Page No.
PART I.	Financial Information
		ITEM 1.	Financial Statements
			Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015		2
			Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015		3
			Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015		4
			Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015		5
			Notes to Unaudited Condensed Consolidated Financial Statements		6
		ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
		ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		43
		ITEM 4.	Controls and Procedures		44
PART II.	Other Information
		ITEM 1.	Legal Proceedings		46
		ITEM 1A.	Risk Factors		46
		ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
		ITEM 3.	Defaults Upon Senior Securities		46
		ITEM 4.	Mine Safety Disclosures		46
		ITEM 5.	Other Information		46
		ITEM 6.	Exhibits		47
SIGNATURES					48

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
		(Dollars in thousands, except per share amounts)
		(Unaudited)
Homebuilding:
Home sale revenues		$	1,665,030			$	626,008			$	4,402,896			$	1,789,065
Land sale revenues			5,928				26,182				32,107				33,035
Total revenues			1,670,958				652,190				4,435,003				1,822,100
Cost of home sales			(1,290,628	)			(467,358	)			(3,440,549	)			(1,346,108	)
Cost of land sales			(5,638	)			(25,076	)			(31,217	)			(30,190	)
Total cost of sales			(1,296,266	)			(492,434	)			(3,471,766	)			(1,376,298	)
Gross margin			374,692				159,756				963,237				445,802
Selling, general and administrative expenses			(170,815	)			(73,260	)			(473,210	)			(219,240	)
Income (loss) from unconsolidated joint ventures			1,231				121				2,643				(381	)
Other income (expense)			(4,169	)			(11,170	)			(11,992	)			(16,742	)
Homebuilding pretax income			200,939				75,447				480,678				209,439
Financial Services:
Revenues			21,433				7,011				59,524				19,815
Expenses			(11,626	)			(4,164	)			(34,635	)			(12,942	)
Financial services pretax income			9,807				2,847				24,889				6,873
Income before taxes			210,746				78,294				505,567				216,312
Provision for income taxes			(78,398	)			(31,117	)			(187,798	)			(80,332	)
Net income			132,348				47,177				317,769				135,980
Less: Net income allocated to preferred shareholder			―				(11,342	)			―				(32,818	)
Less: Net income allocated to unvested restricted stock			(294	)			(93	)			(635	)			(274	)
Net income available to common stockholders		$	132,054			$	35,742			$	317,134			$	102,888
Income Per Common Share:
Basic		$	1.12			$	0.65			$	2.66			$	1.87
Diluted		$	0.97			$	0.59			$	2.34			$	1.71
Weighted Average Common Shares Outstanding:
Basic			118,338,891				55,345,443				119,188,145				55,059,683
Diluted			136,077,415				62,292,524				136,888,927				62,152,754
Weighted average additional common shares outstanding
if preferred shares converted to common shares			―				17,562,557				―				17,562,557
Total weighted average diluted common shares outstanding
if preferred shares converted to common shares			136,077,415				79,855,081				136,888,927				79,715,311
Cash Dividends Declared Per Common Share		$	0.04			$	―			$	0.12			$	―

	Three Months Ended September 30,									Nine Months Ended September 30,
	2016					2015				2016				2015
	(Dollars in thousands)
	(Unaudited)
Net income		$	132,348			$	47,177			$	317,769			$	135,980
Other comprehensive income, net of tax:
Unrealized gain on marketable securities, available for sale			―				―				39				―
Total comprehensive income		$	132,348			$	47,177			$	317,808			$	135,980

		September 30, 2016				December 31, 2015
		(Dollars in thousands)
		(Unaudited)
ASSETS
Homebuilding:
Cash and equivalents		$	184,033			$	151,076
Restricted cash			29,796				35,990
Inventories:
Owned			6,533,047				6,069,959
Not owned			75,484				83,246
Investments in unconsolidated joint ventures			139,373				132,763
Deferred income taxes, net of valuation allowance of $1,441 and $1,156 at
September 30, 2016 and December 31, 2015, respectively			323,955				396,194
Goodwill			970,185				933,360
Other assets			109,348				118,768
Total Homebuilding Assets			8,365,221				7,921,356
Financial Services:
Cash and equivalents			30,241				35,518
Restricted cash			21,799				22,914
Mortgage loans held for sale, net			171,262				325,770
Mortgage loans held for investment, net			24,450				22,704
Other assets			19,488				17,243
Total Financial Services Assets			267,240				424,149
Total Assets		$	8,632,461			$	8,345,505
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable		$	204,803			$	191,681
Accrued liabilities			533,794				478,793
Revolving credit facility			146,000				―
Secured project debt and other notes payable			40,930				25,683
Senior notes payable			3,393,799				3,462,016
Total Homebuilding Liabilities			4,319,326				4,158,173
Financial Services:
Accounts payable and other liabilities			16,802				22,474
Mortgage credit facilities			161,898				303,422
Total Financial Services Liabilities			178,700				325,896
Total Liabilities			4,498,026				4,484,069
Equity:
Stockholders' Equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
and outstanding at September 30, 2016 and December 31, 2015			―				―
Common stock, $0.01 par value; 600,000,000 shares authorized; 117,348,095
and 121,286,153 shares issued and outstanding at September 30, 2016 and
December 31, 2015, respectively			1,173				1,213
Additional paid-in capital			3,293,823				3,324,328
Accumulated earnings			839,395				535,890
Accumulated other comprehensive income, net of tax			44				5
Total Equity			4,134,435				3,861,436
Total Liabilities and Equity		$	8,632,461			$	8,345,505

The accompanying notes are an integral part of these condensed consolidated balance sheets.

