M.D.C. HOLDINGS, INC. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A, Risk Factors Relating to our Business." This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 2022 2021 2020 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues$ 5,586,264 $ 5,102,456 $ 3,765,379 Home cost of sales (4,214,379) (3,924,093) (2,982,668) Inventory impairments (121,875) (1,600) - Total cost of sales (4,336,254) (3,925,693) (2,982,668) Gross profit 1,250,010 1,176,763 782,711 Gross margin % 22.4 % 23.1 % 20.8 % Selling, general and administrative expenses (536,395) (493,993) (403,218) Loss on debt retirement - (23,571) - Interest and other income 10,843 5,965 4,233 Other expense (32,991) (5,476) (5,209) Homebuilding pretax income 691,467 659,688 378,517 Financial Services: Revenues 131,723 152,212 135,832 Expenses (71,327) (64,477) (52,465) Other income (expense), net 7,991 4,271 (4,372) Financial services pretax income 68,387 92,006 78,995 Income before income taxes 759,854 751,694 457,512 Provision for income taxes (197,715) (178,037) (89,930) Net income$ 562,139 $ 573,657 $ 367,582 Earnings per share: Basic $ 7.87$ 8.13 $ 5.33 Diluted $ 7.67$ 7.83 $ 5.17 Weighted average common shares outstanding: Basic 71,035,558 70,174,281 68,531,856 Diluted 72,943,844 72,854,601 70,676,581 Cash dividends declared per share $ 2.00$ 1.67 $ 1.29 Cash provided by (used in): Operating Activities$ 905,646 $ (207,990) $ (23,095) Investing Activities$ (585,885) $ (27,679) $ 21,685 Financing Activities$ (206,125) $ 335,156 $ 31,170 16
--------------------------------------------------------------------------------
Table of Contents
EXECUTIVE SUMMARY
Overview
Industry Conditions and Outlook for MDC*
During the first three months of 2022, housing market conditions and demand for our homes remained strong. During the second quarter of 2022, housing demand slowed, and further deteriorated in the second half of 2022 as 30-year fixed mortgage rates increased significantly due to theFederal Reserve's aggressive actions to combat inflationary pressures. The magnitude and speed of these rate increases have caused many buyers to pause and reconsider a home purchase, resulting in lower gross orders, higher cancellations, and higher incentives. We expect these factors to continue to negatively impact demand in the near term. Management has responded to these declining housing market conditions by adjusting base pricing and incentives as necessary to maintain a reasonable pace of gross orders, offering financing incentives to assist our homebuyers in backlog impacted by the increase in mortgage rates and reducing acquisition spend on new housing projects while industry conditions remain volatile and uncertain. While our cancellation rate as a percentage of homes in beginning backlog was above our historical average during the second half of the year, these cancellations have provided us with a source of quick move-in homes at a time when more buyers are looking for homes that can close quickly in order to provide certainty as to their ultimate mortgage rate at closing. Due to the change in consumer preferences and the ongoing uncertainty around mortgage rates that has negatively impacted the build-to-order market, management has pivoted its strategy to focus on more speculative construction starts to supplement build-to-order construction activity. Like many within the industry, we have continued to see production challenges due to supply chain disruptions, labor market tightness, and shortages of certain building materials throughout 2022. These disruptions have caused both our construction and land development times to extend. However, with the softening of demand and the resulting decrease in new home construction starts, we expect these challenges to begin easing in 2023. Despite these challenges, we achieved record home sale revenues of$5.59 billion , as well as strong consolidated net income of$562.1 million for the full year endedDecember 31, 2022 . Similar to past homebuilding cycles, we believe we are well-positioned to navigate the ever-evolving market conditions given our seasoned leadership team and strong financial position. We ended the quarter with total cash and cash equivalents and marketable securities of$1.28 billion , total liquidity of$2.43 billion and no senior note maturities until 2030. We generated cash flow from operating activities during the year endedDecember 31, 2022 of$905.6 million and ended the year with a debt-to-capital ratio of 32.6%. While we remain confident in the long-term growth prospects for the industry given the underproduction of new homes over more than the past decade, the current demand for new homes is subject to continued uncertainty due to many factors. These include ongoing inflation concerns, theFederal Reserve's continued quantitative tightening and the resulting impact on mortgage interest rates, consumer confidence, the current geopolitical environment, the continued impact of the COVID-19 pandemic and other factors. The potential effect of these factors is highly uncertain and could adversely and materially impact our operations and financial results in future periods.
Results for the Twelve Months Ended
For the year endedDecember 31, 2022 , we reported net income of$562.1 million , or$7.67 per diluted share, a 2% decrease compared to net income of$573.7 million , or$7.83 per diluted share, for the prior year period. Our financial services business was the driver of the decrease, as pretax income decreased$23.6 million , or 26%. Also contributing to the decrease was our effective tax rate, which increased to 26.0% during the periodDecember 31, 2022 compared to 23.7% in the prior year period. This was slightly offset by our homebuilding business, as pretax income increased$31.8 million , or 5%. The increase in homebuilding pretax income was the result of a 9% increase in home sale revenues, a 10 basis point decrease in our selling, general and administrative expenses as a percentage of revenue and a$23.6 million loss on debt retirement incurred in the prior year period. These increases in homebuilding pretax income were partially offset by project abandonment expense of$33.1 million and$121.9 million of inventory impairments incurred in the year endedDecember 31, 2022 . The decrease in financial services pretax income was primarily due to our mortgage operations, as we have seen profitability per loan locked, closed and sold return to more historical levels during the period endedDecember 31, 2022 as competition in the primary mortgage market has increased. Further, within our mortgage operations business, we saw a decrease in the number of loans locked primarily due to lower net home sales. The decrease in mortgage operations was partly offset by our insurance operations, which benefited from increased premium revenue within our captive insurance companies. The increase in our effective tax rate was due to an increase in our state tax rate and limitations on deductible executive compensation, as well as reversal of uncertain tax positions during the year endedDecember 31, 2021 .
* See "Forward-Looking Statements" above.
