are completed. We do not believe that it is probable that any outstanding bonds as of June 30, 2016 will be drawn upon.

Legal Proceedings — We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations. We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. At June 30, 2016 and December 31, 2015, our legal accruals were $1.9 million and $0.8 million, respectively. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.


26


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “the Company,” “we,” “us,” or “our” refer to Taylor Morrison Home Corporation (“TMHC”) and its subsidiaries.

Forward-Looking Statements
This quarterly report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or management’s intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “can,” “could,” “might,” “project” or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this quarterly report, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”). Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in the Annual Report, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

Our forward-looking statements made herein are made only as of the date of this quarterly report. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, except as required by applicable law.
Business Overview
Our principal business is residential homebuilding and the development of lifestyle communities with operations in Arizona, California, Colorado, Georgia, Florida, Illinois, North Carolina and Texas. Our Company serves a wide array of consumer groups from coast to coast, including first time, move-up, luxury and 55 plus buyers. Our homebuilding business operates under our Taylor Morrison and Darling Homes brand names. Our business is organized into multiple homebuilding operating divisions and a mortgage and title services division, which are managed as multiple reportable segments, as follows:
 
East
  
Atlanta, Charlotte, North Florida, Raleigh, Southwest Florida and Tampa
Central
 
Austin, Dallas and Houston (which includes a Taylor Morrison division and a Darling Homes division)
West
  
Bay Area, Chicago, Denver, Phoenix, Sacramento and Southern California
Mortgage Operations
  
Taylor Morrison Home Funding (TMHF) and Inspired Title Services, LLC (Inspired Title)

We offer single family attached and detached homes and revenue is recognized when the homes are completed and delivered to the buyers. Our primary costs are the acquisition of land in various stages of development and the construction costs of the homes we sell.

Our Mortgage Operations reportable segment provides mortgage services to customers through our wholly owned mortgage subsidiary, TMHF, and title services through our wholly owned title services subsidiary, Inspired Title. Revenues from loan origination are recognized at the time the related real estate transactions are completed, usually upon the close of escrow.


Factors Affecting Comparability of Results

The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements included elsewhere in this quarterly report. The primary factors that affect the comparability of our results of operations are the disposal of Monarch Corporation (“Monarch”) and gain on foreign currency hedge in January 2015, loss on extinguishment of debt and the acquisition of JEH Homes in the second quarter of 2015, the acquisition of three divisions of Orleans Homes in the third quarter of 2015, and the acquisition of Acadia Homes in

27


January 2016. For the six months ended June 30, 2015, the operating results of Monarch are included in discontinued operations, and historical periods have been recast to show the effects of our segment realignment effective December 31, 2015.

Non-GAAP Measures
In addition to the results reported in accordance with generally accepted accounting principles in the United States (“GAAP”), we have provided information in this quarterly report relating to “adjusted home closings gross margin.”

Adjusted home closings gross margin
We calculate adjusted home closings gross margin from GAAP gross margin by adding impairment charges, if any, attributable to the write-down of communities, and the amortization of capitalized interest through cost of home closings. Management uses adjusted home closings gross margin to evaluate our operational and economic performance on a consolidated basis as well as the operating and economic performance of our segments. We believe adjusted home closings gross margin is relevant and useful to investors for evaluating our overall financial performance. This measure is considered a non-GAAP financial measure and should be considered in addition to, rather than as a substitute for, the comparable GAAP financial measure as a measure of our operating performance. Although other companies in the homebuilding industry report similar information, the methods used may differ.

Second Quarter 2016 Highlights
Key financial results as of and for the three months ended June 30, 2016, as compared to the same period in 2015, are as follows:

Second quarter total revenue of $854 million
Average community count increased 29% from the prior year quarter to 315
Home closings revenue was $830 million, a 22% increase from the prior year quarter
GAAP home closings gross margin, inclusive of capitalized interest, was 18.1%
Net income for the quarter was $46 million, with earnings per share of $0.37




28


Results of Operations
The following table sets forth our results of operations (unaudited):

 
 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2016
 (Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Statements of Operations Data:
 
 
 
 
 
 
 
 
Home closings revenue, net
 
$
829,882

 
$
682,387

 
$
1,458,969

 
$
1,175,980

Land closings revenue
 
10,936

 
8,743

 
17,540

 
16,931

Mortgage operations revenue
 
13,498

 
9,843

 
23,136

 
17,478

Total revenues
 
854,316

 
700,973

 
1,499,645

 
1,210,389

Cost of home closings
 
679,685

 
553,652

 
1,194,217

 
958,757

Cost of land closings
 
6,686

 
4,566

 
12,318

 
9,232

Mortgage operations expenses
 
8,193

 
6,096

 
14,717

 
11,158

Gross margin
 
159,752

 
136,659

 
278,393

 
231,242

Sales, commissions and other marketing costs
 
59,182

 
47,022

 
107,023

 
83,242

General and administrative expenses
 
31,710

 
24,204

 
61,134

 
44,908

Equity in income of unconsolidated entities
 
(2,305
)
 
(1,225
)
 
(3,087
)
 
(1,527
)
Interest income, net
 
(15
)
 
(82
)
 
(102
)
 
(132
)
Other expense, net
 
3,412

 
3,463

 
6,666

 
9,232

Loss on extinguishment of debt
 

 
33,317

 

 
33,317

Gain on foreign currency forward
 

 

 

 
(29,983
)
Income from continuing operations before income taxes
 
67,768

 
29,960

 
106,759

 
92,185

Income tax provision
 
22,104

 
9,939

 
34,991

 
31,981

Net income from continuing operations
 
45,664

 
20,021

 
71,768

 
60,204

Discontinued operations:
 
 
 
 
 
 
 
 
Transaction expenses from discontinued operations
 

 

 

 
(9,043
)
Gain on sale of discontinued operations
 

 

 

 
80,205

Income tax provision from discontinued operations
 

 

 

 
(14,500
)
Net income from discontinued operations
 

 

 

 
56,662

Net income before allocation to non-controlling interests
 
45,664

 
20,021

 
71,768

 
116,866

Net income attributable to non-controlling interests – joint ventures
 
(296
)
 
(920
)
 
(480
)
 
(1,289
)
Net income before non-controlling interests – Principal Equityholders
 
45,368

 
19,101

 
71,288

 
115,577

Net income from continuing operations attributable to non-controlling interests – Principal Equityholders
 
(33,683
)
 
(14,024
)
 
(52,790
)
 
