CalAtlantic Group, Inc.
CalAtlantic Group, Inc. (Form: 10-Q, Received: 07/28/2017 16:36:08)




 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
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
 
CALATLANTIC GROUP, INC.
(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.)
 
1100 Wilson Boulevard, #2100, Arlington, Virginia
(Address of principal executive offices)
 
22209
(Zip Code)
 
(240) 532-3806
(Registrant’s telephone number, including area code)
 
 
N/A
 
  ( Former name, former address and former fiscal year, if changed since last report )  
 
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 No ___.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ___.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ___ No X .
 
Registrant's shares of common stock outstanding at July 27, 2017: 110,204,545

CALATLANTIC GROUP, INC.
FORM 10-Q
INDEX
 
     
Page No.
   
 
PART I. Financial Information  
       
   
ITEM 1.
       
    2
       
    Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016  3
       
   
4
       
   
5
       
   
6
       
    ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
       
    ITEM 3.
39
       
    ITEM 4.
40
     
PART II. Other Information
 
       
    ITEM 1.
42
       
   
ITEM 1A.
42
       
    ITEM 2.
42
       
    ITEM 3.
42
       
    ITEM 4.
42
       
    ITEM 5. Other Information 42
       
    ITEM 6. Exhibits 43
       
SIGNATURES  
44
 
 
PART I.   FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

CALATLANTIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
     
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
     
(Dollars in thousands, except per share amounts)
 
     
(Unaudited)
 
                         
Homebuilding:
                       
Home sale revenues
 
$
1,620,614
   
$
1,558,701
   
$
2,958,313
   
$
2,737,866
 
Land sale revenues
   
500
     
19,661
     
500
     
26,179
 
Total revenues
   
1,621,114
     
1,578,362
     
2,958,813
     
2,764,045
 
Cost of home sales
   
(1,297,249
)
   
(1,217,793
)
   
(2,360,104
)
   
(2,149,921
)
Cost of land sales
   
(7
)
   
(19,212
)
   
(7
)
   
(25,579
)
Total cost of sales
   
(1,297,256
)
   
(1,237,005
)
   
(2,360,111
)
   
(2,175,500
)
Gross margin
   
323,858
     
341,357
     
598,702
     
588,545
 
Selling, general and administrative expenses
   
(173,997
)
   
(165,694
)
   
(330,273
)
   
(302,395
)
Income (loss) from unconsolidated joint ventures
   
446
     
223
     
4,334
     
1,412
 
Other income (expense)
   
(2,675
)
   
(4,415
)
   
(2,844
)
   
(7,823
)
Homebuilding pretax income
   
147,632
     
171,471
     
269,919
     
279,739
 
Financial Services:
                               
Revenues
   
20,277
     
20,539
     
40,233
     
38,091
 
Expenses
   
(11,661
)
   
(12,393
)
   
(24,036
)
   
(23,009
)
Financial services pretax income
   
8,616
     
8,146
     
16,197
     
15,082
 
                                 
Income before taxes
   
156,248
     
179,617
     
286,116
     
294,821
 
Provision for income taxes
   
(57,254
)
   
(66,857
)
   
(104,502
)
   
(109,400
)
Net income
   
98,994
     
112,760
     
181,614
     
185,421
 
  Less: Net income allocated to unvested restricted stock
   
(408
)
   
(251
)
   
(705
)
   
(350
)
Net income available to common stockholders
 
$
98,586
   
$
112,509
   
$
180,909
   
$
185,071
 
                                 
Income Per Common Share:
                               
Basic
 
$
0.87
   
$
0.95
   
$
1.59
   
$
1.55
 
Diluted
 
$
0.75
   
$
0.83
   
$
1.38
   
$
1.36
 
                                 
Weighted Average Common Shares Outstanding:
                               
Basic
   
113,689,435
     
118,419,937
     
114,086,136
     
119,617,438
 
Diluted
   
131,636,412
     
136,088,146
     
132,079,976
     
137,277,899
 
                                 
Cash Dividends Declared Per Common Share
 
$
0.04
   
$
0.04
   
$
0.08
   
$
0.08
 












The accompanying notes are an integral part of these condensed consolidated statements.
CALATLANTIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2017
   
2016
   
2017
   
2016
 
  
(Dollars in thousands)
 
  
(Unaudited)
 
                         
Net income
 
$
98,994
   
$
112,760
   
$
181,614
   
$
185,421
 
Other comprehensive income, net of tax:
                               
Unrealized gain on marketable securities, available for sale
   
     
     
     
39
 
Total comprehensive income
 
$
98,994
   
$
112,760
   
$
181,614
   
$
185,460
 


























 















The accompanying notes are an integral part of these condensed consolidated statements.
CALATLANTIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30,
2017
   
December 31,
2016
 
   
(Dollars in thousands)
 
   
(Unaudited)
       
ASSETS
           
Homebuilding:
           
Cash and equivalents
 
$
167,833
   
$
191,086
 
Restricted cash
   
32,367
     
28,321
 
Inventories:
               