17--------------------------------------------------------------------------------
Table of Contents
Homebuilding
Pretax Income (Loss)
Year Ended December 31,
Change Change
2022 Amount % 2021 Amount % 2020
(Dollars in thousands)
West $ 413,426 $ (49,876) (11) % $ 463,302 $ 233,351 101 % $ 229,951
Mountain 245,456 13,933 6 % 231,523 56,522 32 % 175,001
East 126,824 67,330 113 % 59,494 39,488 197 % 20,006
Corporate (94,239) 392 - % (94,631) (48,190) 104 % (46,441)
Total homebuilding pretax
income $ 691,467 $ 31,779 5 % $ 659,688 $ 281,171 74 % $ 378,517
Homebuilding pretax income for 2022 was $691.5 million , an increase of $31.8
million from $659.7 million for the year ended December 31, 2021 . The increase
was primarily attributable to a 9% increase in home sale revenues, a 10 basis
point improvement in selling, general and administrative expenses as a
percentage of revenue and $23.6 million of losses on debt retirement incurred in
the prior year period. These increases were partially offset by project
abandonment expense of $33.1 million and a 70 basis point decrease in gross
margin from home sales largely driven by $121.9 million of inventory
impairments.
Our West segment experienced a $49.9 million year-over-year decrease in pretax
income, due to a decrease in gross margin from home sales largely driven by
$96.9 million of inventory impairments during the period ended December 31,
2022 . This was partially offset by a decrease in selling, general and
administrative expenses as a percentage of revenue and a 2% increase in home
sale revenues. Our Mountain segment experienced a $13.9 million increase in
pretax income from the prior year, as a result of an 8% increase in home sale
revenues and a decrease in selling, general and administrative expenses as a
percentage of revenue. This was partially offset by a decrease in gross margin
from home sales, largely driven by $22.5 million of inventory impairments during
the period ended December 31, 2022 . Our East segment experienced a $67.3 million
increase in pretax income from the prior year, primarily due to a 53% increase
in home sale revenues, an improved gross margin from home sales and a decrease
in selling, general and administrative expenses as a percentage of revenue. Our
Corporate segment experienced a $0.4 million decrease in pretax loss, due
primarily to the $23.6 million loss on retirement of debt recognized in the
prior year, an increase in the amount of corporate cost allocated to our
homebuilding and financial services segment, and an increase in interest income
from marketable securities acquired in the current year. This was partially
offset by an increase in stock-based and deferred compensation expense.
Assets
December 31, Change
2022 2021 Amount %
(Dollars in thousands)
West $ 2,275,144 $ 2,472,378 $ (197,234) (8) %
Mountain 1,005,622 1,072,717 (67,095) (6) %
East 427,926 450,675 (22,749) (5) %
Corporate 1,249,370 547,364 702,006 128 %
Total homebuilding assets $ 4,958,062 $ 4,543,134 $ 414,928 9 %
Total homebuilding assets increased 9% from December 31, 2021 to December 31,
2022 . Homebuilding assets decreased in each of our homebuilding operating
segments largely due to a lower number of homes completed or under construction
as of period-end. Corporate assets increased due to an increase in cash and cash
equivalents, deferred tax assets and marketable securities year-over-year.
18--------------------------------------------------------------------------------
Table of Contents
New Home Deliveries & Home Sale Revenues:
Changes in home sale revenues are impacted by changes in the number of new homes
delivered and the average selling price of those delivered homes. Commentary for
each of our segments on significant changes in these two metrics is provided
below.
December 31,
2022 2021 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 5,234
872,832 469.3 1,480 570,492 385.5 26 % 53 % 22 %
Total 9,710 $ 5,586,264 $ 575.3 9,982 $ 5,102,456 $ 511.2 (3) % 9 % 13 %
December 31,
2021 2020 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 5,732
570,492 385.5 1,216
365,359 300.5 22 % 56 % 28 %
Total 9,982
For the year endedDecember 31, 2022 , the number of new homes delivered in each of our segments was negatively impacted by an increase in construction cycle times year-over-year. This increase was primarily the result of extended permitting times, supply chain disruptions and labor shortages as a result of the pandemic as well as the strong demand for new homes experienced in recent periods. West Segment Commentary For the year endedDecember 31, 2022 , the decrease in new home deliveries was the result of a decrease in backlog conversion rates due to increased cycle times discussed above. This was partially offset by the construction status of those homes in beginning backlog for the respective periods as well as an increase in the number of homes in backlog to begin the period. The decrease was also partially offset by an increase in the number of spec closings to 1,352 homes in the year endedDecember 31, 2022 from 783 in the same period during 2021. The average selling price of homes delivered increased as a result of price increases implemented during 2021 and the first quarter of 2022. Mountain Segment Commentary For the year endedDecember 31, 2022 , the decrease in new home deliveries was due to a decrease in backlog conversion rates as a result of the increase in cycle times discussed above. This was partially offset by an increase in beginning backlog and the construction status of those homes in beginning backlog. The decrease was also partially offset by an increase in the number of spec closings to 683 homes in the year endedDecember 31, 2022 from 428 in the same period during 2021. The average selling price of homes delivered increased as a result of price increases implemented during 2021 and the first quarter of 2022. East Segment Commentary For the year endedDecember 31, 2022 , the increase in new home deliveries was due to an increase in beginning backlog as well as the construction status of those homes in backlog. The increase was also due to an increase in the number of spec closings to 434 homes in the year endedDecember 31, 2022 from 172 in the same period during 2021. This was partially offset by an increase in cycle times as discussed above. The average selling price of homes delivered increased as a result of price increases implemented during 2021 and the first quarter of 2022. 19
--------------------------------------------------------------------------------
Table of Contents
Gross Margin
Our gross margin from home sales for the year endedDecember 31, 2022 decreased 70 basis points year-over-year from 23.1% to 22.4%. The decrease in gross margin from home sales was driven by$121.9 million of inventory impairments and$3.1 million of warranty accrual adjustments recorded in the current year, increased incentives as well as increased building costs year-over-year. These decreases were partially offset by price increases implemented in 2021 and the first quarter of 2022.
