CalAtlantic Group, Inc.
STANDARD PACIFIC CORP /DE/ (Form: 10-K, Received: 02/23/2015 16:52:23)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2014
               
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from N/A to
                
Commission file number 1-10959
STANDARD PACIFIC CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
33-0475989
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
15360 Barranca Parkway, Irvine, California, 92618
(Address of principal executive offices, including zip code)
(949) 789-1600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
(and accompanying Preferred Share Purchase Rights)
 
New York Stock Exchange
6¼% Senior Notes due 2021
(and related guarantees)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,263,712,027.
As of February 20, 2015, there were 272,405,931 shares of the registrant’s common stock outstanding.
Documents incorporated by reference:
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
 
STANDARD PACIFIC CORP.
 
INDEX
 
   
Page No.
 
PART I
 
     
Item 1.
1
Item 1A.
5
Item 1B.
14
Item 2.
15
Item 3.
15
Item 4.
15
     
 
PART II
 
     
Item 5.
16
Item 6.
18
Item 7.
19
Item 7A.
36
Item 8.
38
Item 9.
74
Item 9A.
74
Item 9B.
76
     
 
PART III
 
     
Item 10.
76
Item 11.
76
Item 12.
76
Item 13.
76
Item 14.
76
     
 
PART IV
 
     
Item 15.
77
 
 
 
 
 
 
i
STANDARD PACIFIC CORP.
 
PART I
 
ITEM 1.
BUSINESS
 
Standard Pacific Homes has been building communities since 1965.  Our geographically diversified business spans many of the nation's largest housing markets, including major metropolitan markets in California, Florida, the Carolinas, Texas, Arizona, and Colorado.  While we construct homes within a wide range of price and size, we have increased our emphasis in recent years on the move-up market.  We believe that our well built and innovatively designed homes, located in desirable communities, and our focus on providing an outstanding customer experience, make Standard Pacific Homes particularly attractive to the move-up homebuyer.
The percentage of our homes delivered by state and product mix for the year ended December 31, 2014 were as follows:
State
 
Percentage of
Deliveries
California
 
   36%
Florida
 
21
Texas
 
17
Carolinas
 
16
Arizona
 
5
Colorado
 
5
Total
 
100%
 
Product Mix
 
Percentage of
Deliveries
Move-up / Luxury
 
   76%
Entry-level
 
21
Active adult      3
Total
 
100%
The average selling prices of our homes delivered by state for the year ended December 31, 2014 were as follows:

State
Average
Selling
Price
 
(Dollars in thousands)
California                                                                                                                                                     
$638
Florida                                                                                                                                                     
$378
Texas                                                                                                                                                   
$453
Carolinas                                                                                                                                                   
$324
Arizona                                                                                                                                                     
$332
Colorado                                                                                                                                                     
$510
   
 
Homebuilding Operations
We have been building beautiful, high-quality homes and neighborhoods since our founding in Southern California in 1965.  With a trusted reputation for quality craftsmanship, an outstanding customer experience and exceptional architectural design, we utilize our decades of land acquisition, development and homebuilding expertise to successfully navigate today's complex landscape to acquire and build desirable communities in locations that meet the high expectations of our targeted move-up homebuyers.   We currently build homes in 25 markets through a total of 15 operating divisions.  Our homes sizes typically range from approximately 1,500 to 3,500 square feet, although we have built homes from 1,100 to over 6,000 square feet.  Sales prices generally range from approximately $165,000 to over $1 million.  At December 31, 2014, we owned or controlled 35,430 homesites (including joint ventures) and had 192 active selling communities.  For the year ended December 31, 2014, approximately 81% of our deliveries were single-family detached homes.  The remainder of our deliveries were single-family attached homes, generally townhomes and condominiums configured with eight or fewer units per building.
We customize our home designs to meet the specific needs of each particular market and its customers' preferences. These preferences are reflected in every aspect of our community sales and marketing, including community locations, exterior styles, and model home merchandising.

Mortgage Operations

We have a mortgage financing subsidiary that provided financing to 77% of our homebuyers who chose to finance their home purchases during 2014.  Staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, our mortgage operations benefit our homebuyers by offering a dependable source of competitively priced financing that is seamlessly integrated into our sales and home close process.  Our mortgage operations also complement our homebuilding operations by making the timing of our new home deliveries more predictable. The loans funded by our mortgage subsidiary are generally sold in the secondary mortgage market.

Strategy

During the national recession, as many builders chose to refocus their businesses on lower priced homes, we elected a different strategy. With significant competition at lower price points from new homebuilders and re-sale homes, including short-sales and foreclosures, we decided to leverage our 50 years of experience in the move-up market to significantly expand our new home offerings at higher price points.  We believe homebuyers at these higher price points ("move-up homebuyers") are more likely to value and pay for the quality construction and industry leading customer service experience that are the hallmarks of Standard Pacific Homes.

Our strategy includes the following elements:

·
Acquire land in desirable locations at acceptable prices;
·
Leverage our land acquisition and master plan development expertise to garner an advantage in the competitive market for highly sought after locations;
·
Construct well built, innovatively designed, and energy efficient homes that cater to the move-up homebuyer;
·
Provide an industry leading customer experience;
·
Optimize the size of our business in each of our markets to appropriately leverage operating efficiencies;
·
Maintain a cost structure that positions us for near and long-term profitability;
·
Seek opportunities to enhance revenue while maintaining an appropriate sales pace; and
·
Concentrate operations and invested capital in anticipated growth markets.

Dollar Value of Backlog

The dollar value of our backlog as of December 31, 2014 was $916.4 million, or 1,711 homes.  We expect all of our backlog at December 31, 2014 to be converted to deliveries and revenues during 2015, net of cancellations.
Marketing and Sales
Our homes are marketed through a variety of channels, including through individual communities where new homes are sold by local sales teams. At the community level, home shoppers have the opportunity to experience fully-furnished and landscaped model homes that demonstrate the livability of our floorplans. Our forward-thinking architectural philosophy
 
entitled, The Artistry of Home®, is a key differentiator in marketing to move-up buyers. We closely examine buyer preferences communicated to our sales team and through buyer surveys and in-home studies. This research, coupled with the skilled expertise of architects who have both domestic and international experience, provides our move-up homebuyer thoughtful solutions that cater to the way people live today through innovative ideas and practical conveniences.
Many buyers begin or supplement their buying process via online research, which allows us to engage and inform them through a robust website and a wide array of digital marketing initiatives. Brokers and real estate professionals are a viable extension of our sales team and we market to them directly. Move-up homebuyers are understandably more savvy and experienced with the homebuying process and more commonly employ real estate professionals to aid in their purchase.
Our homes are sold pursuant to written sales contracts that usually require the homebuyer to make a cash deposit.  We sell both pre-built and to-be-built homes.  For the to-be-built homes sold prior to construction, homebuyers have the opportunity to purchase various optional amenities and upgrades such as prewiring and electrical options, upgraded flooring, cabinets, finished carpentry and countertops, varied interior and exterior color schemes, additional and upgraded appliances, and some alternative room configurations. Purchasers are typically permitted for a limited time to cancel their contracts if they fail to qualify for financing. In some cases, purchasers are also permitted to cancel their contract if they are unable to sell their existing homes or if certain other conditions are not met. A buyer's liability for wrongfully terminating a sales contract is typically limited to the forfeiture of the buyer's cash deposit to the Company, although some states provide for more limited remedies.
Seasonality and Longer Term Cycles
 
          Our homebuilding operations have historically experienced seasonal fluctuations. We typically experience the highest new home order activity in the spring and summer months, although new order activity is highly dependent on the number of active selling communities and the timing of new community openings as well as other market factors. Because it typically takes us four to six months to construct a new home, we typically deliver a greater number of homes in the second half of the calendar year as spring and early summer orders are converted to home deliveries. As a result, our revenues and cash flows (exclusive of the amount and timing of land purchases) from homebuilding operations are generally higher in the second half of the calendar year, particularly in the fourth quarter.
 
          Our homebuilding operations are also subject to longer term business cycles, the severity, duration, beginning and ending of which are difficult to predict. At the high point of this business cycle, the demand for new homes and new home prices are at their peak. Land prices also tend to be at their peak in this phase of the cycle. At the low point in the cycle, the demand for homes is weak and land prices tend to be more favorable. While difficult to accomplish, our goal is to deliver as many homes as possible near the top of the cycle and to make significant investments in land at the bottom of the cycle.
 
          We believe we were at or near the bottom of the current cycle for the several years prior to 2012 and, as such, made substantial investments in land.  We plan to continue to make substantial investments in land, which is likely to utilize a significant portion of our cash resources, so long as we believe that such investments will yield results that meet our investment criteria.

Competitive Conditions in the Business
 
          The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor, and employees. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. While we compete with other residential construction companies for customers, we also compete with the resale of existing homes and rental properties.  In addition, we compete with some larger competitors who, because of their scale, may have lower costs of capital, labor, materials and overhead.  Their size and favorable cost structures may provide them with an advantage as we compete for customers, land, materials and labor.

Financing
 
          We typically use both our equity (including internally generated funds from operations and proceeds from public and private equity offerings and proceeds from the exercise of stock options) and debt financing in the form of bank debt and note offerings, to fund land acquisition and development and construction of our properties.  To a lesser extent, we use seller
 
financing to fund the acquisition of land and, in some markets, community facility district or other similar assessment district bond financing is used to fund community infrastructure such as roads and sewers.
 
          We also utilize joint ventures and option arrangements with land sellers, other builders and developers as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, leveraging our capital base and managing the financial and market risk associated with land holdings.  In addition to equity contributions made by us and our partners, our joint ventures typically will obtain secured project specific financing to fund the acquisition of land and development and construction costs.  For more detailed discussion of our current joint venture arrangements please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements".

Development and Construction

We customarily acquire unimproved or improved land zoned for residential use.  To control larger land parcels or gain access to highly desirable parcels, we sometimes form land development joint ventures with third parties which provide us the right to acquire from the joint venture a portion of the lots when developed.  If we purchase raw land or partially developed land, we will perform development work that may include negotiating with governmental agencies and local communities to obtain any necessary zoning, environmental and other regulatory approvals and permits, and constructing, as necessary, roads, water, sewer and drainage systems and recreational facilities like parks, community centers, pools, hiking and biking trails.  With our long California heritage of creating master planned communities, we have expertise and experience in handling complex development opportunities.

We act as a general contractor with our supervisory employees coordinating most of the development and construction work on a project.  Independent architectural design, engineering and other consulting firms are generally engaged on a project-by-project basis to assist in project planning and home design, and subcontractors are engaged to perform all of the physical development and construction work.  Although the construction time for our homes varies from project to project depending on geographic region, the time of year, the size and complexity of the homes, local labor situations, the governmental approval processes, availability of materials and supplies, and other factors, we typically complete the construction of a home in approximately four to six months, with a current average cycle time of approximately five months.

Sources and Availability of Raw Materials

We, either directly or indirectly through our subcontractors, purchase drywall, cement, steel, lumber, insulation and the other building materials necessary to construct a home.  While these materials are generally widely available from a variety of sources, from time to time we experience serious material shortages on a localized basis, particularly during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures and during periods of robust sales activity when there is high demand for construction materials.   During these periods, the prices for these materials can substantially increase and our construction process can be slowed.

Government Regulation
 
       For a discussion of the impact of government regulations on our business, including the impact of environmental regulations, please see the risk factors included under the heading "Regulatory Risks" in the Risk Factors section.

Financial Services

Customer Financing
 
       As part of our ongoing operations, we provide mortgage loans to many of our homebuyers through our mortgage financing subsidiary, Standard Pacific Mortgage.  Standard Pacific Mortgage's principal sources of revenue are fees generated from loan originations, net gains on the sale of loans and net interest income earned on loans during the period we hold them prior to sale.  In addition to being a source of revenues, our mortgage operations benefit our homebuyers and complement our homebuilding operations by offering a dependable source of competitively priced financing, staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, all of which help to make our new home deliveries more predictable .

We sell substantially all of the loans we originate in the secondary mortgage market, with servicing rights released on a non-recourse basis.  These sales are generally subject to our obligation to repay the gain on sale if the loan is prepaid by the borrower within a certain time period following such sale, or to repurchase the loan if, among other things, the loan
 
purchaser's underwriting guidelines are not met or there is fraud in connection with the loan.  As of December 31, 2014, we had incurred an aggregate of $10.8 million in losses related to loan repurchases and make-whole payments we had been required to make on the $9.0 billion total dollar value of the loans we originated in the 2004-2014 period.  We record allowances for loan related claims when we determine it is appropriate to do so.  However, if we are required to make a materially higher number of make-whole payments and/or loan repurchases than we anticipate or if losses are more severe than predicted, current allowances might prove to be inadequate and we would be required to use additional cash and take additional charges to reflect the higher level of repurchase and make-whole activity.
We manage the interest rate risk associated with making loan commitments to our customers and holding loans for sale by preselling loans.  Preselling loans consists of obtaining commitments (subject to certain conditions) from third party investors to purchase the mortgage loans while concurrently extending interest rate locks to loan applicants.  Before completing the sale to these investors, Standard Pacific Mortgage finances these loans under its mortgage credit facilities for a short period of time (typically for 30 to 45 days), while the investors complete their administrative review of the applicable loan documents.  While preselling these loans reduces our risk, we remain subject to risk relating to purchaser non-performance, particularly during periods of significant market turmoil.
Title Services
 
       In Texas and Florida, we act as a title insurance agent performing title examination services for our homebuyers through our title services subsidiary.  

