M.D.C. HOLDINGS, INC. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management's experiences, observations, and analyses. 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" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and this Quarterly Report on Form 10-Q. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues$ 1,367,773 $ 886,758 $ 2,409,631 $ 1,583,843 Home cost of sales (1,051,181) (707,789) (1,865,069) (1,266,436) Gross profit 316,592 178,969 544,562 317,407 Gross margin 23.1 % 20.2 % 22.6 % 20.0 % Selling, general and administrative expenses (128,861) (92,316) (243,854) (181,637) Interest and other income 868 720 1,835 2,609 Other expense (1,090) (2,452) (1,527) (3,789) Homebuilding pretax income 187,509 84,921 301,016 134,590 Financial Services: Revenues 33,318 32,964 78,341 54,850 Expenses (16,440) (12,178) (31,545) (23,107) Other income (expense), net 1,155 5,931 2,042 (6,133) Financial services pretax income 18,033 26,717 48,838 25,610 Income before income taxes 205,542 111,638 349,854 160,200 Provision for income taxes (51,190) (27,242) (84,812) (39,044) Net income$ 154,352 $
84,396
Earnings per share: Basic$ 2.19 $ 1.23 $ 3.76 $ 1.78 Diluted$ 2.11 $ 1.21 $ 3.62 $ 1.73 Weighted average common shares outstanding: Basic 70,291,057 68,057,093 70,044,326 67,775,735 Diluted 72,715,273 69,207,415 72,754,141 69,701,942
Dividends declared per share$ 0.40 $ 0.31 $ 0.77 $ 0.61 Cash provided by (used in): Operating Activities$ 70,041 $ 92,877 $ 12,084 $ 55,704 Investing Activities$ (7,698) $ 42,512 $ (13,447) $ 35,494 Financing Activities$ (97,592) $ 574 $ 238,750 $ (4,822) -22-
-------------------------------------------------------------------------------- Table of Contents Overview Industry Conditions and Outlook for MDC* The demand for our homes remained very strong during the second quarter of 2021, driven by low interest rates, an improving economy and a continued focus on suburban homeownership. In contrast, the supply of new and existing homes remained constrained, due in large part to the underproduction of new homes over the past decade. As a result of this supply-demand imbalance, we continued to raise sales prices in the majority of our communities during the second quarter in order to (1) offset cost increases, which have been significant due to labor and material shortages; (2) reduce our sales absorption rate to keep our backlog at a level that is manageable for our construction personnel and trade partners, and; (3) improve the profitability per home closed given the limits on construction capacity. While our construction cycle times have been negatively impacted by an increased demand for labor and materials, our management team remains focused on minimizing the impact of any such disruptions on our home construction process. To that end, we delivered 2,722 homes during the second quarter, representing a 43% increase from the prior year quarter and an 80% increase from the second quarter of 2019. We ended the quarter in a strong financial position, with total liquidity of$1.91 billion and a debt-to-capital ratio of 37.3%. We continue to strategically deploy capital to grow our lot count and replenish our land pipeline. During the second quarter we acquired 3,686 lots across 66 communities and approved over 5,700 lots for purchase. We control 34,400 lots as ofJune 30, 2021 , which represents a 37% increase year-over-year and provides a strong platform for the future growth of our Company. While we remain confident in the long term growth prospects for the industry, we continue to closely monitor developments related to COVID-19, which are highly uncertain and could adversely impact our operations and financial results in future periods. Three Months EndedJune 30, 2021 For the three months endedJune 30, 2021 , our net income was$154.4 million , or$2.11 per diluted share, a 83% increase compared to net income of$84.4 million , or$1.21 per diluted share, for the same period in the prior year. The increase was driven by our homebuilding operations, which generated pretax income of$187.5 million . This represented an increase of$102.6 million , or 121% from the second quarter of 2020. The increase in homebuilding pretax income was the result of a 54% increase in home sale revenues and a 390 basis point increase in our operating margin. The increase in operating margin was the result of our improved pricing over the last twelve months as well as better operating leverage as we continue to see strong results in our more traditional markets and the results of better scale within some of our smaller markets. Our financial services pretax income decreased$8.7 million or 33% from the prior year period to$18.0 million . The decrease in financial services pretax income was primarily due to$5.0 million of gains on equity securities recognized during the prior year quarter. No such gains or losses were recognized in the current year to date. Our mortgage business experienced a small decrease in pretax income