Inventory Impairments
Inventory impairments recognized by segment for the years ended
Year Ended December 31,
2022 2021 2020
(Dollars in thousands)
Housing Completed or Under Construction :
West $ 8,017 $ 1,600 $ -
Mountain 1,812 - -
East - - -
Subtotal 9,829 1,600 -
Land and Land Under Development :
West 88,843 - -
Mountain 20,688 - -
East 2,515 - -
Subtotal 112,046 - -
Total Inventory Impairments $ 121,875 $ 1,600 $ -
The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory.
Impairment Data Quantitative Data
Number of Fair Value of
Subdivisions Inventory Inventory After
Three Months Ended Impaired Impairments Impairments Discount Rate
(Dollars in thousands)
March 31, 2022 1 $ 660 $ 1,728 N/A
September 30, 2022 9 28,415 44,615 15% - 18%
December 31, 2022 16 92,800 96,496 15% - 20%
Total $ 121,875
December 31, 2021 1 1,600 $ 6,903 N/A
Total $ 1,600
20--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
Year Ended December 31,
2022 Change 2021 Change 2020
(Dollars in thousands)
General and administrative expenses $292,349 $46,307 $246,042 $61,322 $184,720
General and administrative expenses as a
percentage of home sale revenues 5.2% 40 bps 4.8% (10) bps 4.9%
Marketing expenses $103,330 $(1,105) $104,435 $9,332 $95,103
Marketing expenses as a percentage of home
sale revenues 1.8% (20) bps 2.0% (50) bps 2.5%
Commissions expenses $140,716 $(2,800) $143,516 $20,121 $123,395
Commissions expenses as a percentage of home
sale revenues 2.5% (30) bps 2.8% (50) bps 3.3%
Total selling, general and administrative
expenses $536,395 $42,402 $493,993 $90,775 $403,218
Total selling, general and administrative
expenses as a percentage of home sale revenues
(SG&A Rate) 9.6% (10) bps 9.7% (100) bps 10.7%
For the year ended December 31, 2022 , the increase in our general and
administrative expenses was primarily due to increased bonus, stock-based and
deferred compensation expenses and to a lesser extent increased salary related
expenses due to higher average headcount.
For the year ended
For the year ended
21
--------------------------------------------------------------------------------
Table of Contents
Other Homebuilding Operating Data
Changes in the dollar value of net new orders are impacted by changes in the
number of net new orders and the average selling price of those homes.
Commentary for each of our segments on significant changes in these two metrics
is provided below.
December 31,
2022 2021 % Change
Monthly Monthly
Dollar Average Absorption Average Monthly Dollar Absorption
Homes Value Price Rate * Homes Dollar Value Price Absorption Rate * Homes Value Average Price Rate *
(Dollars in thousands)
West 2,909 $ 1,735,202 $ 596.5 2.01 6,238 $ 3,417,437 $ 547.8 5.25 (53) % (49) % 9 % (62) %
Mountain 1,157 788,734 681.7 1.85 2,926 1,831,755 626.0 4.33 (60) % (57) % 9 % (57) %
East 978 489,946 501.0 2.25 1,803 789,810 438.1 4.05 (46) % (38) % 14 % (44) %
Total 5,044 $ 3,013,882 $ 597.5 2.02 10,967 $ 6,039,002 $ 550.7 4.75 (54) % (50) % 9 % (57) %
December 31,
2021 2020 % Change
Monthly Monthly
Dollar Average Absorption Average Monthly Dollar Absorption
Homes Value Price Rate * Homes Dollar Value Price Absorption Rate * Homes Value Average Price Rate *
(Dollars in thousands)
West 6,238 $ 3,417,437 $ 547.8 5.25 6,099 $ 3,078,584 $ 504.8 5.29 2 % 11 % 9 % (1) %
Mountain 2,926 1,831,755 626.0 4.33 3,337 1,818,833 545.1 4.46 (12) % 1 % 15 % (3) %
East 1,803 789,810 438.1 4.05 1,576 562,419 356.9 4.27 14 % 40 % 23 % (5) %
Total 10,967 $ 6,039,002 $ 550.7 4.75 11,012 $ 5,459,836 $ 495.8 4.85 - % 11 % 11 % (2) %
*Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period
Active Subdivisions Average Active Subdivisions
December 31, Year Ended December 31,
2022 2021 % Change 2022 2021 % Change
West 134 96 40 % 120 99 21 %
Mountain 53 54 (2) % 52 56 (7) %
East 38 37 3 % 36 37 (3) %
Total 225 187 20 % 208 192 8 %
For the year ended December 31, 2022 , the number of net new orders in each of
our segments was negatively impacted by a decrease in the monthly sales
absorption pace. This was driven by a lower pace of gross orders (before
cancellations) as well as an increase in cancellations as a percentage of homes
in beginning backlog to start the respective quarters ("cancellation rates").
The lower pace of gross orders experienced during the year ended December 31,
2022 was the result of the sharp rise in mortgage interest rates and homebuyer
concerns about purchasing in an uncertain housing market. See the "Cancellation
Rate" section below for commentary on the increase in our cancellation rate.
West Segment Commentary
For the year ended December 31, 2022 , the decrease in net new orders was due to
a decrease in the monthly sales absorption rate as discussed above. This was
partially offset by an increase in average active subdivisions year-over-year.
The increase in average selling price was due to price increases implemented in
the second half of 2021 and the first quarter of 2022.
Mountain Segment Commentary
For the year ended December 31, 2022 , the decrease in net new orders was due to
a decrease in the monthly sales absorption rates as discussed above, as well as
a decrease in average active subdivisions year-over-year. The increase in
average selling price was due to price increases implemented in the second half
of 2021 and the first quarter of 2022.
22--------------------------------------------------------------------------------
Table of Contents
East Segment Commentary
For the year ended December 31, 2022 , the decrease in net new orders was due to
a decrease in the monthly sales absorption rate as discussed above, as well as a
decrease in average active subdivisions year-over-year. The increase in average
selling price was due to price increases implemented in the second half of 2021
and the first quarter of 2022.
