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MERITAGE HOMES CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview and Outlook Most housing markets continued to benefit from generally favorable conditions in the second quarter of 2014, with relatively low inventories of homes available and an improving economy and job market that have helped lead to steady housing demand. While sales pace moderated over the past several quarters and overall housing affordability has declined somewhat, we are still benefiting from good customer interest and traffic in our communities that translate into generally steady order demand and pricing power in most markets. We remain focused on strategically positioning ourselves in well-located and highly-desired communities in many of the top real-estate markets in the United States. Results vary in our individual housing markets, but in most of our markets we are placing more emphasis on increasing pricing power over sales pace in order to maximize our profitability. This has resulted in increasing average sales prices and margins and a corresponding slowdown in orders pace in our year over year results. We offer our buyers the ability to personalize their homes and we provide a home warranty, successfully setting us apart from the competition we face with resale homes. We also believe we successfully differentiate ourselves from our competition by offering a line-up of plans that highlight the benefits of our industry-leading energy efficient homes. Our consistent operating and financial results during the three and six months ended June 30, 2014 are reflected in our improved profitability over the same periods in 2013. Company Actions and Positioning As the homebuilding market continues to improve, albeit at a more stabilized pace than in the prior year, we remain focused on our main goals of growing our orders and revenue, and generating profit while maintaining a strong balance sheet. To help meet these goals we continue to execute on the following initiatives: • Strategic expansion through acquisitions into new markets that indicate positive long-term growth trends: • Announced in July 2014 our plans to enter the Atlanta, Georgia, and Greenville, South Carolina markets and grow our Charlotte, North Carolina operations through the pending acquisition of Legendary Communities; • Entered the Nashville, Tennessee market through theacquisition of the assets and operations of Phillips Builders in August 2013, acquiring approximately 500 lots; • Strengthening our balance sheet: • Completed two new senior note issuances in 2013, and extended our earliest debt maturities until 2018; • Increased the capacity of our unsecured revolving credit facility to $400 million in the second quarter of 2014; • Completed an equity offering in January 2014; • Increased the percentage of controlled lots through optioned contracts in order to minimize initial cash outlays for land purchases; • Continuing to actively acquire and develop lots in markets we deem key to our success in order to maintain and strategically grow our lot supply and active community count over the long term; increasing controlled lots by 14.2% year over year; • Utilizing our enhanced market research to capitalize on the knowledge of our buyers' demands in each community, tailoring our pricing, product and amenities offered; • Continuing to innovate and promote the Meritage Green energy efficiency program, where all new homes we construct (except those we construct in areas in which we have recent acquisitions), at a minimum, meets ENERGY STAR® standards, certified by the U.S. Environmental Protection Agency, for indoor air quality, water conservation and overall energy efficiency; • Focusing our purchasing efforts to manage cost increases; and • Striving for excellence in construction; and monitoring our customers' satisfaction as measured by survey scores and working toward improving them based on the results of the surveys. In addition to the strategic acquisitions mentioned above, we also continue to acquire lot positions within our existing geographic footprint through with an increased usage of option contracts, more specifically through land banking arrangements that have become more available recently and that allow us to leverage our balance sheet by securing additional land through limited initial cash outlays. (See Note 3 to the unaudited consolidated financial statements for additional information related to option contracts). In the second quarter of 2014, we opened 13 new communities while closing out 27 communities, ending the quarter with 175 active communities. Year over year, our average active community count increased by 9.3%, and we expect it to 24-------------------------------------------------------------------------------- Table of Contents increase in the last half of 2014 as we continue to focus on growing our land positions and strategically increasing our active community count in preferred locations. Our active community count decreased sequentially from the first quarter of 2014 mainly due to delays in obtaining governmental plan approvals which postponed community openings. We expect our total community count to increase in the third quarter as these delayed communities come on line. We also may continue to opportunistically access the capital markets through various debt and equity transactions, providing additional liquidity, extending our debt maturities and strengthening our balance sheet. During 2014, we took steps to strengthen our balance sheet through two capital transactions. In the first quarter of 2014 we issued common stock, raising $110.4 million, net of offering costs, in a public offering. In the second quarter of 2014, we replaced our prior unsecured revolving credit facility with a new and expanded facility of $400 million. (See Note 5 to the accompanying unaudited consolidated financial statements for further discussion regarding our debt). Summary Company Results We began 2014 with higher beginning backlog and have been successful in maintaining increased backlog year-over-year. Home closing revenue and net earnings increased by 15.3% and 24.6%, respectively, over the second quarter of 2013, whereas growth in new home orders has slowed somewhat with relatively flat year-over-year results. We believe our focus on community placement, coupled with our appealing Meritage Green energy efficiency product offerings, as well as improving general and economic conditions will help to drive demand as the year moves forward that will help us continue to generate positive trends in closing revenue and net earnings. In the second quarter of 2014, we experienced improvements in many of our key operating and financial metrics both year-over-year and sequentially from the first quarter of 2014. We recorded 1,368 closings and $502.8 million in associated revenue, reflecting a moderate 3.6% rise in closing units and more notably an 11.3% increase in averages sales prices translating to a 15.3% increase in revenue over 2013. We experienced a slight increase in home orders year over year