year-over-year due to increased competition in the primary mortgage market, increased compensation related costs and a temporary decrease in the number of mortgages we originated as a percentage of our total home delivered ("Capture Rate"). The dollar value of our net new home orders increased 40% from the prior year period, due to a 14% increase in the number of net new orders and a 24% increase in the average selling price of those orders. The increase in the number of net new orders was due to an increase in the monthly sales absorption rate driven by strong demand during the quarter as noted above. The increase in the average selling price was the result of price increases implemented over the past twelve months. Six Months EndedJune 30, 2021 For the six months endedJune 30, 2021 , our net income was$265.0 million , or$3.62 per diluted share, a 119% increase compared to net income of$121.2 million , or$1.73 per diluted share, for the same period in the prior year. Both our homebuilding and financial services businesses contributed to the increase, as pretax income from our homebuilding operations increased$166.4 million , or 124%, and our financial services pretax income increased$23.2 million , or 91%. The main drivers of the increase in homebuilding pretax income are consistent with the second quarter discussed above. The increase in financial services pretax income was primarily due to our mortgage business, which experienced an increase in loan origination and sales activity driven by the overall increase in volume of our homebuilding operations. Additionally,$8.3 million of net losses on equity securities were recognized in the prior year period, further impacting the year-over-year increase in financial services pretax income. * See "Forward-Looking Statements" below. -23- --------------------------------------------------------------------------------
Table of Contents
Homebuilding
Pretax Income:
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
(Dollars in thousands)
West $ 132,919 $ 48,745 $ 84,174 173 % $ 210,106 $ 85,321 $ 124,785 146 %
Mountain 64,052 41,807 22,245 53 % 109,910 63,319 46,591 74 %
East 10,846 3,073 7,773 253 % 18,681 3,973 14,708 370 %
Corporate (20,308) (8,704) (11,604) (133) % (37,681) (18,023) (19,658) (109) %
Total Homebuilding pretax
income $ 187,509 $ 84,921 $ 102,588 121 % $ 301,016 $ 134,590 $ 166,426 124 %
For the three months ended June 30, 2021 , we recorded homebuilding pretax income
of $187.5 million , an increase of 121% from $84.9 million for the same period in
the prior year. The increase was due to a 54% increase in home sale revenues, a
290 basis point increase in our gross margin from home sales and a 100 basis
point decrease in our selling, general and administrative expenses as a
percentage of revenue.
Our West segment experienced a $84.2 million year-over-year increase in pretax
income, due to a 73% increase in home sales revenue and an improved gross
margin. Our Mountain segment experienced a $22.2 million increase in pretax
income from the prior year, as a result of a 27% increase in home sales revenue
and an improved gross margin. Our East segment experienced a $7.8 million
increase in pretax income from the prior year, due to an improved gross margin
as well as a 49% increase in home sales revenue. Each of our homebuilding
segments also benefited from decreased selling, general and administrative
expenses as a percentage of revenue driven by improved operating leverage. Our
Corporate segment experienced an $11.6 million increase in pretax loss, due
primarily to increases in stock-based and deferred compensation expenses as well
as increased bonus expense.
For the six months ended June 30, 2021 , we recorded homebuilding pretax income
of $301.0 million , an increase of 124% from $134.6 million for the same period
in the prior year. The increase was due to a 52% increase in home sale revenues,
a 260 basis point increase in our gross margin from home sales and a 140 basis
point decrease in our selling, general and administrative expenses as a
percentage of revenue. Commentary on the drivers of the increase in pretax
income in our individual homebuilding segments is consistent with the 2021
second quarter discussion above.
Assets:
June 30, December 31, Change
2021 2020 Amount %
(Dollars in thousands)
West $ 2,083,436 $ 1,855,567 227,869 12 %
Mountain 994,226 905,007 89,219 10 %
East 372,166 274,937 97,229 35 %
Corporate 690,572 470,909 219,663 47 %
Total homebuilding assets $ 4,140,400 $ 3,506,420 $ 633,980 18 %
Total homebuilding assets increased 18% from December 31, 2020 to June 30, 2021 .
Homebuilding assets increased in each of our operating segments largely due to a
greater number of homes completed or under construction as of period-end.
Corporate assets increased as a result of the issuance of $350 million of 2.500%
senior notes in January of this year.
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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.