Cancellation Rate:
Cancellations As a Percentage of Homes in Beginning Backlog
2022 2021
Three Months Ended
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
West 25 % 17 % 10 % 8 % 9 % 8 % 5 % 7 %
Mountain 26 % 17 % 9 % 8 % 8 % 7 % 5 % 8 %
East 20 % 17 % 11 % 9 % 10 % 7 % 9 % 13 %
Total 25 % 17 % 10 % 8 % 9 % 7 % 6 % 8 %
Cancellations As a Percentage of Gross Sales
December 31,
2022 Change 2021 Change 2020
West 44 % 28 % 16 % (1) % 17 %
Mountain 50 % 32 % 18 % (4) % 22 %
East 38 % 20 % 18 % (6) % 24 %
Total 45 % 28 % 17 % (2) % 19 %
Our cancellation rates as a percentage of gross sales and as a percentage of
homes in beginning backlog increased year-over-year in each of our segments
during the year ended December 31, 2022 and was above our typical historical
levels. The increase in the respective cancellation rates was due to the rapid
rise in mortgage rates during the year resulting in a softening in housing
market demand and overall homebuyer sentiment.
Backlog:
December 31,
2022 2021 % Change
Dollar Average Dollar Average Dollar
Homes Value Price Homes Value Price Homes Value Average Price
(Dollars in thousands)
West 1,891 $ 1,049,805 $ 555.2 4,216 $ 2,328,949 $ 552.4 (55) % (55) % - %
Mountain 715 515,460 720.9 2,174 1,402,052 644.9 (67) % (63) % 12 %
East 368 187,629 509.9 1,250 567,695 454.2 (71) % (67) % 12 %
Total 2,974 $ 1,752,894 $ 589.4 7,640 $ 4,298,696 $ 562.7 (61) % (59) % 5 %
At December 31, 2022 , we had 2,974 homes in backlog with a total value of $1.75
billion , representing respective decreases of 61% and 59%, respectively, from
December 31, 2021 . The decrease in the number of homes in backlog is primarily a
result of increased cancellations and a decrease in the pace of gross sales
during 2022. This was partially offset by an increase in cycle times
year-over-year within nearly all of our markets. The increase in the average
selling price of homes in backlog was due to price increases implemented in the
second half of 2021 and the first quarter of 2022. Our ability to convert
backlog into closings could be negatively impacted in future periods by rising
mortgage interest rates, the pandemic and other factors, the extent to which is
highly uncertain and depends on future developments.
23--------------------------------------------------------------------------------
Table of Contents
Homes Completed or
December 31,
2022 2021 % Change
Unsold:
Completed 396 25 1,484 %
Under construction 1,063 312 241 %
Total unsold started homes 1,459 337 333 %
Sold homes under construction or completed 2,756 6,379 (57) %
Model homes under construction or completed 555 479 16 %
Total homes completed or under construction 4,770 7,195 (34) %
The increase in total unsold started homes is due to an increase in the cancellation rate during the year endedDecember 31, 2022 . The increase is also due to a shift in strategy to focus on speculative construction starts given current market conditions and a shift in consumer preferences. The decrease in sold homes under construction or completed is due to a decrease in net sales during the year endedDecember 31, 2022 .
Lots Owned and Optioned (including homes completed or under construction):
December 31, 2022 December 31, 2021
Lots Lots Lots Lots Total %
Owned Optioned Total Owned Optioned Total Change
West 12,667 687 13,354 15,968 4,534 20,502 (35) %
Mountain 5,398 1,561 6,959 6,660 4,171 10,831 (36) %
East 3,534 1,455 4,989 4,304 2,443 6,747 (26) %
Total 21,599 3,703 25,302 26,932 11,148 38,080 (34) %
Our total owned and optioned lots at December 31, 2022 were 25,302, a decrease
of 34% from December 31, 2021 . This decrease is a result of our intentional
slowdown in land acquisition and approval activity due to current market
uncertainty. We believe that our total lot supply is sufficient to meet our
operating needs, consistent with our philosophy of maintaining a two to three
year supply of land. See "Forward-Looking Statements" above.
Financial Services
Year Ended December 31,
Change Change
2022 Amount % 2021 Amount % 2020
(Dollars in thousands)
Financial services revenues
Mortgage operations $ 72,806 $ (34,729) (32) % $ 107,535 $ 5,860 6 % $ 101,675
Other 58,917 14,240 32 % 44,677 10,520 31 % 34,157
Total financial services
revenues $ 131,723 $ (20,489) (13) % $ 152,212 $ 16,380 12 % $ 135,832
Financial services pretax
income
Mortgage operations $ 30,177 $ (39,278) (57) % $ 69,455 $ (1,562) (2) % $ 71,017
Other 38,210 15,659 69 % 22,551 14,573 183 % 7,978
Total financial services
pretax income $ 68,387 $ (23,619) (26) % $ 92,006 $ 13,011 16 % $ 78,995
For the year ended December 31, 2022 , our financial services pretax income
decreased $23.6 million or 26% from the same period in the prior year. The
decrease in financial services pretax income was driven by our mortgage
operations as a result of decreased profitability per loan locked, closed and
sold during the period ended December 31, 2022 due to increased competition in
the primary mortgage market and special financing programs offered during 2022.
The decrease in mortgage operations was partly offset by an increase in mortgage
servicing revenue due to an increase in additions to the servicing portfolio
year-over-year. The decrease was also partially offset by our insurance
operations, which benefited from increased
24--------------------------------------------------------------------------------
Table of Contents
premium revenue within our captive insurance companies as well as an increase in interest income due to the marketable securities acquired during 2022.
The table below sets forth information for our mortgage operations relating to mortgage loans originated and capture rate.