Employees
 
       At December 31, 2014, we had approximately 1,250 employees, up from approximately 1,115 employees at the prior year end.  Of our employees at the end of 2014, approximately 335 were executive, administrative and clerical personnel, 410 were sales and marketing personnel, 340 were involved in construction and project management, 85 were involved in new home warranty, and 80 worked in the mortgage operations.  None of our employees are covered by collective bargaining agreements, although employees of some of the subcontractors that we use are represented by labor unions and may be subject to collective bargaining agreements.  We believe that our relations with our employees and subcontractors are good.

Business Segment Financial Data

For business segment financial data, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as Note 3 to our consolidated financial statements.

Availability of Reports

This annual report on Form 10-K and each of our subsequent quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments, are available free of charge on our website, www.standardpacifichomes.com , as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). The information contained on our website is not incorporated by reference into this report and should not be considered part of this report.  In addition, the SEC website contains reports, proxy and information statements, and other information about us at www.sec.gov .

Company Information
Standard Pacific Corp. was incorporated in the State of Delaware in 1991.  Through our predecessors, we commenced our homebuilding operations in 1965. Our principal executive offices are located at 15360 Barranca Parkway, Irvine, California 92618. Unless the context otherwise requires, the terms "we," "us," "our" and "the Company" refer to Standard Pacific Corp. and its predecessors and subsidiaries.
ITEM 1A.
RISK FACTORS
 
The discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below.  They describe various risks and uncertainties to which we are or may become subject.  These risks and uncertainties, as well as other risks which we cannot foresee at this time, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
 
Risks related to us and our business

Market and Economic Risks
The market value and availability of land may fluctuate significantly, which could decrease the value of our developed and undeveloped land holdings and limit our ability to develop new communities.
The risk of owning developed and undeveloped land can be substantial for us. Our strategy calls for us to continue to invest a substantial portion of our cash in land. Our execution of this strategy has significantly increased the amount of land we hold. The market value of the undeveloped land, buildable lots and housing inventories we hold can fluctuate significantly as a result of changing economic and market conditions. During the national recession, we experienced negative economic and market conditions that resulted in the impairment of a significant number of our land positions and write-offs of some of our land option deposits. If economic or market conditions deteriorate in the future, we may have to impair our land holdings and projects, write down our investments in unconsolidated joint ventures, write off option deposits, sell homes or land at a loss, and/or hold land or homes in inventory longer than planned. In addition, inventory carrying costs (such as property taxes and interest) can be significant, particularly if inventory must be held for longer than planned, which can trigger asset impairments in poorly performing projects or markets. As we increase the amount of land we hold, we also increase our exposure to the risks associated with owning land, which means that if economic and market conditions were to deteriorate, it could have a significantly greater adverse impact on our financial condition.
Our long-term success also depends in part upon the continued availability of suitable land at acceptable prices. The availability of land for purchase at acceptable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding of land prices and restrictive governmental regulation. If a sufficient amount of suitable land opportunities do not become available, it could limit our ability to develop new communities, increase our land costs and negatively impact our sales and earnings.
We depend on the California market. If conditions in California deteriorate, our sales and earnings may be negatively impacted.
We generate approximately 50% of our revenue and a significant amount of our profits from, and hold over 43% of the dollar value of our real estate inventory in, California. During the national recession, land values, the demand for new homes and home prices declined substantially in California, negatively impacting our profitability and financial position.  Our profitability and financial position could be adversely impacted if conditions in California deteriorate.
Customers may be unwilling or unable to purchase our homes at times when mortgage-financing costs are high or when credit is difficult to obtain.
The majority of our homebuyers finance their purchases through Standard Pacific Mortgage or third-party lenders. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. While interest rates remain near historic lows, many lenders have significantly tightened their underwriting standards, are requiring higher credit scores, substantial down payments, increased cash reserves, and have eliminated or significantly limited many subprime and other alternative mortgage products, which are important to sales in many of our markets, particularly California. The availability of mortgage financing is also affected by changes in liquidity in the secondary mortgage market and the market for mortgage-backed securities, which are directly impacted by the federal government's decisions regarding its financial support of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary market. If the availability and cost of mortgage financing deteriorates, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes could be adversely affected, which could adversely affect our operating results and profitability.
The homebuilding industry is highly competitive and, with more limited resources than some of our competitors, we may not be able to compete effectively.
The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor and employees. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. We also compete with the resale of existing homes and rental properties.  In addition, we compete with some larger competitors who, because of their scale, may have lower costs of capital, labor, materials and overhead.  Their size and favorable cost structures may provide them with an advantage as we compete for customers, land, materials and labor .
 
Adverse economic conditions negatively impact the demand for homes.  A negative change in economic conditions could have adverse effects on our operating results and financial condition.

The homebuilding industry is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, availability of financing and interest rate levels. From approximately 2007 to 2011, the national recession, credit market disruption, high unemployment levels, the absence of home price stability, and the decreased availability of mortgage financing, among other factors, adversely impacted the homebuilding industry and our operations and financial condition.  Although the housing market has recovered in most of the geographies in which we operate, if market conditions deteriorate, our results of operations and financial condition could be adversely impacted.

High cancellation rates may negatively impact our business.

In connection with the sale of a home we collect a deposit from the homebuyer that is a small percentage of the total purchase price.  The deposit may, in certain circumstances, be fully or partially refundable to our homebuyer prior to closing, depending on, among other things, the laws of the state in which the home is located.  If the prices for our homes in a given community decline, competitors increase sales incentives, interest rates increase, the availability of mortgage financing tightens or a buyer experiences a change in their personal finances, they may have an incentive to cancel their home purchase contracts with us, even where they might be entitled to no refund or only a partial refund of this deposit.  Significant cancellations could have a material adverse effect on our business.

Operational Risks

Our longer-term land acquisition strategy poses significant risks.
From time-to-time, we purchase land parcels with longer-term time horizons when we believe market conditions provide an opportunity to purchase this land at acceptable prices.  We plan to continue to invest a substantial portion of our cash in land, including in larger land parcels with longer holding periods that will require significant development operations. This strategy is subject to a number of risks. It is difficult to accurately forecast development costs and sales prices the longer the time horizon for a project and, with a longer time horizon, there is a greater chance that unanticipated development cost increases, changes in general market conditions and other adverse unanticipated changes could negatively impact the profitability of a project. In addition, larger land parcels are generally undeveloped and typically do not have all (or sometimes any) of the governmental approvals necessary to develop and construct homes. If we are unable to obtain these approvals or obtain approvals that restrict our ability to use the land in ways we do not anticipate, the value of the parcel will be negatively impacted. In addition, the acquisition of land with a longer term development horizon historically has not been a significant focus of our business in many of our markets outside California and may therefore be subject to greater execution risk.
Labor and material shortages and price fluctuations could delay or increase the cost of home construction and reduce our sales and earnings.
The residential construction industry experiences serious labor and material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. The cost of material may also be adversely affected during periods of shortage or high inflation. The cost of labor may be adversely affected by shortages of qualified tradespeople such as carpenters, roofers, electricians and plumbers, changes in laws relating to union activity and changes in immigration laws and trends in labor migration.  During the national recession, a large number of qualified tradespeople went out of business or otherwise exited our markets. The reduction in available tradespeople is currently exacerbating labor shortages as demand for new housing has increased. From time to time, we have experienced volatile price swings in the cost of labor and materials, including in particular the cost of lumber, cement, steel and drywall. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could harm our operating results and profitability.
We may be unable to obtain suitable bonding for the development of our communities.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. If we are unable to obtain the required surety or performance bonds for our projects, our business operations and revenues could be adversely affected. From time to time, when market conditions become unfavorable, surety providers become reluctant to issue new bonds and some providers request credit enhancements (such as cash deposits or letters of credit) in
 
order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future, or are required to provide credit enhancements with respect to our current or future bonds, our liquidity could be negatively impacted.
  Severe weather and other natural conditions or disasters may disrupt or delay construction.
Severe weather and other natural conditions or disasters, such as earthquakes, landslides, hurricanes, tornadoes, droughts, floods, heavy or prolonged rain or snow, and wildfires can negatively affect our operations by requiring us to delay or halt construction or to perform potentially costly repairs to our projects under construction and to unsold homes. Some scientists believe that the rising level of carbon dioxide in the atmosphere is leading to climate change and that climate change is increasing the frequency and severity of weather related disasters. If true, we may experience increasing negative weather related impacts to our operations in the future.
 
We are subject to product liability and warranty claims arising in the ordinary course of business, which can be costly.
As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. While we maintain product liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and as a result our ability to seek indemnity for insured claims is significantly limited), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Additionally, the coverage offered by and availability of product liability insurance for construction defects is limited and costly. There can be no assurance that coverage will not be further restricted, become more costly or even unavailable.
In addition, we conduct a material portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on most construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than our competitors who have smaller California operations.
A major safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident is likely to be costly. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies or governmental authorities, and our ability to attract customers, which in turn could have a material adverse effect on our business, financial condition and operating results.
We rely on subcontractors to construct our homes and, in many cases, to obtain, building materials. The failure of our subcontractors to properly construct our homes, or to obtain suitable building materials, may be costly.
We engage subcontractors to perform the actual construction of our homes, and in many cases, to obtain the necessary building materials. Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues we repair the homes in accordance with our new home warranty standards and as required by law. The cost of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.
Our mortgage subsidiary may become obligated to repurchase loans it has sold in the secondary mortgage market or may become subject to borrower lawsuits.
While our mortgage subsidiary generally sells the loans it originates within a short period of time in the secondary mortgage market on a non-recourse basis, this sale is subject to an obligation to repurchase the loan if, among other things, the purchaser's underwriting guidelines are not met or there is fraud in connection with the loan. As of December 31, 2014, our mortgage subsidiary had incurred an aggregate of $10.8 million in losses related to loan repurchases and make-whole payments it had been required to make on the $9.0 billion total dollar value of the loans it originated from the beginning of
 
2004 through the end of 2014.  It is possible that our mortgage subsidiary will be required to make a materially higher number of make-whole payments and/or repurchases in the future as the holders of defaulted loans scrutinize loan files to seek reasons to require us to make make-whole payments or repurchases. Further, such make-whole payments could have a higher severity than previously experienced. In such cases our current allowances might prove to be inadequate and we would be required to use additional cash and take additional charges to reflect the higher level of repurchase and make-whole activity, which could harm our financial condition and results of operations.
We are dependent on the services of key employees and the loss of any substantial number of these individuals or an inability to hire additional personnel could adversely affect us.
Our success is dependent upon our ability to attract and retain skilled employees, including personnel with significant management and leadership skills. Competition for the services of these individuals in many of our operating markets can be intense and has increased as market conditions have improved. If we are unable to attract and retain skilled employees, we may be unable to accomplish the objectives set forth in our business plan.
We may not be able to successfully identify, complete and integrate acquisitions, which could harm our profitability and divert management resources.
We may from time to time acquire other homebuilders or related businesses. Successful acquisitions require us to correctly identify appropriate acquisition candidates and to integrate acquired operations and management with our own. Should we make an error in judgment when identifying an acquisition candidate, should the acquired operations not perform as anticipated, or should we fail to successfully integrate acquired operations and management, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences. Acquisitions involve a number of other risks, including the diversion of the attention of our management and corporate staff from operating our existing business, potential charges to earnings in the event of any write-down or write-off of goodwill and other assets recorded in connection with acquisitions and exposure to the acquired company's pre-existing liabilities. We can give no assurance that we will be able to successfully identify, complete and integrate acquisitions.
Our failure to maintain the security of our electronic and other confidential information could expose us to liability and materially adversely affect our financial condition and results of operations.
Privacy, security, and compliance concerns have continued to increase as technology has evolved. As part of our normal business activities, we collect and store certain confidential information, including personal information of homebuyers/borrowers and information about employees, vendors and suppliers. This information is entitled to protection under a number of regulatory regimes. We may share some of this information with vendors who assist us with certain aspects of our business, particularly our mortgage and title businesses. Our failure to maintain the security of the data which we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations.
Negative publicity could adversely affect our reputation and our business, financial results and stock price.
Unfavorable media related to our industry, company, brand, personnel, operations, business performance, or prospects may impact our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity is disseminated has increased dramatically through the use of electronic communication, including social media outlets, websites, and blogs. Our success in maintaining and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.