CALATLANTIC GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30,
		2016				2015
		(Dollars in thousands)
		(Unaudited)
Cash Flows From Operating Activities:
Net income		$	317,769			$	135,980
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Income) loss from unconsolidated joint ventures			(2,643	)			381
Depreciation and amortization			43,193				22,369
Amortization of stock-based compensation			11,216				8,620
Excess tax benefits from share-based payment arrangements			―				(8,573	)
Deferred income tax provision			8,118				52,132
Other operating activities			100				633
Changes in cash and equivalents due to:
Mortgage loans held for sale			154,622				88,360
Inventories - owned			(366,095	)			(521,646	)
Inventories - not owned			(29,192	)			(21,612	)
Other assets			7,665				8,862
Accounts payable			13,122				37,669
Accrued liabilities			9,787				(19,005	)
Net cash provided by (used in) operating activities			167,662				(215,830	)
Cash Flows From Investing Activities:
Investments in unconsolidated homebuilding joint ventures			(27,000	)			(83,288	)
Distributions of capital from unconsolidated homebuilding joint ventures			23,727				10,289
Other investing activities			(5,389	)			(11,716	)
Net cash provided by (used in) investing activities			(8,662	)			(84,715	)
Cash Flows From Financing Activities:
Change in restricted cash			7,309				1,047
Borrowings from revolving credit facility			1,008,000				491,400
Principal payments on revolving credit facility			(862,000	)			(222,700	)
Principal payments on secured project debt and other notes payable			(10,389	)			(569	)
Principal payments on senior notes payable			(280,000	)			(29,789	)
Proceeds from the issuance of senior notes payable			300,000				―
Payment of debt issuance costs			(2,657	)			―
Net proceeds from (payments on) mortgage credit facilities			(141,524	)			(10,554	)
Repurchases of common stock			(137,464	)			(22,073	)
Common stock dividend payments			(14,264	)			―
Issuance of common stock under employee stock plans, net of tax withholdings			1,868				(461	)
Excess tax benefits from share-based payment arrangements			―				8,573
Other financing activities			(199	)			―
Net cash provided by (used in) financing activities			(131,320	)			214,874
Net increase (decrease) in cash and equivalents			27,680				(85,671	)
Cash and equivalents at beginning of period			186,594				212,393
Cash and equivalents at end of period		$	214,274			$	126,722
Cash and equivalents at end of period		$	214,274			$	126,722
Homebuilding restricted cash at end of period			29,796				37,425
Financial services restricted cash at end of period			21,799				1,045
Cash and equivalents and restricted cash at end of period		$	265,869			$	165,192

The accompanying notes are an integral part of these condensed consolidated statements.

CALATLANTIC GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

The accompanying condensed consolidated financial statements include the accounts of CalAtlantic Group, Inc. and its wholly owned subsidiaries and have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for Form 10-Q.  Certain information normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") has also been omitted pursuant to applicable rules and regulations.   In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2016 and the results of operations and cash flows for the periods presented.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10‑K for the year ended December 31, 2015.  Unless the context otherwise requires, the terms "we," "us," "our" and "the Company" refer to CalAtlantic Group, Inc. and its subsidiaries.  The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

 

2.      Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes existing accounting literature relating to how and when a company recognizes revenue.  Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606):  Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year.  As a result, for public companies, ASU 2014-09 will be effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2017, and is to be applied either with a full retrospective or modified retrospective approach, with early application permitted.  We are currently evaluating the impact the adoption will have on our condensed consolidated financial statements and related disclosures.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"), which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  A reporting entity should apply existing guidance in ASC 718, Compensation — Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards.  Our adoption of ASU 2014-12 on January 1, 2016 did not have an effect on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"), which requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required.  The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter.  Our adoption of ASU 2014-15 is not expected to have a material effect on our financial statements and related disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"), which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Our adoption of ASU 2015-02 on January 1, 2016 did not have a material effect on our financial statements and related disclosures.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU 2015-16"), which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively.  Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date.  Our adoption of ASU 2015-16 on January 1, 2016 did not have a material effect on our financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception.  A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC Topic 820, Fair Value Measurements, and as such these investments may be measured at cost.  ASU 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.  We are currently evaluating the impact adoption will have on our financial statements.

In March 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification.  The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP.  ASU 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.  We are currently evaluating the impact adoption will have on our financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting ("ASU 2016-07"), which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment.  ASU 2016-07 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.  Our adoption of ASU 2016-07 is not expected to have a material effect on our financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08").  ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.  ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09.  We are currently evaluating the impact the adoption of this ASU and ASU 2014-09 will have on our financial statements and related disclosures.

 In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for annual periods and interim periods within those annual periods beginning

 

after December 15, 2016.  We are currently evaluating the impact adoption will have on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15").  ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows.  ASU 2016-15 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted.  We are currently evaluating the impact adoption will have on our financial statements.

On October 1, 2015, pursuant to the terms and conditions of the Amended and Restated Agreement and Plan of Merger, dated as of June 14, 2015 (the "Merger Agreement"), between Standard Pacific Corp. ("Standard Pacific") and The Ryland Group, Inc. ("Ryland"), Ryland merged with and into Standard Pacific (the "Merger"), with Standard Pacific continuing as the surviving corporation.  At the same time Standard Pacific changed its name to CalAtlantic Group, Inc.  The primary purpose for our merger with Ryland was to gain both geographic and product diversification and expand our reach and enhance our growth prospects across the homebuilding spectrum, from entry level to luxury.  In addition, the merger was intended to create production, purchasing and other synergies intended to result in cost savings and efficiencies.

Based on an evaluation of the provisions of ASC Topic 805, Business Combinations ("ASC 805"), Standard Pacific was determined to be the acquirer for accounting purposes.  Under ASC 805, Standard Pacific is treated as having acquired Ryland in an all-stock transaction for an estimated total purchase price of approximately $2.0 billion.  The total purchase price was allocated to Ryland's assets and liabilities based upon fair values as determined by the Company, as follows (in thousands):

Cash and cash equivalents		$	268,517
Inventories			2,404,765
Investments in unconsolidated joint ventures			13,821
Deferred income taxes			120,615
Homebuilding other assets			77,124
Financial services assets, excluding cash			144,889
Goodwill			970,185
Total assets			3,999,916
Accounts payable and accrued liabilities			(495,425	)
Secured project debt and other notes payables			(22,213	)
Senior notes payable			(1,291,541	)
Financial services liabilities			(124,619	)
Additional paid-in capital			(93,834	)
Total purchase price		$	1,972,284

 

During the 2016 first quarter the Company completed a valuation of the 1.625% convertible senior notes assumed in the merger with Ryland and determined that the value associated with the conversion feature was $93.8 million, which is included in additional paid-in capital in the accompanying condensed consolidated balance sheet as of September 30, 2016.  In connection with the valuation of the conversion feature, the related deferred tax asset was reduced by approximately $35.9 million, with a corresponding increase in goodwill.  The $970.2 million of goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, and it is not deductible for income tax purposes.  As of the merger date, goodwill primarily consisted of the following: (i) expected production, purchasing and other synergies resulting from the merger, (ii)  savings in corporate and divisional overhead costs, (iii) the benefit of the combination of the best components of the operating practices of both legacy companies, (iv) the benefit of the combination of the best employees of each legacy company, (v) expected expanded opportunities for growth through greater geographic and customer segment diversity.