Year Ended
% or Percentage % or Percentage
2022 Change 2021 Change 2020
(Dollars in thousands)
Total Originations:
Loans 5,876 (6) % 6,247 10 % 5,688
Principal $ 2,746,903 5 % $ 2,622,158 23 % $ 2,140,229
Capture Rate Data:
Capture rate as % of all homes delivered 60 % (2) % 62 % (7) % 69 %
Capture rate as % of all homes delivered
(excludes cash sales) 64 % (1) % 65 % (7) % 72 %
Mortgage Loan Origination Product Mix:
FHA loans 13 % (3) % 16 % (6) % 22 %
Other government loans (VA & USDA) 21 % 2 % 19 % (2) % 21 %
Total government loans 34 % (1) % 35 % (8) % 43 %
Conventional loans 66 % 1 % 65 % 8 % 57 %
100 % - % 100 % - % 100 %
Loan Type:
Fixed rate 99 % (1) % 100 % - % 100 %
ARM 1 % 1 % - % - % - %
Credit Quality:
Average FICO Score 744 1 % 740 1 % 735
Other Data:
Average Combined LTV ratio 81 % (3) % 84 % (1) % 85 %
Full documentation loans 100 % - % 100 % - % 100 %
Loans Sold to Third Parties:
Loans 5,977 (4) % 6,210 10 % 5,620
Principal $ 2,785,712 9 % $ 2,563,637 22 % $ 2,104,624
Income Taxes
We recorded an income tax provision of $197.7 million , $178.0 million and $89.9
million for the years ended December 31, 2022 , 2021 and 2020, respectively, and
our resulting effective income tax rates were 26.0%, 23.7% and 19.7%,
respectively. Our tax provision and effective tax rate is driven by (i) pre-tax
book income for the full year, adjusted for items that are
deductible/non-deductible for tax purposes only (i.e., permanent items); (ii)
benefits from federal energy credits; (iii) taxable income generated in state
jurisdictions that varies from consolidated income and (iv) stock based
compensation windfalls recorded as discrete items. The difference between our
effective tax rate for the year ended December 31, 2022 and the federal
statutory rate was primarily due to 4.0% in state taxes and a 3.1% increase due
to limitations on deductible executive compensation. These items were partially
offset by 2.0% decrease due to benefits for federal energy credits.
25--------------------------------------------------------------------------------
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources to (1) support our operations,
including the purchase of land, land development and construction of homes; (2)
provide working capital; and (3) provide mortgage loans for our homebuyers. Our
liquidity includes our cash and cash equivalents, marketable securities,
Revolving Credit Facility (as defined below) and Mortgage Repurchase Facility
(as defined below). Additionally, we have an existing effective shelf
registration statement that allows us to issue equity, debt or hybrid securities
up to $5.0 billion , of which $5.0 billion remains.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as ofDecember 31, 2022 , while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, payments due on our Mortgage Repurchase Facility, purchase obligations related to expected acquisition of land under purchase agreements and land development agreements (many of which are secured by letters of credit or surety bonds) and operating leases. Other material cash requirements include land acquisition and development costs not yet contracted for, home construction costs, operating expenses, including our selling, general and administrative expenses, investments and funding of capital improvements and dividend payments. AtDecember 31, 2022 , we had outstanding senior notes with varying maturities totaling an aggregate principal amount of$1.5 billion , with none payable within 12 months. Future interest payments associated with the notes total$1.3 billion , with$64.2 million payable within 12 months. As ofDecember 31, 2022 , we had$29.8 million of required operating lease future minimum payments. AtDecember 31, 2022 , we had deposits of$19.5 million in the form of cash and$4.3 million in the form of letters of credit that secured option contracts to purchase 3,703 lots for a total estimated purchase price of$344.7 million . AtDecember 31, 2022 , we had outstanding surety bonds and letters of credit totaling$362.0 million and$137.0 million , respectively, including$88.6 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately$146.8 million and$87.5 million , respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit. We have made no material guarantees with respect to third-party obligations.
Capital Resources
Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders' equity; (2) long-term financing, represented by our 3.850% senior notes due 2030, 2.500% senior notes due 2031, 6.000% senior notes due 2043, and 3.966% senior notes due 2061; (3) our Revolving Credit Facility and (4) our Mortgage Repurchase Facility. Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" above. We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility
Senior Notes. Our senior notes are not secured and, while the senior note
indentures contain some restrictions on secured debt and other transactions,
they do not contain financial covenants. Our senior notes are fully and
unconditionally guaranteed on an unsecured basis, jointly and severally, by most
of our homebuilding segment subsidiaries. We believe that we are in compliance
with the representations, warranties and covenants in the senior note
indentures.
26--------------------------------------------------------------------------------
Table of Contents
Revolving Credit Facility. We have an unsecured revolving credit agreement
("Revolving Credit Facility") with a group of lenders, which may be used for
general corporate purposes. This agreement was amended on December 28, 2020 to
(1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the
"Commitment"), (2) extend the Revolving Credit Facility maturity of $1.125
billion of the Commitments to December 18, 2025 with the remaining Commitment
continuing to terminate on December 18, 2023 and (3) provide that the aggregate
amount of the commitments may increase to an amount not to exceed $1.7 billion
upon our request, subject to receipt of additional commitments from existing or
additional lenders and, in the case of additional lenders, the consent of the
co-administrative agents. As defined in the Revolving Credit Facility, interest
rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime
rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified
eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined
based on our credit ratings and leverage ratio. Interest rates on eurocurrency
borrowings are equal to a specified eurocurrency rate plus a margin that is
determined based on our credit ratings and leverage ratio. At any time at which
our leverage ratio, as of the last day of the most recent calendar quarter,
exceeds 55%, the aggregate principal amount of all consolidated senior debt
borrowings outstanding may not exceed the borrowing base. There is no borrowing
base requirement if our leverage ratio, as of the last day of the most recent
calendar quarter, is 55% or less.
The Revolving Credit Facility provides for a transition from the eurocurrency rate to a benchmark replacement upon the occurrence of certain events.
