News Column

MDC HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 1, 2014

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013 and this Quarterly Report on Form 10-Q. Three Months Ended March 31, 2014 2013 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues $ 318,534$ 331,748 Home cost of sales (259,478 ) (274,076 ) Gross margin 59,056 57,672 Gross margin % 18.5 % 17.4 % Selling, general and administrative expenses (48,341 ) (48,201 ) Interest and other income 13,549 6,549 Interest expense (685 ) (817 ) Other expense (614 ) (356 ) Loss on early extinguishment of debt (9,412 ) - Homebuilding pretax income 13,553 14,847 Financial Services: Revenues 9,223 12,506 Expenses (4,924 ) (5,642 ) Interest and other income 788 875 Financial services pretax income 5,087 7,739 Income before income taxes 18,640 22,586 Provision for income taxes (7,136 ) (70 ) Net income $ 11,504$ 22,516 Earnings per share: Basic $ 0.24$ 0.46 Diluted $ 0.23$ 0.45 Weighted average common shares outstanding: Basic 48,585,757 48,342,145 Diluted 48,854,675 48,922,335 Dividends declared per share $ 0.25 $ - Cash provided by (used in): Operating Activities $ (114,248 )$ (55,418 ) Investing Activities $ 56,342$ (107,069 ) Financing Activities $ (46,613 )$ 218,072 - 26 -

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Overview For the 2014 first quarter, we recorded pretax income of $18.6 million, a year-over-year decrease of $3.9 million. Excluding early extinguishment of debt charges of $9.4 million1, our pretax earnings increased 24% year-over-year. Other items impacting the year-over-year improvement in pretax results included a 110 basis point improvement in our gross margin percentage to 18.5% and a $6.5 million net realized gain from the sale of the marketable securities, which were slightly offset by a 4% decline in home sale revenues and a $2.7 million reduction in pretax income from our financial services operations. We continued to see significant volatility in the demand for new homes. Early in the quarter, our new home orders were negatively impacted by slow overall market conditions, similar to the last half of 2013, as well as adverse weather conditions in certain markets in our East segment. In contrast, we saw significant improvements in the latter part of the quarter that drove a year-over-year improvement in our total dollar value of new home orders for the full quarter, despite our unit number of orders falling slightly short of last year. Our net income was $11.5 million, or $0.23 per diluted share, for the 2014 first quarter, compared to net income of $22.5 million, or $0.45 per diluted share for the year earlier period. The year-over-year decline was driven primarily by a $9.4 million charge related to the early extinguishment of debt and an increase in income tax expense to $7.1 million from $0.1 million a year ago, partially offset by a $7.0 million increase in homebuilding interest and other income. We had a slight increase in total gross margin to $59.1 million from $57.7 million a year ago, despite a 14% decrease in the number of homes delivered for the 2014 first quarter. The decrease in homes delivered was driven by a 23% year-over-year decrease in number of homes in backlog to start the quarter, partially offset by an increase in the number of homes that were both sold and delivered during the quarter. However, the impact of the lower deliveries was more than offset by a 12% increase in our average selling price of homes delivered and a 110 basis point increase in our gross margin percentage, both largely the result of price increases achieved during much of 2013, and, to a lesser extent, the geographic mix of homes delivered. Our dollar value of net new home orders was up 6% year-over-year to $466.0 million for the 2014 first quarter as a result of an 11% increase in the average price of new orders, which was driven by our ability to increase prices in most of our communities during 2013. The impact of the average price improvement was partly offset by a 5% decrease in the number of orders generated to 1,236 homes. We believe that our prospects for improving net orders in future quarters is strengthened by our community count, which increased by 13% to 157 at March 31, 2014 from 139 at March 31, 2013, our first year-over-year increase since the 2012 second quarter. During the quarter, we redeemed $250 million of senior notes due December 2014, which resulted in an early extinguishment of debt charge of $9.4 million. We also increased inventories by $139.1 million, including the purchase of nearly 1,300 lots in 46 communities during the 2014 first quarter, resulting in a 26% year-over-year increase in the total supply of lots owned and under option at March 31, 2014. To fund both the early redemption of our senior notes due December 2014 and the increase in inventories, we (1) used proceeds from the issuance of $250 million of 10-year senior notes due in 2024, and (2) sold a portion of our marketable securities portfolio. The sale of the marketable securities resulted in a net realized gain of $6.5 million, which drove an increase in our homebuilding interest and other income to $13.5 million for the 2014 first quarter as compared with $6.5 million for the same quarter of 2013. Including our $450 million revolving credit facility, which we entered into in the 2013 fourth quarter, we ended the 2014 first quarter with overall liquidity of $1.1 billion, up 22% over the prior year. We believe that this level of liquidity provides the appropriate balance for us between supporting potential growth opportunities and providing protection from the volatile and cyclical nature of the housing market.