The following presents summarized unaudited supplemental pro forma operating results as if Ryland had been included in the Company's Condensed Consolidated Statements of Operations as of January 1, 2015.

 

	Three Months Ended September 30, 2015					Nine Months Ended September 30, 2015
	(Dollars in thousands)
Home sale revenues		$	1,318,885			$	3,619,912
Pretax income		$	142,352			$	383,655

 

The supplemental pro forma operating results have been determined after adjusting the operating results of Ryland to reflect additional amortization that would have been recorded assuming the fair value adjustment to intangible assets had been applied beginning January 1, 2015. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts.

We operate two principal businesses: homebuilding and financial services.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes.  In connection with the merger with Ryland, the Company experienced key personnel changes and significant growth in its operations, and as a result, the Company began to develop processes and reporting packages to manage and assess the Company's performance at a regional level.  In light of the key personnel changes, growth in operations, and the focus on regional information provided to the Company's chief operating decision maker, during 2016, we performed an assessment of our operating segments in accordance with ASC Topic 280, Segment Reporting ("ASC 280"), and determined that each of our four homebuilding regions and financial services operations are our operating segments.  Prior to this change, in accordance with the aggregation criteria defined in ASC 280, our homebuilding divisions were grouped into four reportable segments (which were our four homebuilding regions): North, consisting of our divisions in Georgia, Delaware, Illinois, Indiana, Maryland, Minnesota, New Jersey, Pennsylvania, Virginia and Washington D.C.; Southeast, consisting of our divisions in Florida and the Carolinas; Southwest, consisting of our divisions in Texas, Colorado and Nevada; and West, consisting of our divisions in California and Arizona.  As such, current period segment information is presented consistent with prior periods.

 

Our mortgage financing operation provides mortgage financing to many of our homebuyers in substantially all of the markets in which we operate, and sells substantially all of the loans it originates in the secondary mortgage market.  Our title services operation provides various title services for our homebuyers in most of our operating divisions.  Our mortgage financing and title services operations are included in our financial services reportable segment, which is separately reported in our condensed consolidated financial statements under "Financial Services."

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources.  Corporate also provides the necessary administrative functions to support us as a publicly traded company.  All of the expenses incurred by Corporate are allocated to each of our four homebuilding regions based on their respective percentage of revenues.

Segment financial information relating to the Company's homebuilding operations was as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
		(Dollars in thousands)
Homebuilding revenues:
North		$	283,060			$	n/a			$	710,889			$	n/a
Southeast			400,720				211,759				1,065,038				556,330
Southwest			389,160				155,595				1,165,797				461,304
West			598,018				284,836				1,493,279				804,466
Total homebuilding revenues		$	1,670,958			$	652,190			$	4,435,003			$	1,822,100
Homebuilding pretax income (1):
North		$	25,627			$	n/a			$	53,177			$	n/a
Southeast			31,303				19,379				84,125				44,909
Southwest			39,312				16,552				113,145				49,817
West			104,697				39,516				230,231				114,713
Total homebuilding pretax income		$	200,939			$	75,447			$	480,678			$	209,439

__________________

(1)

Homebuilding pretax income includes depreciation and amortization expense of $1.7 million, $4.2 million, $2.8 million and $7.1 million, respectively, in the North, Southeast, Southwest and West for the quarter ended September 30, 2016 and $4.5 million, $11.2 million, $8.6 million and $18.9 million, respectively, in the North, Southeast, Southwest and West for the nine months ended September 30, 2016.

Segment financial information relating to the Company's homebuilding assets was as follows:

 

		September 30,				December 31,
		2016				2015
		(Dollars in thousands)
Homebuilding assets:
North		$	1,158,975			$	732,689
Southeast			2,189,173				1,766,241
Southwest			1,874,226				1,470,654
West			2,613,248				2,357,597
Corporate (1)			529,599				1,594,175
Total homebuilding assets		$	8,365,221			$	7,921,356

__________________

(1)

The assets in our Corporate Segment include cash and cash equivalents and our deferred tax asset, and at December 31, 2015 included $0.9 billion of goodwill recorded in connection with our merger with Ryland.  During the 2016 second quarter, recorded goodwill was allocated to the Company's reporting units (as of September 30, 2016, approximately $0.3 billion was included in each of the North, Southeast and Southwest segments, and approximately $0.1 billion was included in the West segment).

We compute earnings per share in accordance with ASC Topic 260, Earnings per Share ("ASC 260"), which requires earnings per share for each class of stock (common stock and participating preferred stock) to be calculated using the two-class method.  The two-class method is an allocation of earnings between the holders of common stock and a company's participating security holders.  Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based on their respective participation rights in undistributed earnings.  Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.

Basic earnings per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares of basic common stock outstanding.  Our Series B junior participating convertible preferred stock ("Series B Preferred Stock"), which was convertible into shares of our common stock at the holder's option, and our unvested restricted stock, are classified as participating securities in accordance with ASC 260.  Net income allocated to the holders of our Series B Preferred Stock and unvested restricted stock is calculated based on the shareholders' proportionate share of weighted average shares of common stock outstanding on an if-converted basis.

 

For purposes of determining diluted earnings per common share, basic earnings per common share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options, stock appreciation rights, performance share awards and unvested restricted stock using the more dilutive of either the two-class method or the treasury stock method, and Series B Preferred Stock and convertible debt using the if-converted method.  Under the two-class method of calculating diluted earnings per share, net income is reallocated to common stock, the Series B Preferred stock and all dilutive securities based on the contractual participating rights of the security to share in the current earnings as if all of the earnings for the period had been distributed.  In the computation of diluted earnings per share, the two-class method and if-converted method for the Series B Preferred Stock resulted in the same earnings per share amounts as the holder of the Series B Preferred Stock had the same economic rights as the holders of the common stock.