The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a "term-out" of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default. The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as ofDecember 31, 2022 . We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. As ofDecember 31, 2022 , we had$10.0 million in borrowings and$48.3 million in letters of credit outstanding under the Revolving Credit Facility, leaving remaining borrowing capacity of$1.14 billion . Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the "Mortgage Repurchase Facility") withU.S. Bank National Association ("USBNA"). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of$75 million (subject to increase by up to$75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement ("Custody Agreement"), dated as ofNovember 12, 2008 , by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended onSeptember 24, 2020 ,March 25, 2021 ,May 20, 2021 ,December 21, 2021 andMay 19, 2022 to adjust the commitments to purchase for specific time periods. The total capacity of the facility atDecember 31, 2022 was$300 million . TheMay 19, 2022 amendment extended the termination date of the Repurchase Agreement toMay 18, 2023 . AtDecember 31, 2022 and 2021, HomeAmerican had$175.8 million and$256.3 million , respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted TangibleNet Worth requirement, (ii) a maximum Adjusted TangibleNet Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage 27
--------------------------------------------------------------------------------
Table of Contents
Repurchase Facility. We believe HomeAmerican was in compliance with the
representations, warranties and covenants included in the Mortgage Repurchase
Facility as of
Dividends
In the years endedDecember 31, 2022 and 2021, we paid dividends of$2.00 per share and$1.67 per share, respectively. In addition to the cash dividends paid, the Company distributed a stock dividend of 8% during 2021.
MDC Common Stock Repurchase Program
AtDecember 31, 2022 , we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock under this repurchase program during the year endedDecember 31, 2022 .
Consolidated Cash Flow
Our operating cash flows are primarily impacted by: (1) land purchases and related development and construction of homes; (2) closing homes and the associated timing of collecting receivables from home closings; (3) the origination and subsequent sale of mortgage loans originated by HomeAmerican; (4) payments on accounts payables and accrued liabilities; and (5) funding for payroll. When we close on the sale of a house, our homebuilding subsidiaries will generally receive the proceeds from the sale of the homes within a few days of the home being closed. Therefore, our home sales receivable balance can increase or decrease from period to period based upon the timing of our home closings. Additionally, the amount of mortgage loans held-for-sale can be impacted period to period based upon the number of mortgage loans that were originated by HomeAmerican that have not been sold to third party purchasers and by the timing of fundings by third party mortgage purchasers. Accordingly, mortgage loans held-for-sale may increase if HomeAmerican originates more homes towards the end of one reporting period when compared with the same period in the previous year. HomeAmerican will generally sell mortgage loans it originates between 5 to 35 days after origination.
Operating Cash Flow Activities
For the year endedDecember 31, 2022 , net cash provided by operating activities was$905.6 million compared with net cash used in operating activities of$208.0 million in the prior year. During the year endedDecember 31, 2022 , cash used to increase land and land under development was$95.4 million compared to$502.8 million in the prior year. The decrease was driven by the acquisition of 4,377 lots during the year endedDecember 31, 2022 compared to 15,435 lots during the year endedDecember 31, 2021 . Cash provided by the decrease in housing completed or under construction for the year endedDecember 31, 2022 was$186.3 million , as homes in inventory decreased during the period. Cash used to increase housing completed or under construction for the year endedDecember 31, 2021 was$431.9 million as homes in inventory increased during the period. Cash used to decrease accounts payable and accrued liabilities for the year endedDecember 31, 2022 was$18.5 million , primarily due to the decrease in homes in inventory at period end. Cash provided by the increase in accounts payable and accrued liabilities for the year endedDecember 31, 2021 was$126.4 million due to the increased construction spend as a result of the year-over-year increases in home deliveries as well as the increase in homes in inventory at period end. Cash provided by the decrease in mortgage loans held-for-sale was$53.0 million compared to cash used to increase mortgage loans held-for-sale of$50.0 million in the year endedDecember 31, 2022 and 2021, respectively, as a result of a decrease in loan originations for the year endedDecember 31, 2022 . Cash used to increase trade and other receivables for the year endedDecember 31, 2022 and 2021 was$21.8 million and$25.3 million , respectively, due to the year-over-year increases in home sale revenues during both periods. The most significant source of cash provided by operating activities in both years was net income.
Investing Cash Flow Activities
For the year endedDecember 31, 2022 , net cash used in investing activities was$585.9 million compared with$27.7 million in the prior year. The primary driver of this increase in cash from investing activities relates to$656.8 million in cash used in the purchase of marketable securities during the current year, offset partially by net cash provided by the maturities of marketable securities during the year of$100.0 million . Cash used to purchase property and equipment remained consistent year-over-year. 28
--------------------------------------------------------------------------------
Table of Contents
Financing Cash Flow Activities
For the year endedDecember 31, 2022 , net cash used in financing activities was$206.1 million compared with net cash provided by financing activities of$335.2 million in the prior year. The primary driver of this decrease in cash provided by financing activities was the proceeds from the issuance of senior notes of$694.7 million during the year endedDecember 31, 2021 , which was partially offset by$277.0 million used to accelerate the retirement of our unsecured notes scheduled to mature inJanuary 2024 . Cash used to fund dividend payments increased year-over year as a result of an increase in the cash dividend declared per share inOctober 2021 . Cash used to decrease the mortgage repurchase facility was$80.5 million for the year endedDecember 31, 2022 , driven by the increased proceeds from the sale of mortgage loans. Cash provided by the increase of the mortgage repurchase facility was$53.9 million for the year endedDecember 31, 2021 , driven by the increased volume of loan originations during the year endedDecember 31, 2021 . CRITICAL ACCOUNTING ESTIMATES AND POLICIES The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. See "Forward-Looking Statements" above.
Listed below are those estimates and policies that we believe are critical and require the use of complex judgment in their application. Our critical accounting estimates and policies are as follows and should be read in conjunction with the Notes to our Consolidated Financial Statements.
Homebuilding Inventory Valuation. Refer to Note 1, Summary of Significant Accounting Policies, in the notes to the financial statements for information on the composition of the inventory balances.