-------------------------------------------------------------------------------- 1 Pretax income excluding early extinguishment of debt charges is a non-GAAP financial measure. We believe this information is meaningful as it improves the comparability between the first quarters of 2014 and 2013. - 27 - --------------------------------------------------------------------------------

Homebuilding Pretax Income Three Months Ended March 31, Change 2014 2013 Amount % (Dollars in thousands) West $ 12,650$ 10,611$ 2,039 19 % Mountain 7,359 12,996 (5,637 ) (43) % East 2,661 1,528 1,133 74 % Corporate (9,117 ) (10,288 ) 1,171 (11) % Total homebuilding pretax income $ 13,553$ 14,847$ (1,294 ) (9) % For the 2014 first quarter, we reported homebuilding pretax income of $13.6 million, compared to pretax income of $14.8 million for the first quarter of 2013. The $1.3 million decline was driven primarily by the $9.4 million charge related to the early redemption of our senior notes due December 2014, which was largely offset by a 110 basis point improvement in our gross margin from home sales and $7.0 million increase in interest and other income related to the net realized gain on the sale of marketable securities. Our West and East segments each showed improvements in pretax results for the three months ended March 31, 2014 as compared with the same period in 2013. In the East, the improvement was primarily the result of increased home sale revenues, while in the West the increase was mostly the result of an improvement in gross margin from home sales. Pretax income in our Mountain segment decreased primarily due to a 24% decline in home sale revenues resulting from a 27% drop in new home deliveries. For our Corporate segment, higher interest and other income and lower incentive-based and stock-based compensation expense partially offset the $9.4 million early extinguishment of debt charge. Assets March 31, December 31, Change 2014 2013 Amount % (Dollars in thousands) West $ 837,792$ 760,450$ 77,342 10 % Mountain 467,630 418,796 48,834 12 % East 325,042 297,627 27,415 9 % Corporate 809,656 951,809 (142,153 ) (15) % Total homebuilding assets $ 2,440,120$ 2,428,682$ 11,438 0 % Homebuilding assets in our West, Mountain and East segments increased from December 31, 2013 as higher construction and land acquisition activity drove an increase in our inventory balances. Assets in our Corporate segment declined by $142.2 million primarily due to the early redemption of $250 million of senior notes and the incremental investment of Corporate funds into assets in each of our homebuilding operating segments, partially offset by our January issuance of $250 million of new senior notes. Home sale revenues Three Months Ended March 31, Change 2014 2013 Amount % (Dollars in thousands) West $ 136,422$ 134,979$ 1,443 1 % Mountain 100,945 133,377 (32,432 ) (24) % East 81,167 63,392 17,775 28 % Total home and revenues $ 318,534$ 331,748$ (13,214 ) (4) %



The decrease in home sale revenues for the quarter ended March 31, 2014 was driven primarily by a 14% decrease in new home deliveries, which was partially offset by a 12% increase in our average selling price.