with 1,647 and 1,637 orders in the second three months of 2014 and 2013, respectively and an 8.0% increase over the first quarter of 2014. Our average orders pace was 9.0 units in the second quarter of 2014 down from 9.8 for the same period in 2013, which to some extent reflects the effect that recent interest rate and home price increases have had as home buyers adjust to the recovering market, as well as general slowing in specific markets. Individual markets have responded to the changes in the real estate environment differently, with our West Region posting declines year-over-year in both orders and orders pace whereas the East and Central Regions reported gains in both metrics. The West Region declines are largely due to the very strong results that 2013 posted, which were unsustainable for the long-term, as well as a softening housing market in Arizona. Through our efforts to focus on optimizing profitability, we recorded an increase year-over year in home closing gross margin during the three months ended June 30, 2014, up from 21.5% in 2013 to 21.9% in 2014. Our 40-basis point improvement stems largely from the higher average sales prices we generated from orders in the latter half of 2013, although that does represent a drop sequentially from 22.8% reported in the first quarter of 2014. The first quarter 2014 results benefited largely from the increased average prices generated in 2013 that closed in the first quarter of 2014, particularly in the West Region. In the second quarter, our Central Region increased in both volume and gross margin, which helped to offset some of the declines in the West Region. We anticipate the comparative results in units and average sales prices to continue to temper sequentially as we progress further into the year. We believe that the current housing environment still has room for growth, although comparative positive year over year revenue and profitability trends are and will continue to be difficult as we began experiencing notable and sustained improvement throughout all of 2013. However, we expect that our comparisons on year over year orders should ease as the significant 2013 gains began to slow as the year progressed into its second half. The $66.8 million increase in home closing revenue is primarily driven by the $37,400 or 11.3% increase in average sales price and to a lesser extent the 47 additional closing units for the three months ended June 30, 2014 as compared to the same period in the prior year. Increased average sales prices for homes closed were realized in every state in which we operate. Much of that increase is due to changes in product mix as more of our closings in recent quarters are from higher-priced and larger product offerings. We reported pre-tax earnings and net earnings of $55.2 million and $35.1 million, respectively for the three months ended June 30, 2014, as compared to $38.5 million and $28.1 million, respectively, for the same period in 2013, highlighting our ability to leverage the higher average sales prices we earned. Our increased tax rate for the both the three and six months ended June 30, 2014 was higher than the same periods in 2013 largely due to the absence in 2014 of energy tax credits and a partial reversal of the state valuation allowance on our deferred tax assets that occurred during 2013. We expect improving year over year revenue and profitability for the remainder of the year, as indicated by our 18.0% and 11.6% higher ending backlog dollars and units, respectively, although the pace of margin growth is expected to level out due to slowing in certain markets. At June 30, 2014, our backlog of $951.6 million reflects an increase of $145.3 million, when compared to backlog at June 30, 2013. The improvement is the result of increased sales prices on orders for the first half of 2014. In the second quarter of 2014, we maintained a low cancellation rate on home orders at 13% of gross orders, as compared to 11% in the second quarter of 2013, both of which were below our historical averages. Critical Accounting Policies The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate and warranty reserves. There have been no significant changes to our critical accounting policies during the six months ended June 30, 2014 compared to those disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2013 Annual Report on Form 10-K. 25-------------------------------------------------------------------------------- Table of Contents The composition of our closings, home orders and backlog is constantly changing and is based on a dissimilar mix of communities between periods as new projects open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables below present operating and financial data that we consider most critical to managing our operations (dollars in thousands): Home Closing Revenue Three Months Ended June 30, Quarter over Quarter 2014 2013 Chg $ Chg % Total Dollars $ 502,800 $ 436,040 $ 66,760 15.3 % Homes closed 1,368 1,321 47 3.6 % Avg sales price $ 367.5 $ 330.1 $ 37.4 11.3 % West Region Arizona Dollars $ 84,606 $ 79,736 $ 4,870 6.1 % Homes closed 252 251 1 0.4 % Avg sales price $ 335.7 $ 317.7 $ 18.0 5.7 % California Dollars $ 95,067 $ 124,818 $ (29,751 ) (23.8 )% Homes closed 185 297 (112 ) (37.7 )% Avg sales price $ 513.9 $ 420.3 $ 93.6 22.3 % Colorado Dollars $ 52,292 $ 37,001 $ 15,291 41.3 % Homes closed 115 100 15 15.0 % Avg sales price $ 454.7 $ 370.0 $ 84.7 22.9 % Nevada Dollars N/A $ 5,086 N/M N/M Homes closed N/A 21 N/M N/M Avg sales price N/A $ 242.2 N/M N/M West Region Totals Dollars $ 231,965 $ 246,641 $ (14,676 ) (6.0 )% Homes closed 552 669 (117 ) (17.5 )% Avg sales price $ 420.2 $ 368.7 $ 51.5 14.0 % Central Region - Texas Central Region Totals Dollars $ 159,562 $ 116,970 $ 42,592 36.4 % Homes closed 524 449 75 16.7 % Avg sales price $ 304.5 $ 260.5 $ 44.0 16.9 % East Region Carolinas Dollars $ 36,127 $ 19,273 $ 16,854 87.4 % Homes closed 89 51 38 74.5 % Avg sales price $ 405.9 $ 377.9 $ 28.0 7.4 % Florida Dollars $ 60,732 53,156 $ 7,576 14.3 % Homes closed 155 152 3 2.0 % Avg sales price $ 391.8 349.7 $ 42.1 12.0 % Tennessee Dollars $ 14,414 N/A N/M N/M Homes closed 48 N/A N/M N/M Avg sales price $ 300.3 N/A N/M N/M East Region Totals Dollars $ 111,273 $ 72,429 $ 38,844 53.6 % Homes closed 292 203 89 43.8 % Avg sales price $ 381.1 $ 356.8 $ 24.3 6.8 % 26-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, Year over Year 2014 2013 Chg $ Chg % Total Dollars $ 908,579 $ 766,750 $ 141,829 18.5 % Homes closed 2,477 2,373 104 4.4 % Avg sales price $ 366.8 $ 323.1 $ 43.7 13.5 % West Region Arizona Dollars $ 156,388 $ 136,885 $ 19,503 14.2 % Homes closed 463 443 20 4.5 % Avg sales price $ 337.8 $ 309.0 $ 28.8 9.3 % California Dollars $ 174,994 $ 215,460 $ (40,466 ) (18.8 )% Homes closed 350 525 (175 ) (33.3 )% Avg sales price $ 500.0 $ 410.4 $ 89.6 21.8 % Colorado Dollars $ 92,214 $ 69,205 $ 23,009 33.2 % Homes closed 204 194 10 5.2 % Avg sales price $ 452.0 $ 356.7 $ 95.3 26.7 % Nevada Dollars N/A $ 8,655 N/M N/M Homes closed N/A 37 N/M N/M Avg sales price N/A $ 233.9 N/M N/M West Region Totals Dollars $ 423,596 $ 430,205 $ (6,609 ) (1.5 )% Homes closed 1,017 1,199 (182 ) (15.2 )% Avg sales price $ 416.5 $ 358.8 $ 57.7 16.1 % Central Region - Texas Central Region Totals Dollars $ 277,761 $ 207,675 $ 70,086 33.7 % Homes closed 927 803 124 15.4 % Avg sales price $ 299.6 $ 258.6 $ 41.0 15.9 % East Region Carolinas Dollars $ 58,706 $ 33,488 $ 25,218 75.3 % Homes closed 144 91 53 58.2 % Avg sales price $ 407.7 $ 368.0 $ 39.7 10.8 % Florida Dollars $ 127,829 95,382 $ 32,447 34.0 % Homes closed 318 280 38 13.6 % Avg sales price $ 402.0 340.7 $ 61.3 18.0 % Tennessee Dollars $ 20,687 N/A N/M N/M Homes closed 71 N/A N/M N/M Avg sales price $ 291.4 N/A N/M N/M East Region Totals Dollars $ 207,222 $ 128,870 $ 78,352 60.8 % Homes closed 533 371 162 43.7 % Avg sales price $ 388.8 $ 347.4 $ 41.4 11.9 % 27-------------------------------------------------------------------------------- Table of Contents Home Orders (1) Three Months Ended June 30, Quarter over Quarter 2014 2013 Chg $ Chg % Total Dollars $ 618,435 $ 573,392 $ 45,043 7.9 % Homes ordered 1,647 1,637 10 0.6 % Avg sales price $ 375.5 $ 350.3 $ 25.2 7.2 % West Region Arizona Dollars $ 77,372 $ 105,683 $ (28,311 ) (26.8 )% Homes ordered 239 334 (95 ) (28.4 )% Avg sales price $ 323.7 $ 316.4 $ 7.3 2.3 % California Dollars $ 107,608 $ 113,561 $ (5,953 ) (5.2 )% Homes ordered 205 251 (46 ) (18.3 )% Avg sales price $ 524.9 $ 452.4 $ 72.5 16.0 % Colorado Dollars $ 64,491 $ 53,278 $ 11,213 21.0 % Homes ordered 140 121 19 15.7 % Avg sales price $ 460.7 $ 440.3 $ 20.4 4.6 % Nevada Dollars N/A $ 289 N/M N/M Homes ordered N/A 1 N/M N/M Avg sales price N/A $ 289.0 N/M N/M West Region Totals Dollars $ 249,471 $ 272,811 $ (23,340 ) (8.6 )% Homes ordered 584 707 (123 ) (17.4 )% Avg sales price $ 427.2 $ 385.9 $ 41.3 10.7 % Central Region - Texas Central Region Totals Dollars $ 240,463 $ 183,509 $ 56,954 31.0 % Homes ordered 718 641 77 12.0 % Avg sales price $ 334.9 $ 286.3 $ 48.6 17.0 % East Region Carolinas Dollars $ 43,062 $ 31,604 $ 11,458 36.3 % Homes ordered 102 77 25 32.5 % Avg sales price $ 422.2 $ 410.4 $ 11.8 2.9 % Florida Dollars $ 67,891 $ 85,468 $ (17,577 ) (20.6 )% Homes ordered 180 212 (32 ) (15.1 )% Avg sales price $ 377.2 $ 403.2 $ (26.0 ) (6.4 )% Tennessee Dollars $ 17,548 N/A N/M N/M Homes ordered 63 N/A N/M N/M Avg sales price $ 278.5 N/A N/M N/M East Region Totals Dollars $ 128,501 $ 117,072 $ 11,429 9.8 % Homes ordered 345 289 56 19.4 % Avg sales price $ 372.5 $ 405.1 $ (32.6 ) (8.0 )% (1) Home orders and home order dollars for any period represent the aggregate units or sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer's existing home or any other material contingency as a sales contract until the contingency is removed. 28-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, Year over Year 2014 2013 Chg $ Chg % Total Dollars $ 1,173,475 $ 1,093,795 $ 79,680 7.3 % Homes ordered 3,172 3,184 (12 ) (0.4 )% Avg sales price $ 369.9 $ 343.5 $ 26.4 7.7 % West Region Arizona Dollars $ 153,019 $ 203,391 $ (50,372 ) (24.8 )% Homes ordered 467 652 (185 ) (28.4 )% Avg sales price $ 327.7 $ 311.9 $ 15.8 5.1 % California Dollars $ 227,660 $ 247,192 $ (19,532 ) (7.9 )% Homes ordered 442 565 (123 ) (21.8 )% Avg sales price $ 515.1 $ 437.5 $ 77.6 17.7 % Colorado Dollars $ 119,249 $ 110,073 $ 9,176 8.3 % Homes ordered 264 262 2 0.8 % Avg sales price $ 451.7 $ 420.1 $ 31.6 7.5 % Nevada Dollars N/A $ 5,795 N/M N/M Homes ordered N/A 24 N/M N/M Avg sales price N/A $ 241.5 N/M N/M West Region Totals Dollars $ 499,928 $ 566,451 $ (66,523 ) (11.7 )% Homes ordered 1,173 1,503 (330 ) (22.0 )% Avg sales price $ 426.2 $ 376.9 $ 49.3 13.1 % Central Region - Texas Central Region Totals Dollars $ 432,694 $ 314,639 $ 118,055 37.5 % Homes ordered 1,352 1,144 208 18.2 % Avg sales price $ 320.0 $ 275.0 $ 45.0 16.4 % East Region Carolinas Dollars $ 77,081 $ 58,490 $ 18,591 31.8 % Homes ordered 183 146 37 25.3 % Avg sales price $ 421.2 $ 400.6 $ 20.6 5.1 % Florida Dollars $ 132,506 $ 154,215 $ (21,709 ) (14.1 )% Homes ordered 353 391 (38 ) (9.7 )% Avg sales price $ 375.4 $ 394.4 $ (19.0 ) (4.8 )% Tennessee Dollars $ 31,266 N/A N/M N/M Homes ordered 111 N/A N/M N/M Avg sales price $ 281.7 N/A N/M N/M East Region Totals Dollars $ 240,853 $ 212,705 $ 28,148 13.2 % Homes ordered 647 537 110 20.5 % Avg sales price $ 372.3 $ 396.1 $ (23.8 ) (6.0 )% 29-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, 2014 2013 Beginning Ending Beginning Ending Active Communities Total 189 175 168 165 West Region Arizona 41 42 40 36 California 17 15 15 13 Colorado 13 13 11 12 Nevada - - - - West Region Total 71 70 66 61 Central Region - Texas 77 69 69 71 Central Region Total 77 69 69 71 East Region Carolinas 18 13 11 13 Florida 17 18 22 20 Tennessee 6 5 - - East Region Total 41 36 33 33 Six Months Ended June 30, 2014 2013 Beginning Ending Beginning Ending Active Communities Total 188 175 158 165 West Region Arizona 40 42 38 36 California 22 15 17 13 Colorado 14 13 12 12 Nevada - - 1 - West Region Total 76 70 68 61 Central Region - Texas 70 69 65 71 Central Region Total 70 69 65 71 East Region Carolinas 17 13 7 13 Florida 20 18 18 20 Tennessee 5 5 - - East Region Total 42 36 25 33 Three Months Ended June 30, Six Months Ended June 30, Cancellation Rates (1) 2014 2013 2014 2013 Total 13 % 11 % 13 % 11 % West Region Arizona 12 % 13 % 13 % 11 % California 14 % 11 % 15 % 11 % Colorado 10 % 10 % 12 % 8 % Nevada N/A 50 % N/A 11 % West Region Total 12 % 12 % 13 % 10 % Central Region - Texas 14 % 12 % 14 % 14 % Central Region Total 14 % 12 % 14 % 14 % East Region Carolinas 11 % 6 % 11 % 6 % Florida 14 % 8 % 12 % 9 % Tennessee 3 % N/A 3 % N/A East Region Total 11 % 7 % 10 % 8 % (1) Cancellation rates are computed as the number of canceled units for the period divided by the gross order units for the same period. 30-------------------------------------------------------------------------------- Table of Contents Order Backlog (1) At June 30, Year over Year 2014 2013 Chg $ Chg % Total Dollars $ 951,568 $ 806,311 $ 145,257 18.0 % Homes in backlog 2,548 2,283 265 11.6 % Avg sales price $ 373.5 $ 353.2 $ 20.3 5.7 % West Region Arizona Dollars $ 93,870 $ 147,322 $ (53,452 ) (36.3 )% Homes in backlog 282 458 (176 ) (38.4 )% Avg sales price $ 332.9 $ 321.7 $ 11.2 3.5 % California Dollars $ 160,129 $ 156,320 $ 3,809 2.4 % Homes in backlog 317 355 (38 ) (10.7 )% Avg sales price $ 505.1 $ 440.3 $ 64.8 14.7 % Colorado Dollars $ 119,419 $ 90,957 $ 28,462 31.3 % Homes in backlog 262 210 52 24.8 % Avg sales price $ 455.8 $ 433.1 $ 22.7 5.2 % Nevada Dollars N/A $ 245 N/M N/M Homes in backlog N/A 1 N/M N/M Avg sales price N/A $ 245.0 N/M N/M West Region Totals Dollars $ 373,418 $ 394,844 $ (21,426 ) (5.4 )% Homes in backlog 861 1,024 (163 ) (15.9 )% Avg sales price $ 433.7 $ 385.6 $ 48.1 12.5 % Central Region - Texas Central Region Totals Dollars $ 400,588 $ 239,281 $ 161,307 67.4 % Homes in backlog 1,217 841 376 44.7 % Avg sales price $ 329.2 $ 284.5 $ 44.7 15.7 % East Region Carolinas Dollars $ 61,593 $ 42,343 $ 19,250 45.5 % Homes in backlog 147 104 43 41.3 % Avg sales price $ 419.0 $ 407.1 $ 11.9 2.9 % Florida Dollars $ 93,949 $ 129,843 $ (35,894 ) (27.6 )% Homes in backlog 243 314 (71 ) (22.6 )% Avg sales price $ 386.6 $ 413.5 $ (26.9 ) (6.5 )% Tennessee Dollars $ 22,020 N/A N/M N/M Homes in backlog 80 N/A N/M N/M Avg sales price $ 275.3 N/A N/M N/M East Region Totals Dollars $ 177,562 $ 172,186 $ 5,376 3.1 % Homes in backlog 470 418 52 12.4 % Avg sales price $ 377.8 $ 411.9 $ (34.1 ) (8.3 )% (1) Our backlog represented net orders that have not yet closed. 