In accordance with Accounting Standards Codification ("ASC") Topic 360,
Property, Plant, and Equipment ("ASC 360"), homebuilding inventories, excluding
those classified as held for sale, are carried at cost unless events and
circumstances indicate that the carrying value of the underlying subdivision may
not be recoverable. We evaluate inventories for impairment at each quarter end
on a subdivision level basis as each such subdivision represents the lowest
level of identifiable cash flows. In making this determination, we review, among
other things, the following for each subdivision:
•actual and trending "Operating Margin" (which is defined as home sale revenues
less home cost of sales and all incremental costs associated directly with the
subdivision, including sales commissions and marketing costs);
•forecasted Operating Margin for homes in backlog;
•actual and trending net home orders;
•homes available for sale;
•market information for each sub-market, including competition levels, home
foreclosure levels, the size and style of homes currently being offered for sale
and lot size; and
•known or probable events indicating that the carrying value may not be
recoverable.
If events or circumstances indicate that the carrying value of our inventory may
not be recoverable, assets are reviewed for impairment by comparing the
undiscounted estimated future cash flows from an individual subdivision
(including capitalized interest) to its carrying value. We generally determine
the estimated fair value of each subdivision by calculating the present value of
the estimated future cash flows using discount rates, which are Level 3 inputs
(see Note 6, Fair Value Measurements, in the notes to the financial statements
for definitions of fair value inputs), that are commensurate with the risk of
the subdivision under evaluation. The evaluation for the recoverability of the
carrying value of the assets for each individual subdivision can be impacted
significantly by our estimates of future home sale revenues, home construction
costs, and development costs per home, all of which are Level 3 inputs. These
estimates of undiscounted future cash flows are dependent on specific market or
sub-market conditions for each subdivision. While we consider available
information to determine what we believe to be our best estimates as of the end
of a reporting period, these estimates are subject to change in future reporting
periods as facts and circumstances change. Local market-specific conditions that
may impact these estimates for a subdivision include:
29--------------------------------------------------------------------------------
Table of Contents
•historical subdivision results, and actual and trending Operating Margin, base
selling prices and home sales incentives;
•forecasted Operating Margin for homes in backlog;
•the intensity of competition within a market or sub-market, including publicly
available home sales prices and home sales incentives offered by our
competitors;
•increased levels of home foreclosures;
•the current sales pace for active subdivisions;
•subdivision specific attributes, such as location, availability and size of
lots in the sub-market, desirability and uniqueness of subdivision location and
the size and style of homes currently being offered;
•potential for alternative home styles to respond to local market conditions;
•changes by management in the sales strategy of a given subdivision; and
•current local market economic and demographic conditions and related trends and
forecasts.
These and other local market-specific conditions that may be present are
considered by personnel in our homebuilding divisions as they prepare or update
the forecasted assumptions for each subdivision. Quantitative and qualitative
factors other than home sales prices could significantly impact the potential
for future impairments. The sales objectives can differ among subdivisions, even
within a given sub-market. For example, facts and circumstances in a given
subdivision may lead us to price our homes with the objective of yielding a
higher sales absorption pace, while facts and circumstances in another
subdivision may lead us to price our homes to minimize deterioration in our
gross margins from home sales, even though this could result in a slower sales
absorption pace. Furthermore, the key assumptions included in our estimated
future undiscounted cash flows may be interrelated. For example, a decrease in
estimated base sales price or an increase in home sales incentives may result in
a corresponding increase in sales absorption pace. Additionally, a decrease in
the average sales price of homes to be sold and closed in future reporting
periods for one subdivision that has not been generating what management
believes to be an adequate sales absorption pace may impact the estimated cash
flow assumptions of a nearby subdivision. Changes in our key assumptions,
including estimated construction and land development costs, absorption pace and
selling strategies could materially impact future cash flow and fair value
estimates. Due to the number of possible scenarios that would result from
various changes in these factors, we do not believe it is possible to develop a
sensitivity analysis with a level of precision that would be meaningful to an
investor.
If the undiscounted future cash flows of a subdivision are less than its
carrying value, the carrying value of the subdivision is written down to its
then estimated fair value. We determine the estimated fair value of each
subdivision either: (1) by determining the present value of the estimated future
cash flows at discount rates that are commensurate with the risk of the
subdivision under evaluation; or (2) assessing the market value of the land in
its current condition by considering the estimated price a willing buyer would
pay for the land (other than in a forced liquidation), and recent land purchase
transactions that we believe are indicators of fair value. The estimated future
cash flows are the same for both our recoverability and fair value assessments.
Factors we consider when determining the discount rate to be used for each
subdivision include, among others:
•the number of lots in a given subdivision;
•the amount of future land development costs to be incurred;
•risks associated with the home construction process, including the stage of
completion for the entire subdivision and the number of owned lots under
construction; and
•the estimated remaining lifespan of the subdivision.
We allocate the impairments recorded between housing completed or under
construction and land and land under development for each impaired subdivision
based upon the status of construction of a home on each lot (i.e., if the lot is
in housing completed or under construction, the impairment for that lot is
recorded against housing completed or under construction). The allocation of
impairment is the same with respect to each lot in a given subdivision. Changes
in management's estimates, particularly the timing and amount of the estimated
future cash inflows and outflows and forecasted average selling prices of homes
to be sold and closed can materially affect any impairment calculation. Because
our forecasted cash flows are impacted significantly by changes in market
conditions, it is reasonably possible that actual results could differ
significantly from those estimates. Please see the "Inventory Impairments"
section for a detailed discussion and analysis of our asset impairments.
If land is classified as held for sale, we measure it at the lower of the
carrying value or fair value less estimated costs to sell. In determining fair
value, we primarily rely upon the most recent negotiated price. If a negotiated
price is not available, we will consider several factors including, but not
limited to, current market conditions, recent comparable sales transactions and
market analysis studies. If the fair value less estimated costs to sell is lower
than the current carrying value, the land is impaired down to its estimated fair
value less costs to sell.