(43,157
)
Net income from discontinued operations attributable to non-controlling interests – Principal Equityholders
 

 

 

 
(41,381
)
Net income available to Taylor Morrison Home Corporation
 
$
11,685

 
$
5,077

 
$
18,498

 
$
31,039

Home closings gross margin
 
18.1
%
 
18.9
%
 
18.1
%
 
18.5
%
Adjusted home closings gross margin
 
20.8
%
 
21.9
%
 
20.8
%
 
21.6
%
Sales, commissions and other marketing costs as a percentage of home closings revenue
 
7.1
%
 
6.9
%
 
7.3
%
 
7.1
%
General and administrative expenses as a percentage of home closings revenue
 
3.8
%
 
3.5
%
 
4.2
%
 
3.8
%
Average sales price per home closed
 
$
457

 
$
461

 
$
455

 
$
462








29





Three and Six Months Ended June 30, 2016 Compared to Three and Six Months Ended June 30, 2015
Average Active Selling Communities
 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
Change
East
 
126

 
87

 
44.8
%
Central
 
110

 
93

 
18.3

West
 
79

 
65

 
21.5

Total
 
315

 
245

 
28.6
%

 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
Change
East
 
121

 
81

 
49.4
%
Central
 
112

 
93

 
20.4

West
 
80

 
64

 
25.0

Total
 
313

 
238

 
31.5
%

Average active selling communities for the three and six months ended June 30, 2016 increased by 28.6% and 31.5%, respectively, when compared to the same periods in the prior year, primarily due to our acquisitions of Acadia Homes and three divisions of Orleans Homes. The acquisition of JEH Homes also contributed to the increase for the six months ended June 30, 2016 when compared to 2015. In addition, our legacy markets experienced growth which further contributed to the overall increase in average active selling communities. From June 2015 to June 2016, we opened 113 new communities and closed out 69 existing communities throughout our legacy markets.

Net Sales Orders
 
 
Three Months Ended June 30,
 
 
Net Sales Orders (1) 
 
Sales Value (1)
 
Average Selling Price
(Dollars in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
East
 
820

 
573

 
43.1
 %
 
$
315,587

 
$
200,684

 
57.3
 %
 
$
385

 
$
350

 
10.0
 %
Central
 
493

 
593

 
(16.9
)
 
225,004

 
271,422

 
(17.1
)
 
456

 
458

 
(0.4
)
West
 
712

 
711

 
0.1

 
389,093

 
345,786

 
12.5

 
546

 
486

 
12.3

Total
 
2,025

 
1,877

 
7.9
 %
 
$
929,684

 
$
817,892

 
13.7
 %
 
$
459

 
$
436

 
5.3
 %

 
 
Six Months Ended June 30,
 
 
Net Sales Orders (1) 
 
Sales Value (1) 
 
Average Selling Price
(Dollars in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
East
 
1,534

 
1,040

 
47.5
 %
 
$
593,202

 
$
388,569

 
52.7
 %
 
$
387

 
$
374

 
3.5
%
Central
 
924

 
1,168

 
(20.9
)
 
422,654

 
524,001

 
(19.3
)
 
457

 
449

 
1.8

West
 
1,395

 
1,398

 
(0.2
)
 
751,563

 
676,819

 
11.0

 
539

 
484

 
11.4

Total
 
3,853

 
3,606

 
6.8
 %
 
$
1,767,419

 
$
1,589,389

 
11.2
 %
 
$
459

 
$
441

 
4.1
%
(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers, net of cancellations.

East:
The number of net homes sold increased by 43.1% and 47.5%, respectively, for the three and six months ended June 30, 2016 compared to the prior year. Sales value of homes increased by 57.3% and 52.7%, respectively, for the same comparative periods. The increase in the total sales value is a result of increased units which is primarily attributable to an increase in

30


average active selling communities as a result of the acquisitions of our new divisions in Atlanta, Raleigh, and Charlotte. The average selling price of net homes sold increased throughout the East region for the three and six months ended June 30, 2016 due to our strong product acceptance in desirable locations.

Central:

The number of net homes sold decreased by 16.9% and 20.9%, respectively, for the three and six months ended June 30, 2016 compared to the prior year. Sales value of homes decreased by 17.1% and 19.3%, respectively, for the same comparative periods. For the quarter, average selling price remained relatively flat and for the first half of the year the average selling price increased by 1.8%. While the economic environment related to the oil industry in this region impacted the year-over-year performance, certain divisions in the Central region are showing continued strength in their markets as evidenced by average selling price.

West:
Sales value of homes increased by 12.5% and 11.0%, respectively, for the three and six months ended June 30, 2016 compared to the prior year. The average selling price of net homes sold increased by 12.3% and 11.4% for the quarter and six month periods, which contributed to the increased total sales value, however, net units sold remained relatively flat year-over-year.


Sales Order Cancellations
 
 
Cancellation Rate(1)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
East
 
11.2
%
 
8.6
%
 
11.5
%
 
10.8
%
Central
 
17.6

 
13.6

 
17.6

 
12.6

West
 
11.1

 
11.0

 
12.0

 
11.0

Total Company
 
12.8
%
 
11.1
%
 
13.2
%
 
11.5
%
(1) Cancellation rate represents the number of canceled sales orders divided by gross sales orders.

The primary driver for the increase in the consolidated cancellation rate was the Central region. Cancellation rates for the total company were sequentially better in the three months ended June 30, 2016 compared to the six months ended June 30, 2016. Our use of prequalification criteria through TMHF and robust earnest money deposits help us manage our cancellation rate across the company.

Sales Order Backlog
 
 
As of June 30,
 
 
Sold Homes in Backlog (1)
 
Sales Value
 
Average Selling Price
(Dollars in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
East
 
1,313

 
992

 
32.4
 %
 
$
559,195

 
$
404,228

 
38.3
 %
 
$
426

 
$
407

 
4.7
%
Central
 
1,032

 
1,364

 
(24.3
)
 
525,028

 
663,069

 
(20.8
)
 
509

 
486

 
4.7

West
 
1,297

 
1,100

 
17.9

 
674,454

 
562,835

 
19.8

 
520

 
512

 
1.6

Total
 
3,642

 
3,456

 
5.4
 %
 
$
1,758,677

 
$
1,630,132

 
7.9
 %
 
$
483

 
$
472

 
2.3
%
(1) Sales order backlog represents homes under contract for which revenue has not yet been recognized at the end of the period (including homes sold but not yet started). Some of the contracts in our sales order backlog are subject to contingencies including mortgage loan approval and buyers selling their existing homes, which can result in cancellations.