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
		(Dollars in thousands, except per share amounts)
Numerator:
Net income		$	132,348			$	47,177			$	317,769			$	135,980
Less: Net income allocated to preferred shareholder			―				(11,342	)			―				(32,818	)
Less: Net income allocated to unvested restricted stock			(294	)			(93	)			(635	)			(274	)
Net income available to common stockholders for basic
earnings per common share			132,054				35,742				317,134				102,888
Effect of dilutive securities:
Net income allocated to preferred shareholder			―				11,342				―				32,818
Interest on 1.625% convertible senior notes due 2018			91				―				1,088				―
Interest on 0.25% convertible senior notes due 2019			82				―				984				―
Interest on 1.25% convertible senior notes due 2032			62				41				744				490
Net income available to common and preferred stock for diluted
earnings per share		$	132,289			$	47,125			$	319,950			$	136,196
Denominator:
Weighted average basic common shares outstanding			118,338,891				55,345,443				119,188,145				55,059,683
Weighted average additional common shares outstanding if preferred shares
converted to common shares (if dilutive)			―				17,562,557				―				17,562,557
Total weighted average common shares outstanding if preferred shares
converted to common shares			118,338,891				72,908,000				119,188,145				72,622,240
Effect of dilutive securities:
Share-based awards			643,602				684,511				605,860				830,501
1.625% convertible senior notes due 2018			7,165,845				―				7,165,845				―
0.25% convertible senior notes due 2019			3,638,080				―				3,638,080				―
1.25% convertible senior notes due 2032			6,290,997				6,262,570				6,290,997				6,262,570
Weighted average diluted shares outstanding			136,077,415				79,855,081				136,888,927				79,715,311
Income per common share:
Basic		$	1.12			$	0.65			$	2.66			$	1.87
Diluted		$	0.97			$	0.59			$	2.34			$	1.71

 

We account for share-based awards in accordance with ASC 718 which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.  ASC 718 requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

Total compensation expense recognized related to stock-based compensation was $3.7 million and $3.5 million for the three months ended September 30, 2016 and 2015, respectively.  For the nine months ended September 30, 2016 and 2015, we recognized stock-based compensation expense of $11.2 million and $8.6 million, respectively.  As of September 30, 2016, total unrecognized stock-based compensation expense was $23.7 million, with a weighted average period over which the remaining unrecognized compensation expense is expected to be recorded of approximately 2.0 years.

 

Cash and equivalents include cash on hand, demand deposits and all highly liquid short-term investments, including interest-bearing securities purchased with a maturity of three months or less from the date of purchase.  At September 30, 2016, cash and equivalents included $116.5 million of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.

At September 30, 2016, homebuilding restricted cash represented $29.8 million of cash held in cash collateral accounts primarily related to certain letters of credit that have been issued.  Financial services restricted cash as of September 30, 2016 consisted of $17.7 million held in cash collateral accounts primarily related to certain letters of credit that have been issued, $3.5 million related to our financial services subsidiary mortgage credit facilities and $0.6 million related to funds held in trust for third parties.

8.    Marketable Securities, Available-for-sale

The Company's investment portfolio includes mainly municipal debt securities and metropolitan district bond securities, which are included in homebuilding other assets in the accompanying condensed consolidated balance sheets.  As defined in ASC Topic 320, Investments—Debt and Equity Securities ("ASC 320"), the Company considers its investment portfolio to be available-for-sale.  Accordingly, these investments are recorded at their fair values.  The cost of securities sold is based on an average-cost basis.  Unrealized gains and losses on these investments are included in accumulated other comprehensive income, net of tax, within stockholders' equity.  At September 30, 2016, accumulated other comprehensive income included unrealized gains of $392,000 on available-for-sale marketable securities, offset with reclassification adjustments, which represent net realized earnings associated with the Company's investment portfolio, which included interest, dividends and net realized gains on sales of marketable securities, and totaled $348,000 for the nine months ended September 30, 2016.  Realized gains or losses were included in homebuilding other income (expense) in the accompanying condensed consolidated statements of operations.

The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost bases, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  At September 30, 2016, the Company believes that the cost bases for its available-for-sale securities were recoverable in all material respects.

The primary objectives of the Company's investment portfolio are safety of principal and liquidity.  Investments are made with the purpose of achieving the highest rate of return consistent with these two objectives. The Company's investment policy limits investments to debt securities rated investment grade or better, as well as to bank and money market instruments and to issues by the U.S. government, U.S. government agencies and municipal or other institutions primarily with investment‑grade credit ratings.  Our policy places restrictions on maturities, as well as on concentration by type and issuer.

 

 

The following table displays the fair values of marketable securities, available-for-sale, by contractual maturity:

 

		September 30, 2016
		(Dollars in thousands)
Contractual maturity:
Maturing in one year or less		$	―
Maturing after three years			18,482
Total marketable securities, available-for-sale		$	18,482

 

 

a. Inventories Owned

 

Inventories owned consisted of the following at:

 

		September 30, 2016
		North				Southeast				Southwest				West				Total
		(Dollars in thousands)
Land and land under development (1)		$	441,119			$	1,121,369			$	631,520			$	1,258,888			$	3,452,896
Homes completed and under construction			341,535				651,531				713,662				874,834				2,581,562
Model homes			76,905				131,147				115,784				174,753				498,589
Total inventories owned		$	859,559			$	1,904,047			$	1,460,966			$	2,308,475			$	6,533,047
		December 31, 2015
		North				Southeast				Southwest				West				Total
		(Dollars in thousands)
Land and land under development (1)		$	370,584			$	1,169,350			$	687,792			$	1,318,563			$	3,546,289
Homes completed and under construction			266,967				464,668				599,183				708,779				2,039,597
Model homes			66,100				119,283				113,549				185,141				484,073
Total inventories owned		$	703,651			$	1,753,301			$	1,400,524			$	2,212,483			$	6,069,959

__________________

(1)

During the nine months ended September 30, 2016, we purchased $680.9 million of land (10,048 homesites), of which 25% (based on homesites) were located in the North, 25% in the Southeast, 25% in the Southwest, and 25% in the West. During the year ended December 31, 2015, we purchased $515.3 million of land (6,631 homesites) and acquired an additional 40,245 homesites as a result of the merger with Ryland.  The homesites we purchased during 2015, other than through the merger, were located as follows:  12% (based on homesites) were located in the North, 39% in the Southeast, 18% in the Southwest, and 31% in the West.