- 28 - -------------------------------------------------------------------------------- New Home Deliveries Three Months Ended March 31, 2014 2013 % Change Dollar Average Price Dollar Average Price Dollar Average Price Homes Value Homes Value Homes Value (Dollars in thousands) Arizona 125 $ 32,672 $ 261.4 140 $ 33,161 $ 236.9 (11) % (1) % 10 % California 92 41,100 446.7 146 49,589 339.7 (37) % (17) % 31 % Nevada 120 39,937 332.8 133 32,745 246.2 (10) % 22 % 35 % Washington 64 22,713 354.9 61 19,484 319.4 5 % 17 % 11 % West 401 136,422 340.2 480 134,979 281.2 (16) % 1 % 21 % Colorado 248 93,383 376.5 304 113,488 373.3 (18) % (18) % 1 % Utah 24 7,562 315.1 67 19,889 296.9 (64) % (62) % 6 % Mountain 272 100,945 371.1 371 133,377 359.5 (27) % (24) % 3 % Maryland 77 36,905 479.3 54 21,704 401.9 43 % 70 % 19 % Virginia 57 27,267 478.4 63 29,119 462.2 (10) % (6) % 4 % Florida 66 16,995 257.5 50 12,569 251.4 32 % 35 % 2 % East 200 81,167 405.8 167 63,392 379.6 20 % 28 % 7 % Total 873 $ 318,534 $ 364.9 1,018 $ 331,748 $ 325.9 (14) % (4) % 12 % The decline in the dollar value of new home deliveries was driven by a 13% year-over-year decrease in the dollar value of beginning backlog, partially offset by a year-over-year increase in the number of homes both sold and delivered during the quarter, which was the direct result of our decision to increase our inventory of speculative homes during the last half of 2013. The most significant decrease in the dollar value of home deliveries occurred in Utah, as the dollar value of beginning backlog in this market declined more than any of our other markets. Conversely, the dollar value of homes delivered in Maryland, Florida, Nevada and Washington increased during the 2014 first quarter. All four markets increased the number of homes both sold and delivered during the quarter compared to the prior year. Maryland, Nevada and Washington also benefited from a higher rate of deliveries from beginning backlog, whereas Florida benefited from a 61% increase in the dollar value of its beginning backlog.



The increase in average selling price of deliveries during the 2014 first quarter occurred in all of our segments and was driven largely by price increases implemented during 2013. The mix of homes closed in each market also contributed to the increased average selling price, especially in Nevada, California and Maryland.

Gross Margin Gross margin from home sales for the 2014 first quarter was 18.5%, compared to 17.4% for both the year-earlier period and the 2013 fourth quarter. The year-over-year increase was primarily attributable to our focus on increasing pricing during much of 2013. On a sequential basis, gross margin from home sales increased during the 2014 first quarter due to a shift in the mix of homes closed, including a higher percentage of deliveries from our Nevada division, which has a gross margin percentage that is higher than the company-wide average and experienced construction delays that temporarily decreased its contribution of closings in the 2013 fourth quarter. Our gross margin percentage excluding interest in cost of sales for the three months ended March 31, 2014 was 22.2%, compared to 20.4% for the same period in 2013. The table set forth below is a reconciliation of our gross margin from home sales to gross margin from home sales excluding interest in cost of sales, which is a non-GAAP measure. - 29 -

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Three Months Ended March 31, 2014 Gross Margin % 2013 Gross Margin % (Dollars in thousands) Gross Margin from Home Sales $ 59,056 18.5 % $ 57,672 17.4 % Add: Interest in Cost of Sales 11,724



9,874

Gross Margin Excluding Interest in Cost of Sales $ 70,780 22.2 % $ 67,546 20.4 % (1) Gross margin from home sales excluding interest in cost of sales is a



non-GAAP financial measure. We believe this information is meaningful as it

isolates the impact that interest has on our Gross Margin from Home Sales

and permits investors to make better comparisons with our competitors, who

also break out and adjust gross margins in a similar fashion. Inventory Impairments



We did not recognize any impairments for the three months ended March 31, 2014 or 2013.

The following table shows the number of subdivisions and carrying value of the inventory we tested for impairment during the first quarter of 2014 and 2013. Total Carrying Value Carrying Value Subdivisions of Inventory of Impaired Fair Value of Number of Tested for Tested for Inventory Before Inventory Subdivisions Number of Lots Impairment Impairment Impairment at Inventory After Impaired During Impaired During Three Months Ended During Quarter During Quarter



Quarter End Impairments Impairments the Quarter

the Quarter

(Dollars in thousands) March 31, 2014 16 $ 37,404 $ - $ - $ - - - March 31, 2013 17 $ 42,919 $ - $ - $ - - -