East:
Backlog units and sales value increased by 32.4% and 38.3%, respectively, at June 30, 2016 compared to June 30, 2015, primarily due to an increase in net sales orders in both legacy and recently acquired markets. Average selling price increased by 4.7% to $426,000 as demand for our products in this region continues to grow.
Central:

31


Backlog units and sales value decreased by 24.3% and 20.8%, respectively, at June 30, 2016 compared to June 30, 2015, primarily due to a decrease in net sales orders. Despite a decrease in backlog units, the decrease in backlog dollars was partially offset by an increased average sales price.
West:
Backlog units and sales value increased by 17.9% and 19.8%, respectively, at June 30, 2016 compared to June 30, 2015, primarily due to an increase in Phoenix backlog. The product mix on a year-over-year basis resulted in an overall modest increase in average selling price.

Home Closings Revenue
 
 
Three Months Ended June 30,
 
 
Homes Closed
 
Home Closings Revenue, Net
 
Average Selling Price
(Dollars in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
East
 
674

 
465

 
44.9
 %
 
$
255,781

 
$
181,848

 
40.7
 %
 
$
379

 
$
391

 
(3.1
)%
Central
 
517

 
545

 
(5.1
)
 
238,743

 
259,581

 
(8.0
)
 
462

 
476

 
(2.9
)
West
 
625

 
470

 
33.0

 
335,358

 
240,958

 
39.2

 
537

 
513

 
4.7

Total
 
1,816

 
1,480

 
22.7
 %
 
$
829,882

 
$
682,387

 
21.6
 %
 
$
457

 
$
461

 
(0.9
)%

 
 
Six Months Ended June 30,
 
 
Homes Closed
 
Home Closings Revenue, Net
 
Average Selling Price
(Dollars in thousands)
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
East
 
1,160

 
746

 
55.5
 %
 
$
433,503

 
$
299,366

 
44.8
 %
 
$
374

 
$
401

 
(6.7
)%
Central
 
922

 
956

 
(3.6
)
 
432,640

 
439,630

 
(1.6
)
 
469

 
460

 
2.0

West
 
1,125

 
841

 
33.8

 
592,826

 
436,984

 
35.7

 
527

 
520

 
1.3

Total
 
3,207

 
2,543

 
26.1
 %
 
$
1,458,969

 
$
1,175,980

 
24.1
 %
 
$
455

 
$
462

 
(1.5
)%


East:
The number of homes closed increased by 44.9% and 55.5%, respectively, for the three and six months ended June 30, 2016 compared to the prior year, and home closings revenue, net increased by 40.7% and 44.8%, respectively, for the same comparative periods. The increase in the number of homes closed is a result of our continued improvements in sales as we grow our legacy markets though community openings as well as the incremental sales from our newly acquired divisions in Atlanta, Charlotte and Raleigh. Certain economic market improvements, as well as favorable homebuyer reception of new products and new communities, contributed to the increase in net home closings revenue. The average sales price decreased by 3.1% and 6.7%, respectively, for the three and six months ended June 30, 2016 compared to the prior year periods primarily due to a shift in closings from Florida to Atlanta, Charlotte, and Raleigh where average selling prices are lower.

Central:

The number of homes closed decreased by 5.1% and 3.6%, respectively, for the three and six months ended June 30, 2016 compared to the prior year, and home closings revenue, net decreased by 8.0% and 1.6%, respectively, for the same comparative periods. The decrease in the number of homes closed is primarily the result of Darling Homes in Houston which has a higher price point. The markets which sell the Darling brand typically attract higher end, luxury buyers when compared to the other markets within the region. Both Darling markets experienced an increase in average sales price, which contributed to the region's 2.0% increase for the first half of the year compared to the prior year. For the three months ended June 30, 2016, the slight decrease in average selling price when compared to the same period in the prior year is primarily due to product mix between the divisions within the region.

West:
The number of homes closed increased by 33.0% and 33.8%, respectively, for the three and six months ended June 30, 2016 compared to the prior year, and home closings revenue, net increased by 39.2% and 35.7%, respectively, for the same comparative periods. The increases are primarily driven by our divisions in California and Phoenix in addition to the increased average communities throughout all of the divisions in the West region. Average selling price of homes closed during the

32


quarter increased by 4.7% and increased during the first half of the year by 1.3%. The average sales price increases are driven primarily by our higher priced California markets and to a lesser degree our Phoenix market which continues to experience strong consumer demand.


Land Closings Revenue
 
 
Three Months Ended June 30,
(Dollars in thousands)

 
2016
 
2015
 
Change
East
 
$
25

 
$

 
$
25

Central
 
3,267

 
3,702

 
(435
)
West
 
7,644

 
5,041

 
2,603

Total
 
$
10,936

 
$
8,743

 
$
2,193


 
 
Six Months Ended June 30,
(Dollars in thousands)
 
2016
 
2015
 
Change
East
 
$
25

 
$
445

 
$
(420
)
Central
 
9,871

 
11,445

 
(1,574
)
West
 
7,644

 
5,041

 
2,603

Total
 
$
17,540

 
$
16,931

 
$
609


We generally purchase land and lots with the intent to build and sell homes. However, in some locations where we act as a developer, we occasionally purchase land that includes commercially zoned parcels or areas designated for school or government use, which we typically sell to commercial developers or municipalities, as applicable. We also sell residential lots or land parcels to manage our land and lot supply on larger tracts of land. As a developer, we often include land sales in our underwriting strategies in many of our master plan communities where we may mitigate risk, enhance our returns or pursue opportunities allowing access to new land positions. Land and lot sales occur at various intervals and varying degrees of profitability. Therefore, the revenue and gross margin from land closings will fluctuate from period to period, depending upon market opportunities.


33


Segment Home Closings Gross Margin
The following tables set forth a reconciliation between our GAAP home closings gross margin and adjusted home closings gross margin. See“—Non-GAAP Measures—Adjusted home closings gross margin.”