Regulatory Risks

We are subject to extensive government regulation, which can increase costs and reduce profitability.
Our homebuilding operations, including land development activities, are subject to extensive federal, state and local regulation, including environmental, building, employment and worker health and safety, zoning and land use regulation. This regulation affects all aspects of the homebuilding process and can substantially delay or increase the costs of homebuilding activities, even on land for which we already have approvals. During the development process, we must obtain the approval of numerous governmental authorities that regulate matters such as:
·
permitted land uses, levels of density and architectural designs;
·
the level of energy efficiency and greenhouse gas emissions our homes are required to achieve;
·
the installation of utility services, such as water and waste disposal;
·
the dedication of acreage for open space, parks, schools and other community services; and
·
the preservation of habitat for endangered species and wetlands, storm water control and other environmental matters.
 
The approval process can be lengthy, can be opposed by consumer or environmental groups, and can cause significant delays or permanently halt the development process. Delays or a permanent halt in the development process can cause substantial increases to development costs or cause us to abandon the project and to sell the affected land at a potential loss, which in turn could harm our operating results.
In addition, new housing developments are often subject to various assessments or impact fees for schools, parks, streets, highways and other public improvements. The costs of these assessments are subject to substantial change and can cause increases in the effective prices of our homes, which in turn could reduce our sales and/or profitability.
There is a variety of energy related legislation being considered for enactment around the world. For instance, the federal congress considered an array of energy related initiatives, from carbon "cap and trade" to a federal energy efficiency building code that would increase energy efficiency requirements for new homes between 30 and 50 percent. If all or part of this proposed legislation, or similar legislation, were to be enacted, the cost of home construction could increase significantly, which in turn could reduce our sales and/or profitability.
Much of this proposed legislation is in response to concerns about climate change. As climate change concerns grow, legislation and regulatory activity of this nature is expected to continue and become more onerous. Similarly, energy related initiatives will impact a wide variety of companies throughout the world and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, these initiatives could have an indirect adverse effect on our operations and profitability to the extent the suppliers of our materials are burdened with expensive cap and trade and similar energy related regulations.
Our mortgage operations are also subject to federal, state, and local regulation, including eligibility requirements for participation in federal loan programs and various consumer protection laws. Our title insurance agency operations are subject to applicable insurance and other laws and regulations. Failure to comply with these requirements can lead to administrative enforcement actions, the loss of required licenses and other required approvals, claims for monetary damages or demands for loan repurchase from investors, and rescission or voiding of the loan by the consumer.
  Increased regulation of the mortgage industry could harm our future sales and earnings.
The mortgage industry remains under intense scrutiny and continues to face increasing regulation at the federal, state and local level. Changes in regulation have negatively impacted the full spectrum of mortgage related activity. Potential changes to federal laws and regulations could have the effect of limiting the activities of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary mortgage market, which could lead to increases in mortgage interest rates. At the same time, recent changes and proposed changes to the Federal Housing Administration's rules to require increased Borrower FICO scores, increased down payment amounts, and limiting the amount of permitted seller concessions, lessen the number of buyers able to finance a new home. All of these regulatory activities reduce the number of potential buyers who qualify for the financing necessary to purchase our homes, which could harm our future sales and earnings.
Changes to tax laws could make homeownership more expensive.
Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual's federal, and in many cases, state, taxable income. If the federal or state governments were to change applicable tax law to eliminate or reduce these benefits for all or certain classes of taxpayers, the after-tax cost of owning a home could increase significantly. This would harm our future sales and earnings.
States, cities and counties in which we operate may adopt slow growth or no growth initiatives reducing our ability or increasing our costs to build in these areas, which could harm our future sales and earnings.
Several states, cities and counties in which we operate have in the past approved, or approved for inclusion on their ballot, various "slow growth" or "no growth" initiatives and other ballot measures that could negatively impact the land we own as well as the availability of additional land and building opportunities within those localities. Approval of slow or no growth measures would increase the cost of land and reduce our ability to open new home communities and to build and sell homes in the affected markets and would create additional costs and administrative requirements, which in turn could harm our future sales and earnings.

Financing Risks

We may need additional funds, and if we are unable to obtain these funds, we may not be able to operate our business as planned.
Our operations require significant amounts of cash. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate as market conditions and our financial performance and operations change. We cannot assure you that we will maintain cash reserves and generate sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs. Additionally, while we have a $450 million unsecured revolving credit facility designed to provide us with an additional source of liquidity to meet short-term cash needs, our ability and capacity to borrow under the facility is limited by our ability to meet the covenants of the facility.
The availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if available, additional financing could be costly or have adverse consequences. If additional funds are raised through the issuance of stock, dilution to stockholders could result. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we are not successful in obtaining or refinancing capital when needed, it could adversely impact our ability to operate our business effectively, which could reduce our sales and earnings, and adversely impact our financial position.
We may be unable to meet the conditions contained in our debt instruments that must be satisfied to incur additional indebtedness and make restricted payments.
Our debt instruments impose restrictions on our operations, financing, investments and other activities. For example, our outstanding 2016 notes prohibit us from incurring additional debt, except for limited categories of indebtedness (including up to $1.1 billion in bank credit facility debt), if we do not satisfy either a maximum leverage ratio or a minimum interest coverage ratio. The 2016 notes also limit our ability to make restricted payments (including dividends, stock repurchases, distributions on stock and contributions to joint ventures), prohibiting such payments unless we satisfy one of the ratio requirements for the incurrence of additional debt and comply with a basket limitation (as defined in the indenture). As of December 31, 2014, we were able to satisfy the conditions necessary to incur additional debt and to make restricted payments. However, we have in the past been unable to satisfy these conditions and there can be no assurance that we will be able to satisfy these conditions in the future. If we are unable to satisfy these conditions in the future, we will be precluded from incurring additional borrowings, subject to certain exceptions, and will be precluded from making restricted payments, other than through funds available from our unrestricted subsidiaries.
We have substantial debt and may incur additional debt; leverage may impair our financial condition and restrict our operations and prevent us from fulfilling our obligations under our debt instruments.
We currently have a substantial amount of debt. As of December 31, 2014, the principal amount of our homebuilding debt outstanding was approximately $2,142.5 million, $30.5 million of which matures in 2015, $282.4 million of which matures between 2016 and 2017, $576.6 million of which matures between 2018 and 2019 and $1,253.0 million of which matures between 2020 and 2032.  In addition, the instruments governing our debt permit us to incur significant additional debt.  Our existing debt and any additional debt we incur could:
·
make it more difficult for us to satisfy our obligations under our existing debt instruments;
·
increase our vulnerability to general adverse economic and industry conditions;
·
limit our ability to obtain additional financing to fund land acquisitions and construction and development activities, particularly when the availability of financing in the capital markets is limited;
·
require a substantial portion of our cash flows from operations for the payment of interest on our debt, reducing our ability to use our cash flows to fund working capital, land acquisitions and land development, acquisitions of other homebuilders and related businesses and other general corporate requirements;
·
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
·
place us at a competitive disadvantage to less leveraged competitors.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and refinance our debt and to fund planned capital expenditures depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We cannot assure you that we will be able to refinance any of our debt on favorable terms, if at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.
In addition, our 1¼% Convertible Senior Notes due 2032 (the "Convertible Notes") entitle holders to require us to repurchase their notes at a price of 100% of the principal amount, plus accrued and unpaid interest, on August 1, 2017, 2022 or 2027, or in the event of a fundamental change (as defined in the indenture governing the Convertible Notes).  If we do not have sufficient funds to repurchase notes when we are required to do so, or if instruments governing debt we have incurred prohibit us from using cash or other assets for that purpose, we might be unable to meet our obligations. Our failure to repurchase the Convertible Notes at a time when their repurchase is required by the indenture would constitute a default under the indenture.  A default under the Convertible Notes indenture, or the fundamental change itself, could also lead to a default under other debt securities we have issued or could cause borrowings we have incurred to become due.  If the repayment of a substantial amount of indebtedness were to be accelerated after any applicable notice or grace period, we might not have sufficient funds to repay the indebtedness and repurchase the notes.
We currently have significant amounts invested in unconsolidated joint ventures with independent third parties in which we have less than a controlling interest. These investments are highly illiquid and have significant risks.
We participate in unconsolidated homebuilding and land development joint ventures with independent third parties in which we have less than a controlling interest.  At December 31, 2014, we had an aggregate of $50.1 million invested in these joint ventures, of which only one joint venture had $30 million of project specific debt outstanding.  This joint venture debt is non-recourse to us.
While these joint ventures provide us with a means of accessing larger and/or more desirable land parcels and lot positions, they are subject to a number of risks, including the following:
·
Restricted Payment Risk.     Our 2016 notes prohibit us from making restricted payments, including investments in joint ventures, when we are unable to meet either a maximum leverage condition or a minimum interest coverage condition and when making such a payment will cause us to exceed a basket limitation. As a result, when we are unable to meet these conditions, payments to satisfy our joint venture obligations must be made through funds available from our unrestricted subsidiaries. If we become unable to fund our joint venture obligations this could
 
result in, among other things, defaults under our joint venture operating agreements, loan agreements, and credit enhancements.   And, our failure to satisfy our joint venture obligations could also affect our joint venture's ability to carryout its operations or strategy which could impair the value of our investment in the joint venture.
·
Entitlement Risk.     Certain of our joint ventures acquire parcels of unentitled raw land. If the joint venture is unable to timely obtain entitlements at a reasonable cost, project delay or even project termination may occur resulting in an impairment of the value of our investment.
·
Development Risk.     The projects we build through joint ventures are often larger and have a longer time horizon than the typical project developed by our wholly-owned homebuilding operations. Time delays associated with obtaining entitlements, unforeseen development issues, unanticipated labor and material cost increases, higher carrying costs, and general market deterioration and other changes are more likely to impact larger, long-term projects, all of which may negatively impact the profitability of these ventures and our proportionate share of income.
·
Financing Risk.     There are generally a limited number of sources willing to provide acquisition, development and construction financing to land development and homebuilding joint ventures.  During difficult market conditions, it may be difficult or impossible to obtain financing for our joint ventures on commercially reasonable terms, or to refinance existing borrowings as such borrowings mature. As a result, we may be required to contribute our corporate funds to the joint venture to finance acquisition and development and/or construction costs following termination or step-down of joint venture financing that the joint venture is unable to restructure, extend, or refinance with another third party lender. In addition, our ability to contribute our funds to or for the joint venture may be limited if we do not meet the restricted payment condition discussed above.
·
Contribution Risk.     Under credit enhancements that we typically provide with respect to joint venture borrowings, we and our partners could be required to make additional unanticipated investments in these joint ventures, either in the form of capital contributions or loan repayments, to reduce such outstanding borrowings. We may have to make additional contributions that exceed our proportional share of capital if our partners fail to contribute any or all of their share. While in most instances we would be able to exercise remedies available under the applicable joint venture documentation if a partner fails to contribute its proportional share of capital, our partner's financial condition may preclude any meaningful cash recovery on the obligation.
·
Completion Risk.     We often sign a completion agreement in connection with obtaining financing for our joint ventures. Under such agreements, we may be compelled to complete a project even if we no longer have an economic interest in the property.
·
Illiquid Investment Risk.     We lack a controlling interest in our joint ventures and therefore are generally unable to compel our joint ventures to sell assets, return invested capital, require additional capital contributions or take any other action without the vote of at least one or more of our venture partners. This means that, absent partner agreement, we may not be able to liquidate our joint venture investments to generate cash.
·
Partner Dispute.     If we have a dispute with one of our joint venture partners and are unable to resolve it, a buy-sell provision in the applicable joint venture agreement could be triggered or we may otherwise pursue a negotiated settlement involving the unwinding of the venture and it is possible that litigation between us and our partner(s) could result. In such cases, we may sell our interest to our partner or purchase our partner's interest. If we sell our interest, we will forgo the profit we would have otherwise earned with respect to the joint venture project and may be required to forfeit our invested capital and/or pay our partner to release us from our joint venture obligations. If we are required to purchase our partner's interest, we will be required to fund this purchase, as well as the completion of the project, with corporate level capital and to consolidate the joint venture project onto our balance sheet, which could, among other things, adversely impact our liquidity, our leverage and other financial conditions or covenants.
·
Consolidation Risk.     The accounting rules for joint ventures are complex and the decision as to whether it is proper to consolidate a joint venture onto our balance sheet is fact intensive. If the facts concerning an unconsolidated joint venture were to change and a triggering event under applicable accounting rules were to occur, we might be required to consolidate previously unconsolidated joint ventures onto our balance sheet which could adversely impact our leverage and other financial conditions or covenants.
At times, such as now, when we are pursuing a longer-term land acquisition strategy, we become directly subject to some of these risks in varying degrees, including those discussed above related to entitlement, development, financing,
 
completion and illiquid investment. Increasing our direct exposure to these types of risks could have a material adverse effect on our financial position or results or operations.