31-------------------------------------------------------------------------------- Table of Contents Operating Results Companywide. Home closings revenue for the three months ended June 30, 2014 increased 15.3% to $502.8 million on 1,368 units when compared to the prior year, due to a 47-unit increase in units closed and an 11.3% increase in average closing price. Home orders were relatively flat at 1,647 units for the quarter ended June 30, 2014 up ten units from the same period in 2013, although the order value was boosted by an increased average sales price of $25,200, or 7.2%. The results year over year for orders were difficult comparatively, as the first half of 2013 posted particularly strong orders with 48.6% and 21.0% increases over 2012 in order dollars and units, respectively. Sales pace of orders per average active community dropped to 9.0 versus 9.8 in 2013, mainly driven by the normalizing of the California market and a softening Arizona market. We ended June 30, 2014 with an increased active community count of 175 communities as compared to 165 at June 30, 2013, however that represents a 3.4% drop in average active communities from the first quarter of the year due to governmental plan approval delays impacting community opening dates, which are now slated for third and fourth quarter openings. We are continually focused on growing actively selling communities in desirable locations and we expect that the significant investments we have made in our land pipeline will allow us to increase that count as we progress throughout the year and into 2015. The results for the three months ended June 30, 2014 generated a 265-unit, or 11.6%, increase in our ending backlog with 2,548 homes as compared to 2,283 homes at June 30, 2013. Additionally, the value of orders in backlog at June 30, 2014 increased 18.0% due to a $20,300 or 5.7% improvement in average sales price versus the same period a year ago. Closed units for the six months ended June 30, 2014 increased 104 homes or 4.4% over the same period in 2013. Order units of 3,172 in the first six months of 2014 decreased slightly by 12 units as compared to 3,184 in the same period in 2013, offset by a $26,400, or 7.7% increase in average sales price, reflecting the shift in focus to profitability over volume. West. In the three months ended June 30, 2014, home closings decreased to 552 units, a drop of 17.5% or 117 units over prior year, partially offset by an average sales price increase of 14.0%, ending the 2014 period with closings revenue of $232.0 million, a decrease of 6.0% from 2013. The Region had a 123-unit decrease in orders partially offset by a $41,300 increase in average sales price, resulting in a net decrease in order dollar value of 8.6% or $23.3 million. The increase in average sales price is a result of our community locations with higher-priced homes that have also had successive periods of price increases throughout 2013, although demand has slowed from the prior year as evidenced by the decrease in units. These results led to ending backlog in the Region valued at $373.4 million on 861 units, a $21.4 million or 5.4% decrease over the same period in the prior year. The decline in second quarter year-over-year comparisons on orders in the Region is largely the result of a return to more normalized demand levels in California coupled with a general slowdown in demand in Arizona markets. The prior year results for individual states in the West region reflected strong growth in orders, orders pace and average sales prices, providing a difficult comparative base for 2014 results, as discussed below. Our orders per average active community in the Region was 8.3 units for the three months ended June 30, 2014 representing a decrease of 25.6% over the prior year, largely due to the exceptional and unsustainable demand the California market experienced in 2013 of 17.9 orders per average community. Although California orders pace did decline from 2013, that market is still performing at the highest pace of all of our markets with 12.8 orders per average community in the second quarter of 2014. We plan to continue to capitalize on the strong demand the California market is generating by strategically increasing our active community count there throughout the year. Orders in Arizona have moderated in recent quarters and home prices there have begun to follow suit. Our orders pace in Arizona was noticeably softer throughout the second quarter declining to 5.8 as compared to the second quarter of 2013 with 8.8 orders per average community. A 2.3% increase in our average sales price offset some of that decline, but overall order value was down 26.8% year over year. We have recently initiated limited price decreases and incentives to encourage buyers to purchase homes but we still believe the fundamentals in the Arizona market are strong in the long-run. We believe the current operating results in Arizona are due to the rapid appreciation the state experienced in 2013 in both demand and average sales prices. Colorado is the only state in the Region with improved orders year-over-year in the second quarter of 2014 coupled with continued growth in average sales prices leading to an overall $11.2 million increase in order value on 19 additional units. Colorado has increased its contribution to overall results in the Region to 24.0% of total order volume from 17.1% in 2013 helping offset declines in California and Arizona and aiding the overall average sales price growth the Region continues to experience. Similar to the quarterly 2014 activity and for similar reasons noted above, the six months ended June 30, 2014, home closings in our West Region decreased 182 units to 1,017 closings, a decline that was nearly offset by a $57,700 increase in average sales price resulting in a net 1.5% decrease in home closing revenue as compared to the same period in 2013. Orders in the first six months of 2014 decreased 330 units or 22.0%, which, consistent with the quarterly results, was partially offset by a 13.1% average sales price growth, resulting in a net decrease of $66.5 million or 11.7% in order value over the same period in 2013. Central. The Central Region, made up of our Texas markets, led the Company in second quarter closing revenue and revenue growth with 524 units totaling $159.6 million in revenue in the three months ended June 30, 2014, 16.7% and 36.4% increases in units and dollars, respectively, as compared to those reported in the same period in 2013. The Region also experienced a 12.0% increase in orders to 718 units as compared to 641 units for the same period a year ago. The orders increases were achieved 