30--------------------------------------------------------------------------------
Table of Contents
Warranty Accrual. Our homes are sold with limited third-party warranties. We record expenses and warranty accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. A warranty accrual is recorded for each home closed based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring. Actual future warranty costs could differ from currently estimated amounts. A 10% change in the historical warranty rates used to estimate our warranty accrual would not result in a material change in our accrual. Insurance Reserves. The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. Historical trends in claim severity and frequency patterns have been inconsistent and we believe they may continue to fluctuate. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves. A 10% increase in both the claim frequency and the average cost per claim used to estimate the reserves would result in an increase in our insurance reserves and an associated increase in expense of approximately$17.7 million . A 10% decrease in both the claim frequency and the average cost per claim would result in a decrease in our insurance reserves and an associated reduction in expense of$16.0 million . Litigation Accruals. In the normal course of business, we are a defendant in claims primarily relating to premises liability, product liability and personal injury claims. These claims seek relief from us under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes. We have accrued for losses that may be incurred with respect to legal claims based upon information provided by our legal counsel, including counsel's on-going evaluation of the merits of the claims and defenses and the level of estimated insurance coverage. Due to uncertainties in the estimation process, actual results could vary from those accruals and could have a material impact on our results of operations. Revenue Recognition for Homebuilding Segments. We recognize home sale revenues from home deliveries when we have satisfied the performance obligations within the sales agreement, which is generally when title to and possession of the home are transferred to the buyer at the home closing date. Revenue from a home delivery includes the base sales price and any purchased options and upgrades and is reduced for any sales price incentives. In certain states where we build, we are not always able to complete certain outdoor features (such as landscaping or pools) prior to closing the home. To the extent these separate deliverables are not complete upon the closing of a home, we defer home sale revenues related to incomplete outdoor features, and recognize that revenue upon completion of the outdoor features. Revenue Recognition for HomeAmerican: Revenues recorded by HomeAmerican primarily reflect (1) origination fees and (2) the corresponding sale, or expected future sale, of a loan, which will include the estimated earnings from either the release or retention of a loan's servicing rights. Origination fees are recognized when a loan is originated. When an interest rate lock commitment is made to a customer, we record the expected gain on sale of the mortgage, plus the estimated earnings from the expected sale of the associated servicing rights, adjusted for a pull-through percentage (which is defined as the likelihood that an interest rate lock commitment will be originated), as revenue. As the interest rate lock commitment gets closer to being originated, the expected gain on the sale of that loan plus its servicing rights is updated to reflect current market value and the increase or decrease in the fair value of that interest rate lock commitment is recorded through revenues. At the same time, the expected pull-through percentage of the interest rate lock commitment to be originated is updated based upon current market conditions and the remaining time until loan origination and, if there has been a change, revenues are adjusted as necessary. After origination, our mortgage loans, which could also include their servicing rights, are sold to third-party purchasers in accordance with sale agreements entered into by us with a third-party purchaser of the loans. We make representations and warranties with respect to the status of loans transferred in the sale agreements. The sale agreements generally include statements acknowledging the transfer of the loans is intended by both parties to constitute a sale. Sale of a mortgage loan has occurred when the following criteria, among others, have been met: (1) fair consideration has been paid for transfer of the loan by a third party in an arms-length transaction, (2) all the usual risks and rewards of ownership that are in substance a sale have been transferred by us to the third party purchaser; and (3) we do not have a substantial continuing involvement with the mortgage loan. 31
--------------------------------------------------------------------------------
Table of Contents
We carry interest rate lock commitments and mortgage loans held-for-sale at fair value.
Home Cost of Sales. Refer to the Note 1, Summary of Significant Accounting
Policies, in the notes to the financial statements for information on the
composition of home cost of sales. When a home is closed, we generally have not
yet paid or incurred all costs necessary to complete the construction of the
home and certain land development costs. At the time of a home closing, we
compare the home construction budgets to actual recorded costs to determine the
additional estimated costs remaining to be paid on each closed home. For amounts
not incurred or paid as of the time of closing a home, we record an estimated
accrual associated with certain home construction and land development costs.
Generally, these accruals are established based upon contracted work which has
yet to be paid, open work orders not paid at the time of home closing, as well
as land completion costs more likely than not to be incurred, and represent
estimates believed to be adequate to cover the expected remaining home
construction and land development costs. We monitor the adequacy of these
accruals on a house-by-house basis and in the aggregate on both a
market-by-market and consolidated basis.
Stock-Based Compensation. ASC Topic 718, Compensation-Stock Compensation ("ASC
718") requires that share-based compensation expense be measured and recognized
at an amount equal to the fair value of share-based payments granted under
compensation arrangements. Determining the appropriate fair value model and
calculating the fair value of stock option awards requires judgment, including
estimating stock price volatility, annual forfeiture rates and the expected life
of an award. For stock option awards granted with just service and/or
performance conditions, we estimate the fair value using a Black-Scholes option
pricing model. For any stock option awards granted that contain a market
condition, we estimate the fair value using a Monte Carlo simulation model. Both
the Black-Scholes option pricing model and Monte Carlo simulation utilize the
following inputs to calculate the estimated fair value of stock options:
(1) closing price of our common stock on the measurement date (generally the
date of grant); (2) exercise price; (3) expected stock option life; (4) expected
volatility; (5) risk-free interest rate; and (6) expected dividend yield rate.
The expected life of employee stock options represents the period for which the
stock options are expected to remain outstanding and is derived primarily from
historical exercise patterns. The expected volatility is determined based on our
review of the implied volatility that is derived from the price of exchange
traded options of the Company. The risk-free interest rate assumption is
determined based upon observed interest rates appropriate for the expected term
of our employee stock options. The expected dividend yield assumption is based
on our historical dividend payouts. We determine the estimated fair value of the
stock option awards on the date they were granted. The fair values of previously
granted stock option awards are not adjusted as subsequent changes in the
foregoing assumptions occur; for example, an increase or decrease in the price
of our common stock. However, changes in the foregoing inputs, particularly the
price of our common stock, expected stock option life and expected volatility,
significantly change the estimated fair value of future grants of stock options.
An annual forfeiture rate is estimated at the time of grant, and revised if necessary, in subsequent periods if the actual forfeiture rate differs from our estimate.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 2, Recently Issued Accounting Standards, in our consolidated financial statements.
32--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