 
 
Three Months Ended June 30,
 
 
East
 
Central
 
West
 
Consolidated
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Home closings revenue, net
 
$
255,781

 
$
181,848

 
$
238,743

 
$
259,581

 
$
335,358

 
$
240,958

 
$
829,882

 
$
682,387

Cost of home closings
 
202,920

 
142,004

 
195,355

 
210,208

 
281,410

 
201,440

 
679,685

 
553,652

Home closings gross margin
 
52,861

 
39,844

 
43,388

 
49,373

 
53,948

 
39,518

 
150,197

 
128,735

Capitalized interest amortization
 
5,196

 
5,091

 
6,731

 
8,058

 
10,173

 
7,541

 
22,100

 
20,690

Adjusted home closings gross margin
 
$
58,057

 
$
44,935

 
$
50,119

 
$
57,431

 
$
64,121

 
$
47,059

 
$
172,297

 
$
149,425

Home closings gross margin %
 
20.7
%
 
21.9
%
 
18.2
%
 
19.0
%
 
16.1
%
 
16.4
%
 
18.1
%
 
18.9
%
Adjusted home closings gross margin %
 
22.7
%
 
24.7
%
 
21.0
%
 
22.1
%
 
19.1
%
 
19.5
%
 
20.8
%
 
21.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
East
 
Central
 
West
 
Consolidated
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Home closings revenue, net
 
$
433,503

 
$
299,366

 
$
432,640

 
$
439,630

 
$
592,826

 
$
436,984

 
$
1,458,969

 
$
1,175,980

Cost of home closings
 
342,814

 
233,228

 
352,756

 
358,609

 
498,647

 
366,920

 
1,194,217

 
958,757

Home closings gross margin
 
90,689

 
66,138

 
79,884

 
81,021

 
94,179

 
70,064

 
264,752

 
217,223

Capitalized interest amortization
 
8,814

 
8,510

 
12,031

 
13,847

 
17,685

 
14,360

 
38,530

 
36,717

Adjusted home closings gross margin
 
$
99,503

 
$
74,648

 
$
91,915

 
$
94,868

 
$
111,864

 
$
84,424

 
$
303,282

 
$
253,940

Home closings gross margin %
 
20.9
%
 
22.1
%
 
18.5
%
 
18.4
%
 
15.9
%
 
16.0
%
 
18.1
%
 
18.5
%
Adjusted home closings gross margin %
 
23.0
%
 
24.9
%
 
21.2
%
 
21.6
%
 
18.9
%
 
19.3
%
 
20.8
%
 
21.6
%

On a consolidated basis home closings gross margin percentage decreased to 18.1% from 18.9% for three months ended June 30, 2016 compared to the same period of 2015 and decreased to 18.1% from 18.5% for the six months ended June 30, 2016 compared to the prior year period. Amortization of capitalized interest benefited our overall margins as we experienced a decrease in our interest rate from the redemption, in May 2015, of our 7.75% Senior Notes due 2020 and issuance, in April 2015, of our 5.875% Senior Notes due 2023. Partially offsetting this benefit, we increased closings of aged finished inventory which negatively impacted margins as such homes typically have lower margins than to-be-built homes.
East:
Home closings gross margin percentage decreased to 20.7% from 21.9% for the three months ended June 30, 2016 compared to 2015 and decreased to 20.9% from 22.1% for the six months ended June 30, 2016 compared to the prior year. The decreases are primarily as a result of the addition of lower margin communities from our recent acquisitions and the effects of purchase accounting stemming from business combinations.

Central:

Home closings gross margin percentage decreased to 18.2% from 19.0% for the three months ended June 30, 2016 compared to 2015 and increased slightly to 18.5% from 18.4% for the six months ended June 30, 2016 compared to the prior year. The change in the quarter is a result of increased construction costs in our Darling Homes business. The change for the first half of

34


the year is a result of higher margins from a decrease in construction costs for our Taylor Morrison Houston business which was offset by reduced margins attributable to increased costs in our Darling Homes brand.

West:
Home closings gross margin percentage decreased slightly to 16.1% from 16.4% for the three months ended June 30, 2016 compared to 2015 and remained relatively flat for the six months ended June 30, 2016 compared to the prior year. The changes for all comparative periods were a result of increased homes closed in the California divisions which have lower average gross margins and higher average sales prices.

Mortgage Operations
Our Mortgage Operations segment provides mortgage lending through our subsidiary, TMHF, and title services through our subsidiary, Inspired Title. The following is a summary of mortgage operations gross margin:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Mortgage operations revenue
 
$
13,498

 
$
9,843

 
$
23,136

 
$
17,478

Mortgage operations expenses
 
8,193

 
6,096

 
14,717

 
11,158

Mortgage operations gross margin
 
$
5,305

 
$
3,747

 
$
8,419

 
$
6,320

Mortgage operations margin %
 
39.3
%
 
38.1
%
 
36.4
%
 
36.2
%

Our Mortgage Operations segment’s revenue increased primarily due to increased closings volume, average loan amounts, and improved capture rate.

The following details the number of loans closed, the aggregate value and capture rate on our loans for the following periods:

 
 
Closed
Loans
 
Aggregate
Loan Volume
(in millions)
 
Capture Rate
Three Months Ended June 30, 2016
 
1,096

 
$
373.4

 
80
%
Three Months Ended June 30, 2015
 
856

 
$
286.4

 
77
%

 
 
Closed
Loans
 
Aggregate
Loan Volume
(in millions)
 
Capture Rate
Six Months Ended June 30, 2016
 
1,897

 
$
635.1

 
79
%
Six Months Ended June 30, 2015
 
1,507

 
$
503.8

 
76
%


Our mortgage capture rate represents the percentage of our homes sold to a home purchaser that utilized a mortgage and for which the borrower obtained such mortgage from TMHF or one of our preferred third party lenders. In the second quarter of 2016 and 2015, the average FICO score of customers who obtained mortgages through TMHF was 744 for both periods. In the first half of 2016 and 2015, the average FICO score of customers who obtained their mortgages through TMHF was 742 and 740, respectively.

Sales, Commissions and Other Marketing Costs
Sales, commissions and other marketing costs, as a percentage of home closings revenue, net, increased for the three months ended June 30, 2016 to 7.1% from 6.9% in the same period in 2015 and to 7.3% from 7.1% for the six months ended June 30, 2016 compared to the prior year. The increases are primarily a result of increased model home amortization, sales office expenses and advertising expenses due to increased community count as well as newly acquired divisions. Our new communities typically have higher sales and marketing costs during their earlier stages of sales due to various start up costs.


35


General and Administrative Expenses
General and administrative expenses as a percentage of home closings revenue, net, increased to 3.8% from 3.5%, for the three months ended June 30, 2016 and 2015, respectively, and to 4.2% from 3.8% for the six months ended June 30, 2016 compared to the prior year, respectively. The increase is attributable to investments we have made for the future of our company related to our organic business as well as recent acquisitions.

Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities was $2.3 million and $1.2 million for the three months ended June 30, 2016 and 2015, respectively, and $3.1 million and $1.5 million for the six months ended June 30, 2016 and June 30, 2015, respectively. The increase is primarily due to our increase in active unconsolidated joint ventures. We had five active unconsolidated joint ventures at June 30, 2016 compared to three active at June 30, 2015.

Interest Income, Net
Interest income, net includes interest earned on cash balances offset by interest incurred but not capitalized on our long-term debt and other borrowings. Interest income for three and six months ended June 30, 2016, was consistent with interest income for the three and six months ended June 30, 2015.

Other Expense, Net
Other expense, net for the three months ended June 30, 2016 and 2015 was $3.4 million and $3.5 million, respectively, and $6.7 million and $9.2 million for the six months ended June 30, 2016 and June 30, 2015, respectively. The majority of the expense for both periods related to accruals for contingent consideration, pre-acquisition costs on abandoned land projects, captive insurance claims costs and financing fees on our Revolving Credit Facility.

Loss on Extinguishment of Debt

During the second quarter of 2015, we redeemed the entire outstanding aggregate principal amount of our 2020 Senior Notes at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. As a result of the redemption, we recorded a loss on extinguishment of debt of $33.3 million, which included the payment of the redemption premium and write off of net unamortized deferred financing fees.

We did not incur any losses on extinguishment of debt for the three or six months ended June 30, 2016.

Gain on Foreign Currency Forward
In December 2014, we entered into a derivative financial instrument in the form of a foreign currency forward. The derivative financial instrument hedged our exposure to the Canadian dollar in conjunction with the disposition of the Monarch business. The final settlement of the derivative financial instrument occurred on January 30, 2015 and a gain in the amount of $30.0 million was recorded in foreign currency forward in the accompanying Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

Income Tax Provision

The effective tax rate for the three months ended June 30, 2016 reflects a favorable accrual to return adjustment and certain benefits from energy tax credits which were not available for the same period in 2015. On December 18, 2015, legislation was passed that enacted the credits retroactively for 2015 and prospectively for 2016, which is contemplated in our effective rate.

Net Income

Net income from continuing operations and earnings per diluted share for the three months ended June 30, 2016 was $45.7 million and $0.37, respectively. Net income from continuing operations and earnings per diluted share for the three months ended June 30, 2015 was $20.0 million and $0.15, respectively. The increase in net income from continuing operations and earnings per share from the prior year is attributable to an increase in margin dollars, lower effective tax rates, and an increase in our repurchase of treasury shares.

Liquidity and Capital Resources
Liquidity

36



We finance our operations through the following:

Borrowings under our Revolving Credit Facility (as defined below);
Our various series of Senior Notes (as defined below);
Mortgage warehouse facilities;
Project-level financing (including non-recourse loans);
Performance, payment and completion surety bonds, and letters of credit; and
Cash generated from operations.

We believe that we can fund our current and foreseeable liquidity needs for the next 12 months from:

Cash generated from operations;
Borrowings under our Revolving Credit Facility; and

To the extent necessary, we can also fund our current and foreseeable liquidity needs from additional offerings of senior notes, if available in the credit markets.

We may access the capital markets to obtain additional liquidity through debt and equity offerings on an opportunistic basis.
Our principal uses of capital for the six months ended June 30, 2016 and 2015 were land purchases, lot development, home construction, operating expenses, payment of debt service, income taxes, and the payment of various liabilities. In addition, capital was used for the business acquisition of Acadia homes and investments in joint ventures for the six months ended June 30, 2016. Cash flows for each of our communities depend on the status of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash expenditures for land acquisitions, on and off-site development, construction of model homes, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of earnings.

The table below summarizes our total cash and liquidity as of the dates indicated (in thousands):

(Dollars in thousands)
 
As of
 
 
June 30, 2016
 
December 31, 2015
Total Cash, including Restricted Cash
 
$
133,179

 
$
127,468

 
 
 
 
 
Total Revolving Credit Facility
 
500,000

 
500,000

Letters of Credit Outstanding
 
(32,809
)
 
(32,906
)
Revolving Credit Facility Borrowings Outstanding (1)
 
(215,000
)
 
(115,000
)
Revolving Credit Facility Availability
 
252,191

 
352,094

 
 
 
 
 
Total Liquidity
 
$
385,370

 
$
479,562

(1) Outstanding borrowings under the Revolving Credit Facility are presented gross of debt issuance costs.

Cash Flow Activities

Operating Cash Flow Activities
Our net cash provided by operating activities was $65.7 million for the six months ended June 30, 2016 compared to $292.9 million used for the six months ended June 30, 2015. Cash provided by operating activities for the six months ended June 30, 2016 was primarily attributable to net income, customer deposits, and mortgages held for sale, prepaid expenses and other assets; all of which were partially offset by investment in real estate inventory and land deposits. Cash used in operating activities for the six months ended June 30, 2015 was primarily attributable to investment in real estate inventory and land deposits which was partially offset by net income. These items resulted in positive cash provided by operating activities for 2016. We used cash in operating activities for the six months ended June 30, 2015 primarily as a result of significant investments in real estate inventory from proceeds of the sale of Monarch.

Investing Cash Flow Activities

37


Net cash used in investing activities was $73.0 million for the six months ended June 30, 2016, as compared to net cash provided by investing activities of $217.5 million for the six months ended June 30, 2015. We used cash of $52.8 million during the first quarter of 2016 for the acquisition of Acadia Homes. In addition, cash provided by investing activities in the 2015 period reflects the proceeds from the sale of Monarch and our foreign currency forward which occurred during the first quarter of 2015.

Financing Cash Flow Activities
Net cash provided by financing activities was $13.0 million for the six months ended June 30, 2016, compared to $221.3 million of net cash used in financing activities for the six months ended June 30, 2015. The increase in cash provided by financing activities was primarily attributable to an increase in net borrowings under our mortgage warehouse credit facilities and the Revolving Credit Facility in 2016.


Debt Instruments

Senior Notes:

The following table summarizes our outstanding senior unsecured notes (collectively, the “Senior Notes”), as of June 30, 2016.
 