Other Risks

Our principal stockholder has the ability to exercise significant influence over the composition of our Board of Directors and matters requiring stockholder approval.
As of December 31, 2014, MP CA Homes LLC held 49% of the voting power of our voting stock. Pursuant to the stockholders' agreement that we entered into with MP CA Homes LLC on June 27, 2008, MP CA Homes LLC is entitled to designate a number of directors to serve on our Board of Directors as is proportionate to the total voting power of its voting stock (up to one less than a majority), and is entitled to designate at least one MP CA Homes LLC designated director to each committee of the board (subject to limited exceptions), giving MP CA Homes LLC the ability to exercise significant influence on the composition and actions of our Board of Directors and its committees. In addition, this large voting block may have a significant or decisive effect on the approval or disapproval of matters requiring approval of our stockholders, including any amendment to our certificate of incorporation, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. The interests of MP CA Homes LLC in these other matters may not always coincide with the interests of our other stockholders. In addition, the ownership of such a large block of our voting power and the right to designate directors by MP CA Homes LLC may discourage someone from making a significant equity investment in us, even if we needed the investment to operate our business, or could be a significant factor in delaying or preventing a change of control transaction that other stockholders may deem to be in their best interests.
Our charter, bylaws, stockholders' rights agreement and debt covenants could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock.
Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of and could limit the price that investors might be willing to pay in the future for shares of our common stock.
Our certificate of incorporation also authorizes our Board of Directors to issue new series of common stock and preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the reaction of the market to the series, rights of existing stockholders could be negatively affected. For example, subject to applicable law, our Board of Directors could create a series of common stock or preferred stock with preferential rights to dividends or assets upon liquidation, or with superior voting rights to our existing common stock. The ability of our Board of Directors to issue these new series of common stock and preferred stock could also prevent or delay a third party from acquiring us, even if doing so would be beneficial to our stockholders.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits Delaware corporations from engaging in business combinations specified in the statute with an interested stockholder, as defined in the statute, for a period of three years after the date of the transaction in which the person first becomes an interested stockholder, unless the business combination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstanding disinterested shares. The application of Section 203 of the Delaware General Corporation Law could also have the effect of delaying or preventing a change of control of us.
We also have a stockholders' rights agreement that could make it difficult to acquire us without the approval of our Board of Directors. Our stockholders' rights agreement has been filed with and is publicly available at or from the SEC; see Part IV, Item 15.
 
In addition, some of our debt covenants contained in the indentures for our outstanding public notes and our revolving credit facility may delay or prevent a change in control. Our outstanding notes contain change of control provisions that give the holders of our outstanding notes the right to require us to purchase the notes upon a change in control triggering event at a purchase price equal to 101% of the principal amount of the notes plus accrued and unpaid interest.  In addition, a change of control is an event of default under our revolving credit facility.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.
PROPERTIES
 
We lease office facilities for our homebuilding and mortgage operations.  We also lease our corporate headquarters, which is located in Irvine, California.  The lease on this facility, which also includes offices for our Orange County division, consists of approximately 39,000 square feet and expires in August 2016.  We lease approximately 21 other properties for our other division offices, mortgage operations and design centers.  For information about land owned or controlled by us for use in our homebuilding activities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
 
ITEM 3.
LEGAL PROCEEDINGS
       
Various claims and actions that we consider normal to our business have been asserted and are pending against us. We do not believe that any of such claims and actions will have a material adverse effect upon our results of operations or financial position.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
None.
 
Executive Officers of the Registrant
 
Our executive officers' ages, positions and brief accounts of their business experience as of February 20, 2015, are set forth below.
 
Name
A ge
Position
Scott D. Stowell
   57
Chief Executive Officer and President
Jeff J. McCall
   43
Executive Vice President and Chief Financial Officer
John P. Babel
   43
Executive Vice President, General Counsel and Secretary
Wendy L. Marlett        51     Chief Marketing Officer and Executive Vice President
 
Scott D. Stowell has served as Chief Executive Officer since January 2012 and President since March 2011.  Prior to that, Mr. Stowell served as Chief Operating Officer from May 2007 to March 2011.  Mr. Stowell joined the Company in 1986 as a project manager.  Since March 2014, Mr. Stowell has also served as a member of the Board of Directors of Pacific Mutual Holding Company.

Jeff J. McCall has served as Executive Vice President and Chief Financial Officer since June 2011.  Prior to joining the Company, Mr. McCall was Chief Financial Officer – Americas at Regus plc, the world's largest provider of serviced offices, from August 2004 to May 2011.  From December 2003 to August 2004 Mr. McCall served as Chief Financial Officer and Executive Vice President of HQ Global Workplaces, Inc., which was acquired by Regus plc in August 2004.  From 1998 to 2003, Mr. McCall was Principal at Casas, Benjamin & White LLC, a leading boutique advisory services firm specializing in middle market mergers, acquisitions, divestitures, restructuring, and private equity investments.

John P. Babel has served as Executive Vice President, General Counsel and Secretary since February 2012.  Prior to that, Mr. Babel was our Senior Vice President, General Counsel and Secretary from February 2009 until February 2012.  Mr. Babel joined the Company as Associate General Counsel in October 2002.  Prior to joining the Company, Mr. Babel was a corporate lawyer with the international law firm of Gibson, Dunn & Crutcher LLP.
 
       Wendy L. Marlett has served as Chief Marketing Officer and Executive Vice President since September 2010.  Ms. Marlett leads all of the Company's sales, marketing, communications and architecture functions across our operations.  Prior to joining the Company, Ms. Marlett was Senior Vice President of sales, marketing and communications at KB Home, where she held progressive roles since 1995 and was a recognized innovator in marketing and brand management.

PART II
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our shares of common stock are listed on the New York Stock Exchange under the symbol "SPF."  The following table sets forth, for the fiscal quarters indicated, the reported high and low intra-day sales prices per share of our common stock as reported on the New York Stock Exchange Composite Tape and the common dividends paid per share.
 
     
 
Year Ended December 31,
     
2014
 
2013
     
High
 
Low
 
Dividend
 
High
 
Low
 
Dividend
Quarter Ended
                                   
March 31
 
$
 9.20
 
$
 7.95
 
$
 ―
 
$
 9.18
 
$
 7.33
 
$
 ―
June 30
   
 8.75
   
 7.55
   
 ―
   
 9.97
   
 7.62
   
 ―
September 30
   
 8.81
   
 7.45
   
 ―
   
 8.89
   
 7.03
   
 ―
December 31
   
 8.17
   
 6.86
   
 ―
   
 9.13
   
 7.15
   
 ―
 
For further information on our dividend policy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

As of February 20, 2015, the number of record holders of our common stock was 1,266.

Issuer Purchases of Equity Securities

During the three months ended December 31, 2014, we repurchased the following shares under our repurchase program:
 
             
Total Number
 
Approximate
             
 of Shares
 
 Dollar Value
             
 Purchased as
 
 of Shares that
             
 Part of
 
 May Yet be
         
Average
 
 Publicly
 
 Purchased
     
Total Number
 
 Price
 
 Announced
 
 Under the
     
of Shares
 
 Paid per
 
 Plans or
 
 Plans or
Period
 
 Purchased (1)
 
 Share
 
 Programs (1)
 
 Programs (1)
October 1, 2014 to October 31, 2014
 
      ―
 
       ―
 
      ―
 
$
100,000,000
November 1, 2014 to November 30, 2014
 
 2,740,900
 
$
7.37  
 2,740,900
 
$
79,800,809
December 1, 2014 to December 31, 2014
 
 2,299,100
 
$
7.17  
 2,299,100
 
$
63,320,258
Total
 
 5,040,000
     
 5,040,000
   
________________
(1)
On October 28, 2014, we announced that our Board of Directors authorized the repurchase of up to $100 million of our common stock. The stock repurchase plan authorized by the Board of Directors has no stated expiration date.

We do not intend to declare cash dividends in the near future. We plan to retain our earnings to finance the continuing development of the business.  Future cash dividends, if any, will depend upon our financial condition, results of operations, capital requirements, compliance with Delaware law, certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.  Our senior note indentures and revolving credit facility (other than our convertible senior note indenture) contain restrictions on the payment of cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources" and Notes 6.b. and 6.c. of the accompanying consolidated financial statements.

The following graph shows a five-year comparison of cumulative total returns to stockholders of the Company, as compared with the Standard & Poor's 500 Composite Stock Index and the Dow Jones Industry Group-U.S. Home Construction Index.  The graph assumes reinvestment of all dividends.
 
Comparison of Five-Year Cumulative Total Stockholders' Return
Among Standard Pacific Corp., The Standard & Poor's 500 Composite Stock Index and
the Dow Jones Industry Group-U.S. Home Construction Index
 
     
 
        The above graph is based upon common stock and index prices calculated as of year-end for each of the last five calendar years.  The Company's common stock closing price on December 31, 2014 was $7.29 per share.  The stock price performance of the Company's common stock depicted in the graph above represents past performance only and is not necessarily indicative of future performance.

ITEM 6. SELECTED FINANCIAL DATA
 
The following should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K.
 
     
Year Ended December 31,
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
    (Dollars in thousands, except per share amounts)  
Revenues:
                   
Homebuilding
 
$
2,411,178
   
$
1,914,609
   
$
1,236,958
   
$
882,993
   
$
912,418
 
Financial Services
   
24,119
     
24,910
     
21,300
     
10,907
     
12,456
 
Total revenues
 
$
2,435,297
   
$
1,939,519
   
$
1,258,258
   
$
893,900
   
$
924,874
 
                                         
Pretax income (loss):
                                       
Homebuilding (1)
 
$
340,121
   
$
246,269
   
$
67,645
   
$
(18,156
)
 
$
(14,001
)
Financial Services
   
9,843
     
11,429
     
10,542
     
1,683
     
1,720
 
Pretax income (loss)
 
$
349,964
   
$
257,698
   
$
78,187
   
$
(16,473
)
 
$
(12,281
)
                                         
Net income (loss) (2)
 
$
215,865
   
$
188,715
   
$
531,421
   
$
(16,417
)
 
$
(11,724
)
                                         
Basic income (loss) per common share
 
$
0.59
   
$
0.52
   
$
1.52
   
$
(0.05
)
 
$
(0.05
)
                                         
Diluted income (loss) per common share
 
$
0.54
   
$
0.47
   
$
1.44
   
$
(0.05
)
 
$
(0.05
)
                                         
Weighted average common shares outstanding:
                                       
Basic
   
278,687,740
     
253,118,247
     
201,953,799
     
193,909,714
     
105,202,857
 
Diluted
   
316,285,412
     
291,173,953
     
220,518,897
     
193,909,714
     
105,202,857
 
                                         
Weighted average additional common shares outstanding
                                       
  if preferred shares converted to common shares:
   
87,812,786
     
110,826,557
     
147,812,786
     
147,812,786
     
147,812,786
 
                                         
Total weighted average diluted common shares outstanding
                                       
  if preferred shares converted to common shares:
   
404,098,198
     
402,000,510
     
368,331,683
     
341,722,500
     
253,015,643
 
                                         
Balance Sheet and Other Financial Data:
                                       
Homebuilding cash (including restricted cash)
 
$
218,650
   
$
376,949
   
$
366,808
   
$
438,157
   
$
748,754
 
Inventories owned
 
$
3,255,204
   
$
2,536,102
   
$
1,971,418
   
$
1,477,239
   
$
1,181,697
 
Total assets
 
$
4,174,420
   
$
3,662,105
   
$
3,113,074
   
$
2,200,383
   
$
2,133,123
 
Homebuilding debt
 
$
2,136,082
   
$
1,839,595
   
$
1,542,018
   
$
1,324,948
   
$
1,320,254
 
Financial services debt
 
$
89,413
   
$
100,867
   
$
92,159
   
$
46,808
   
$
30,344
 
Stockholders' equity
 
$
1,676,688
   
$
1,468,960
   
$
1,255,816
   
$
623,754
   
$
621,862
 
Stockholders' equity per common share (3)
 
$
6.09
   
$
5.29
   
$
5.89
   
$
3.20
   
$
3.23
 
Pro forma stockholders' equity per common share (4)
 
$
4.62
   
$
4.02
   
$
3.48
   
$
1.82
   
$
1.83
 
                                         
Operating Data (excluding unconsolidated joint ventures):
                                       
Deliveries
   
4,956
     
4,602
     
3,291
     
2,528
     
2,646
 
Average selling price
 
$
478
   
$
413
   
$
362
   
$
349
   
$
343
 
Net new orders (homes)
   
4,967
     
4,898
     
4,014
     
2,795
     
2,461
 
Backlog (homes)
   
1,711
     
1,700
     
1,404
     
681
     
414
 
Average active selling communities
   
182
     
166
     
155
     
152
     
130
 
________________
(1)
Homebuilding pretax income (loss) for 2011 and 2010 includes pretax impairment charges totaling $13.2 million and $2.3 million, respectively.
(2)
Net income for 2012 includes a $454 million income tax benefit resulting from the reversal of a portion of our deferred tax asset valuation allowance.
(3)
At December 31, 2011 and 2010, common shares outstanding exclude 3.9 million shares issued under a share lending facility related to our 6% convertible senior subordinated notes issued September 28, 2007.  On October 11, 2012, the remaining 3.9 million shares outstanding under the share lending facility were returned to us and no shares under the share lending facility remain outstanding.  In addition, at December 31, 2012, 2011 and 2010, common shares outstanding exclude 147.8 million common equivalent shares issued during the year ended December 31, 2008 in the form of preferred stock to MP CA Homes LLC, an affiliate of MatlinPatterson Global Advisers LLC ("MP CA Homes").  On May 20, 2013, MP CA Homes converted 183,000 shares of our preferred stock into 60 million shares of our common stock.  As a result, at December 31, 2014 and 2013, common shares outstanding exclude 87.8 million common equivalent shares issuable upon conversion of preferred shares outstanding.
(4)
At December 31, 2012, 2011 and 2010, pro forma common shares outstanding include 147.8 million common equivalent shares issuable upon conversion of preferred shares outstanding.  As a result of the conversion of preferred shares by MP CA Homes described above, at December 31, 2014 and 2013, pro forma common shares outstanding include 87.8 million common equivalent shares issuable upon conversion of preferred shares outstanding.  In addition, at December 31, 2011 and 2010, pro forma common shares outstanding exclude 3.9 million shares issued under the share lending facility related to our 6% convertible senior subordinated notes.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the section "Selected Financial Data" and our consolidated financial statements and the related notes included elsewhere in this Form 10-K.
 