Selling, General and Administrative ("SG&A") Expenses

Our SG&A rate increased 70 basis points from 14.5% in the 2013 first quarter to 15.2% in the 2014 first quarter. The increase in our SG&A rate was attributable mostly to the 4% decline in home sale revenues and to a lesser extent due to an increase in marketing expenses resulting from our recent focus on increasing active community count. Interest and Other Income Our interest and other income increased $7.0 million from the 2013 first quarter to $13.5 million. The increase was primarily driven by the sale of various debt and equity marketable securities for a net realized gain of $6.5 million. Early Extinguishment of Debt During the quarter, we redeemed $250 million of senior notes due December 2014, which resulted in an early extinguishment of debt charge of $9.4 million. We funded the early redemption of our senior notes using proceeds from the issuance of $250 million of 10-year senior notes due in 2024 and from selling a portion of our marketable securities portfolio. - 30 - --------------------------------------------------------------------------------



Other Homebuilding Operating Data

Net New Orders: Three Months Ended March 31, 2014 2013 % Change Monthly Monthly Monthly Dollar Absorption Absorption Absorption Homes Value Average Price Rate * Homes Dollar Value Average Price Rate * Homes



Dollar Value Average Price Rate *

(Dollars in thousands) Arizona 191 $ 52,392 $ 274.3 2.32 127 $ 30,293 $ 238.5 2.82 50 % 73 % 15 % (18) % California 153 75,421 492.9 4.08 164 60,401 368.3 4.37 (7) % 25 % 34 % (7) % Nevada 150 44,861 299.1 3.16 170 47,042 276.7 5.15 (12) % (5) % 8 % (39) % Washington 92 34,017 369.8 2.67 93 28,546 306.9 3.01 (1) % 19 % 20 % (11) % West 586 206,691 352.7 2.90 554 166,282 300.1 3.78 6 % 24 % 18 % (23) % Colorado 396 157,613 398.0 3.52 418 147,589 353.1 3.57 (5) % 7 % 13 % (1) % Utah 43 14,481 336.8 2.61 65 20,238 311.4 1.92 (34) % (28) % 8 % 36 % Mountain 439 172,094 392.0 3.40 483 167,827 347.5 3.20 (9) % 3 % 13 % 6 % Maryland 68 31,347 461.0 1.35 90 38,450 427.2 1.67 (24) % (18) % 8 % (19) % Virginia 59 29,893 506.7 1.87 93 48,656 523.2 2.52 (37) % (39) % (3) % (26) % Florida 84 25,930 308.7 2.19 80 19,981 249.8 1.93 5 % 30 % 24 % 13 % East 211 87,170 413.1 1.76 263 107,087 407.2 1.99 (20) % (19) % 1 % (12) % Total 1,236 $ 465,955 $ 377.0 2.74 1,300 $ 441,196 $ 339.4 3.03 (5) % 6 % 11 % (10) %



* Calculated as total net new orders in period average active communities during period number of months in period

The dollar value of our net new orders increased 6% year-over-year, driven largely by an 11% increase in our average selling price that was partially offset by a 5% decline in units ordered. The decrease in units ordered resulted from a 10% decline in our monthly sales absorption rate to 2.74 per community as demand across most markets was slower than the prior year period, especially early in the quarter, similar to the conditions experienced during the last half of 2013. The absorption rate in Maryland and Virginia was also impacted by extreme winter weather conditions, which slowed traffic to our subdivisions in those markets. In Nevada, which experienced the most significant year-over-year decline in absorption rate, demand was impacted by higher prices as this market has experienced the highest year-over-year increase in average selling price for homes delivered during the quarter. In addition, an increase in the average number of active subdivisions partially offset the impact of the overall decline in the Company absorption rate, especially in Arizona. The increase in average selling price of orders during the quarter occurred in almost all of our segments and was driven largely by price increases implemented during much of 2013. The mix of homes closed in each market also contributed to the increased average selling price, especially in California and Florida. - 31 - --------------------------------------------------------------------------------