(Dollars in thousands)
 
Date Issued
 
Principal
Amount
 
Initial Offering
Price
 
Interest Rate
 
Original Net
Proceeds
 
Original Debt
Issuance
Cost
Senior Notes due 2021
 
April 16, 2013
 
550,000

 
100.0
%
 
5.250
%
 
541,700

 
8,300

Senior Notes due 2023
 
April 16, 2015
 
350,000

 
100.0
%
 
5.875
%
 
345,500

 
4,500

Senior Notes due 2024
 
March 5, 2014
 
350,000

 
100.0
%
 
5.625
%
 
345,300

 
4,700

Total
 
 
 
$
1,250,000

 
 
 
 
 
$
1,232,500

 
$
17,500


2021 Senior Notes
On April 16, 2013, we issued $550.0 million aggregate principal amount of 5.25% Senior Notes due 2021 (the “2021 Senior Notes”).

The 2021 Senior Notes mature on April 15, 2021. The 2021 Senior Notes are guaranteed by TMM Holdings, Taylor Morrison Holdings, Inc., Taylor Morrison Communities II, Inc. and their homebuilding subsidiaries (collectively, the “Guarantors”) which are all subsidiaries directly or indirectly of TMHC. The 2021 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The indenture for the 2021 Senior Notes contains covenants that limit (i) the making of investments, (ii) the payment of dividends and the redemption of equity and junior debt, (iii) the incurrence of additional indebtedness, (iv) asset dispositions, (v) mergers and similar corporate transactions, (vi) the incurrence of liens, (vii) the incurrence of prohibitions on payments and asset transfers among the issuers and restricted subsidiaries and (viii) transactions with affiliates, among others. The indenture governing the 2021 Senior Notes contains customary events of default. If we do not apply the net cash proceeds of certain asset sales within specified deadlines, we will be required to offer to repurchase the 2021 Senior Notes at par (plus accrued and unpaid interest) with such proceeds. We are also required to offer to repurchase the 2021 Senior Notes at a price equal to 101% of their aggregate principal amount (plus accrued and unpaid interest) upon certain change of control events.

There are no financial maintenance covenants for the 2021 Senior Notes.

2023 Senior Notes and Redemption of 2020 Senior Notes
On April 16, 2015, we issued $350.0 million aggregate principal amount of 5.875% Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The net proceeds of the offering, together with cash on hand, were used to redeem the entire remaining principal amount of 7.75% Senior Notes due 2020 on May 1, 2015, at a redemption price of 105.813% of their aggregate principal amount, plus accrued and unpaid interest thereon to, but not including, the date of redemption. As a result of the redemption of the 2020 Senior Notes, we recorded a loss on extinguishment of debt of $33.3 million during the second quarter of 2015, which included the payment of the redemption premium and write off of net unamortized deferred financing fees.


38


The 2023 Senior Notes mature on April 15, 2023. The 2023 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 Senior Notes. The indenture governing the 2023 Senior Notes contains covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions. The indenture governing the 2023 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 Senior Notes. The change of control provisions in the indenture governing the 2023 Senior Notes are similar to those contained in the indenture governing the 2021 Senior Notes, but a credit rating downgrade must occur in connection with the change of control before the repurchase offer requirement is triggered for the 2023 Senior Notes.

Prior to January 15, 2023, the 2023 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through January 15, 2023 (plus accrued and unpaid interest). Beginning January 15, 2023, the 2023 Senior Notes are redeemable at par (plus accrued and unpaid interest).

There are no financial maintenance covenants for the 2023 Senior Notes.

2024 Senior Notes
On March 5, 2014, we issued $350.0 million aggregate principal amount of 5.625% Senior Notes due 2024 (the “2024 Senior Notes”). The net proceeds from the issuance of the 2024 Senior Notes were used to repay the outstanding balance under the Revolving Credit Facility and for general corporate purposes.

The 2024 Senior Notes mature on March 1, 2024. The 2024 Senior Notes are guaranteed by the same Guarantors that guarantee the 2021 and 2023 Senior Notes. The 2024 Senior Notes and the related guarantees are senior unsecured obligations and are not subject to registration rights. The indenture governing the 2024 Senior Notes contains covenants that limit our ability to incur debt secured by liens and enter into certain sale and leaseback transactions similar to the 2023 Senior Notes. The indenture governing the 2024 Senior Notes contains events of default that are similar to those contained in the indenture governing the 2021 and 2023 Senior Notes. The change of control provisions in the indenture governing the 2024 Senior Notes are similar to those contained in the indenture governing the 2023 Senior Notes.

Prior to December 1, 2023, the 2024 Senior Notes are redeemable at a price equal to 100% plus a “make-whole” premium for payments through December 1, 2023 (plus accrued and unpaid interest). Beginning on December 1, 2023, the 2024 Senior Notes are redeemable at par (plus accrued and unpaid interest).

There are no financial maintenance covenants for the 2024 Senior Notes.

TMHC Compared to TMM Holdings
TMM Holdings is a parent guarantor of certain of our debt facilities. The financial information of TMHC is substantially identical to the financial performance and operations of TMM Holdings except for certain SEC and regulatory fees which are attributable to TMHC.

Revolving Credit Facility
Our $500.0 million Revolving Credit Facility matures on April 12, 2019. The Revolving Credit Facility is guaranteed by the same Guarantors that guarantee the 2021, 2023, and 2024 Senior Notes.

The Revolving Credit Facility contains certain “springing” financial covenants, requiring us and our subsidiaries to comply with a maximum debt to capitalization ratio of not more than 0.60 to 1.00 and a minimum consolidated tangible net worth level of at least $1.5 billion. The financial covenants would be in effect for any fiscal quarter during which any (a) loans under the Revolving Credit Facility are outstanding during the last day of such fiscal quarter or on more than five separate days during such fiscal quarter or (b) undrawn letters of credit (except to the extent cash collateralized) issued under the Revolving Credit Facility in an aggregate amount greater than $40.0 million or unreimbursed letters of credit issued under the Revolving Credit Facility are outstanding on the last day of such fiscal quarter or for more than five consecutive days during such fiscal quarter.

For purposes of determining compliance with the financial covenants for any fiscal quarter, the Revolving Credit Facility provides that we may exercise an equity cure by issuing certain permitted securities for cash or otherwise recording cash contributions to our capital that will, upon the contribution of such cash to the borrower, be included in the calculation of consolidated tangible net worth and consolidated total capitalization. The equity cure right is exercisable up to twice in any period of four consecutive fiscal quarters and up to five times overall.


39


The Revolving Credit Facility contains certain restrictive covenants including limitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors, limitations on prepayment of subordinated indebtedness and limitations on fundamental changes. The Revolving Credit Facility contains customary events of default, subject to applicable grace periods, including for nonpayment of principal, interest or other amounts, violation of covenants (including financial covenants, subject to the exercise of an equity cure), incorrectness of representations and warranties in any material respect, cross default and cross acceleration, bankruptcy, material monetary judgments, ERISA events with material adverse effect, actual or asserted invalidity of material guarantees and change of control. As of June 30, 2016, we were in compliance with all of the covenants under the Revolving Credit Facility.