Results of Operations
Selected Financial Information
 
   
Year Ended December 31,
 
   
2014
   
2013
   
2012
 
   
(Dollars in thousands, except per share amounts)
 
Homebuilding:
           
  Home sale revenues
 
$
2,366,754
   
$
1,898,989
   
$
1,190,252
 
  Land sale revenues
   
44,424
     
15,620
     
46,706
 
Total revenues
   
2,411,178
     
1,914,609
     
1,236,958
 
  Cost of home sales
   
(1,748,954
)
   
(1,431,797
)
   
(946,630
)
  Cost of land sales
   
(43,841
)
   
(13,616
)
   
(46,654
)
Total cost of sales
   
(1,792,795
)
   
(1,445,413
)
   
(993,284
)
Gross margin
   
618,383
     
469,196
     
243,674
 
Gross margin percentage
   
25.6
%
   
24.5
%
   
19.7
%
  Selling, general and administrative expenses
   
(275,861
)
   
(230,691
)
   
(172,207
)
  Income (loss) from unconsolidated joint ventures
   
(668
)
   
949
     
(2,090
)
  Interest expense
   
     
     
(6,396
)
  Other income (expense)
   
(1,733
)
   
6,815
     
4,664
 
Homebuilding pretax income
   
340,121
     
246,269
     
67,645
 
Financial Services:
                       
  Revenues
   
24,119
     
24,910
     
21,300
 
  Expenses
   
(15,245
)
   
(14,159
)
   
(11,062
)
  Other income
   
969
     
678
     
304
 
Financial services pretax income
   
9,843
     
11,429
     
10,542
 
Income before taxes
   
349,964
     
257,698
     
78,187
 
(Provision) benefit for income taxes
   
(134,099
)
   
(68,983
)
   
453,234
 
Net income
   
215,865
     
188,715
     
531,421
 
  Less: Net income allocated to preferred shareholder    
(51,650
)
   
(57,386
)
   
(224,408
)
  Less: Net income allocated to unvested restricted stock    
(297
)
   
(265
)
   
(410
)
Net income available to common stockholders
 
$
163,918
   
$
131,064
   
$
306,603
 
     
 
     
 
     
 
 
Income per common share:
                       
  Basic
 
$
0.59
   
$
0.52
   
$
1.52
 
  Diluted
 
$
0.54
   
$
0.47
   
$
1.44
 
                         
Weighted average common shares outstanding:
                       
  Basic
   
278,687,740
     
253,118,247
     
201,953,799
 
  Diluted
   
316,285,412
     
291,173,953
     
220,518,897
 
                         
Weighted average additional common shares outstanding
                       
  if preferred shares converted to common shares:
   
87,812,786
     
110,826,557
     
147,812,786
 
                         
Total weighted average diluted common shares outstanding
                       
  if preferred shares converted to common shares:
   
404,098,198
     
402,000,510
     
368,331,683
 
                         
Net cash provided by (used in) operating activities
 
$
(362,397
)
 
$
(154,216
)
 
$
(283,116
)
Net cash provided by (used in) investing activities
 
$
(31,020
)
 
$
(143,857
)
 
$
(105,205
)
Net cash provided by (used in) financing activities
 
$
242,519
   
$
314,809
   
$
324,354
 
Adjusted Homebuilding EBITDA (1)
 
$
480,004
   
$
383,621
   
$
193,903
 
________________
(1)
Adjusted Homebuilding EBITDA means net income (plus cash distributions of income from unconsolidated joint ventures) before (a) income taxes, (b) homebuilding interest expense, (c) expensing of previously capitalized interest included in cost of sales, (d) impairment charges and deposit write-offs, (e) gain (loss) on early extinguishment of debt, (f) homebuilding depreciation and amortization, (g) amortization of stock-based compensation, (h) income (loss) from unconsolidated joint ventures and (i) income (loss) from financial services subsidiary. Other companies may calculate Adjusted Homebuilding EBITDA (or similarly titled measures) differently. We believe Adjusted Homebuilding EBITDA information is useful to management and investors as one measure of our ability to service debt and obtain financing. However, it should be noted that Adjusted Homebuilding EBITDA is not a U.S. generally accepted accounting principles ("GAAP") financial measure. Due to the significance of the GAAP components excluded, Adjusted Homebuilding EBITDA should not be considered in isolation or as an alternative to cash flows from operations or any other liquidity performance measure prescribed by GAAP.


Selected Financial Information (continued)
 
(1) Continued
 
The table set forth below reconciles net cash provided by (used in) operating activities, calculated and presented in accordance with GAAP, to Adjusted Homebuilding EBITDA.
 
   
Year Ended December 31,
 
   
2014
   
2013
   
2012
 
   
(Dollars in thousands)
 
             
Net cash provided by (used in) operating activities
 
$
(362,397
)
 
$
(154,216
)
 
$
(283,116
)
Add:
                       
Provision (benefit) for income taxes
   
134,099
     
68,983
     
(453,234
)
Deferred income tax benefit (provision)
   
(98,998
)
   
(84,214
)
   
454,000
 
Homebuilding interest amortized to cost of sales and interest expense
   
123,112
     
121,778
     
110,298
 
Excess tax benefits from share-based payment arrangements
   
13,404
     
     
 
Less:
                       
Income from financial services subsidiary
   
8,874
     
10,751
     
10,238
 
Depreciation and amortization from financial services subsidiary
   
138
     
121
     
108
 
Loss on disposal of property and equipment
   
11
     
17
     
37
 
Net changes in operating assets and liabilities:
                       
Trade and other receivables
   
4,777
     
3,244
     
(801
)
Mortgage loans held for sale
   
52,838
     
2,543
     
46,339
 
Inventories-owned
   
642,008
     
415,312
     
315,639
 
Inventories-not owned
   
33,027
     
43,319
     
31,551
 
Other assets
   
(9,306
)
   
(965
)
   
(2,618
)
Accounts payable
   
(9,314
)
   
(13,325
)
   
(4,617
)
Accrued liabilities
   
(34,223
)
   
(7,949
)
   
(9,155
)
Adjusted Homebuilding EBITDA
 
$
480,004
   
$
383,621
   
$
193,903
 
 
Overview

We remain focused on acquiring and developing strategically located and appropriately priced land and on designing and building highly desirable, amenity-rich communities and homes that appeal to the move-up and luxury home buying segments we target.  The continued execution of our move-up strategy, coupled with the lift we experienced from improved market conditions, drove the strong financial performance we achieved in 2014, the third most profitable year in the Company's 50-year history, with full year pretax income, home sale revenues and backlog value up 36%, 25% and 14%, respectively.  We reported net income of $215.9 million, or $0.54 per diluted share, for 2014, compared to net income of $188.7 million, or $0.47 per diluted share for 2013 (2013 net income included the aggregate income tax benefit of $30.6 million related primarily to the partial reversal of our deferred tax asset valuation allowance and the reversal of our liability for unrecognized tax benefits during the year), and net income of $531.4 million, or $1.44 per diluted share, for 2012 (2012 net income included the $454 million tax benefit we received in 2012 from the reversal of a significant portion of our deferred tax asset valuation allowance).  Homebuilding pretax income for 2014 was $340.1 million, compared to $246.3 million in 2013 and $67.6 million in 2012.  Our gross margin from home sales rose to 26.1% for 2014, a 150 basis point increase compared to 2013 and our operating margin from home sales for 2014 was 14.4%, a 190 basis point increase compared to 2013.

We ended 2014 with $218.7 million of homebuilding cash (including $38.2 million of restricted cash), compared to $376.9 million (including $21.5 million of restricted cash) at the end of the prior year.  Net cash used in operating activities during 2014 was $362.4 million compared to $154.2 million in 2013.  The higher level of cash used in operating activities for 2014 as compared to the prior year was driven primarily by a $216.5 million increase in cash land purchase and development costs, partially offset by a 26% increase in homebuilding revenues.  Cash flows from financing activities for 2014 included $296 million of net proceeds from a senior notes offering during the 2014 fourth quarter.  In July 2014, we amended our revolving credit facility to, among other things, increase the aggregate commitment to $450 million, expand the accordion feature to permit the aggregate commitment to be increased to a maximum amount of $750 million, subject to the Company's future needs and the availability of additional bank capacity, and extend the maturity date to July 2018.

Homebuilding
 
   
Year Ended December 31,
 
   
2014
   
% Change
   
2013
   
% Change
   
2012
 
    (Dollars in thousands)  
Homebuilding revenues:
                   
 California
 
$
1,154,847
     
15
%
 
$
1,006,572
     
44
%
 
$
699,672
 
 Southwest
   
583,555
     
42
%
   
411,967
     
66
%
   
248,421
 
 Southeast
   
672,776
     
36
%
   
496,070
     
72
%
   
288,865
 
   Total homebuilding revenues
 
$
2,411,178
     
26
%
 
$
1,914,609
     
55
%
 
$
1,236,958
 
                                         
Homebuilding pretax income:
                                       
 California
 
$
215,259
     
31
%
 
$
164,805
     
254
%
 
$
46,491
 
 Southwest
   
58,630
     
37
%
   
42,792
     
233
%
   
12,852
 
 Southeast
   
66,232
     
71
%
   
38,672
     
366
%
   
8,302
 
   Total homebuilding pretax income
 
$
340,121
     
38
%
 
$
246,269
     
264
%
 
$
67,645
 
                                         
Homebuilding pretax income as a percentage of homebuilding revenues:
                                       
 California
   
18.6
%
   
2.2
%
   
16.4
%
   
9.8
%
   
6.6
%
 Southwest
   
10.0
%
   
(0.4
%)
   
10.4
%
   
5.2
%
   
5.2
%
 Southeast
   
9.8
%
   
2.0
%
   
7.8
%
   
4.9
%
   
2.9
%
   Total homebuilding pretax income percentage
   
14.1
%
   
1.2
%
   
12.9
%
   
7.4
%
   
5.5
%
 
    
As of December 31,
 
   
2014
   
% Change
   
2013
   
% Change
   
2012
 
    (Dollars in thousands)  
Total Assets:
                   
  California
 
$
1,542,584
     
14.7
%
 
$
1,344,605
     
12.8
%
 
$
1,192,249
 
  Southwest
   
826,489
     
28.8
%
   
641,711
     
29.1
%
   
496,902
 
  Southeast
   
1,060,343
     
34.9
%
   
785,988
     
79.4
%
   
438,122
 
  Corporate
   
517,701
     
(30.1
%)
   
740,950
     
(12.1
%)
   
842,705
 
   Total homebuilding
   
3,947,117
     
12.3
%
   
3,513,254
     
18.3
%
   
2,969,978
 
  Financial services
   
227,303
     
52.7
%
   
148,851
     
4.0
%
   
143,096
 
      Total Assets
 
$
4,174,420
     
14.0
%
 
$
3,662,105
     
17.6
%
 
$
3,113,074
 
 
       For 2014, we generated homebuilding pretax income of $340.1 million compared to $246.3 million in 2013.  This improvement was primarily the result of a 25% increase in home sale revenues, an increase in gross margin from home sales and the operating leverage inherent in our business.  The improvement in our financial performance in 2014 compared to 2013 was realized across all three of our reportable segments.

For 2013, we generated homebuilding pretax income of $246.3 million compared to $67.6 million in 2012.  This improvement was primarily the result of a 60% increase in home sale revenues, an increase in gross margin from home sales, a $6.4 million decrease in interest expense and the operating leverage inherent in our business. The improvement in our financial performance in 2013 compared to 2012 was realized across all three of our reportable segments.