Owned
   
6,654,990
     
6,438,792
 
Not owned
   
86,618
     
66,267
 
Investments in unconsolidated joint ventures
   
125,768
     
127,127
 
Deferred income taxes, net of valuation allowance of $1,925 and $2,456
               
at June 30, 2017 and December 31, 2016, respectively
   
312,471
     
330,378
 
Goodwill
   
985,185
     
970,185
 
Other assets
   
233,785
     
204,489
 
Total Homebuilding Assets
   
8,599,017
     
8,356,645
 
Financial Services:
               
Cash and equivalents
   
47,861
     
17,041
 
Restricted cash
   
21,375
     
21,710
 
Mortgage loans held for sale, net
   
155,180
     
262,058
 
Mortgage loans held for investment, net
   
25,613
     
24,924
 
Other assets
   
17,750
     
26,666
 
Total Financial Services Assets
   
267,779
     
352,399
 
Total Assets
 
$
8,866,796
   
$
8,709,044
 
                 
LIABILITIES AND EQUITY
               
Homebuilding:
               
Accounts payable
 
$
146,383
   
$
211,780
 
Accrued liabilities
   
542,568
     
599,905
 
Revolving credit facility
   
     
 
Secured project debt and other notes payable
   
27,041
     
27,579
 
Senior notes payable
   
3,735,232
     
3,392,208
 
Total Homebuilding Liabilities
   
4,451,224
     
4,231,472
 
Financial Services:
               
Accounts payable and other liabilities
   
19,374
     
22,559
 
Mortgage credit facility
   
149,828
     
247,427
 
Total Financial Services Liabilities
   
169,202
     
269,986
 
Total Liabilities
   
4,620,426
     
4,501,458
 
                 
Equity:
               
Stockholders' Equity:
               
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
               
and outstanding at June 30, 2017 and December 31, 2016
   
     
 
Common stock, $0.01 par value; 600,000,000 shares authorized; 110,204,353
               
and 114,429,297 shares issued and outstanding at June 30, 2017 and
               
December 31, 2016, respectively
   
1,102
     
1,144
 
Additional paid-in capital
   
3,060,402
     
3,204,835
 
Accumulated earnings
   
1,174,374
     
1,001,779
 
Accumulated other comprehensive income (loss), net of tax
   
(172
)
   
(172
)
  Total Stockholders' Equity
   
4,235,706
     
4,207,586
 
Noncontrolling Interest
   
10,664
     
 
Total Equity
   
4,246,370
     
4,207,586
 
Total Liabilities and Equity
 
$
8,866,796
   
$
8,709,044
 

The accompanying notes are an integral part of these condensed consolidated balance sheets.
CALATLANTIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
      
Six Months Ended June 30,
 
   
2017
   
2016
 
      (Dollars in thousands)  
       (Unaudited)  
Cash Flows From Operating Activities:
     
Net income
 
$
181,614
   
$
185,421
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
(Income) loss from unconsolidated joint ventures
   
(4,334
)
   
(1,412
)
Depreciation and amortization
   
27,672
     
27,428
 
Amortization of stock-based compensation
   
9,216
     
7,512
 
Deferred income tax provision
   
14,866
     
4,315
 
Other operating activities
   
3,104
     
97
 
Changes in cash and equivalents due to:
               
Mortgage loans held for sale
   
106,893
     
136,903
 
Inventories - owned
   
(178,314
)
   
(271,304
)
Inventories - not owned
   
(34,472
)
   
(19,254
)
Other assets
   
(13,043
)
   
(1,758
)
Accounts payable
   
(65,397
)
   
24,080
 
Accrued liabilities
   
(47,213
)
   
(28,414
)
Net cash provided by (used in) operating activities
   
592
     
63,614
 
                 
Cash Flows From Investing Activities:
               
Investments in unconsolidated homebuilding joint ventures
   
(25,002
)
   
(22,592
)
Distributions of capital from unconsolidated homebuilding joint ventures
   
8,045
     
8,115
 
Net cash paid for acquisitions
   
(44,477
)
   
 
Other investing activities
   
(9,793
)
   
(4,166
)
Net cash provided by (used in) investing activities
   
(71,227
)
   
(18,643
)
                 
Cash Flows From Financing Activities:
               
Change in restricted cash
   
(3,711
)
   
6,063
 
Borrowings from revolving credit facility
   
264,450
     
693,700
 
Principal payments on revolving credit facility
   
(264,450
)
   
(693,700
)
Principal payments on secured project debt and other notes payable
   
(615
)
   
(10,169
)
Principal payment on senior notes payable
   
(230,000
)
   
 
Proceeds from the issuance of senior notes payable
   
579,125
     
300,000
 
Payment of debt issuance costs
   
(4,595
)
   
(2,195
)
Net proceeds from (payments on) mortgage credit facility
   
(97,599
)
   
(128,908
)
Repurchases of common stock
   
(150,014
)
   
(99,829
)
Common stock dividend payments
   
(9,019
)
   
(9,527
)
Issuance of common stock under employee stock plans, net of tax withholdings
   
(5,303
)
   
1,069
 
Other financing activities
   
(67
)
   