Mortgage Warehouse Borrowings
The following is a summary of our mortgage subsidiary warehouse borrowings:
(Dollars in thousands)
 
As of June 30, 2016
Facility
 
Amount Drawn
 
Facility Amount
 
Interest Rate
 
Expiration Date
 
Collateral (1)
Flagstar
 
$
28,453

 
$
30,000

 
LIBOR + 2.5%
 
30 days written notice
 
Mortgage Loans
Comerica
 
33,161

 
50,000

 
LIBOR + 2.25%
 
November 16, 2016
 
Mortgage Loans
J.P. Morgan
 
56,485

 
100,000

 
LIBOR + 2.375%
 
September 26, 2016
 
Mortgage Loans and Pledged Cash
Total
 
$
118,099


$
180,000

 
 
 
 
 
 
 
(1) 
The mortgage warehouse borrowings outstanding as of June 30, 2016, are collateralized by $146.0 million of mortgage loans held for sale, which comprise the balance of mortgage loans held for sale and $1.3 million of restricted short-term investments which are included in restricted cash in the accompanying Condensed Consolidated Balance Sheet.

Loans Payable and Other Borrowings
Loans payable and other borrowings as of June 30, 2016 consist of project-level debt due to various land sellers and seller financing notes from current and prior year acquisitions. Project-level debt is generally secured by the land that was acquired and the principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. Loans payable bear interest at rates that ranged from 0% to 8% at June 30, 2016 and December 31, 2015. We impute interest for loans with no stated interest rates. The weighted average interest rate on $107.5 million of the loans as of June 30, 2016 was 5.1% per annum, and $50.7 million of the loans were non-interest bearing.

Letters of Credit, Surety Bonds and Financial Guarantees

The following table summarizes our letters of credit and surety bonds as of the dates indicated:
(Dollars in thousands)
 
As of
 
 
June 30, 2016
 
December 31, 2015
Letters of credit (1)
 
$
32,809

 
$
32,906

Surety bonds
 
371,795

 
361,941

Total outstanding letters of credit and surety bonds
 
$
404,604

 
$
394,847

(1) As of June 30, 2016 and December 31, 2015, there was $200 million total capacity of letters of credit available under our Revolving Credit Facility.


Off-Balance Sheet Arrangements as of June 30, 2016

Investments in Land Development and Homebuilding Joint Ventures or Unconsolidated Entities
We participate in strategic land development and homebuilding joint ventures with related and unrelated third parties. The use of these entities, in some instances, enables us to acquire land to which we could not otherwise obtain access, or could not obtain access on terms that are as favorable. Our partners in these joint ventures historically have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to sites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large or expensive land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital.

40



In certain of our unconsolidated joint ventures, we enter into loan agreements, whereby one of our subsidiaries will provide the lenders with customary guarantees, including completion, indemnity and environmental guarantees subject to usual non-recourse terms.

For the six months ended June 30, 2016, total net capital contributed to unconsolidated joint ventures was $21.6 million.

Land Purchase and Land Option Contracts
We enter into land purchase and option contracts to procure land or lots for the construction of homes in the ordinary course of business. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduce the risks associated with land ownership and development. As of June 30, 2016, we had outstanding land purchase and lot option contracts of $753.7 million. We are obligated to close the transaction under our land purchase contracts. However, our obligations with respect to the option contracts are generally limited to the forfeiture of the related non-refundable cash deposits and/or letters of credit provided to obtain the options.

Seasonality
Our business is seasonal. We have historically experienced, and in the future expect to continue to experience, variability in our results on a quarterly basis. We generally have more homes under construction, close more homes and have greater revenues and operating income in the third and fourth quarters of the year. Therefore, although new home contracts are obtained throughout the year, a higher portion of our home closings occur during the third and fourth calendar quarters. Our revenue therefore may fluctuate significantly on a quarterly basis and we must maintain sufficient liquidity to meet short-term operating requirements. Factors expected to contribute to these fluctuations include:
 
the timing of the introduction and start of construction of new projects;
the timing of project sales;
the timing of closings of homes, lots and parcels;
our ability to continue to acquire land and options on that land on acceptable terms;
the timing of receipt of regulatory approvals for development and construction;
the condition of the real estate market and general economic conditions in the areas in which we operate;
mix of homes closed;
construction timetables;
the prevailing interest rates and the availability of financing, both for us and for the purchasers of our homes;
the cost and availability of materials and labor; and
weather conditions in the markets in which we build.

As a result of seasonal activity, our quarterly results of operations and financial position are not necessarily representative of the results we expect at year end.

Inflation
We and the homebuilding industry in general may be adversely affected during periods of high inflation, primarily because of higher land, financing, labor and construction material costs. In addition, higher mortgage interest rates can significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales prices. However, during periods of soft housing market conditions, we may not be able to offset our cost increases with higher selling prices.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies during the six months ended June 30, 2016 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report.


41



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operations are interest rate sensitive. We monitor our exposure to changes in interest rates and incur both fixed rate and variable rate debt. At June 30, 2016, approximately 81% of our debt was fixed rate and 19% was variable rate. None of our market sensitive instruments were entered into for trading purposes. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument but may affect our future earnings and cash flows, and may also impact our variable rate borrowing costs, which principally relate to any borrowings under our Revolving Credit Facility and to any borrowings by TMHF under its various warehouse facilities. As of June 30, 2016, we had $210.7 million outstanding borrowings under our Revolving Credit Facility, net of unamortized debt issuance costs. We had $252.2 million of additional availability for borrowings and $167.2 million of additional availability for letters of credit (giving effect to $32.8 million of letters of credit outstanding as of such date). Our 2021 Senior Notes are subject to a requirement that we offer to purchase such notes at par with certain proceeds of asset sales (to the extent not otherwise applied in accordance with the indenture governing such notes). We are also required to offer to purchase all of the outstanding Senior Notes at 101% of their aggregate principal amount upon the occurrence of specified change of control events. Other than in those circumstances, we do not have an obligation to prepay fixed rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not be expected to have a significant impact on our cash flows related to our fixed rate debt until such time as we are required to refinance, repurchase or repay such debt.

We are not materially exposed to interest rate risk associated with TMHF’s mortgage loan origination business because at the time any loan is originated, TMHF has identified the investor who will agree to purchase the loan on the interest rate terms that are locked in with the borrower at the time the loan is originated.