Active Subdivisions: March 31, % 2014 2013 Change Arizona 31 16 94 % California 15 12 25 % Nevada 17 9 89 % Washington 11 12 (8) % West 74 49 51 % Colorado 38 36 6 % Utah 6 9 (33) % Mountain 44 45 (2) % Maryland 15 19 (21) % Virginia 10 12 (17) % Florida 14 14 0 % East 39 45 (13) % Total 157 139 13 % Average for quarter ended 150 143 5 % At March 31, 2014, we had 157 active subdivisions, a 13% increase from 139 active subdivisions at March 31, 2013 and an increase of 8% from December 31, 2013. The year-over-year increase in active subdivisions at March 31, 2014 was our first since the 2012 second quarter and was driven primarily by significant land acquisition activity over the past 18 months, particularly in our West markets. As a result of this activity, we have had two consecutive quarters of sequential active subdivision increases. Cancellation Rate: Three Months Ended March 31, Change in 2014 2013 Percentage Arizona 19 % 22 % (3) % California 22 % 19 % 3 % Nevada 20 % 22 % (2) % Washington 16 % 11 % 5 % West 19 % 20 % (1) % Colorado 15 % 16 % (1) % Utah 12 % 16 % (4) % Mountain 15 % 16 % (1) % Maryland 28 % 22 % 6 % Virginia 27 % 21 % 6 % Florida 22 % 20 % 2 % East 25 % 21 % 4 % Total 19 % 18 % 1 % Our cancellation rate for the three months ended March 31, 2014 was 19%, nearly unchanged from 18% in the prior year period. The main driver for the slight increase in our cancellation rate was due to a 4% reduction in the gross new home orders (before cancellations), as our total cancellations remained relatively consistent year-over-year. Our Maryland and Virginia markets in our East segment had the greatest increases in cancellation rate due to significant declines in the number of homes sold during the quarter, as compared to the same period in the prior year. - 32 -

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Backlog: March 31, 2014 2013 % Change Dollar Dollar Dollar Homes Value Average Price Homes Value Average Price Homes Value Average Price (Dollars in thousands) Arizona 226 $ 63,587 $ 281.4 137 $ 32,224 $ 235.2 65 % 97 % 20 % California 208 106,121 510.2 247 89,688 363.1 (16) % 18 % 41 % Nevada 170 53,490 314.6 241 64,216 266.5 (29) % (17) % 18 % Washington 74 27,427 370.6 111 36,118 325.4 (33) % (24) % 14 % West 678 250,625 369.7 736 222,246 302.0 (8) % 13 % 22 % Colorado 565 237,413 420.2 584 212,109 363.2 (3) % 12 % 16 % Utah 45 15,232 338.5 79 25,556 323.5 (43) % (40) % 5 % Mountain 610 252,645 414.2 663 237,665 358.5 (8) % 6 % 16 % Maryland 120 57,871 482.3 219 95,970 438.2 (45) % (40) % 10 % Virginia 105 53,278 507.4 215 111,823 520.1 (51) % (52) % (2) % Florida 112 36,852 329.0 94 25,350 269.7 19 % 45 % 22 % East 337 148,001 439.2 528 233,143 441.6 (36) % (37) % (1) % Total 1,625 $ 651,271 $ 400.8 1,927 $ 693,054 $ 359.7 (16) % (6) % 11 % We ended the 2014 first quarter with 1,625 homes in backlog, with an estimated sales value of $651.3 million, compared with a backlog of 1,927 homes with an estimated sales value of $693.1 million at March 31, 2013. The decline in our backlog was due primarily to lower backlog at the beginning of 2014 as compared to 2013.



Homes Completed or Under Construction (WIP lots):

March 31, % 2014 2013 Change Unsold: Completed 484 222 118 % Under construction 740 514 44 % Total unsold started homes (speculative homes) 1,224 736 66 % Sold homes under construction or completed 1,245 1,345 (7) % Model homes 258 221 17 % Total homes completed or under construction 2,727 2,302 18 % Our total homes completed or under construction increased 18% to 2,727 at March 31, 2014 from 2,302 at March 31, 2013, primarily relating to our deliberate effort to start more speculative homes in the latter half of 2013 due to higher homebuyer demand for speculative homes. - 33 - --------------------------------------------------------------------------------



Lots Owned and Optioned (including homes completed or under construction):