Revenues

Homebuilding revenues for 2014 increased 26% from 2013 as a result of an 8% increase in new home deliveries, a 16% increase in our consolidated average home price to $478 thousand and a $28.8 million increase in land sale revenues.  Homebuilding revenues for 2013 increased 55% from 2012 as a result of a 40% increase in new home deliveries and a 14% increase in our consolidated average home price to $413 thousand, partially offset by a $31.1 million decrease in land sale revenues.
 
           
Year Ended December 31,
           
2014
 
% Change
 
2013
 
% Change
 
2012
New homes delivered:
                   
 
California
 
 1,759
 
(0%)
 
 1,762
 
35%
 
 1,304
 
Arizona
 
 267
 
3%
 
 258
 
4%
 
 247
 
Texas
 
 826
 
23%
 
 669
 
42%
 
 472
 
Colorado
 
 233
 
39%
 
 168
 
47%
 
 114
 
Nevada
 
     ―  
 
     ―  
 
     ―  
 
(100%)
 
 9
   
Total Southwest
 
 1,326
 
21%
 
 1,095
 
30%
 
 842
 
Florida
 
 1,057
 
3%
 
 1,027
 
77%
 
 581
 
Carolinas
 
 814
 
13%
 
 718
 
27%
 
 564
   
Total Southeast
 
 1,871
 
7%
 
 1,745
 
52%
 
 1,145
     
Total
 
 4,956
 
8%
 
 4,602
 
40%
 
 3,291
 
       New home deliveries increased 8% in 2014 as compared to the prior year, primarily as a result of a 21% increase in the number of homes in backlog at the beginning of the year as compared to the year earlier period and a 10% increase in average active selling communities throughout 2014 compared to 2013.  These increases were driven largely by a 21% increase in deliveries from the Company's Southwest region as a result of a 41% increase in the number of homes in backlog at the beginning of the year as compared to the year earlier period, and where average active selling communities grew 27%.  New home deliveries increased 40% in 2013 as compared to 2012, driven largely by a 106% increase in the number of homes in backlog at the beginning of 2013 as compared to the beginning of 2012 and a 22% increase in net new orders, partially offset by a decrease in speculative homes sold and closed during the year.
 
         
Year Ended December 31,
         
2014
 
% Change
 
2013
 
% Change
 
2012
          (Dollars in thousands) 
Average selling prices of homes delivered:
                         
 
California
 
$
 638
 
13%
 
$
 565
 
12%
 
$
 506
 
Arizona
   
 332
 
19%
   
 280
 
31%
   
 213
 
Texas
   
 453
 
15%
   
 393
 
24%
   
 318
 
Colorado
   
 510
 
13%
   
 450
 
16%
   
 388
 
Nevada
 
 
      ―   
 
      ―   
 
 
      ―   
 
      ―   
 
 
 192
   
Total Southwest
 
 
 438
 
17%
 
 
 375
 
27%
 
 
 295
 
Florida
   
 378
 
35%
   
 279
 
13%
   
 247
 
Carolinas
 
 
 324
 
12%
 
 
 289
 
17%
 
 
 247
   
Total Southeast
 
 
 354
 
25%
 
 
 283
 
15%
 
 
 247
     
Total
 
$
 478
 
16%
 
$
 413
 
14%
 
$
 362
 
During 2014, our consolidated average home price increased 16% to $478 thousand as compared to $413 thousand for 2013.  This increase was largely due to higher average home prices within the majority of our markets, a shift to more move-up product and a decrease in the use of sales incentives.  During 2013, our consolidated average home price increased 14% to $413 thousand as compared to $362 thousand for 2012.  This increase was largely due to higher average home prices within the majority of our markets and a decrease in the use of sales incentives.

Gross Margin

Our 2014 gross margin percentage from home sales was 26.1%, up 150 basis points from 24.6% in 2013.  This 150 basis point increase resulted primarily from price increases and a higher proportion of deliveries from more profitable communities, partially offset by an increase in direct construction costs per home.  Our 2013 gross margin percentage from home sales was 24.6%, up 410 basis points from 20.5% in 2012.  This 410 basis point increase resulted primarily from price increases, a higher proportion of deliveries from more profitable communities, and improved margins from speculative homes sold and delivered during the year.

SG&A Expenses

Our 2014 SG&A expenses (including corporate G&A) were $275.9 million compared to $230.7 million for the prior year.  Despite this increase in dollar amount, our 2014 SG&A rate from home sales was 11.7% versus 12.1% for 2013.  This 40 basis point improvement was primarily the result of a 25% increase in home sale revenues and our operating leverage.  We continue to leverage our G&A expenses as our home sale revenues have increased year over year, with G&A expenses as
 
a percentage of home sale revenues improving to 6.8% for 2014 compared to 7.2% for 2013.  Our selling expenses as a percentage of home sale revenues remained flat at 4.9% for 2014 and 2013.

Our 2013 SG&A expenses (including corporate G&A) were $230.7 million compared to $172.2 million for 2012.  Our 2013 SG&A rate from home sales was 12.1% versus 14.5% for 2012.  This 240 basis point improvement was primarily the result of a 60% increase in home sale revenues and our operating leverage.

Interest Expense

During the years ended December 31, 2014 and 2013, our qualified assets exceeded our debt, and as of December 31, 2014 and 2013, the amount of our qualified assets in excess of our debt was $827.7 million and $430.6 million, respectively.  As a result, all of our interest incurred during 2014 and 2013 was capitalized in accordance with ASC Topic 835, Interest .

Other Income (Expense)

Other expense of $1.7 million for 2014 was primarily attributable to $2.2 million of project abandonment costs and $0.3 million of acquisition-related costs, partially offset by $0.6 million of interest income.  Other income of $6.8 million for 2013 was primarily attributable to the receipt of property insurance claim settlements of approximately $10.2 million and interest income of $0.8 million, partially offset by $1.7 million of project abandonment costs and $1.2 million of acquisition-related costs.
 
       Operating Data
 
         
Year Ended December 31,
         
2014
 
% Change
 
% Absorption Change (1)
 
2013
 
% Change
 
% Absorption Change (1)
 
2012
Net new orders (2):
                           
 
California
 
 1,661
 
(3%)
 
(3%)
 
 1,718
 
9%
 
14%
 
 1,570
 
Arizona
 
 258
 
(10%)
 
(26%)
 
 286
 
7%
 
(17%)
 
 267
 
Texas
 
 1,007
 
33%
 
3%
 
 755
 
43%
 
(3%)
 
 527
 
Colorado
 
 200
 
(0%)
 
(20%)
 
 201
 
29%
 
13%
 
 156
 
Nevada
 
 ― 
 
 ― 
 
 ― 
 
 ― 
 
(100%)
 
 ― 
 
 6
   
Total Southwest
 
 1,465
 
18%
 
(7%)
 
 1,242
 
30%
 
(5%)
 
 956
 
Florida
 
 1,004
 
(14%)
 
(23%)
 
 1,165
 
48%
 
34%
 
 785
 
Carolinas
 
 837
 
8%
 
16%
 
 773
 
10%
 
24%
 
 703
   
Total Southeast
 
 1,841
 
(5%)
 
(9%)
 
 1,938
 
30%
 
30%
 
 1,488
     
Total
 
 4,967
 
1%
 
(8%)
 
 4,898
 
22%
 
14%
 
 4,014
________________
(1)
Represents the percentage change of net new orders per average number of selling communities during the period.
(2)
Net new orders are new orders for the purchase of homes during the period, less cancellations during such period of existing contracts for the purchase of homes.
 
 
 
 
 
 
Year Ended December 31,
 
 
 
 
 
2014
 
% Change
 
2013
 
% Change
 
2012
 
 
 
 
 
(Dollars in thousands)
Average selling prices of net new orders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
 
$
 644
 
9%
 
$
 593
 
20%
 
$
 494
 
Arizona
 
 
 321
 
7%
 
 
 299
 
37%
 
 
 218
 
Texas
 
 
 464
 
13%
 
 
 410
 
22%
 
 
 337
 
Colorado
 
 
 517
 
13%
 
 
 457
 
18%
 
 
 387
 
Nevada
 
 
      ―   
 
      ―   
 
 
      ―   
 
      ―   
 
 
 181
 
 
Total Southwest
 
 
 446
 
14%
 
 
 392
 
26%
 
 
 311
 
Florida
 
 
 414
 
22%
 
 
 339
 
38%
 
 
 245
 
Carolinas
 
 
 325
 
11%
 
 
 292
 
14%
 
 
 256
 
 
Total Southeast
 
 
 374
 
17%
 
 
 320
 
27%
 
 
 251
 
 
 
Total
 
$
 485
 
12%
 
$
 434
 
21%
 
$
 360
 
         
Year Ended December 31,
         
2014
 
% Change
 
2013
 
% Change
 
2012
Average number of selling communities during the year:
                   
 
California
 
 47
 
    ―
 
 47
 
(4%)
 
 49
 
Arizona
 
 11
 
22%
 
 9
 
29%
 
 7
 
Texas
 
 40
 
29%
 
 31
 
48%
 
 21
 
Colorado
 
 10
 
25%
 
 8
 
14%
 
 7
   
Total Southwest
 
 61
 
27%
 
 48
 
37%
 
 35
 
Florida
 
 45
 
13%
 
 40
 
11%
 
 36
 
Carolinas
 
 29
 
(6%)
 
 31
 
(11%)
 
 35
   
Total Southeast
 
 74
 
4%
 
 71
 
    ―
 
 71
     
Total
 
 182
 
10%
 
 166
 
7%
 
 155
 
Net new orders for 2014 increased 1% from the prior year on a 10% increase in the number of average active selling communities.  Our monthly sales absorption rate was 2.3 per community for 2014, down from 2.5 for 2013, and reflects our continued emphasis on margin over sales pace.  During the 2014 fourth quarter our monthly sales absorption rate was 1.8 per community, up 5% from the 2013 fourth quarter and down sequentially 15% compared to the 2014 third quarter.  The 15% decrease in sales absorption rate from the 2014 third quarter to the 2014 fourth quarter was favorable compared to the approximately 20% decrease in sales absorption rate we have typically experienced from the third quarter to the fourth quarter over the last 10 years.  Our consolidated cancellation rate for 2014 was 17% compared to 15% for 2013, and was 21% for both the 2014 fourth quarter and 2013 fourth quarter.  Our 2014 fourth quarter cancellation rate was consistent with our average historical cancellation rate over the last 10 years.

Net new orders for 2013 increased 22% from 2012 on a 7% increase in the number of average active selling communities.  Our monthly sales absorption rate was 2.5 per community for 2013, up from 2.2 for 2012.  Our consolidated cancellation rate for 2013 was 15% compared to 13% for 2012.
 
         
As of December 31,
         
2014
 
2013
 
% Change
Backlog ($ in thousands):
 
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
 
Homes
 
Dollar
Value
 
California
 
 298
 
$
 227,787
 
 396
 
$
 262,097
 
(25%)
 
(13%)
 
Arizona
 
 96
   
 33,607
 
 105
   
 35,846
 
(9%)
 
(6%)
 
Texas
 
 471
   
 244,231
 
 290
   
 134,583
 
62%
 
81%
 
Colorado
 
 75
 
 
 45,396
 
 108
 
 
 54,946
 
(31%)
 
(17%)
   
Total Southwest
 
 642
 
 
 323,234
 
 503
 
 
 225,375
 
28%
 
43%
 
Florida
 
 451
   
 252,569
 
 504
   
 215,312
 
(11%)
 
17%
 
Carolinas
 
 320
 
 
 112,786
 
 297
 
 
 97,710
 
8%
 
15%
   
Total Southeast
 
 771
 
 
 365,355
 
 801
 
 
 313,022
 
(4%)
 
17%
     
Total
 
 1,711
 
$
 916,376
 
 1,700
 
$
 800,494
 
1%
 
14%

The dollar value of our backlog as of December 31, 2014 increased 14% from 2013 to $916.4 million.  The increase in backlog value from 2013 was driven primarily by the 14% increase in our consolidated average home price in backlog to $536 thousand.  The higher average home price in our backlog as of December 31, 2014 compared to the prior year was attributable to price increases within the majority of our markets, resulting from the continued execution of our move-up homebuyer focused strategy and a favorable pricing environment in select markets.
 