The following table sets forth principal cash flows by scheduled maturity and effective weighted average interest rates and estimated fair value of our debt obligations as of June 30, 2016. The interest rate for our variable rate debt represents the interest rate on our borrowings under our Revolving Credit Facility and mortgage warehouse facilities. Because the mortgage warehouse facilities are effectively secured by certain mortgage loans held for sale which are typically sold within approximately 20 - 30 days, its outstanding balance is included as a variable rate maturity in the most current period presented.
 
 
 
Expected Maturity Date
 
Fair
Value
(In millions, except percentage data)
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Fixed Rate Debt
 
$
72.3

 
$
34.3

 
$
21.7

 
$
16.0

 
$
5.6

 
$
1,258.3

 
$
1,408.2

 
$
1,397.2

Weighted average interest rate(1)
 
3.5
%
 
3.5
%
 
3.5
%
 
3.5
%
 
3.5
%
 
5.5
%
 
5.3
%
 
 
Variable Rate Debt(2)
 
$
118.1

 
$

 
$

 
$
215.0

 
$

 
$

 
$
333.1

 
$
333.1

Weighted average interest rate
 
2.7
%
 

 

 
2.3
%
 

 

 
2.5
%
 
 
(1) Represents the coupon rate of interest on the full principal amount of the debt.
(2) Based upon the amount of variable rate debt at June 30, 2016, and holding the variable rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $3.3 million per year.

Currency Exchange Risk
In December 2014, we entered into a derivative financial instrument in the form of a foreign currency forward. The derivative financial instrument hedged our exposure to the Canadian dollar in conjunction with the disposition of the Monarch business. The final settlement of the derivative financial instrument occurred on January 30, 2015, and a gain in the amount of $30.0 million was recorded in foreign currency forward in the accompanying Condensed Consolidated Statements of Operations for the six months ended June 30, 2015.

42



ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer, principal financial officer and principal accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of June 30, 2016.  Based on this evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that, as of June 30, 2016, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level. Consistent with guidance issued by the SEC, the scope of management’s assessment of the effectiveness of our disclosure controls and procedures did not include the internal controls over financial reporting of the three divisions of Orleans Homes, which we acquired on July 21, 2015, and the acquisition of Acadia Homes, which we acquired in January 2016 and which represented, on a combined basis (excluding the acquired entities’ capitalized interest, but including their goodwill), 6.9% of the Company’s consolidated total assets and 7.7% of the Company’s consolidated homebuilding revenues as of and for the quarter ended June 30, 2016.

Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

43



PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations. We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

ITEM 1A. RISK FACTORS
There have been no material changes to the Risk Factors set forth in Part I, Item 1A. of our 2015 Annual Report on Form 10-K. These Risk Factors may materially affect our business, financial condition or results of operations. You should carefully consider the Risk Factors set forth in our 2015 Annual Report on Form 10-K and the other information set forth elsewhere in this quarterly report. You should be aware that these Risk Factors and other information may not describe every risk facing our Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

During the three months ended June 30, 2016, we repurchased the following number of shares of our Class A Common Stock:

 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of a publicly announced plan or program
 
Approximate dollar value of shares that may yet be purchased under the plan or program (in thousands) (a)
April 1 to April 30, 2016

 
$

 

 
$
30,000

May 1 to May 31, 2016
351,390

 
$
14.17

 
351,390

 
$
25,000

June 1 to June 30, 2016
982,483

 
$
15.12

 
982,483

 
$
10,300

   Total
1,333,873

 
 
 
1,333,873

 
 

(a)Our Board of Directors has authorized the repurchase of up to $50.0 million of the Company’s Class A Common Stock through December 31, 2016 in open market purchases, privately negotiated transactions or other transactions. The stock repurchase program is subject to prevailing market conditions and other considerations, including our liquidity, the terms of our debt instruments, planned land investment and development spending, acquisition and other investment opportunities and ongoing capital requirements. During the three and six months ended June 30, 2016, there were an aggregate of 1,333,873 and 1,671,633 shares of Class A Common Stock repurchased for $19.7 million and $24.7 million, respectively. During the year ended December 31, 2015, there were an aggregate of 934,434 shares of Class A Common Stock repurchased for $15.0 million.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4. MINE SAFETY DISCLOSURES

44


None.

ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit
No.
  
Description
 
 
3.1
  
Amended and Restated Certificate of Incorporation (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).
 
 
 
3.2
  
Amended and Restated By-laws (included as Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).
 
 
 
10.1
 
Taylor Morrison Home Corporation 2013 Omnibus Equity Award Plan (Amended and Restated May 25, 2016) (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed on April 12, 2016 (File No. 001-35873)).


 
 
 
31.1*
  
Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
 
31.2*
  
Certification of C. David Cone, Chief Financial Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
 
32.1*
  
Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
 
32.2*
  
Certification of C. David Cone, Chief Financial Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
 
101.INS
  
XBRL Instance Document.
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith
† Management contract or compensatory plan in which directors and/or executive officers are eligible to participate.


The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


45


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  
 
TAYLOR MORRISON HOME CORPORATION
 
 
  
Registrant
DATE:
August 3, 2016
  
 
 
 
  
/s/ Sheryl D. Palmer

 
 
  
Sheryl D. Palmer
 
 
  
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
  
/s/ C. David Cone

 
 
  
C. David Cone
 
 
  
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
  
/s/ Joseph Terracciano

 
 
  
Joseph Terracciano
 
 
  
Chief Accounting Officer
(Principal Accounting Officer)


46


EXHIBIT INDEX

Exhibit
No.
  
Description
 
 
 
3.1
  
Amended and Restated Certificate of Incorporation (included as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).
 
 
 
3.2
  
Amended and Restated By-laws (included as Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on April 15, 2013, and incorporated herein by reference).
 
 
 
10.1
 
Taylor Morrison Home Corporation 2013 Omnibus Equity Award Plan (Amended and Restated May 25, 2016) (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed on April 12, 2016 (File No. 001-35873)).

 
 
 
31.1*
  
Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
 
 
31.2*
  
Certification of C. David Cone, Chief Financial Officer, pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.
 
 
 
32.1*
  
Certification of Sheryl D. Palmer, Chief Executive Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
 
 
32.2*
  
Certification of C. David Cone, Chief Financial Officer, pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
 * Filed herewith
† Management contract or compensatory plan in which directors and/or executive officers are eligible to participate.


The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


47