32-------------------------------------------------------------------------------- Table of Contents due to a an increase in our average active community count of 4.3% over June 30, 2013 and by our 9.8 orders per average community, representing a 6.5% increase over the prior year. The Central Region's increase in orders in the three months ended June 30 2014, aided by a $48,600 average sales price increase, contributed to a higher-ending backlog value of $400.6 million, an increase of $161.3 million or 67.4% as compared to the same period a year ago. A generally improving economy in the Texas markets, community placement and more actively selling communities are largely credited for the year-over-year gains. Year to date, the Region's revenues were $277.8 million on closings volume of 927 units, $70.1 million higher revenue than the same period in the prior year, making Texas the state with the largest year-to-date revenue gain in the Company. The 208-unit and $118.1 million increases in orders in the first six months of 2014 mirror the gains experienced in the second quarter. Improvements in the general economy and our new product line up both contributed to our year-to-date gains. East. Our East Region continues to benefit from year-over-year revenue growth, generating 292 closings with $111.3 million of home closing revenue in the second quarter of 2014, 43.8% and 53.6% increases, respectively, from the same period in 2013. The Region also reported higher results in orders year over year generating $11.4 million of additional order dollars, due to a 19.4% increase in units, partially offset by a $32,600 or 8.0% decrease in average sales prices from 2013. This decrease in prices is mainly attributable to our new operations in Nashville, where our current product offering is smaller and accordingly average sales prices are lower than the other markets in the East Region, as Tennessee contributed 18.3% of the Region's orders with current average sales prices approximately $100,000 less than the other states in the Region. To a lesser extent, the dip in average sales prices in Florida impacted the Region's overall results and is mainly the result of our mix of communities. Sales pace in the Region increased slightly year over year to 9.0, along with a 16.7% increase in number of average selling communities. The Region ended the quarter with a 52-unit and $5.4 million increase in ending backlog, 12.4% and 3.1% gains, respectively. The Florida market was the largest contributor to the Region's results, although operations in the Carolinas contributed 89 units, or $36.1 million in closings and 102 units, or $43.1 million, in order volume from 15.5 average actively-selling communities during the second quarter of 2014. Tennessee operations contributed 48 closings valued at $14.4 million and 63 orders valued at $17.5 million, ending the quarter with 80 units in backlog valued at $22.0 million with no comparable results in 2013. The Tennessee market is proving to be a significant contributor to the Region, accounting for 37.1% and 53.9% of the Region's year over year growth in revenue and closing units, respectively, and 153.5% and 112.5% of the year over year growth in order value and units, respectively, in the second quarter of 2014. The Region's home closings for the six months ended June 30, 2014 increased 162 units, or 43.7% over the same period in 2013. This generated total home closing revenue of $207.2 million for the six months ended June 30, 2014, a 60.8% increase over the same period a year ago. Year-to-date orders and order value increased 20.5% and 13.2%, respectively, to 647 units as compared to the same period in 2013. The increasing volume that the new markets in this Region are contributing, coupled with the same factors that impacted the second quarter performance helped to generate these positive year-to-date results. Land Closing Revenue and Gross Profit From time to time, we sell certain land parcels to other homebuilders, developers or investors if we believe the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify or divest our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of $2.8 and $5.4 million for the three and six months ending June 30, 2014, respectively, as compared to $13.9 million and $19.6 million for the three and six months ending June 30, 2013, respectively. 33-------------------------------------------------------------------------------- Table of Contents Operating Information (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Percent Percent Percent Percent of Home of Home of Home of Home Closing Closing Closing Closing Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue Home Closing Gross Profit Total $ 109,961 21.9% $ 93,605 21.5% $ 202,560 22.3% $ 157,965 20.6% West $ 50,234 21.7% $ 57,685 23.4% $ 97,495 23.0% $ 96,313 22.4% Central $ 35,964 22.5% $ 21,535 18.4% $ 60,536 21.8% $ 36,657 17.7% East $ 23,763 21.4% $ 14,385 19.9% $ 44,529 21.5% $ 24,995 19.4% Home Closing Gross Profit Companywide. Home closing gross profit represents home closing revenue less cost of home closings. Cost of home closings include land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs, common community and recreation areas and landscaping, and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead, closing costs, less impairments, if any. Home closing gross margin increased to 21.9% and 22.3% for the three and six months ended June 30, 2014, respectively, as compared to 21.5% and 20.6% for the three and six months ended June 30, 2013, respectively. The second quarter's 40-basis-point and year-to-date 170-basis-point improvements in home closing gross profit represents our success in maintaining and, in certain markets increasing, gross profit due to price increases from orders in the latter part of 2013 offset partially by some direct cost increases experienced in the homebuilding industry coupled with rising land costs as we are experiencing a higher percentage of closings from post-downturn land purchases. Sequentially, we experienced a 90-basis point decrease in gross margin, largely as a result of the increased land costs as our sales price appreciation has begun to moderate due to slower market conditions in certain areas. West. Our West Region experienced a decline in home closing gross margin in the second quarter to 21.7% for the three months ended June 30, 2014 from 23.4% in the same period of 2013, largely the result of the slowdown in price appreciation and demand as compared to the 2013 results that produced significant year-over-year gains. Year-to-date gross margin results for the West Region saw a slight improvement from 22.4% in 2013 to 23.0% in 2014, mostly related to the price increases in the latter half of 2013 that closed the first portion of 2014. Gross margins in the West Region declined as anticipated sequentially from the 24.7% as reported in the first quarter of 2014. This decline is mainly due to the recent softening in some markets in this Region coupled with rising land costs. We expect gross margins to stabilize or potentially decrease somewhat in the