         
At December 31,
         
2014
 
% Change
 
2013
 
% Change
 
2012
Homesites owned and controlled:
                   
 
California
 
 9,930
 
3%
 
 9,638
 
(6%)
 
 10,288
 
Arizona
 
 2,098
 
(11%)
 
 2,351
 
20%
 
 1,965
 
Texas
 
 4,733
 
3%
 
 4,607
 
(10%)
 
 5,129
 
Colorado
 
 1,087
 
(17%)
 
 1,307
 
65%
 
 792
 
Nevada
 
 1,124
 
     ― 
 
 1,124
 
     ― 
 
 1,124
   
Total Southwest
 
 9,042
 
(4%)
 
 9,389
 
4%
 
 9,010
 
Florida
 
 12,478
 
9%
 
 11,461
 
40%
 
 8,159
 
Carolinas
 
 3,980
 
(15%)
 
 4,687
 
42%
 
 3,310
   
Total Southeast
 
 16,458
 
2%
 
 16,148
 
41%
 
 11,469
     
Total (including joint ventures)
 
 35,430
 
1%
 
 35,175
 
14%
 
 30,767
                           
 
Homesites owned
 
 28,972
 
4%
 
 27,733
 
9%
 
 25,475
 
Homesites optioned or subject to contract
 
 6,260
 
(11%)
 
 7,047
 
51%
 
 4,681
 
Joint venture homesites (1)
 
 198
 
(50%)
 
 395
 
(35%)
 
 611
     
Total (including joint ventures) (1)
 
 35,430
 
1%
 
 35,175
 
14%
 
 30,767
                           
Homesites owned:
                   
 
Raw lots
 
 8,162
 
31%
 
 6,211
 
12%
 
 5,522
 
Homesites under development
 
 8,119
 
(13%)
 
 9,340
 
(0%)
 
 9,357
 
Finished homesites
 
 7,210
 
3%
 
 7,024
 
36%
 
 5,178
 
Under construction or completed homes
 
 3,104
 
11%
 
 2,804
 
28%
 
 2,194
 
Held for sale
 
 2,377
 
1%
 
 2,354
 
(27%)
 
 3,224
   
Total
 
 28,972
 
4%
 
 27,733
 
9%
 
 25,475
________________
(1)
Joint venture homesites represent our expected share of land development joint venture homesites and all of the homesites of our homebuilding joint ventures.
 
Total homesites owned and controlled as of December 31, 2014 increased 1% from 2013.  We purchased $585.7 million of land (6,813 homesites) during 2014, of which 35% (based on homesites) was located in Florida, 26% in California, 15% in Texas, 12% in the Carolinas, with the balance spread throughout the Company's other operations.  During 2013, we purchased $493.6 million of land (6,911 homesites), of which 37% (based on homesites) was located in Florida, 23% in the Carolinas, 19% in California and 12% in Texas, with the balance spread throughout Arizona and Colorado.  As of December 31, 2014, we owned or controlled 35,430 homesites, of which 24,434 are owned and actively selling or under development, 6,458 are controlled or under option, and the remaining 4,538 homesites are held for future development or for sale.
 
           
At December 31,
           
2014
 
% Change
 
2013
 
% Change
 
2012
Homes under construction and speculative homes:
                   
 
Homes under construction (excluding specs)
 
 1,131
 
0%
 
 1,130
 
17%
 
 963
 
Speculative homes under construction
 
 901
 
3%
 
 871
 
43%
 
 611
   
Total homes under construction
 
 2,032
 
2%
 
 2,001
 
27%
 
 1,574
                             
Completed homes:
                   
 
Completed and unsold homes (excluding models)
 
 515
 
57%
 
 327
 
52%
 
 215
 
Completed and under contract (excluding models)
 
 206
 
21%
 
 170
 
19%
 
 143
 
Model homes
 
 351
 
15%
 
 306
 
17%
 
 262
   
Total completed homes
 
 1,072
 
33%
 
 803
 
30%
 
 620
 
Total homes under construction (excluding speculative homes) as of December 31, 2014 were relatively flat compared to December 31, 2013, consistent with our homes in backlog which were 1,711 and 1,700 as of December 31, 2014 and 2013, respectively.  Speculative homes under construction and completed and unsold homes (excluding models) as of December 31, 2014 increased 18% over the prior year period, resulting primarily from a year over year increase in our number of active selling communities and our strategy to maintain a supply of speculative homes in each community.


Financial Services

For 2014, our financial services subsidiary generated pretax income of $8.9 million compared to $10.8 million in 2013.  The decrease in 2014 was driven by lower margins on loans closed and sold and a $0.5 million increase in loan loss expense related to indemnification and repurchase allowances.  These changes were partially offset by a $0.3 million decrease in loan loss expense (net of recoveries) related to allowances for loans held for investment in 2014 compared to the prior year.

For 2013, our financial services subsidiary generated pretax income of $10.8 million compared to $10.2 million in 2012.  The increase in 2013 was driven by a 45% increase in the dollar volume of loans closed and sold and a decrease in loan loss expense related to indemnification and repurchase allowances, from approximately $1.0 million for 2012 to $0 for 2013.  These changes were partially offset by lower margins on loan closed and sold, a $0.5 million increase in loan loss expense (net of recoveries) related to allowances for loans held for investment, and an increase in personnel expenses as a result of higher production levels in 2013 compared to 2012.

The following table details information regarding loan originations and related credit statistics for our mortgage financing operations:
 
         
Year Ended December 31,
         
2014
 
2013
 
2012
          (Dollars in thousands)
Total Originations:
           
 
Loans
 
 2,936
 
 2,982
 
 2,352
 
Principal
 
 $986,335
 
 $933,649
 
 $662,400
 
Capture rate
 
77%
 
81%
 
82%
                   
Loans Sold to Third Parties:
           
 
Loans
 
 2,806
 
 2,994
 
 2,234
 
Principal
 
 $931,786
 
 $925,449
 
 $616,599
                   
Mortgage Loan Origination Product Mix:
           
 
FHA loans
 
8%
 
18%
 
23%
 
Other government loans (VA & USDA)
 
10%
 
14%
 
18%
   
Total government loans
 
18%
 
32%
 
41%
 
Conforming loans
 
74%
 
65%
 
59%
 
Jumbo loans
 
8%
 
3%
 
         
100%
 
100%
 
100%
                   
Loan Type:
           
 
Fixed
 
92%
 
96%
 
98%
 
ARM
 
8%
 
4%
 
2%
                   
Credit Quality:
           
 
Avg. FICO score
 
752
 
744
 
744
                   
Other Data:
           
 
Avg. combined LTV ratio
 
80%
 
84%
 
86%
 
Full documentation loans
 
100%
 
100%
 
100%
 
Non-Full documentation loans
 
 
 
 
Income Taxes

Our 2014 provision for income taxes was $134.1 million primarily related to our $350.0 million of pretax income.  As of December 31, 2014, we had a $279.0 million deferred tax asset which was offset by a valuation allowance of $2.6 million related to state net operating loss carryforwards that are limited by shorter carryforward periods.  As of such date, $119.0 million of our deferred tax asset related to net operating loss carryforwards that are subject to the Internal Revenue Code Section 382 gross annual limitation of $15.6 million for both federal and state purposes.  The $160.0 million balance of the deferred tax asset is not subject to such limitations.

Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable in accordance with ASC Topic 740, Income Taxes ("ASC 740").  ASC 740 requires an assessment of available positive and negative evidence and, if the available positive evidence outweighs the available negative evidence, such that we are able to conclude that it is more likely than not (likelihood of more than 50%) that our deferred tax asset will be realized, we are required to reverse any corresponding deferred tax asset valuation allowance.  We continue to evaluate our deferred tax asset on a quarterly basis and note that, if economic conditions were to change such that we earn less taxable income than
 
the amount required to fully utilize our deferred tax asset, a portion of the asset may expire unused.  See Note 11 to our accompanying consolidated financial statements for further discussion.

Liquidity and Capital Resources

Our principal uses of cash over the last several years have been for:

·  land acquisition
·  homebuilder acquisitions
·  construction and development
·  operating expenses
·  principal and interest payments on debt
·  cash collateralization
·  stock repurchases

Cash requirements over the last several years have been met by:

·  internally generated funds
·  bank revolving credit and term loans
·  land option contracts and seller notes
·  public and private sales of our equity
·  public and private note offerings
·  joint venture financings
·  assessment district bond financings
·  letters of credit and surety bonds
·  mortgage credit facilities
·  tax refunds

For the year ended December 31, 2014, we used $362.4 million of cash in operating activities versus $154.2 million in the year earlier period.  The increase in cash used in operating activities as compared to the prior year period was driven primarily by a $216.5 million increase in cash land purchase and development costs, partially offset by a 26% increase in homebuilding revenues.  Cash flows used in investing activities for 2014 included the acquisition of approximately 10 current and future communities from a homebuilder in Austin, Texas during the 2014 second quarter.  Cash flows from financing activities for 2014 included $296 million of net proceeds from a senior notes offering during the 2014 fourth quarter, partially offset by $36.8 million of common stock repurchases during the 2014 fourth quarter.  As of December 31, 2014, our homebuilding cash balance was $218.7 million (including $38.2 million of restricted cash).

Revolving Credit Facility. On July 31, 2014, we amended our unsecured revolving credit facility (the "Revolving Facility") to, among other things, increase the aggregate commitment to $450 million, expand the accordion feature to permit the aggregate commitment to be increased to a maximum amount of $750 million , subject to the availability of additional bank commitments and certain other conditions, and extend the maturity date to July 2018.  Substantially all of our 100% owned homebuilding subsidiaries are guarantors of the Revolving Facility.  The July 2014 amendment to our Revolving Facility did not modify our covenant requirements.  Our covenant compliance for the Revolving Facility is set forth in the table below:
 
Covenant and Other Requirements
 
Actual at
December 31, 2014
 
Covenant
Requirements at
December 31, 2014
      (Dollars in millions)
           
Consolidated Tangible Net Worth (1)
  $1,676.1            ≥   $983.3
Leverage Ratio:          
 
Net Homebuilding Debt to Adjusted Consolidated Tangible Net Worth Ratio (2)
 
1.18
 
       ≤   2.25
Land Not Under Development Ratio:
         
 
Land Not Under Development to Consolidated Tangible Net Worth Ratio (3)
 
0.25
 
       ≤   1.00
Liquidity or Interest Coverage Ratio (4):          
  Liquidity   $168.8            ≥   $142.8
  EBITDA (as defined in the Revolving Facility) to Consolidated Interest Incurred (5)   2.84            ≥   1.25
Investments in Homebuilding Joint Ventures or Consolidated Homebuilding Non-Guarantor Entities (6)   $230.2            ≤   $666.6
Actual/Permitted Borrowings under the Revolving Facility (7)   $0            ≤   $450.0
________________  
(1)
The minimum covenant requirement amount is subject to increase over time based on subsequent earnings (without deductions for losses) and proceeds from equity offerings.
(2)
This covenant requirement decreases to 2.00 for the period ending March 31, 2015 and thereafter. Net Homebuilding Debt represents Consolidated Homebuilding Debt reduced for certain cash balances in excess of $5 million.
(3)
Land not under development is land that has not yet undergone physical site improvement and has not been sold to a homebuyer or other third party.
(4)
Under the liquidity and interest coverage ratio covenant, we are required to either (i) maintain an unrestricted cash balance in excess of our consolidated interest incurred for the previous four fiscal quarters or (ii) satisfy a minimum interest coverage ratio.
(5)
Consolidated Interest Incurred excludes noncash interest expense.
(6)
Net investments in unconsolidated homebuilding joint ventures or consolidated homebuilding non-guarantor entities must not exceed 35% of consolidated tangible net worth plus $80 million.
(7)
As of December 31, 2014 our availability under the Revolving Facility was $450 million.
 
Letter of Credit Facilities.  As of December 31, 2014, we were party to five committed letter of credit facilities totaling $58 million, of which $36.6 million was outstanding.  These facilities require cash collateralization and have maturity dates ranging from October 2015 to October 2017.  As of December 31, 2014, these facilities were secured by cash collateral deposits of $37.2 million.  Upon maturity, we may renew or enter into new letter of credit facilities with the same or other financial institutions.

Senior and Convertible Senior Notes.  As of December 31, 2014, the principal amount outstanding on our senior and convertible senior notes payable consisted of the following:
 
     
December 31, 2014
     
(Dollars in thousands)
         
7% Senior Notes due August 2015
 
$
 29,789
10¾% Senior Notes due September 2016
   
 280,000
8⅜% Senior Notes due May 2018
   
 575,000
8⅜% Senior Notes due January 2021
   
 400,000
6¼% Senior Notes due December 2021
   
 300,000
5 % Senior Notes due November 2024
   
 300,000
1¼% Convertible Senior Notes due August 2032
   
 253,000
     
$
 2,137,789
 
These notes contain various restrictive covenants.  Our 10¾% Senior Notes due 2016 contain our most restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments.  Outside of the specified categories of indebtedness that are carved out of the additional indebtedness limitation (including a carve-out for up to $1.1 billion in credit facility indebtedness), the Company must satisfy at least one of two conditions (either a maximum leverage condition or a minimum interest coverage condition) to incur additional indebtedness.  The Company must also satisfy at least one of these two conditions to make restricted payments.  Restricted payments include dividends, stock repurchases and investments in and advances to our joint ventures and other unrestricted subsidiaries.  Our ability to make restricted payments is also subject to a basket limitation (as defined in the indenture). 