Three Months Ended June 30,
2021 2020 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 1,672 $ 847,683 $ 507.0 1,017 $ 490,117 $ 481.9 64 % 73 % 5 %
Mountain 711 400,633 563.5 608 316,666 520.8 17 % 27 % 8 %
East 339 119,457 352.4 275 79,975 290.8 23 % 49 % 21 %
Total 2,722 $ 1,367,773 $ 502.5 1,900 $ 886,758 $ 466.7 43 % 54 % 8 %
Six Months Ended June 30,
2021 2020 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 2,948 $ 1,464,294 $ 496.7 1,888 $ 895,615 $ 474.4 56 % 63 % 5 %
Mountain 1,323 725,350 548.3 1,043 539,524 517.3 27 % 34 % 6 %
East 629 219,987 349.7 516 148,704 288.2 22 % 48 % 21 %
Total 4,900 $ 2,409,631 $ 491.8 3,447 $ 1,583,843 $ 459.5 42 % 52 % 7 %
West Segment Commentary
For the three and six months ended June 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the respective periods. This increase was partially offset for the six
months ended June 30, 2021 by a decrease in backlog conversion rates in most of
our markets within this segment. This decrease was due to (1) the construction
status of homes in beginning backlog, which on average were at a more
preliminary stage of construction as compared to the prior year periods and (2)
increased cycle times resulting from extended permitting times and minor supply
chain disruptions. The average selling price of homes delivered increased as a
result of price increases implemented over the last twelve months as well as a
shift in geographic mix of homes delivered from Arizona to Southern California .
These increases were partially offset by a shift in mix to lower priced
communities.
Mountain Segment Commentary
For the three and six months ended June 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the respective periods. This increase was partially offset by a decrease
in backlog conversion rates as a result of (1) the construction status of homes
in beginning backlog, which on average were at a more preliminary stage of
construction as compared to the prior year periods and (2) a lower percentage of
homes both sold and delivered in the respective periods as compared to the prior
year periods. The increase in the average selling price of homes delivered was
the result of price increases implemented over the past twelve months.
East Segment Commentary
For the three and six months ended June 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the respective periods. This increase was partially offset by a decrease
in backlog conversion rates due to a (1) the construction status of homes in
beginning backlog, which on average were at a more preliminary stage of
construction as compared to the prior year periods, (2) increased cycle times
resulting from extended permitting times and minor supply chain disruptions and
(3) a lower percentage of homes both sold and delivered in the respective
periods as compared to the prior year periods. The average selling price of
homes delivered increased as a result of price increases implemented over the
last twelve months as well as a shift in geographic mix of homes delivered to
our mid-Atlantic market.
-25--------------------------------------------------------------------------------- Table of Contents Gross Margin from Home Sales: Our gross margin from home sales for the three months endedJune 30, 2021 , increased 290 basis points year-over-year from 20.2% to 23.1%. Gross margin from home sales increased across each of our segments on both build-to-order and speculative home deliveries driven by price increases implemented across nearly all of our communities over the past twelve months. Our gross margin from home sales in the 2021 second quarter was also positively impacted by a 60 basis point improvement in our capitalized interest in cost of sales as a percentage of home sale revenues. These increases were partially offset by an increase in building costs year-over-year. Our gross margin from home sales for the six months endedJune 30, 2021 , increased 260 basis points year-over-year from 20.0% to 22.6%. The primary drivers of the improved gross margin from home sales for the six months endedJune 30, 2021 are consistent with those noted above for the three months endedJune 30, 2021 . Selling, General and Administrative Expenses: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change (Dollars in thousands) General and administrative expenses$ 61,958 $ 40,419
4.5 % 4.6 % -10 bps 4.9 % 5.4 % -50 bps
Marketing expenses $ 26,832 $ 22,657
2.0 % 2.6 % -60 bps 2.2 % 2.8 % -60 bps
Commissions expenses $ 40,071 $ 29,240
2.9 % 3.3 % -40 bps 3.0 % 3.3 % -30 bps
Total selling, general and administrative
expenses $ 128,861 $ 92,316 $ 36,545 $ 243,854 $ 181,637 $ 62,217
Total selling, general and administrative
expenses as a percentage of home sale
revenues 9.4 % 10.4 % -100 bps 10.1 % 11.5 % -140 bps
General and administrative expenses increased for the three and six months ended
June 30, 2021 due to (1) increased stock-based and deferred compensation
expenses, (2) increased bonus expense and (3) increased salary related expenses
due to higher average headcount during the respective periods.