In accordance with ASC Topic 360, Property, Plant, and Equipment ("ASC 360"), we record impairment losses on inventories when events and circumstances indicate that they may be impaired, and the future undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.  Inventories that are determined to be impaired are written down to their estimated fair value.  We calculate the fair value of a community under a land residual value analysis and in certain cases in conjunction with a discounted cash flow analysis.  As of September 30, 2016 and 2015, the total active and future communities that we owned were 879 and 380, respectively.  During the nine months ended September 30, 2016 and 2015, we reviewed all communities for indicators of impairment and based on our review we did not record any inventory impairments during these periods.

 

have to write-off should we not exercise the option.  Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a variable interest entity ("VIE") may have been created.  In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

We follow the practice of capitalizing interest to inventories owned during the period of development and to investments in unconsolidated homebuilding and land development joint ventures in accordance with ASC Topic 835, Interest ("ASC 835").  Homebuilding interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold.  Interest capitalized to investments in unconsolidated homebuilding and land development joint ventures is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties.  Interest capitalized to investments in unconsolidated land development joint ventures is transferred to inventories owned if the underlying lots are purchased by us.  To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us.  Qualified assets represent communities that are actively selling or under development as well as investments in homebuilding and land development unconsolidated joint ventures.  During the nine months ended September 30, 2016 and 2015, our qualified assets exceeded our debt, and as a result, all of our homebuilding interest incurred during the nine months ended September 30, 2016 and 2015 was capitalized in accordance with ASC 835.

The following is a summary of homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, amortized to cost of sales and income (loss) from unconsolidated joint ventures and expensed as interest expense, for the three and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
		(Dollars in thousands)
Total interest incurred (1)		$	56,872			$	42,304			$	175,207			$	125,964
Less: Interest capitalized to inventories owned (1)			(55,761	)			(41,611	)			(172,170	)			(124,520	)
Less: Interest capitalized to investments in unconsolidated joint ventures			(1,111	)			(693	)			(3,037	)			(1,444	)
Interest expense		$	―			$	―			$	―			$	―
Interest previously capitalized to inventories owned, included in cost of home sales		$	44,636			$	30,275			$	115,367			$	87,721
Interest previously capitalized to inventories owned, included in cost of land sales		$	115			$	3,048			$	1,596			$	4,803
Interest previously capitalized to investments in unconsolidated joint ventures,
included in income (loss) from unconsolidated joint ventures		$	613			$	―			$	613			$	―
Interest capitalized in ending inventories owned (2)		$	362,807			$	307,603			$	362,807			$	307,603
Interest capitalized as a percentage of inventories owned			5.6	%			8.1	%			5.6	%			8.1	%
Interest capitalized in ending investments in unconsolidated joint ventures (2)		$	3,224			$	2,109			$	3,224			$	2,109
Interest capitalized as a percentage of investments in unconsolidated joint ventures			2.3	%			1.7	%			2.3	%			1.7	%

__________________

(1)

Total interest incurred and interest capitalized to inventories owned during the nine months ended September 30, 2016 includes a $9 million increase related to the valuation of the 1.625% convertible senior notes that was completed during the 2016 first quarter.  Please see Note 3 for further discussion.

(2)	During the three and nine months ended September 30, 2016, in connection with lot purchases from our joint ventures, $1.6 million and $2.1 million, respectively, of capitalized interest was transferred from investments in unconsolidated joint ventures to inventories owned.

The table set forth below summarizes the condensed combined statements of operations for our unconsolidated land development and homebuilding joint ventures that we account for under the equity method:

 

		Nine Months Ended September 30,
		2016				2015
		(Dollars in thousands)
		(Unaudited)
Revenues		$	27,426			$	22,350
Cost of sales and expenses			(17,791	)			(25,444	)
Income (loss) of unconsolidated joint ventures		$	9,635			$	(3,094	)
Income (loss) from unconsolidated joint ventures reflected in the
accompanying condensed consolidated statements of operations		$	2,643			$	(381	)

Income (loss) from unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations represents our share of the income (loss) of our unconsolidated land development and homebuilding joint ventures, which is allocated based on the provisions of the underlying joint venture operating agreements less any additional impairments recorded against our investments in joint ventures which we do not deem recoverable.  In addition, we defer recognition of our share of income that relates to lots purchased by us from land development joint ventures until we ultimately sell the homes to be constructed to third parties, at which time we account for these earnings as a reduction of the cost basis of the lots purchased from these joint ventures.  For the nine months ended September 30, 2016, income (loss) from unconsolidated joint ventures included $0.8 million, $0.9 million, $0.4 million and $0.5 million of income from joint ventures within our West, Southwest, Southeast and North reportable segments, respectively.  For the nine months ended September 30, 2015, income (loss) from unconsolidated joint ventures was primarily attributable to our share of income (loss) related to our West region joint ventures.

 

The table set forth below summarizes the condensed combined balance sheets for our unconsolidated land development and homebuilding joint ventures that we accounted for under the equity method:

 

		September 30,				December 31,
		2016				2015
		(Dollars in thousands)
		(Unaudited)
Assets:
Cash		$	33,799			$	34,893
Inventories			600,056				510,502
Other assets			11,872				14,540
Total assets		$	645,727			$	559,935
Liabilities and Equity:
Accounts payable and accrued liabilities		$	37,176			$	26,571
Non-recourse debt			30,683				33,704
CalAtlantic equity			159,214				130,750
Other members' equity			418,654				368,910
Total liabilities and equity		$	645,727			$	559,935
Investments in unconsolidated joint ventures reflected in
the accompanying condensed consolidated balance sheets (1)		$	139,373			$	132,763

 

In some cases our net investment in these unconsolidated joint ventures is not equal to our proportionate share of total equity reflected in the table above primarily because of differences between asset impairments that we recorded in prior periods against our joint venture investments and the impairments recorded by the applicable joint venture.  As of September 30, 2016 and December 31, 2015, substantially all of our investments in unconsolidated joint ventures were in California.  Our investments in unconsolidated joint ventures also included approximately $3.2 million and $2.9 million of homebuilding interest capitalized to investments in unconsolidated joint ventures as of September 30, 2016 and December 31, 2015, respectively, which capitalized interest is not included in the condensed combined balance sheets above.

 

Our investments in these unconsolidated joint ventures may represent a variable interest in a VIE depending on, among other things, the economic interests of the members of the entity and the contractual terms of the arrangement.  We analyze all of our unconsolidated joint ventures under the provisions of ASC 810 to determine whether these entities are deemed to be VIEs, and if so, whether we are the primary beneficiary.  As of September 30, 2016, all of our homebuilding and land development joint ventures with unrelated parties were determined under the provisions of ASC 810 to be unconsolidated joint ventures either because they were not deemed to be VIEs and we did not have a controlling interest, or, if they were a VIE, we were not deemed to be the primary beneficiary.

Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized.  Amounts accrued are based upon historical experience.  Indirect warranty overhead salaries and related costs are charged to cost of sales in the period incurred.  We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary.  Our warranty accrual is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Changes in our warranty accrual are detailed in the table set forth below:

 

	Nine Months Ended September 30,
	2016					2015
	(Dollars in thousands)
Warranty accrual, beginning of the period		$	40,691			$	13,584
Warranty costs accrued during the period			16,903				7,403
Warranty costs paid during the period			(15,088	)			(7,119	)
Warranty accrual, end of the period		$	42,506			$	13,868

 

  

As of September 30, 2016, we were party to a $750 million unsecured revolving credit facility (the "Revolving Facility"), $350 million of which is available for letters of credit, which matures in October 2019.  The Revolving Facility has an accordion feature under which the Company may increase the total commitment up to a maximum aggregate amount of $1.2 billion, subject to certain conditions, including the availability of additional bank commitments.  Interest rates, as defined in the credit agreement, approximate (i) LIBOR (approximately 0.53% at September 30, 2016) plus 1.75%, or (ii) Prime (3.50% at September 30, 2016) plus 0.75%.

In addition to customary representations and warranties, the facility contains financial and other covenants, including a minimum tangible net worth requirement of $1.65 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), a net homebuilding leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 2.00 to 1.00 and a land covenant that limits land not under development to an amount not to exceed tangible net worth. The Company is also required to maintain either (a) a minimum liquidity level (unrestricted cash in excess of interest incurred for the previous four quarters) or (b) a minimum interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.25 to 1.00.  We were in compliance with all of the Revolving Facility covenants as of September 30, 2016. The Revolving Facility also limits, among other things, the Company's investments in joint ventures and the amount of the Company's common stock that the Company can repurchase.  On September 30, 2016, we had $146.0 million borrowings outstanding under the facility and had outstanding letters of credit issued under the facility totaling $112.9 million, leaving $491.1 million available under the facility to be drawn.

 

As of September 30, 2016, in addition to our $350 million letter of credit sublimit under our Revolving Facility, we were party to four committed letter of credit facilities totaling $48 million, of which $28.2 million was outstanding.  These facilities require cash collateralization and have maturity dates ranging from January 2017 to October 2017.  As of September 30, 2016, these facilities were secured by cash collateral deposits of $28.7 million.  Upon maturity, we may renew or enter into new letter of credit facilities with the same or other financial institutions.

14.  Secured Project Debt and Other Notes Payable

Our secured project debt and other notes payable consist of seller non-recourse financing and community development district and similar assessment district bond financings used to finance land acquisition, development and infrastructure costs for which we are responsible.  At September 30, 2016, we had approximately $40.9 million outstanding in secured project debt and other notes payable.  

15.  Senior Notes Payable

Senior notes payable consisted of the following at:

 

		September 30,				December 31,
		2016				2015
		(Dollars in thousands)
10.75% Senior Notes due September 2016		$	―			$	275,845
8.4% Senior Notes due May 2017			238,625				248,975
8.375% Senior Notes due May 2018			574,397				574,058
1.625% Convertible Senior Notes due May 2018			219,396				301,754
0.25% Convertible Senior notes due June 2019			252,357				248,098
6.625% Senior Notes due May 2020			321,402				325,882
8.375% Senior Notes due January 2021			394,970				394,152
6.25% Senior Notes due December 2021			297,504				297,148
5.375% Senior Notes due October 2022			249,197				249,096
5.875% Senior Notes due November 2024			296,886				296,598
5.25% Senior Notes due June 2026			297,428				―
1.25% Convertible Senior Notes due August 2032			251,637				250,410
		$	3,393,799			$	3,462,016

 

The carrying amount of our senior notes listed above are net of debt issuance costs and any discounts and premiums that are amortized to interest costs over the respective terms of the notes.

The Company's 1.625% Convertible Senior Notes due 2018 (the "1.625% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 1.625% Convertible Notes bear interest at a rate of 1.625% per year and will mature on May 15, 2018, unless earlier converted or repurchased. The holders may convert their 1.625% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 31.8482 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $31.40 per share), subject to adjustment. The Company may not redeem the 1.625% Convertible Notes prior to the stated maturity date.

 

The Company's 0.25% Convertible Senior Notes due 2019 (the "0.25% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 0.25% Convertible Notes bear interest at a rate of 0.25% per year and will mature on June 1, 2019, unless earlier converted, redeemed or repurchased. The holders may convert their 0.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 13.6003 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $73.53 per share), subject to adjustment. The Company may not redeem the 0.25% Convertible Notes prior to June 6, 2017. On or after that date, the Company may redeem for cash any or all of the 0.25% Convertible Notes, at its option, if the closing sale price of its common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending within 5 trading days immediately preceding the date on which it provides notice of redemption, including the last trading day of such 30 day trading period, exceeds 130 percent of the applicable conversion price on each applicable trading day. The redemption price will equal 100 percent of the principal amount of the 0.25% Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The Company's 1.25% Convertible Senior Notes due 2032 (the "1.25% Convertible Notes") are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 1.25% Convertible Notes bear interest at a rate of 1.25% per year and will mature on August 1, 2032, unless earlier converted, redeemed or repurchased. The holders may convert their 1.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 24.8656 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $40.22 per share), subject to adjustment. The Company may not redeem the 1.25% Convertible Notes prior to August 5, 2017. On or after August 5, 2017 and prior to the maturity date, the Company may redeem for cash all or part of the 1.25% Convertible Notes at a redemption price equal to 100% of the principal amount of the 1.25% Convertible Notes being redeemed.  On each of August 1, 2017,

August 1, 2022 and August 1, 2027, holders of the 1.25% Convertible Notes may require the Company to purchase all or any portion of their 1.25% Convertible Notes for cash at a price equal to 100% of the principal amount of the 1.25% Convertible Notes to be repurchased.

During the 2016 second quarter, the Company issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2026, which are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  A portion of the net proceeds of this issuance was used to repay the remaining $280 million principal balance of our 10.75% Senior Notes upon maturity in September 2016.