As of December 31, 2014, as illustrated in the table below, we were able to incur additional indebtedness and make restricted payments because we satisfied both conditions.
 
Covenant Requirements
 
Actual at
December 31, 2014
 
Covenant
Requirements at
December 31, 2014
             
Total Leverage Ratio:
         
 
Indebtedness to Consolidated Tangible Net Worth Ratio
 
1.34
 
≤     2.25
Interest Coverage Ratio:
         
 
EBITDA (as defined in the indenture) to Consolidated Interest Incurred
 
2.64
 
≥    2.00
 
       In November 2014, the Company issued $300 million in aggregate principal amount of 5⅞% Senior Notes due 2024, which are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  The proceeds were used for general corporate purposes.
 
       In July 2012, the Company issued $253 million in aggregate principal amount of 1¼% Convertible Senior Notes due 2032 (the "Convertible Notes").  The Convertible Notes are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  The Convertible Notes bear interest at a rate of 1¼% per year and will mature on August 1, 2032, unless earlier converted, redeemed or repurchased.  The holders may convert their Convertible Notes at any time into shares of the Company's common stock at an initial conversion rate of 123.7662 shares of common stock per $1,000 principal amount of Convertible Notes (which is equal to an initial conversion price of approximately $8.08 per share), subject to adjustment.  The Company may not redeem the Convertible Notes prior to August 5, 2017.  On or after August 5, 2017 and prior to the maturity date, the Company may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes being redeemed.  On each of August 1, 2017, August 1, 2022 and August 1, 2027, holders of the Convertible Notes may require the Company to purchase all or any portion of their Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased.
 
        Potential Future Transactions.   In the future, we may, from time to time, undertake negotiated or open market purchases of, or tender offers for, our notes prior to maturity when they can be purchased at prices that we believe are attractive.  We
 
may also, from time to time, engage in exchange transactions (including debt for equity and debt for debt transactions) for all or part of our notes.  Such transactions, if any, will depend on market conditions, our liquidity requirements, contractual restrictions and other factors. 
  Joint Venture Loans.  As described more particularly under the heading "Off-Balance Sheet Arrangements", our land development and homebuilding joint ventures have historically obtained secured acquisition, development and/or construction financing.  This financing is designed to reduce the use of funds from our corporate financing sources.  As of December 31, 2014, only one joint venture had $30 million of bank debt outstanding.  This joint venture bank debt was non-recourse to us.
  Secured Project Debt and Other Notes Payable.   At December 31, 2014, we had $4.7 million outstanding in secured project debt and other notes payable.  Our secured project debt and other notes payable consist of seller non-recourse financing and community development district and similar assessment district bond financings used to finance land acquisition, development and infrastructure costs for which we are responsible.
  Mortgage Credit Facilities.   At December 31, 2014, we had $89.4 million outstanding under our mortgage financing subsidiary's mortgage credit facilities.  These mortgage credit facilities consist of a $125 million repurchase facility with one lender, maturing in May 2015, and a $75 million repurchase facility with another lender, maturing in October 2015.  These facilities require Standard Pacific Mortgage to maintain cash collateral accounts, which totaled $1.3 million as of December 31, 2014, and also contain financial covenants which require Standard Pacific Mortgage to, among other things, maintain a minimum level of tangible net worth, not to exceed a debt to tangible net worth ratio, maintain a minimum liquidity amount based on a measure of total assets (inclusive of the cash collateral requirement), and satisfy pretax income (loss) requirements.  As of December 31, 2014, Standard Pacific Mortgage was in compliance with the financial and other covenants contained in these facilities.
  Surety Bonds.   Surety bonds serve as a source of liquidity for the Company because they are used in lieu of cash deposits and letters of credit that would otherwise be required by governmental entities and other third parties to ensure our completion of the infrastructure of our projects and other performance.  At December 31, 2014, we had approximately $504.5 million in surety bonds outstanding (exclusive of surety bonds related to our joint ventures), with respect to which we had an estimated $295.0 million remaining in cost to complete.
  Availability of Additional Liquidity.  Over the last several years we have focused on acquiring and developing strategically located and appropriately priced land and on designing and building highly desirable, amenity-rich communities and homes that appeal to the move-up and luxury home buying segments we target.  In the near term, so long as we are able to continue to find appropriately priced land opportunities, we plan to continue with this strategy.  To that end, we may utilize cash generated from our operating activities, our untapped $450 million revolving credit facility (including through the exercise of the accordion feature which would allow the facility be increased up to $750 million, subject to the availability of additional capital commitments and certain other conditions) and the debt and equity capital markets to finance these activities.
  It is important to note, however, that the availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as market conditions change.  There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources.  A weakening of our financial condition, including in particular, a material increase in our leverage or a decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
  Dividends.  We did not pay dividends during the years ended December 31, 2014, 2013 and 2012.
  Stock Repurchases.  On October 28, 2014, we announced that our Board of Directors authorized a $100 million stock repurchase plan.  During 2014, we repurchased 5,040,000 shares of our common stock in open market transactions under the plan, and as of December 31, 2014, we had remaining authorization to repurchase $63.3 million of our common stock.  We did not repurchase capital stock during the years ended December 31, 2013 and 2012.

  Leverage.  Our homebuilding debt to total book capitalization as of December 31, 2014 was 56.0% and our adjusted net homebuilding debt to adjusted total book capitalization was 53.3%.  In addition, as of December 31, 2014 and 2013, our homebuilding debt to adjusted homebuilding EBITDA was 4.5x and 4.8x, respectively, and our adjusted net homebuilding debt to adjusted homebuilding EBITDA was 4.0x and 3.8x, respectively (please see page 20 for the reconciliation of net cash
 
provided by (used in) operating activities, calculated and presented in accordance with GAAP, to adjusted homebuilding EBITDA).  We believe that these adjusted ratios are useful to investors as additional measures of our ability to service debt.

Contractual Obligations
 
The following table summarizes our future estimated cash payments under existing contractual obligations as of December 31, 2014, including estimated cash payments due by period.
 
   
Payments Due by Period
 
   
Total
   
Less Than 1 Year
   
1-3 Years
   
4-5 Years
   
After
5 Years
 
    (Dollars in thousands)  
Contractual Obligations
                   
Long-term debt principal payments (1)
 
$
2,142,478
   
$
30,475
   
$
282,428
   
$
576,575
   
$
1,253,000
 
Long-term debt interest payments
   
778,436
     
152,900
     
264,032
     
164,173
     
197,331
 
Operating leases (2)
   
14,070
     
4,681
     
6,841
     
2,504
     
44
 
Purchase obligations (3)
   
406,724
     
277,487
     
129,237
     
     
 
        Total
 
$
3,341,708
   
$
465,543
   
$
682,538
   
$
743,252
   
$
1,450,375
 
________________
(1)
Long-term debt represents senior and convertible senior notes payable and secured project debt and other notes payable. For a more detailed description of our long-term debt, please see Note 6 in our accompanying consolidated financial statements.
(2)
For a more detailed description of our operating leases, please see Note 10.f. in our accompanying consolidated financial statements.
(3)
Purchase obligations represent commitments (net of deposits) for land purchase and option contracts with non-refundable deposits. For a more detailed description of our land purchase and option contracts, please see "Off-Balance Sheet Arrangements" below and Note 10.a. in our accompanying consolidated financial statements.
 
At December 31, 2014, we had mortgage repurchase facilities with two lenders totaling $200 million, and had $89.4 million outstanding under these facilities.
Off-Balance Sheet Arrangements
 
Land Purchase and Option Agreements

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

In some instances, we may also expend funds for due diligence, development and construction activities with respect to our land purchase and option contracts prior to purchase, which we would have to write off should we not purchase the land.  At December 31, 2014, we had non-refundable cash deposits outstanding of approximately $38.8 million and capitalized pre-acquisition and other development and construction costs of approximately $7.3 million relating to land purchase and option contracts having a total remaining purchase price of approximately $406.7 million.

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

Land Development and Homebuilding Joint Ventures

Historically, we have entered into land development and homebuilding joint ventures from time to time as a means of:

·  accessing larger or highly desirable lot positions
·  establishing strategic alliances
·  leveraging our capital base
·  expanding our market opportunities
·  managing the financial and market risk associated with land holdings

These joint ventures have historically obtained secured acquisition, development and/or construction financing designed to reduce the use of funds from our corporate financing sources.  As of December 31, 2014, we held membership interests in 21 homebuilding and land development joint ventures, of which seven were active and 14 were inactive or winding down.  As of such date, only one joint venture had $30 million of project specific debt outstanding.   This joint venture debt is non-recourse to us and is scheduled to mature in June 2015.  As of December 31, 2014, we had $0.1 million of joint venture surety bonds outstanding subject to indemnity arrangements by us related to one project which was substantially complete as of such date.
  
Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and judgments, including those that impact our most critical accounting policies.  We base our estimates and judgments on historical experience and various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  We believe that the accounting policies related to the following accounts or activities are those that are most critical to the portrayal of our financial condition and results of operations and require the more significant judgments and estimates:

Segment Reporting

We operate two principal businesses: homebuilding and financial services (consisting of our mortgage financing and title operations).  In accordance with ASC Topic 280, Segment Reporting ("ASC 280"), we have determined that each of our homebuilding operating divisions and our financial services operations are our operating segments.  Corporate is a non-operating segment.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes.  In accordance with the aggregation criteria defined in ASC 280, our homebuilding operating segments have been grouped into three reportable segments: California; Southwest, consisting of our operating divisions in Arizona, Texas, Colorado and Nevada; and Southeast, consisting of our operating divisions in Florida and the Carolinas.  In particular, we have determined that the homebuilding operating divisions within their respective reportable segments have similar economic characteristics, including similar historical and expected future long-term gross margin percentages.  In addition, the operating divisions also share all other relevant aggregation characteristics prescribed in ASC 280, such as similar product types, production processes and methods of distribution.

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

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

Inventories and Impairments

Inventories consist of land, land under development, homes under construction, completed homes and model homes and are stated at cost, net of any impairment losses.  We capitalize direct carrying costs, including interest, property taxes and related development costs to inventories.  Field construction supervision and related direct overhead are also included in the capitalized cost of inventories.  Direct construction costs are specifically identified and allocated to homes while other common costs, such as land, land improvements and carrying costs, are allocated to homes within a community based upon their anticipated relative sales or fair value.

We assess the recoverability of real estate inventories in accordance with the provisions of ASC Topic 360, Property, Plant, and Equipment ("ASC 360").  ASC 360 requires long-lived assets, including inventories, that are expected to be held and used in operations to be carried at the lower of cost or, if impaired, the fair value of the asset.  ASC 360 requires that companies evaluate long-lived assets for impairment based on undiscounted future cash flows of the assets at the lowest level for which there is identifiable cash flows.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

We evaluate real estate projects (including unconsolidated joint venture real estate projects) for inventory impairments when indicators of potential impairment are present.  Indicators of impairment include, but are not limited to: significant decreases in local housing market values and selling prices of comparable homes; significant decreases in gross margins and sales absorption rates; accumulation of costs in excess of budget; actual or projected operating or cash flow losses; and current expectations that a real estate asset will more likely than not be sold before its previously estimated useful life.

We perform a detailed budget and cash flow review of all of our real estate projects (including projects actively selling as well as projects under development and on hold) on a periodic basis throughout each fiscal year to, among other things, determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the carrying value of the asset.  If the undiscounted cash flows are more than the carrying value of the real estate project, then no impairment adjustment is required.  However, if the undiscounted cash flows are less than the carrying amount, then the asset is deemed impaired and is written-down to its fair value.  We evaluate the identifiable cash flows at the project level.  When estimating undiscounted future cash flows of a project, we are required to make various assumptions, including the following: (i) the expected sales prices and sales incentives to be offered, including the number of homes available and pricing and incentives being offered in other communities by us or by other builders; (ii) the expected sales pace and cancellation rates based on local housing market conditions and competition; (iii) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property such as the possibility of a sale of lots to a third party versus the sale of individual homes.  Many of these assumptions are interdependent and changing one assumption generally requires a corresponding change to one or more of the other assumptions.  For example, increasing or decreasing the sales absorption rate has a direct impact on the estimated per unit sales price of a home, the level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and promotional and advertising campaign costs).  Depending on what objective we are trying to accomplish with a community, it could have a significant impact on the project cash flow analysis.  For example, if our business objective is to drive delivery levels our project cash flow analysis will be different than if the business objective is to preserve operating margins.  These objectives may vary significantly from project to project, from division to division, and over time with respect to the same project.

Once we have determined a real estate project is impaired, we calculate the fair value of the project under a land residual value analysis and in certain cases in conjunction with a discounted cash flow analysis.  Under the land residual value analysis, we estimate what a willing buyer (including us) would pay and what a willing seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a market rate operating margin based on projected revenues, costs to develop land, and costs to construct and sell homes within a community.  Under the discounted cash flow method, all estimated future cash inflows and outflows directly associated with the real estate project are discounted to calculate fair value.  The net present value of these project cash flows are then compared t