Marketing expenses increased for the three and six months ended June 30, 2021 as
a result of increased deferred selling amortization and master marketing fees
resulting from increased closings.
Commissions expenses increased for the three and six months ended June 30, 2021
due to the increase in homes sale revenues year-over-year.
-26--------------------------------------------------------------------------------- Table of Contents Other Homebuilding Operating DataNet New Orders and Active Subdivisions: 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. Three Months Ended June 30, 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 1,602$ 850,742 $ 531.0 5.67 1,309$ 574,996 $ 439.3 4.62 22 % 48 % 21 % 23 % Mountain 706 433,793 614.4 4.18 758 362,228 477.9 3.99 (7) % 20 % 29 % 5 % East 406 180,205 443.9 3.56 323 106,436 329.5 3.53 26 % 69 % 35 % 1 % Total 2,714$ 1,464,740 $ 539.7 4.80 2,390$ 1,043,660 $ 436.7 4.23 14 % 40 % 24 % 13 % Six Months Ended June 30, 2021 2020 % Change Monthly Monthly Monthly Dollar Average Absorption Average Absorption Dollar Absorption Homes Value Price Rate * Homes Dollar Value Price Rate * Homes Value Average Price Rate (Dollars in thousands) West 3,377$ 1,791,809 $ 530.6 5.73 2,691$ 1,262,330 $ 469.1 4.88 25 % 42 % 13 % 17 % Mountain 1,717 1,017,585 592.7 5.03 1,451 722,197 497.7 3.76 18 % 41 % 19 % 34 % East 829 354,950 428.2 4.03 647 206,911 319.8 3.58 28 % 72 % 34 % 13 % Total 5,923$ 3,164,344 $ 534.2 5.21 4,789$ 2,191,438 $ 457.6 4.28 24 % 44 % 17 % 22 %
*Calculated as total net new orders (gross orders less cancellations) in period ÷ average active communities during period ÷ number of months in period.
Average Active Subdivisions Average Active Subdivisions
Active Subdivisions Three Months Ended Six Months Ended
June 30, % June 30, % June 30, %
2021 2020 Change 2021 2020 Change 2021 2020 Change
West 91 96 (5) % 94 95 (1) % 98 92 7 %
Mountain 55 63 (13) % 56 63 (11) % 57 64 (11) %
East 41 33 24 % 38 31 23 % 34 30 13 %
Total 187 192 (3) % 188 189 (1) % 189 186 2 %
West Segment Commentary
For the three and six months ended June 30, 2021 , the increase in net new orders
was due to an increase in the monthly sales absorption rate, most notably in our
California , Oregon and Washington markets. For the six months ended June 30,
2021 , the increase in net new orders also benefited from an increase in average
active subdivisions year-over-year. The increase in average selling price was
due to price increases implemented over the past twelve months within nearly all
of our communities. This increase was slightly offset by a shift in mix to lower
priced communities.
Mountain Segment Commentary
For the three months ended June 30, 2021 , the decrease in net new orders was due
to a decrease in average active subdivisions within our Colorado markets. This
decrease was partially offset by an increase in the monthly sales absorption
rate in our Colorado markets.
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Table of Contents
For the the six months ended
For the three and six months ended
East Segment Commentary
For the three months ended June 30, 2021 , the increase in net new orders was
primarily driven by an increase in average active subdivisions within each of
our Florida and mid-Atlantic markets.
For the six months ended
For the three and six months endedJune 30, 2021 , the increase in average selling price was due to price increases implemented over the last twelve months within nearly all of our communities. Additionally, we experienced a shift in mix within several markets to higher priced communities. Cancellation Rate: Cancellations
as a Percentage of Homes in Beginning Backlog
2021 2020
Three Months Ended
March 31, June 30, March 31, June 30,
West 7 % 5 % 15 % 14 %
Mountain 8 % 5 % 22 % 20 %
East 13 % 9 % 23 % 22 %
Total 8 % 6 % 18 % 17 %
Our cancellations as a percentage of homes in beginning backlog to start the
quarter ("cancellation rate") decreased year-over-year in each of our segments.
The cancellation rate in the first and second quarter of 2020 was negatively
impacted by the pandemic.