(199
)
Net cash provided by (used in) financing activities
   
78,202
     
56,305
 
                 
Net increase (decrease) in cash and equivalents
   
7,567
     
101,276
 
Cash and equivalents at beginning of period
   
208,127
     
186,594
 
Cash and equivalents at end of period
 
$
215,694
   
$
287,870
 
                 
Cash and equivalents at end of period
 
$
215,694
   
$
287,870
 
Homebuilding restricted cash at end of period
   
32,367
     
30,833
 
Financial services restricted cash at end of period
   
21,375
     
22,008
 
Cash and equivalents and restricted cash at end of period
 
$
269,436
   
$
340,711
 







The accompanying notes are an integral part of these condensed consolidated statements.
CALATLANTIC GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017


1.   Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for Form 10-Q and include the accounts of CalAtlantic Group, Inc., its wholly owned subsidiaries and a variable interest entity in which CalAtlantic Group, Inc. is deemed to be the primary beneficiary.  Certain information normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") has been omitted pursuant to applicable rules and regulations.   In the opinion of management, the unaudited condensed consolidated financial statements included herein reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2017 and the results of operations and cash flows for the periods presented.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10‑K for the year ended December 31, 2016.  Unless the context otherwise requires, the terms "we," "us," "our" and "the Company" refer to CalAtlantic Group, Inc. and its subsidiaries.  The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
 
2.   Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes existing accounting literature relating to how and when a company recognizes revenue.  Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606):  Deferral of the Effective Date , which delayed the effective date of ASU 2014-09 by one year.  As a result, for public companies, ASU 2014-09 will be effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2017, and is to be applied either with a full retrospective or modified retrospective approach, with early application permitted.  We do not plan to early adopt the guidance.  We expect to adopt the new standard under the modified retrospective approach.  Although we are still in the process of evaluating our contracts, we do not believe the adoption of ASU 2014-09 will have a material impact on the amount or timing of our homebuilding revenues. We are continuing to evaluate the impact the adoption of ASU 2014-09 may have on other aspects of our business and on our condensed consolidated financial statements and disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception.  A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements , and as such these investments may be measured at cost.  ASU 2016-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.  We are currently evaluating the impact adoption will have on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-02,  Leases  ("ASU 2016-02"), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification.  The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease.  ASU 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.  We are currently evaluating the impact adoption will have on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07,  Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting  ("ASU 2016-07"), which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment.  Our adoption of ASU 2016-07 on January 1, 2017 did not have an effect on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  In connection with our adoption of ASU 2016-09 on January 1, 2017, the Company elected to apply the provisions of ASU 2016-09 related to the income statement and statement of cash flows impact of income taxes on a prospective basis, and as such, prior periods have not been adjusted.  The Company made a policy election to continue to estimate forfeitures at the grant date of an award.  The remaining updates required in connection with our adoption of ASU 2016-09 did not have a material effect on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows.  ASU 2016-15 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted.  We do not believe that the adoption of ASU 2016-15 will have a material effect on our condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), which provides guidance on the classification of restricted cash in the statement of cash flows. ASU 2016-18 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted.  We determined that upon adoption of this new standard, the Company will no longer present the changes within restricted cash in the consolidated statements of cash flows.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business ("ASU 2017-01"), which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted.  Once adopted, the Company will be required to analyze any future acquisitions to determine whether the transaction qualifies as a purchase of a business or an asset.  Transaction costs associated with asset acquisitions will be capitalized, while transaction costs associated with a business combination will continue to be expensed as incurred.  In addition, asset acquisitions will not be subject to a measurement period, as are business combinations.  The adoption of ASU 2017-01 may have a future impact on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted.  We elected to early adopt ASU 2017-04 for the reporting period beginning January 1, 2017.  Our adoption of ASU 2017-04 did not have a material effect on our condensed consolidated financial statements.
 
3.   Segment Reporting

We operate two principal businesses: homebuilding and financial services.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes.  In accordance with ASC Topic 280, Segment Reporting ("ASC 280"), we have determined that each of our four homebuilding regions and financial services operations (consisting of our mortgage financing and title operations) are our operating segments.  Our four homebuilding reportable segments include:  North, consisting of our divisions in Georgia, Delaware, Illinois, Indiana, Maryland, Minnesota, New Jersey, Pennsylvania, Virginia and Washington D.C.; Southeast, consisting of our divisions in Florida and the Carolinas; Southwest, consisting of our divisions in Texas, Colorado, Nevada and Utah; and West, consisting of our divisions in California, Arizona and Washington.

Our mortgage financing operation, CalAtlantic Mortgage, 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, escrow and insurance subsidiaries provide title, escrow and insurance services to homebuyers in many of our markets.  Our mortgage financing, title, escrow and insurance services operations are included in our financial services reportable segment, which is separately reported in our condensed 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.  All of the expenses incurred by Corporate are allocated to each of our four homebuilding regions based on their respective percentage of revenues.