short term, particularly in markets such as Arizona where pricing power is limited and we are offering incentives in certain sub-markets in order to increase orders. Central. The Central Region's 22.5% home closing gross margin was the highest for the Company for the three months ended June 30, 2014, increasing 410 basis points from 18.4% for the same period of 2013. The Region's year-to-date results also reported a 410-basis-point improvement to 21.8% for the six months ended June 30, 2014. These increases, which we began realizing in the latter part of 2013, are mostly due to strong buyer confidence coupled with our shift in product offering in new and desirable locations that are generating increased demand which is allowing us to initiate sales price increases. East. The East Region reported home closing gross margins of 21.4% for the three months ended June 30, 2014 as compared to 19.9% for the same period in the prior year. We continue to focus on cost containment measures, opening superior community locations and implementing strategic sales price increases, which collectively have led to the 150-basis-point margin improvement from the second quarter of 2013. Similarly, the Region also saw a 210-basis-point improvement in year-to-date gross margins, reporting 21.5% in 2014 as compared to 19.4% in the prior year. 34-------------------------------------------------------------------------------- Table of Contents Financial Services Profit Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Financial Services Profit $ 3,617 $ 4,165 $ 6,642 $ 7,221 Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title company, Carefree Title, as well as our portion of pre-tax earnings from mortgage and title joint ventures. Carefree Title is now fully operational in all applicable markets, thereby replacing our joint venture title operations and associated income. We are beginning to see some decline in the performance of our mortgage joint venture results due to the tightening of the credit market, which has made the mortgage industry more competitive than in prior years, resulting in a reduction in capture rate and per-loan profitability for our mortgage joint venture. Selling, General and Administrative Expenses and Other Expenses Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Commissions and Other Sales Costs Dollars $ 36,105 $ 31,180 $ 67,039 $ 57,059 Percent of home closing revenue 7.2 % 7.2 % 7.4 % 7.4 % General and Administrative Expenses Dollars $ 24,571 $ 22,451 $ 46,242 $ 42,175 Percent of total closing revenue 4.9 % 5.0 % 5.1 % 5.4 % Interest Expense Dollars $ 1,396 $ 4,523 $ 4,109 $ 9,651 Other Income, Net Dollars $ 3,749 $ 685 $ 4,397 $ 1,155 Loss on Early Extinguishment of Debt Dollars $ - $ 3,096 $ - $ 3,796 Provision for Income Taxes Dollars $ 20,157 $ 10,389 $ 34,538 $ 14,823 Commissions and Other Sales Costs Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales and model office costs. As anticipated with higher homebuilding revenues, commissions and other sales costs increased by $4.9 million and $10.0 million for the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013; however, as a percentage of home closing revenue, these costs were flat at 7.2% and 7.4% for the three and six months ended, respectively in both 2014 and 2013. The consistent ratio in these costs year over year is due to the variable nature of these costs, primarily comprised of commissions, which fluctuate with revenue. General and Administrative Expenses General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, public company expenses, insurance and travel expenses. General and administrative expenses increased year over year to $24.6 million for the three months ended June 30, 2014 as compared to $22.5 million for the three months ended June 30, 2013. The increase in dollars incurred is mainly due to increased compensation costs driven by additional staffing volumes as well as overhead costs incurred in newer markets, such as Nashville, which had no comparable 2013 costs. We remain focused on cost control and maintaining overhead leverage at both the divisional and corporate levels. Due to the improved operating leverage, these expenses decreased to 4.9% of total revenue for the three months ended June 30, 2014, as compared to 5.0% for the same period in 2013. Year-to-date general and administrative costs also had dollar increases but decreased as a percentage of revenue. 35-------------------------------------------------------------------------------- Table of Contents Interest Expense Interest expense is comprised of interest incurred but not capitalized. For the three months ended June 30, 2014, our non-capitalizable interest expense was $1.4 million as compared to $4.5 million for the same period in the prior year and $4.1 million for the six months ended June 30, 2014 versus $9.7 million in 2013. The decrease in expense year over year both for the second quarter and year to date is a result of a higher amount of assets under development included in our inventory that qualify for interest capitalization. Other Income, Net Other income, net primarily consists of (i) interest earned on our cash, cash equivalents, investments and marketable securities, (ii) sub lease income, (iii) forfeited deposits from potential homebuyers who canceled their purchase contracts with us, and (iv) payments and awards related to legal settlements. Other income, net, was higher for both the three and six months ended June 30, 2014 as compared to the same periods in the prior year primarily due to the net positive impact of several legal settlements in 2014. Loss on Early Extinguishment of Debt Loss on early extinguishment of debt for the three and six months ended June 30, 2013 is attributable to the charges associated with the redemption of our 2017 senior subordinated notes. The charges represent both the loss on the extinguishment as well as the write off of remaining unamortized capitalized costs related to the notes. There were no such debt extinguishment charges for the three or six months ended June 30, 2014. Income Taxes During the three and six months ended June 30, 2014, we reported an effective tax rate of 36.5% and 36.4%, respectively, compared to 27.0% and 26.9% for the same periods in 2013. The lower rate in 2013 is attributable to the benefit of energy tax credits, the homebuilder manufacturing deduction, and a partial reversal of the state valuation allowance on our deferred tax assets during 2013. Liquidity and Capital Resources We ended the second quarter with $290.6 million of cash and cash equivalents and investments and securities, a $73.2 million decrease from December 31, 2013. Our principal uses of capital for the six months ended June 30, 2014 were home construction and land development, the acquisition of new and strategic lot and land positions, operating expenses and the payment of routine liabilities. We used funds generated by operations to meet our short-term working capital requirements. We remain focused on generating strong margins in our homebuilding operations and acquiring desirable land positions