Backlog:
June 30,
2021 2020 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 4,139 $ 2,204,500 $ 532.6 2,826 $ 1,336,251 $ 472.8 46 % 65 % 13 %
Mountain 2,412 1,426,496 591.4 1,619 816,559 504.4 49 % 75 % 17 %
East 1,127 482,736 428.3 698 220,362 315.7 61 % 119 % 36 %
Total 7,678 $ 4,113,732 $ 535.8 5,143 $ 2,373,172 $ 461.4 49 % 73 % 16 %
At June 30, 2021 , we had 7,678 homes in backlog with a total value of
$4.1 billion . This represented a 49% increase in the number of homes in backlog
and a 73% increase in the dollar value of homes in backlog from June 30, 2020 .
The increase in the number of homes in backlog is primarily a result of the
year-over-year increase in net new orders over the past nine months. The
increase in the average selling price of homes in backlog is due to price
increases implemented over the past twelve months in nearly all of our
communities as well as a shift in our net new order mix in our East segment as
discussed above. Our ability to convert backlog into closings could be
negatively impacted in future periods by the pandemic, the extent to which is
highly uncertain and depends on future developments.
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Homes Completed or Under Construction (WIP lots):
June 30, %
2021 2020 Change
Unsold:
Completed 19 109 (83) %
Under construction 214 191 12 %
Total unsold started homes 233 300 (22) %
Sold homes under construction or completed 6,655 3,573 86 %
Model homes under construction or completed 502 502 - %
Total homes completed or under construction 7,390 4,375 69 %
The increase in sold homes under construction or completed is due to the
increase in the number of homes in backlog year-over-year noted above. Total
unsold started homes have decreased year-over-year due to the strong demand for
new homes.
Lots Owned and Optioned (including homes completed or under construction):
June 30, 2021 June 30, 2020
Total
Lots Lots Lots Lots %
Owned Optioned Total Owned Optioned Total Change
West 13,265 4,729 17,994 9,364 2,619 11,983 50 %
Mountain 6,599 4,174 10,773 6,076 2,667 8,743 23 %
East 3,636 1,997 5,633 2,260 2,041 4,301 31 %
Total 23,500 10,900 34,400 17,700 7,327 25,027 37 %
Our total owned and optioned lots at June 30, 2021 were 34,400, which was an 37%
increase year-over-year. We believe that our total lot supply, coupled with our
planned acquisition activity, can support growth in future periods. See
"Forward-Looking Statements" below.
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Financial Services
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
(Dollars in thousands)
Financial services
revenues
Mortgage operations $ 23,321 $ 24,363 $ (1,042) (4) % $ 58,486 $ 38,988 $ 19,498 50 %
Other 9,997 8,601 1,395 16 % 19,855 15,862 3,993 25 %
Total financial services $ 33,318 $ 32,964 $ 354 1 % $ 78,341 $ 54,850 $ 23,491 43 %
revenues
Financial services pretax
income
Mortgage operations $ 14,088 $ 17,506 (3,418) (20) % $ 40,127 $ 25,749 $ 14,379 56 %
Other 3,945 9,211 (5,266) (57) % 8,711 (139) $ 8,850 N/M
Total financial services
pretax income (loss) $ 18,033 $ 26,717 (8,684)
(33) %
91 %
For the three months endedJune 30, 2021 , our financial services pretax income decreased by$8.7 million , or 33% from the same period in the prior year. The decrease was due to both our mortgage operations as well as other financial services. The decrease in our mortgage operations was due to increased competition in the primary mortgage market, increased compensation related costs and a temporary decrease in our Capture Rate. The decrease in other financial services was primarily the result of$5.0 million of gains on equity securities recognized during the prior year quarter. For the six months endedJune 30, 2021 , our financial services pretax income increased$23.2 million , or 91% from the same period in the prior year. The increase was due to both our mortgage operations as well as other financial services. The increase in our mortgage operations was due to an increase in loan origination and sales activity driven by the overall increase in volume of our homebuilding operations. The increase in other financial services was primarily the result of$8.3 million of net losses on equity securities recognized during the prior year period. -30- -------------------------------------------------------------------------------- Table of Contents The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. Three Months Ended % or Six Months Ended June 30, Percentage June 30, % or 2021 2020 Change 2021 2020 Percentage Change (Dollars in thousands) Total Originations (including transfer loans): Loans 1,564 1,336 17 % 3,132 2,365 32 % Principal$ 643,129 $ 497,566 29 %$ 1,259,134 $ 876,872 44 % Capture Rate Data: Capture rate as % of all homes delivered 57 % 69 % (12) % 64 % 68 % (4) % Capture rate as % of all homes delivered (excludes cash sales) 60 % 72 % (12) % 66 % 71 % (5) % Mortgage Loan Origination Product Mix: FHA loans 18 % 21 % (3) % 19 % 21 % (2) % Other government loans (VA & USDA) 18 % 21 % (3) % 18 % 22 % (4) % Total government loans 36 % 42 % (6) % 37 % 43 % (6) % Conventional loans 64 % 58 % 6 % 63 % 57 % 6 % 100 % 100 % - % 100 % 100 % - % Loan Type: Fixed rate 100 % 100 % - % 100 % 99 % 1 % ARM - % - % - % - % 1 % (1) % Credit Quality: Average FICO Score 740 737 - % 739 736 - % Other Data: ` ` Average Combined LTV ratio 84 % 84 % - % 85 % 84 % 1 % Full documentation loans 100 % 100 % - % 100 % 100 % - % Loans Sold to Third Parties: Loans 1,701 1,229 38 % 3,287 2,428 35 % Principal$ 689,530 $ 460,111 50 %$ 1,300,428 $ 898,213 45 % Income Taxes Our overall effective income tax rates were 24.9% and 24.2% for the three and six months endedJune 30, 2021 and 24.4% for both the three and six months endedJune 30, 2020 . The rates for the three and six months endedJune 30, 2021 resulted in income tax expense of$51.2 million and$84.8 million , respectively, compared to income tax expense of$27.2 million and$39.0 million for the three and six months endedJune 30, 2020 , respectively. The year-over-year increase in the effective tax rate for the three months endedJune 30, 2021 , was primarily due to an increase in pretax income, in addition to a decrease in the amount of executive compensation that is deductible under Internal Revenue Code Section 162(m). -31-
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting 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" below.
Our critical accounting estimates and policies have not changed from those
reported in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2020 .
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, Revolving Credit Facility and
Mortgage Repurchase Facility (both defined below). Additionally, we have an
existing effective shelf registration statement that allows us to issue equity,
debt or hybrid securities up to $2.0 billion . Following the issuance of $350
million of 2.500% senior notes on January 11, 2021 , $1.35 billion remains on our
effective shelf registration statement.
Capital Resources
Our capital structure is primarily a combination of: (1) permanent financing,
represented by stockholders' equity; (2) long-term financing, represented by our
5.500% senior notes due 2024, 3.850% senior notes due 2030, 2.500% senior notes
due 2031 and our 6.000% senior notes due 2043; (3) our Revolving Credit Facility
(defined below); and (4) our Mortgage Repurchase Facility (defined below).
Because of our current balance of cash, cash equivalents, 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" below.
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.
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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 termination 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 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 of June 30, 2021 .
We incur costs associated with unused commitment fees pursuant to the terms of
the Revolving Credit Facility. At June 30, 2021 and December 31, 2020 , there
were $37.7 million and $25.1 million , respectively, in letters of credit
outstanding, which reduced the amounts available to be borrowed under the
Revolving Credit Facility. At June 30, 2021 and December 31, 2020 , we had $10.0
million and $10.0 million , respectively, outstanding under the Revolving Credit
Facility. As of June 30, 2021 , availability under the Revolving Credit Facility
was approximately $1.15 billion .
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement
(the "Mortgage Repurchase Facility") with U.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 of
November 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 on
September 24, 2020 , March 25, 2021 and May 20, 2021 to adjust the commitments to
purchase for specific time periods. As part of the amendments, the commitments
to purchase (subject to increase by up to $75 million under certain conditions)
were increased as follows: (1) $200 million for the periods December 22, 2020
through February 4, 2021 and December 21, 2021 through February 3, 2022 , (2)
$175 million for the periods March 25, 2021 through April 22, 2021 , June 23,
2021 through July 22, 2021 and September 22, 2021 through October 21, 2021 and
(3) $150 million for the period March 23, 2022 through April 21, 2022 . The
Mortgage Repurchase Facility terminates on May 19, 2022 .
The maximum aggregate commitment of the Mortgage Repurchase Facility was
temporarily increased by $25 million on June 28, 2021 effective through July 22,
2021 . The maximum aggregate commitment of the Mortgage Repurchase Facility was
temporarily increased by $50 million on December 28, 2020 effective through
January 27, 2021 . At June 30, 2021 and December 31, 2020 , HomeAmerican had
$164.7 million and $202.4 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.