Segment financial information relating to the Company's homebuilding operations was as follows:
 
    
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
    
(Dollars in thousands)
 
Homebuilding revenues:
                       
North
 
$
331,071
   
$
241,274
   
$
565,847
   
$
427,829
 
Southeast
   
429,269
     
386,836
     
780,372
     
664,318
 
Southwest
   
406,636
     
433,603
     
742,851
     
776,637
 
West
   
454,138
     
516,649
     
869,743
     
895,261
 
     Total homebuilding revenues
 
$
1,621,114
   
$
1,578,362
   
$
2,958,813
   
$
2,764,045
 
                                 
Homebuilding pretax income (1):
                               
North
 
$
29,732
   
$
17,980
   
$
48,597
   
$
27,550
 
Southeast
   
31,885
     
31,772
     
55,601
     
52,822
 
Southwest
   
38,932
     
46,907
     
69,109
     
73,833
 
West
   
47,083
     
74,812
     
96,612
     
125,534
 
     Total homebuilding pretax income
 
$
147,632
   
$
171,471
   
$
269,919
   
$
279,739
 
                                 
Homebuilding income (loss) from unconsolidated joint ventures:
                               
North
 
$
155
   
$
67
   
$
447
   
$
374
 
Southeast
   
     
(19
)
   
     
437
 
Southwest
   
154
     
257
     
263
     
824
 
West
   
137
     
(82
)
   
3,624
     
(223
)
     Total homebuilding income (loss) from unconsolidated joint ventures
 
$
446
   
$
223
   
$
4,334
   
$
1,412
 
__________________
(1)
Homebuilding pretax income includes depreciation and amortization expense of $2.2 million, $4.2 million, $3.0 million and $5.5 million, respectively, in the North, Southeast, Southwest and West for the quarter ended June 30, 2017 and $1.5 million, $4.2 million, $3.2 million and $6.5 million, respectively, in the North, Southeast, Southwest and West for the quarter ended June 30, 2016.  Homebuilding pretax income includes depreciation and amortization expense of $3.6 million, $7.7 million, $5.5 million and $10.8 million, respectively, in the North, Southeast, Southwest and West for the six months ended June 30, 2017 and $2.7 million, $7.0 million, $5.9 million and $11.8 million, respectively, in the North, Southeast, Southwest and West for the six months ended June 30, 2016.

Segment financial information relating to the Company's homebuilding assets was as follows:
 
   
June 30,
   
December 31,
 
   
2017
   
2016
 
    
(Dollars in thousands)
 
Homebuilding assets:
           
North
 
$
1,279,502
   
$
1,181,544
 
Southeast
   
2,342,138
     
2,253,289
 
Southwest
   
1,839,474
     
1,842,869
 
West
   
2,537,127
     
2,500,163
 
Corporate
   
600,776
     
578,780
 
     Total homebuilding assets
 
$
8,599,017
   
$
8,356,645
 
                 
Homebuilding investments in unconsolidated joint ventures:
               
North
 
$
5,726
   
$
5,691
 
Southeast
   
162
     
334
 
Southwest
   
5,393
     
6,085
 
West
   
114,487
     
115,017
 
     Total homebuilding investments in unconsolidated joint ventures
 
$
125,768
   
$
127,127
 
 
4.   Earnings Per Common Share

We compute earnings per share in accordance with ASC Topic 260, Earnings per Share ("ASC 260"), which requires earnings per share for each class of stock to be calculated using the two-class method.  The two-class method is an allocation of earnings between the holders of common stock and a company's participating security holders.  Under the two-class method, earnings for the reporting period are allocated between common shareholders and other security holders based on their respective participation rights in undistributed earnings.  Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.

Basic earnings per common share is computed by dividing income or loss available to common stockholders by the weighted average number of shares of basic common stock outstanding.  Our unvested restricted stock are classified as participating securities in accordance with ASC 260.  Net income allocated to the holders of our unvested restricted stock is calculated based on the shareholders' proportionate share of weighted average shares of common stock outstanding on an if-converted basis.

For purposes of determining diluted earnings per common share, basic earnings per common share is further adjusted to include the effect of potential dilutive common shares outstanding, including stock options, stock appreciation rights, performance share awards and unvested restricted stock using the more dilutive of either the two-class method or the treasury stock method.  Under the two-class method of calculating diluted earnings per share, net income is reallocated to common stock, unvested restricted stock and all dilutive securities based on the contractual participating rights of the security to share in the current earnings as if all of the earnings for the period had been distributed.
 