Prior to our merger with Ryland, MP CA Homes, LLC ("MatlinPatterson") held all of the outstanding shares of Company Series B Preferred Stock and 126.4 million shares of Company common stock, which, together, represented approximately 59% of the total number of shares of Company common stock issued and outstanding on an if-converted basis.  Immediately following the merger, MatlinPatterson converted all of their shares of preferred stock into 17.6 million shares of Company common stock.  As of September 30, 2016, MatlinPatterson held 42.8 million shares (approximately 37%) of the Company's outstanding common stock and no shares of preferred stock.

At September 30, 2016, we had $161.9 million outstanding under our mortgage financing subsidiary's mortgage credit facility.  This mortgage credit facility consisted of a $300 million uncommitted repurchase facility with one lender, maturing in January 2017. This facility requires our mortgage financing subsidiary to maintain cash collateral accounts, which totaled $3.5 million as of September 30, 2016, and also contains financial covenants which require CalAtlantic Mortgage to, among other things, maintain a minimum level of tangible net worth, not to exceed a debt to tangible net worth ratio, maintain a minimum liquidity amount based on a measure of total assets (inclusive of the cash collateral requirement), and satisfy pretax income (loss) requirements.  As of September 30, 2016, CalAtlantic Mortgage was in compliance with the financial and other covenants contained in this facility.

techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:

The following table presents the Company's financial instruments measured at fair value on a recurring basis:

 

					Fair Value at
Description			Fair Value Hierarchy		September 30, 2016			December 31, 2015
					(Dollars in thousands)
	Marketable securities, available-for-sale
	Municipal debt securities		Level 2		$	9,771		$	9,734
	Metropolitan district bond securities		Level 3		$	8,711		$	9,710
	Mortgage loans held for sale		Level 2		$	173,568		$	328,835

 

Marketable Securities, Available-for-sale

Marketable securities that are available-for-sale are comprised mainly of municipal debt securities and metropolitan district bond securities.  The Company's municipal debt securities are valued based on quoted market prices of similar instruments and the metropolitan district bond securities are based on a discounted future cash flow model, which uses Level 3 inputs.  The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as homes drive increases to the taxpaying base for the metro district, (2) the forecasted assessed value of those closed homes and (3) the discount rate.

 

Senior Notes Payable – The senior notes are traded over the counter and their fair values were estimated based upon the values of their last trade at the end of the period.

The fair value of our cash and equivalents, restricted cash, accounts payable and other liabilities, secured project debt and other notes payable, revolving credit facility, and mortgage credit facilities approximate their carrying amounts due to the short-term nature of these assets and liabilities.

 

a. Land Purchase and Option Agreements

 

We are subject to obligations associated with entering into contracts for the purchase of land and improved homesites. These purchase contracts typically require us to provide a cash deposit or deliver a letter of credit in favor of the seller, and our purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.  We also utilize option contracts with land sellers as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the near-term use of funds from our corporate financing sources.  Option contracts generally require a non-refundable deposit for the right to acquire lots over a specified period of time at predetermined prices.  We generally have the right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit or by repaying amounts drawn under our letter of credit with no further financial responsibility to the land seller, although in certain instances, the land seller has the right to compel us to purchase a specified number of lots at predetermined prices.

In some instances, we may also expend funds for due diligence, development and construction activities with respect to our land purchase and option contracts prior to purchase, which we would have to write off should we not purchase the land.  At September 30, 2016, we had non-refundable cash deposits outstanding of approximately $67.8 million and capitalized pre-acquisition and other development and construction costs of approximately $11.8  million relating to land purchase and option contracts having a total remaining purchase price of approximately $790.6 million.

Our utilization of option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries, general housing market conditions, and geographic preferences.  Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

 

b. Land Development and Homebuilding Joint Ventures

 

Our joint ventures have historically obtained secured acquisition, development and construction financing designed to reduce the use of funds from corporate financing sources.  As of September 30, 2016, we held ownership interests in 27 homebuilding and land development joint ventures, of which 13 were active and 14 were inactive or winding down.  As of such date, only two joint ventures had project specific debt outstanding, which totaled $30.7 million.  This joint venture bank debt is non-recourse to us and is scheduled to mature in June 2017.  At September 30, 2016, we had no joint venture surety bonds outstanding.

 

d. Mortgage Loans and Commitments

 

We commit to making mortgage loans to our homebuyers through our mortgage financing subsidiary, CalAtlantic Mortgage.  CalAtlantic Mortgage sells substantially all of the loans it originates in the secondary mortgage market and finances these loans under its mortgage credit facilities for a short period of time (typically for 30 to 45 days), as investors complete their administrative review of applicable loan documents.  Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $266.6 million at September 30, 2016 and carried a weighted average interest rate of approximately 3.5%.  Interest rate risks related to these obligations are mitigated by CalAtlantic Mortgage through the preselling of loans to investors or through its interest rate hedging program.  As of September 30, 2016, CalAtlantic Mortgage had approximately $168.6 million in closed mortgage loans held for sale and $28.1 million of mortgage loans that we were committed to sell to investors subject to our funding of the loans and the investors' completion of their administrative review of the applicable loan documents.  In addition, as of September 30, 2016, CalAtlantic Mortgage had approximately $238.5 million of mortgage loans in process that were or are expected to be originated on a non-presold basis, substantially all of which were hedged by forward sale commitments of mortgage-backed securities prior to entering into loan sale transactions with third party investors.

Substantially all of the loans originated by CalAtlantic Mortgage are sold with servicing rights released on a non-recourse basis.  These sales are generally subject to CalAtlantic Mortgage's obligation to repay its gain on sale if the loan is prepaid by the borrower within a certain time period following such sale, or to repurchase the loan if, among other things, the purchaser's underwriting guidelines are not met, or there is fraud in connection with the loan.  During the nine months ended September 30, 2016 and 2015, CalAtlantic Mortgage recorded loan loss expense related to indemnification and repurchase allowances of $0.1 million and $0.1 million, respectively.  As of September 30, 2016, CalAtlantic Mortgage had indemnity and repurchase allowances related to loans sold of approximately $3.5 million.  In addition, during the nine months ended September 30, 2016 and 2015, CalAtlantic Mortgage made make-whole payments of $0.3 million and $0.1 million, respectively.

e. Insurance and Litigation Accruals

 

Insurance and litigation accruals are established with respect to estimated future claims cost.  We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related claims.  We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations.  However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy.  We record allowances to cover our estimated costs of self-insured retentions and deductible amounts under these policies and estimated costs for claims that may not be covered by applicable insurance or indemnities.  Our total insurance and litigation accruals as of September 30, 2016 and December 31, 2015 were $130.5 million and $125.3 million, respectively, which are included in accrued liabilities in the accompanying condensed consolidated balance sheets.  Estimation of these accruals include consideration of our claims history, including current claims, estimates of claims incurred but not yet reported, and potential for recovery of costs from insurance and other sources.  We utilize the services of an independent third party actuary to assist us with evaluating the level of our insurance and litigation accruals.  Because of the high degree of judgment required in determining these estimated accrual amounts, actual future claim costs could differ materially from our currently estimated amounts.