March 31, 2014 March 31, 2013 Total % Lots Owned Lots Optioned Total Lots Owned Lots Optioned Total Change Arizona 2,861 40 2,901 2,146 40 2,186 33 % California 1,779 23 1,802 997 - 997 81 % Nevada 1,591 290 1,881 1,442 39 1,481 27 % Washington 687 140 827 493 168 661 25 % West 6,918 493 7,411 5,078 247 5,325 39 % Colorado 4,220 1,239 5,459 3,336 1,327 4,663 17 % Utah 533 20 553 465 13 478 16 % Mountain 4,753 1,259 6,012 3,801 1,340 5,141 17 % Maryland 427 311 738 592 297 889 (17) % Virginia 466 421 887 507 287 794 12 % Florida 844 151 995 479 113 592 68 % East 1,737 883 2,620 1,578 697 2,275 15 % Total 13,408 2,635 16,043 10,457 2,284 12,741 26 % As a result of the significant increase in our land acquisition activity during the past 12 months, we increased our owned and optioned lot supply as of March 31, 2014 by 26% year-over-year. We increased our lot supply in most of our markets, with a heavier concentration in markets where we have experienced stronger buyer demand, which includes the entire West segment, Colorado and Florida, where we have expanded our operations in Orlando and South Florida. Financial Services Three Months Ended March 31, Change 2014 2013 Amount % (Dollars in thousands) Financial services revenues Mortgage operations $ 5,119$ 9,044 (3,925 ) (43) % Other 4,104 3,462



642 19 % Total financial services revenues $ 9,223$ 12,506 (3,283 ) (26) %

Financial services pretax income Mortgage operations 2,559 5,999 (3,440 ) (57) % Other 2,528 1,740



788 45 % Total financial services pretax income $ 5,087$ 7,739 (2,652 ) (34) %

Our financial services pretax income for the quarter ended March 31, 2014 was down 34% or $2.7 million from the prior year period. The decrease was primarily driven by a $3.4 million decrease in our mortgage operations segment due to reduced volumes of loans locked and sold and lower per unit origination income and gains on loans locked and sold compared to a year ago, resulting primarily from a more competitive mortgage market and higher interest rates. The following table sets forth information for our mortgage operations relating to mortgage loans originated and capture rate. The "capture rate" is defined as the number of mortgage loans originated by our mortgage operations for our homebuyers as a percent of our total home closings. - 34 - --------------------------------------------------------------------------------

Three Months Ended % or March 31, Percentage 2014 2013 Change (Dollars in thousands) Total Originations (including transfer loans): Loans 514 649 (21) % Principal $ 158,953$ 186,320 (15) % Capture Rate Data: Capture rate as % of all homes delivered 58 % 62 % (4) %



Capture rate as % of all homes delivered excluding cash sales

62 % 66 % (4) % Mortgage Loan Origination Product Mix: FHA loans 14 % 28 % (14) % Other government loans (VA & USDA) 29 % 28 % 1 % Total government loans 43 % 56 % (13) % Conventional loans 57 % 44 % 13 % 100 % 100 % 0 % Loan Type: Fixed rate 93 % 99 % (6) % ARM 7 % 1 % 6 % Credit Quality: Average FICO Score 736 733 0 % Other Data: Average Combined LTV ratio 85 % 90 % (5) % Full documentation loans 100 % 100 % 0 % Non-full documentation loans 0 % 0 % 0 % Loans Sold to Third Parties: Loans 604 748 (19) % Principal $ 185,851$ 217,654 (15) % Income Taxes We had income tax expense of $7.1 million for three months ended March 31, 2014, compared to an income tax expense of $0.1 million for the same period in 2013. For the 2014 first quarter, we recorded our provision based on an effective income tax rate of 38.3% while the nominal tax provision in the 2013 first quarter was the result of the Company having a full valuation allowance reserve against its deferred tax asset. - 35 - --------------------------------------------------------------------------------

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



Our critical accounting estimates and policies have not changed from those reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013.

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 and mortgage repurchase facility. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.25 billion. We have marketable debt and equity securities. Our debt securities consist primarily of fixed and floating rate interest earning debt securities, which may include, among others, United States government and government agency debt and corporate debt. Our equity securities consist primarily of holdings in mutual fund securities, which invest mostly in debt securities. The remaining equity securities in our investment portfolio are holdings in corporate equities. Capital Resources Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders' equity; (2) long-term financing, represented by our publicly traded 5?% senior notes due 2015, 5?% senior notes due 2020, 5% senior notes due 2024, and our 6% senior notes due 2043; (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" below. We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether in 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. On January 15, 2014, we issued $250 million of 5% Senior Notes due 2024 (the "5% Notes"). The 5% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, commencing July 15, 2014, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $248.4 million, net of underwriting fees of $1.6 million. On March 26, 2014, we redeemed our 5?% Senior Notes due December 2014. As a result of this transaction, we paid $259.1 million to extinguish $250 million in debt principal with a carrying value, including unamortized deferred financing costs, of $249.7 million and recorded a $9.4 million expense for loss on extinguishment of debt. - 36 -