     
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
     
(Dollars in thousands, except per share amounts)
 
                         
Numerator:
                       
Net income
 
$
98,994
   
$
112,760
   
$
181,614
   
$
185,421
 
Less: Net income allocated to unvested restricted stock
   
(408
)
   
(251
)
   
(705
)
   
(350
)
Net income available to common stockholders for basic
                               
earnings per common share
   
98,586
     
112,509
     
180,909
     
185,071
 
Effect of dilutive securities:
                               
Interest on 1.625% convertible senior notes due 2018
   
94
     
91
     
468
     
453
 
Interest on 0.25% convertible senior notes due 2019
   
85
     
82
     
423
     
410
 
Interest on 1.25% convertible senior notes due 2032
   
64
     
62
     
320
     
310
 
Net income available to common stock for diluted
                               
earnings per share
 
$
98,829
   
$
112,744
   
$
182,120
   
$
186,244
 
                                 
Denominator:
                               
Weighted average basic common shares outstanding
   
113,689,435
     
118,419,937
     
114,086,136
     
119,617,438
 
Effect of dilutive securities:
                               
Share-based awards
   
821,628
     
583,264
     
868,491
     
575,516
 
1.625% convertible senior notes due 2018
   
7,171,943
     
7,163,865
     
7,171,943
     
7,163,865
 
0.25% convertible senior notes due 2019
   
3,641,157
     
3,637,091
     
3,641,157
     
3,637,091
 
1.25% convertible senior notes due 2032
   
6,312,249
     
6,283,989
     
6,312,249
     
6,283,989
 
Weighted average diluted shares outstanding
   
131,636,412
     
136,088,146
     
132,079,976
     
137,277,899
 
                                 
Income per common share:
                               
Basic
 
$
0.87
   
$
0.95
   
$
1.59
   
$
1.55
 
Diluted
 
$
0.75
   
$
0.83
   
$
1.38
   
$
1.36
 
 
5.   Stock-Based Compensation

We account for share-based awards in accordance with ASC Topic 718, Compensation – Stock Compensation ("ASC 718") which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.  ASC 718 requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

Total compensation expense recognized related to stock-based compensation was $4.9 million and $3.7 million for the three months ended June 30, 2017 and 2016, respectively.  For the six months ended June 30, 2017 and 2016, we recognized stock-based compensation expense of $9.2 million and $7.5 million, respectively.  As of June 30, 2017, total unrecognized stock-based compensation expense was $36.6 million, with a weighted average period over which the remaining unrecognized compensation expense is expected to be recorded of approximately 2.1 years.

6.   Cash and Equivalents and Restricted Cash

Cash and equivalents include cash on hand, demand deposits and all highly liquid short-term investments, including interest-bearing securities purchased with a maturity of three months or less from the date of purchase.  At June 30, 2017, cash and equivalents included $80.6 million of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.

At June 30, 2017, homebuilding restricted cash represented $32.4 million of cash held in cash collateral accounts primarily related to certain letters of credit that have been issued.  Financial services restricted cash as of June 30, 2017 consisted of $17.7 million held in cash collateral accounts primarily related to certain letters of credit that have been issued, $3.0 million related to our financial services subsidiary mortgage credit facility and $0.7 million related to funds held in trust for third parties.

7.   Marketable Securities, Available-for-sale

The Company's investment portfolio includes mainly municipal debt securities and metropolitan district bond securities, which are included in homebuilding other assets in the accompanying condensed consolidated balance sheets.  As defined in ASC Topic 320, Investments—Debt and Equity Securities ("ASC 320"), the Company considers its investment portfolio to be available-for-sale.  Accordingly, these investments are recorded at their fair values.  The cost of securities sold is based on an average-cost basis.  Unrealized gains and losses on these investments are included in accumulated other comprehensive income (loss), net of tax, within stockholders' equity.  At June 30, 2017, accumulated other comprehensive income (loss) included unrealized losses of $172,000 on available-for-sale marketable securities.  Realized earnings associated with the Company's available-for-sale marketable securities, which included interest and dividends totaled $173,000 for the six months ended June 30, 2017, and were included in homebuilding other income (expense) in the accompanying condensed consolidated statements of operations.

The Company periodically reviews its available-for-sale securities for other-than-temporary declines in fair values that are below their cost bases, as well as whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  At June 30, 2017, the Company believes that the cost bases for its available-for-sale securities were recoverable in all material respects.
 
The following table displays the fair values of marketable securities, available-for-sale, by type of security:
         
   
  
June 30, 2017
 
December 31, 2016
   
  
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Amortized Cost
 
Gross Unrealized Losses
 
Estimated Fair Value
   
  
(Dollars in thousands)
Type of security:
  
                     
 
Municipal bond and metropolitan district securities
  
 $             24,994
 
 $               (465)
 
 $            24,529
 
 $             18,563
 
$               (465)
 
 $          18,098
 
The following table displays the fair values of marketable securities, available-for-sale, by contractual maturity:
 
   
  
June 30, 2017
   
  
(Dollars in thousands)
Contractual maturity:
  
   
 
Maturing in one year or less
  
$
   ―  
 
Maturing after three years
  
 
24,529 
 
Total marketable securities, available-for-sale
  
$
24,529 



8.   Inventories
 
a. Inventories Owned
 
Inventories owned consisted of the following at:
 
   
June 30, 2017
 
   
North
   
Southeast
   
Southwest
   
West
   
Total
 
   
(Dollars in thousands)
 
                               
Land and land under development (1)
 
$
356,324
   
$
1,079,342
   
$
434,607
   
$
1,286,105
   
$
3,156,378
 
Homes completed and under construction
   
514,386
     
789,607
     
890,181
     
847,383
     
3,041,557
 
Model homes
   
59,446
     
130,048
     
113,436
     
154,125
     
457,055
 
   Total inventories owned
 
$
930,156
   
$
1,998,997
   
$
1,438,224
   
$
2,287,613
   
$
6,654,990
 
                                         
   