 

 

Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740.  We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable.  Our assessment considers, among other things, the nature, frequency and severity of our prior and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and tax planning alternatives.

 

Our 2016 third quarter provision for income taxes of $78.4 million primarily related to our $210.7 million of pretax income.  As of September 30, 2016, we had a $325.4 million deferred tax asset which was partially offset by a valuation allowance of $1.4 million related to state net operating loss carryforwards that are limited by shorter carryforward periods.  As of such date, $136.9 million of our deferred tax asset related to net operating loss carryforwards ($119.6 million of federal and state net operating loss carryforwards that were subject to Internal Revenue Code Section 382 ("Section 382") limitations and $17.3 million of state net operating loss carryforwards that were not subject to such limitations).  The remaining deferred tax asset balance of $188.5 million represented deductible timing differences, primarily related to inventory impairments and financial accruals, which have no expiration date.   As of September 30, 2016 and December 31, 2015, our liability for unrecognized tax benefits was $12.2 million and $10.6 million, respectively, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets. In addition, as of September 30, 2016, we remained subject to examination by various tax jurisdictions for the tax years ended December 31, 2011 through 2015.

 

The following are supplemental disclosures to the condensed consolidated statements of cash flows:

 

							Nine Months Ended September 30,
							2016			2015
							(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for:
		Income taxes					$	150,822		$	66,310
Supplemental Disclosures of Noncash Activities:
Increase in secured project debt related to seller financed inventory purchases							$	25,625		$	1,725

 

 

 

 

 

 

 

 

 

 

 

Certain of our 100% owned direct and indirect subsidiaries guarantee our outstanding senior notes payable (please see Note 15 "Senior Notes Payable").  Presented below are the condensed consolidated financial statements for our guarantor subsidiaries and non-guarantor subsidiaries.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 

		Three Months Ended September 30, 2016
		CalAtlantic Group, Inc.				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Consolidating Adjustments				Consolidated CalAtlantic Group, Inc.
		(Dollars in thousands)
Homebuilding:
Revenues		$	707,397			$	656,095			$	307,466			$	―			$	1,670,958
Cost of sales			(561,856	)			(520,810	)			(213,600	)			―				(1,296,266	)
Gross margin			145,541				135,285				93,866				―				374,692
Selling, general and administrative expenses			(75,217	)			(75,834	)			(19,764	)			―				(170,815	)
Income (loss) from unconsolidated joint ventures			(717	)			44				1,904				―				1,231
Equity income of subsidiaries			95,380				―				―				(95,380	)			―
Interest income (expense), net			1,075				(886	)			(189	)			―				―
Other income (expense)			(3,602	)			(762	)			195				―				(4,169	)
Homebuilding pretax income			162,460				57,847				76,012				(95,380	)			200,939
Financial Services:
Financial services pretax income			―				―				9,807				―				9,807
Income before taxes			162,460				57,847				85,819				(95,380	)			210,746
Provision for income taxes			(30,112	)			(23,111	)			(25,175	)			―				(78,398	)
Net income		$	132,348			$	34,736			$	60,644			$	(95,380	)		$	132,348

 

		Three Months Ended September 30, 2015
		CalAtlantic Group, Inc.				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Consolidating Adjustments				Consolidated CalAtlantic Group, Inc.
		(Dollars in thousands)
Homebuilding:
Revenues		$	172,420			$	296,420			$	183,350			$	―			$	652,190
Cost of sales			(132,775	)			(226,945	)			(132,714	)			―				(492,434	)
Gross margin			39,645				69,475				50,636				―				159,756
Selling, general and administrative expenses			(21,582	)			(37,660	)			(14,018	)			―				(73,260	)
Income (loss) from unconsolidated joint ventures			14				―				107				―				121
Equity income of subsidiaries			48,155				―				―				(48,155	)			―
Interest income (expense), net			3,109				(2,160	)			(949	)			―				―
Other income (expense)			(11,782	)			(212	)			824				―				(11,170	)
Homebuilding pretax income			57,559				29,443				36,600				(48,155	)			75,447
Financial Services:
Financial services pretax income			―				―				2,847				―				2,847
Income before taxes			57,559				29,443				39,447				(48,155	)			78,294
Provision for income taxes			(10,382	)			(13,931	)			(6,804	)			―				(31,117	)
Net income		$	47,177			$	15,512			$	32,643			$	(48,155	)		$	47,177

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 

		Nine Months Ended September 30, 2016
		CalAtlantic Group, Inc.				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Consolidating Adjustments				Consolidated CalAtlantic Group, Inc.
		(Dollars in thousands)
Homebuilding:
Revenues		$	1,817,935			$	1,866,598			$	750,470			$	―			$	4,435,003
Cost of sales			(1,451,579	)			(1,486,644	)			(533,543	)			―				(3,471,766	)
Gross margin			366,356				379,954				216,927				―				963,237
Selling, general and administrative expenses			(201,503	)			(220,595	)			(51,112	)			―				(473,210	)
Income (loss) from unconsolidated joint ventures			29				444				2,170				―				2,643
Equity income of subsidiaries			229,414				―				―				(229,414	)			―
Interest income (expense), net			3,685				(2,785	)			(900	)			―				―
Other income (expense)			(10,885	)			(1,241	)			134				―				(11,992	)
Homebuilding pretax income			387,096				155,777				167,219				(229,414	)			480,678
Financial Services:
Financial services pretax income			―				―				24,889				―				24,889
Income before taxes			387,096				155,777				192,108				(229,414	)			505,567
Provision for income taxes			(69,327	)			(66,659	)			(51,812	)			―				(187,798	)
Net income		$	317,769			$	89,118			$	140,296			$	(229,414	)		$	317,769