in order to maintain a healthy balance sheet and keep us poised for growth. Operating Cash Flow Activities During the six months ended June 30, 2014 and June 30, 2013, net cash used in operations totaled $174.7 million and $19.5 million, respectively. The first six months of 2014 results benefited from cash generated by the $60.5 million in net income, offset mainly by the $234.9 million increase in real estate due to land acquisition and development spending along with dollars spent on home inventory under construction. Home inventory spending nearly doubled in the first six months of 2014 as compared to the same period in 2013, as we started a higher number of spec homes in order to have an adequate supply of quick move-in homes available and increased land and land development spending as we are buying more unfinished or partially finished lots as well as our strategic increases in land spending in order to have a supply of land to grow our active community count. The near break-even of operating cash flows in the first six months of 2013 was primarily driven by the $40.2 million in net income and the $48.7 million increase in accounts payable and accrued liabilities offset by the $114.0 million increase in real estate due to land acquisition and development spending along with dollars spent on home inventory under construction. Investing Cash Flow Activities During the six months ended June 30, 2014, net cash provided by investing activities totaled $17.8 million as compared to net cash used in investing activities of $16.0 million for the same period in 2013. Cash provided by investing activities in the first six months of 2014 is mainly attributable to the difference between the $65.4 million in maturities and $35.6 million in purchases of new investments and securities comprised of treasury securities and treasury-backed investments coupled with cash outlays related to purchases of property and equipment of $11.9 million. 36-------------------------------------------------------------------------------- Table of Contents Net cash used in investing activities in the first six months of 2013 primarily related to the maturities and purchases of investments and securities of $71.0 million and $76.9 million, respectively. Financing Cash Flow Activities During the six months ended June 30, 2014, net cash provided by financing activities totaled $113.3 million as compared to $83.1 million for the same period in 2013. The net increase in financing cash in the six months ended June 30, 2014 is primarily the net result of proceeds received in connection with our issuance of common stock in January 2014. The net increase in financing cash during the first six months ended June 30, 2013 was related to our issuance of $175.0 million in senior notes reduced by a tender of $102.8 million of our 2017 senior subordinated notes. Overview of Cash Management Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, plat and other approvals, as well as construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our income statements until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently actively acquiring land and developing lots in our markets to maintain and grow our lot supply and active community count. We are also using cash on hand to fund operations in several of our newer markets. As demand for new homes continues to improve and we expand our business, we expect that cash outlays for land purchases and land development in order to grow our lot inventory in the near term will continue to exceed our cash generated by operations. During the second quarter of 2014, we closed 1,368 homes, purchased approximately 1,200 lots for $63.3 million, spent $78.6 million on land development, and started 1,746 homes. In addition, we spent $4.4 million on deposits to enter into option agreements for lots with land bankers in the second quarter of 2014. The opportunity to purchase substantially finished lots in desired locations is becoming increasingly more limited and competitive. As a result, we are spending more dollars on land development as we are purchasing more undeveloped land and partially-finished lots than in recent years. As a means of accessing parcels of land with minimal cash outlay, we have increased our use of rolling option contracts through land banking arrangements. Such arrangements provide us greater cash leveraging and a way of controlling lot inventory through purchasing lots based on predetermined schedules that are structured to mirror our forecasted pace of home construction starts. (See Notes 1 and 3 to the unaudited consolidated financial statements for additional information regarding land contract deposits and their associated committed cash). We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. Additionally, we continue to evaluate our capital needs in light of the improving homebuilding markets and our existing capital structure. In the second quarter of 2014, we increased the capacity of the unsecured revolving credit facility to $400 million (See Note 5 to these unaudited consolidated financial statements for additional information). We expect to generate cash from the sale of our inventory, but we intend to redeploy that cash to acquire and develop strategic and well-positioned lots that represent opportunities to generate desired margins, as well as for other operating purposes. In addition to expanding our business in existing markets, we continue to explore strategic opportunities to expand outside of our existing markets. Accordingly, over the past several years, we have increased our presence in the East by entering the Raleigh-Durham and Charlotte, North Carolina markets, the Tampa, Florida market and we entered the Nashville, Tennessee market through our August 2013 purchase of Phillips Builders. Most recently, we also entered into a purchase contract with Legendary Communities in July 2014 that upon closing will provide us entry into the Atlanta, Georgia and Greenville-Spartanburg, South Carolina markets and will increase our presence in Charlotte, North Carolina. These opportunities expanded our footprint into new markets with positive growth potential. See Note 14 for additional information related to the Legendary Communities purchase contract. We may seek additional capital to strengthen our liquidity position to enable us to opportunistically acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity 37-------------------------------------------------------------------------------- Table of Contents or debt financing could dilute the interests of our existing stockholders or increase our interest costs. Reference is made to Notes 5 and 8 in the notes to the unaudited financial statements included in this Quarterly Report on Form 10-Q. We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands): At June 30, 2014 At December 31, 2013 Senior and senior convertible notes $ 904,771 $ 905,055 Stockholders' equity 1,020,319 841,392 Total capital $ 1,925,090 $ 1,746,447 Debt-to-capital (1) 47.0 % 51.8 % Senior and senior convertible notes $ 904,771 $ 905,055 Less: cash and cash equivalents, and investments and securities (290,574 ) (363,823 ) Net debt 614,197 541,232 Stockholders' equity 1,020,319 841,392 Total capital $ 1,634,516 $ 1,382,624 Net debt-to-capital (2) 37.6 % 39.1 % (1) Debt-to-capital is computed as senior and senior convertible notes divided by the aggregate of total senior and senior convertible notes and stockholders' equity. (2) Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. The most directly comparable GAAP financial measure is the ratio of debt to total capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We have an automatically effective shelf registration statement on file with the Securities and Exchange Commission that can be used to register offerings of debt and equity securities we may offer. Credit Facility Covenants We were in compliance with all Credit Facility covenants as of June 30, 2014. Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $670.3 million (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We had no borrowings drawn on the facility during the six months ended June 30, 2014. Our actual financial covenant calculations as of June 30, 2014 are reflected in the table below: Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth > $687,886 $994,006 Leverage Ratio < 60% 33% Interest Coverage Ratio (1) > 1.50 5.11 Minimum Liquidity (1) > $54,422 $663,831Investments other than defined permitted investments < $318,202 $9,903 (1) We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both. Off-Balance Sheet Arrangements The information in Notes 1, 3, 4 and 13 in the accompanying notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated. Seasonality 38-------------------------------------------------------------------------------- Table of Contents Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We expect this seasonal pattern to continue over the long-term, although it has been and may continue to be affected by the current recovery in the homebuilding industry. Recently Issued Accounting Pronouncements. See Note 1 to the accompanying notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Special Note of Caution Regarding Forward-Looking Statements In passing the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Congress encouraged public companies to make "forward-looking statements" by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA. The words "believe," "expect," "anticipate," "forecast," "plan," "intend," "may," "will," "should," "could," "estimate," and "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Quarterly Report include: statements concerning trends in the homebuilding industry in general, and our markets and results specifically; our operating strategy and initiatives; the benefits of our land acquisition strategy and structures; that we expect to redeploy cash generated from operations to acquire and develop lot positions; management estimates regarding joint venture exposure, including our exposure to joint ventures that are in default of their debt or guarantee agreements; expectations regarding our industry and our business for the remainder of 2014 and beyond; our land and lot acquisition strategy including its benefits and our expansion plans relating to new markets; demographic and other trends related to the homebuilding industry in general; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the adequacy of our insurance coverage and warranty reserves; our strategy, legal positions and the expected outcome of legal proceedings (including the joint venture litigation relating to the South Edge joint venture) we are involved in and the sufficiency of our reserves relating thereto; the sufficiency of our liquidity and capital resources to support our business strategy; our ability and willingness to acquire land under option or contract; the impact of new accounting standards and changes in accounting estimates; our strategy and trends and expectations concerning sales prices, sales pace, closings, orders, cancellations, construction costs and gross margins, gross profit, revenues, net earnings, number, changes in and location of active communities, seasonality and the timing of new community openings; our future cash needs; that we may seek to raise additional debt and equity capital; our intentions regarding the payment of dividends and the use of derivative contracts and the impact of seasonality and changes in interest rates; and our closing of the pending Legendary Communities transaction Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: the availability of finished lots and undeveloped land; interest rates and changes in the availability and pricing of residential mortgages; fluctuations in the availability and cost of labor; changes in tax laws that adversely impact our homebuyers; the ability of our potential buyers to sell their existing homes; cancellation rates and home prices in our markets; weakness in the homebuilding market resulting from an unexpected setback in the current economic recovery; inflation in the cost of materials used to construct homes; the adverse effect of slower order absorption rates; potential write-downs or write-offs of assets, including pre-acquisition costs and deposits; a change in the feasibility of projects under option or contract that could result in the write-off of option deposits; our potential exposure to natural disasters; competition; the adverse impacts of cancellations resulting from small deposits relating to our sales contracts; construction defect and home warranty claims; adverse legal rulings; our success in prevailing on contested tax positions; our ability to obtain performance bonds in connection with our development work; the liquidity of our joint ventures and the ability of our joint venture partners to meet their obligations to us and the joint venture; the loss of key personnel; changes in or our failure to comply with laws and regulations; our lack of geographic diversification; fluctuations in quarterly operating results; our financial leverage and level of indebtedness and our ability to take certain actions because of restrictions contained in the indentures for our senior notes and our ability to raise additional capital when and if needed; our credit ratings; successful integration of past and future acquisitions; our compliance with government regulations and the effect of legislative or other initiatives that seek to restrain growth or new housing construction or similar measures; acts of war; the replication of our "Green" technologies by our competitors; our exposure to information technology failures and security breaches; and other factors identified in documents filed by the company with the Securities and Exchange Commission, 39-------------------------------------------------------------------------------- Table of Contents including those set forth in our Form 10-K for the year ended December 31, 2013 under the caption "Risk Factors," which can be found on our website. Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we undertake no obligations to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time. |