December 31, 2016
 
   
North
   
Southeast
   
Southwest
   
West
   
Total
 
   
(Dollars in thousands)
 
                                         
Land and land under development (1)
 
$
445,245
   
$
1,177,646
   
$
594,585
   
$
1,410,264
   
$
3,627,740
 
Homes completed and under construction
   
327,421
     
585,938
     
710,509
     
680,241
     
2,304,109
 
Model homes
   
79,306
     
132,968
     
116,575
     
178,094
     
506,943
 
   Total inventories owned
 
$
851,972
   
$
1,896,552
   
$
1,421,669
   
$
2,268,599
   
$
6,438,792
 
__________________
(1)
During the six months ended June 30, 2017, we purchased $427.7 million of land (6,651 homesites), of which 33% (based on homesites) were located in the North, 30% in the Southeast, 17% in the Southwest, and 20% in the West. During the year ended December 31, 2016, we purchased $960.8 million of land (13,566 homesites), of which 25% (based on homesites) were located in the North, 25% in the Southeast, 24% in the Southwest, and 26% in the West. 

 
In accordance with ASC Topic 360, Property, Plant, and Equipment ("ASC 360"), we record impairment losses on inventories when events and circumstances indicate that they may be impaired, and the future undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.  We perform a detailed budget and cash flow review of all of our real estate communities (including actively selling communities, future communities and communities on hold/inactive) on a semi-annual basis throughout each fiscal year to, among other things, determine whether the community's estimated remaining undiscounted future cash flows are more or less than the carrying value of the inventory balance.  Inventories that are determined to be impaired are written down to their estimated fair value.  We calculate the fair value of a community under a land residual value analysis and in certain cases in conjunction with a discounted cash flow analysis.  As of June 30, 2017 and 2016, the total active and future communities that we owned were 870 and 876, respectively.  During the three months ended June 30, 2017 and 2016, we reviewed all communities for indicators of impairment and based on our review we did not record any inventory impairments during these periods.
 
During the three months ended June 30, 2017, we acquired the homebuilding operations (representing approximately 19 current and future communities) from a Seattle-based developer and homebuilder for total consideration of $44.5 million, which we accounted for as a business combination in accordance with ASC Topic 805, Business Combinations.  As a result of this transaction, we recorded approximately $25.7 million of inventories owned, $3.9 million of inventories not owned, $15.0 million of goodwill and $0.1 million of other accrued liabilities and other debt.  As of June 30, 2017, these amounts are subject to change as we have not yet finalized the purchase price allocation of the real estate assets acquired in this transaction.
 
b. Inventories Not Owned

Inventories not owned as of June 30, 2017 and December 31, 2016 consisted of land purchase and lot option deposits outstanding at the end of each period, and purchase price allocated to lot option contracts assumed in connection with business acquisitions. Under ASC Topic 810, Consolidation ("ASC 810"), a non-refundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity's expected losses if they occur.  Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property.  In some instances,
 
we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown.  Such costs are classified as inventories owned, which we would have to write-off should we not exercise the option.  Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a variable interest entity ("VIE") may have been created.  In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

9.   Capitalization of Interest

We follow the practice of capitalizing interest to inventories owned during the period of development and to investments in unconsolidated homebuilding and land development joint ventures in accordance with ASC Topic 835, Interest ("ASC 835").  Homebuilding interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold.  Interest capitalized to investments in unconsolidated homebuilding and land development joint ventures is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties.  Interest capitalized to investments in unconsolidated land development joint ventures is transferred to inventories owned if the underlying lots are purchased by us.  To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us.  Qualified assets represent communities that are actively selling or under development as well as investments in homebuilding and land development unconsolidated joint ventures.  During the six months ended June 30, 2017 and 2016, our qualified assets exceeded our debt, and as a result, all of our homebuilding interest incurred during the six months ended June 30, 2017 and 2016 was capitalized in accordance with ASC 835.

The following is a summary of homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, amortized to cost of sales and income (loss) from unconsolidated joint ventures and expensed as interest expense, for the three and six months ended June 30, 2017 and 2016:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(Dollars in thousands)
 
                         
Total interest incurred (1)
 
$
52,168
   
$
55,610
   
$
103,873
   
$
118,335
 
Less: Interest capitalized to inventories owned (1)
   
(51,338
)
   
(54,564
)
   
(102,213
)
   
(116,409
)
Less: Interest capitalized to investments in unconsolidated joint ventures
   
(830
)
   
(1,046
)
   
(1,660
)
   
(1,926
)
Interest expense
 
$
   
$
   
$
   
$
 
                                 
Interest previously capitalized to inventories owned, included in cost of home sales
 
$
52,347
   
$
40,528
   
$
91,775
   
$
70,731
 
Interest previously capitalized to inventories owned, included in cost of land sales
 