Advances under the Mortgage Repurchase Facility carry a price range that is
based on a LIBOR rate or successor benchmark rate.
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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 Tangible Net Worth requirement, (ii) a maximum Adjusted
Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and
(iv) a minimum Liquidity requirement. The foregoing capitalized terms are
defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in
compliance with the representations, warranties and covenants included in the
Mortgage Repurchase Facility as of June 30, 2021 .
Dividends
During the three months ended June 30, 2021 and 2020, we paid cash dividends of
$0.40 per share and $0.31 per share, respectively.
MDC Common Stock Repurchase Program
At June 30, 2021 , 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 during the
three months ended June 30, 2021 .
Consolidated Cash Flow
During the six months ended June 30, 2021 and 2020, we generated $12.1 million
and $55.7 million of cash from operating activities, respectively. The most
significant source of cash provided by operating activities in both periods was
net income. Cash provided by the change in accounts payable and accrued
liabilities for the six months ended June 30, 2021 and 2020 was $70.6 million
and $40.5 million , respectively, due to the increased construction spend during
both periods as a result of the year-over-year increases in home deliveries as
well as the increase in homes in inventory at both period ends. Cash provided
from the sale of mortgage loans for the six months ended June 30, 2021 and 2020
was $46.5 million and $23.5 million , respectively, resulting from the seasonal
nature of our business and the above average level of loan originations that
occur during the month of December. Cash provided by the decrease in land and
land under development for the six months ended June 30, 2021 and 2020, was
$36.4 million and $94.9 million , respectively. The level of lot acquisitions
during the six months ended June 30, 2020 was negatively impacted by the
pandemic. Cash used to increase housing completed or under construction for the
six months ended June 30, 2021 and 2020 was $385.7 million and $233.8 million ,
respectively, as homes in inventory increased significantly during both periods.
Cash used to increase trade and other receivables for the six months ended June
30, 2021 and 2020 was $57.1 million and $23.5 million , respectively, due to the
year-over-year increases in home deliveries during both periods.
During the six months ended June 30, 2021 , net cash used in investing activities
was $13.4 million compared with net cash provided by investing activities of
$35.5 million in the prior year period. This difference primarily relates to
$48.5 million in net cash provided by the sale of marketable securities during
the six months ended June 30, 2020 . Cash used to purchase property and equipment
remained consistent year-over-year.
During the six months ended June 30, 2021 , net cash provided by financing
activities was $238.8 million compared with cash use of $4.8 million in the
prior year period. The primary driver of this increase in cash provided by
financing activities was the proceeds from the issuance of senior notes of
$347.7 million during the six months ended June 30, 2021 .
Off-Balance Sheet Arrangements
Lot Option Purchase Contracts. In the ordinary course of business, we enter into
lot option purchase contracts in order to procure lots for the construction of
homes. Lot option contracts enable us to control lot positions with a minimal
capital investment, which substantially reduces the risks associated with land
ownership and development. At June 30, 2021 , we had deposits of $37.5 million in
the form of cash and $12.2 million in the form of letters of credit that secured
option contracts to purchase 10,900 lots for a total estimated purchase price of
$812.6 million .
Surety Bonds and Letters of Credit. At June 30, 2021 , we had outstanding surety
bonds and letters of credit totaling $295.5 million and $151.7 million ,
respectively, including $114.0 million in letters of credit issued by
HomeAmerican. The estimated cost to complete obligations related to these bonds
and letters of credit was approximately $140.2 million and $107.5 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.
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Table of Contents We have made no material guarantees with respect to third-party obligations.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
The impact of inflation and changing prices have not changed materially from the
disclosure in our
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as statements
made by us in periodic press releases, oral statements made by our officials in
the course of presentations about the Company and conference calls in connection
with quarterly earnings releases, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements regarding our business, financial
condition, results of operations, cash flows, strategies and prospects. These
forward-looking statements may be identified by terminology such as "likely,"
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of such
terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained in this
Report are reasonable, we cannot guarantee future results. These statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by the forward-looking statements. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in subsequent reports on Forms
10-K, 10-Q and 8-K should be considered. Additionally, information about issues
that could lead to material changes in performance and risk factors that have
the potential to affect us is contained under the caption "Risk Factors" in Item
1A of our Annual Report on Form 10-K for the year ended December 31, 2020 and
Item 1A of Part II of this Quarterly Report on Form 10-Q.
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