-------------------------------------------------------------------------------- Revolving Credit Facility. On December 13, 2013, we entered into an unsecured revolving credit facility ("Revolving Credit Facility") with a group of lenders which may be used for general corporate purposes. Our Revolving Credit Facility has an aggregate commitment amount of $450 million (the "Commitment") and a maturity date of December 13, 2018. Each lender may issue letters of credit in an amount up to 50% of its commitment. The facility permits an increase in the maximum Commitment amount to $1.0 billion upon our request, subject to receipt of additional commitments from existing or additional lenders. Interest rates on outstanding borrowings are determined by reference to a specified London Interbank Offered Rate (LIBOR), a specified federal funds effective rate or a specified prime rate, plus a margin that is determined based on our credit ratings and leverage ratio, as defined in the facility agreement. 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 facility agreement. 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) 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, 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 March 31, 2014.



As of March 31, 2014, we had no borrowings and had $15.5 million in letters of credit outstanding under the Revolving Credit Facility.

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement, (the "Mortgage Repurchase Facility"), with U.S. Bank National Association ("USBNA"). This agreement was amended on September 20, 2013 and extended until September 19, 2014. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale 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. The Mortgage Repurchase Facility had a temporary increase in the maximum aggregate commitment from $50 million to $80 million from December 31, 2013 through January 30, 2014. At March 31, 2014 and December 31, 2013, we had $39.3 million and $63.1 million, respectively, of mortgage loans that we were obligated to repurchase under our Mortgage Repurchase Facility. Mortgage loans that we are 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 Pricing Rate equal to the greater of (i) the LIBOR Rate (as defined in the Mortgage Repurchase Facility) plus 2.75%, or (ii) 3.00%. 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 terms are defined in the Mortgage Repurchase Facility. We believe we were in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2014. Dividends For the quarter ended March 31, 2014, we paid a dividend of $0.25 per share. There were no dividends paid during the quarter ended March 31, 2013 as a $1.00 accelerated dividend was paid in the fourth quarter of 2012 in lieu of declaring and paying regular quarterly dividends in calendar year 2013.



MDC Common Stock Repurchase Program

At March 31, 2014, 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 quarter ended March 31, 2014. - 37 - --------------------------------------------------------------------------------

Consolidated Cash Flow During the three months ended March 31, 2014, we used $114.2 million of cash from operating activities, primarily resulting from: (1) increasing our inventory from December 31, 2013, which resulted in the use of $138.9 million in cash, and (2) a decrease in accounts payable and accrued liabilities from December 31, 2013 of $18.4 million. These items were partially offset by net income of $11.5 million and a $27.8 million decrease in mortgage loans held-for-sale. During the three months ended March 31, 2014, we generated $56.3 million in cash for investing activities, primarily attributable to the sale or maturity of $413.2 million of marketable securities, partially offset by the purchase of $356.3 million of marketable securities. During the three months ended March 31, 2014, we used $46.6 million in cash from financing activities, primarily attributable to the redemption of $250 million of our senior notes, repayments totaling $23.7 million on our mortgage repurchase facility and a quarterly dividend payment of $12.2 million, partially offset by the issuance of $250 million of our 10-year 5% senior notes.



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 March 31, 2014, we had deposits of $11.0 million in the form of cash and $3.0 million in the form of letters of credit that secured option contracts to purchase 2,635 lots for a total estimated purchase price of $191.8 million. Surety Bonds and Letters of Credit. At March 31, 2014, we had issued and outstanding surety bonds and letters of credit totaling $110.3 million and $32.2 million, respectively, including $16.7 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $47.1 million and $5.4 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.

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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS



The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 2013 Annual Report on Form 10-K.

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 operation, 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, 2013 and Item 1A of Part II of this Quarterly Report on Form 10-Q.


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Source: Edgar Glimpses