$
   
$
1,302
   
$
   
$
1,481
 
Interest previously capitalized to investments in unconsolidated joint ventures,
                               
included in income (loss) from unconsolidated joint ventures
 
$
8
   
$
   
$
8
   
$
 
Interest capitalized in ending inventories owned (2)
 
$
376,638
   
$
350,210
   
$
376,638
   
$
350,210
 
Interest capitalized as a percentage of inventories owned
   
5.7
%
   
5.5
%
   
5.7
%
   
5.5
%
Interest capitalized in ending investments in unconsolidated joint ventures (2)
 
$
4,515
   
$
4,313
   
$
4,515
   
$
4,313
 
Interest capitalized as a percentage of investments in unconsolidated joint ventures
   
3.6
%
   
2.9
%
   
3.6
%
   
2.9
%
__________________
(1)
Total interest incurred and interest capitalized to inventories owned during the six months ended June 30, 2016 includes a $9 million increase related to the valuation of the 1.625% convertible senior notes that was completed during the 2016 first quarter. 
(2)
During the three and six months ended June 30, 2017, in connection with lot purchases from our joint ventures, $0 and $0.5 million, respectively, of capitalized interest was transferred from investments in unconsolidated joint ventures to inventories owned.

10.     Investments in Unconsolidated Land Development and Homebuilding Joint Ventures

Income (loss) from unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations represents our share of the income (loss) of our unconsolidated land development and homebuilding joint ventures, which is allocated based on the provisions of the underlying joint venture operating agreements less any additional impairments, if any, recorded against our investments in joint ventures which we do not deem recoverable.  In addition, we defer recognition of our share of income that relates to lots purchased by us from land development joint ventures until we
 
ultimately sell the homes to be constructed to third parties, at which time we account for these earnings as a reduction of the cost basis of the lots purchased from these joint ventures.

During each of the six months ended June 30, 2017 and 2016, all of our investments in unconsolidated joint ventures were reviewed for impairment.  Based on the impairment review, no joint venture communities were determined to be impaired for the six months ended June 30, 2017 or 2016.

Our investments in unconsolidated joint ventures may represent a variable interest in a VIE depending on, among other things, the economic interests of the members of the entity and the contractual terms of the arrangement.  We analyze all of our unconsolidated joint ventures under the provisions of ASC 810 to determine whether these entities are deemed to be VIEs, and if so, whether we are the primary beneficiary.  As of June 30, 2017, with the exception of one homebuilding joint venture that we consolidated during the 2017 first quarter in accordance with ASC 810, all of our homebuilding and land development joint ventures with unrelated parties were determined under the provisions of ASC 810 to be unconsolidated joint ventures either because they were not deemed to be VIEs and we did not have a controlling interest, or, if they were a VIE, we were not deemed to be the primary beneficiary.  During the 2017 first quarter, we entered into a homebuilding joint venture with an unrelated party.  Based on our assessment of the joint venture's operating agreement in accordance with ASC 810, we determined that this joint venture is a consolidated VIE where CalAtlantic Group, Inc. is the primary beneficiary that has both (i) the power to direct the activities of the entity that most significantly impact the entity's economic performance and (ii) the obligation to absorb the expected losses of the entity and right to receive benefits from the entity that could be potentially significant to the joint venture.  As a result of consolidating this VIE, we have $10.7 million of noncontrolling interest reflected in the accompanying condensed consolidated balance sheets as of June 30, 2017.

11.     Warranty Costs

Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized.  Amounts accrued are based upon historical experience.  Indirect warranty overhead salaries and related costs are charged to cost of sales in the period incurred.  We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary.  Our warranty accrual is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Changes in our warranty accrual are detailed in the table set forth below:

 
Six Months Ended June 30,
 
 
2017
   
2016
 
 
(Dollars in thousands)
 
             
Warranty accrual, beginning of the period
 
$
43,932
   
$
40,691
 
Warranty costs accrued during the period
   
10,699
     
10,823
 
Warranty costs paid during the period
   
(11,986
)
   
(9,941
)
Warranty accrual, end of the period
 
$
42,645
   
$
41,573
 
 
12.     Revolving Credit Facility and Letter of Credit Facilities
  
As of June 30, 2017, we were party to a $750 million unsecured revolving credit facility, $350 million of which is available for letters of credit, which matures in October 2019.  The facility has an accordion feature under which the Company may increase the total commitment up to a maximum aggregate amount of $1.2 billion, subject to certain conditions, including the availability of additional bank commitments.  Interest rates, as defined in the credit agreement, approximate (i) LIBOR (approximately 1.23% at June 30, 2017) plus 1.75%, or (ii) Prime (4.25% at June 30, 2017) plus 0.75%.
 
In addition to customary representations and warranties, the facility contains financial and other covenants, including a minimum tangible net worth requirement of $1.65 billion (which amount is subject

to increase over time based on subsequent earnings and proceeds from equity offerings), a net homebuilding leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 2.00 to 1.00 and a land covenant that limits land not under development to an amount not to exceed tangible net worth. The Company is also required to maintain either (a) a minimum liquidity level (unrestricted cash in excess of interest incurred for the previous four quarters) or (b) a minimum interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.25 to 1.00.  We were in compliance with all of the revolving facility covenants as of June 30, 2017. The revolving facility also limits, among other things, the Company's investments in joint ventures and the amount of the Company's common stock that the Company can repurchase.  On June 30, 2017, we had no borrowings outstanding under the facility and had outstanding letters of credit issued under the facility totaling $94.7 million, leaving $655.3 million available under the facility to be drawn.
 
As of June 30, 2017, in addition to our $350 million letter of credit sublimit under our revolving facility, we were party to four committed letter of credit facilities totaling $48.0 million, of which $25.9 million was outstanding.  These facilities require cash collateralization and have maturity dates ranging from October 2017 to August 2020.  As of June 30, 2017, these facilities were secured by cash collateral deposits of $26.4 million.  Upon maturity, we may renew or enter into new letter of credit facilities with the same or other financial institutions.

13.     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.  At June 30, 2017, we had approximately $27.0 million outstanding in secured project debt and other notes payable.  

14.     Senior Notes Payable

Senior notes payable consisted of the following at:
 
   
June 30,
   
December 31,
 
   
2017
   
2016
 
   
(Dollars in thousands)
 
             
8.4% Senior Notes due May 2017
 
$
   
$
235,175
 
8.375% Senior Notes due May 2018
   
574,695
     
574,501
 
1.625% Convertible Senior Notes due May 2018
   
221,916
     
220,236
 
0.25% Convertible Senior notes due June 2019
   
256,616
     
253,777
 
6.625% Senior Notes due May 2020
   
316,923
     
319,909
 
8.375% Senior Notes due January 2021
   
395,804
     
395,246
 
6.25% Senior Notes due December 2021
   
297,861
     
297,623
 
5.375% Senior Notes due October 2022
   
249,297
     
249,230
 
5.875% Senior Notes due November 2024
   
426,633
     
296,982
 
5.25% Senior Notes due June 2026
   
395,204
     
297,483
 
5.00% Senior Notes due June 2027
   
347,419
     
 
1.25% Convertible Senior Notes due August 2032
   
252,864
     
252,046
 
   
$
3,735,232
   
$
3,392,208
 
 
The carrying amount of our senior notes listed above are net of debt issuance costs and any discounts and premiums that are amortized to interest costs over the respective terms of the notes.
 
The Company's 1.625% Convertible Senior Notes due 2018 are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 1.625% Convertible Notes bear interest at a rate of 1.625% per year and will mature on May 15, 2018, unless earlier converted or repurchased. The holders may convert their 1.625% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 31.8753 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $31.37 per share), subject to adjustment. The Company may not redeem the 1.625% Convertible Notes prior to the stated maturity date.
 
The Company's 0.25% Convertible Senior Notes due 2019 are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 0.25% Convertible Notes bear interest at a rate of 0.25% per year and will mature on June 1, 2019, unless earlier converted, redeemed or repurchased. The holders may convert their 0.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 13.6118 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $73.47 per share), subject to adjustment. The Company may not redeem the 0.25% Convertible Notes prior to June 6, 2017. On or after that date, the Company may redeem for cash any or all of the 0.25% Convertible Notes, at its option, if the closing sale price of its common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending within 5 trading days immediately preceding the date on which it provides notice of redemption, including the last trading day of such 30 day trading period, exceeds 130 percent of the applicable conversion price on each applicable trading day. The redemption price will equal 100 percent of the principal amount of the 0.25% Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The Company's 1.25% Convertible Senior Notes due 2032 are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis. The 1.25% Convertible Notes bear interest at a rate of 1.25% per year and will mature on August 1, 2032, unless earlier converted, redeemed or repurchased. The holders may convert their 1.25% Convertible Notes at any time into shares of the Company's common stock at a conversion rate of 24.9496 shares of common stock per $1,000 of their principal amount (which is equal to a conversion price of approximately $40.08 per share), subject to adjustment. The Company may not redeem the 1.25% 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 1.25% Convertible Notes at a redemption price equal to 100% of the principal amount of the 1.25% Convertible Notes being redeemed.  On each of August 1, 2017, August 1, 2022 and August 1, 2027, holders of the 1.25% Convertible Notes may require the Company to purchase all or any portion of their 1.25% Convertible Notes for cash at a price equal to 100% of the principal amount of the 1.25% Convertible Notes to be repurchased.

Our senior notes payable are all senior obligations and rank equally with our other existing senior indebtedness and, with the exception of our Convertible Notes, are redeemable at our option, in whole or in part, pursuant to a "make whole" formula.  These notes contain various restrictive covenants, including, but not limited to, a limitation on secured indebtedness and a restriction on sale leaseback transactions.  As of June 30, 2017, we were in compliance with the covenants required by our senior notes.

Many of our 100% owned direct and indirect subsidiaries (collectively, the "Guarantor Subsidiaries") guarantee our outstanding senior notes.  The guarantees are full and unconditional, and joint and several.  Under our most restrictive indenture, a Guarantor Subsidiary will be released and relieved of any obligations under the applicable note guarantee in the event that i) such Guarantor Subsidiary ceases to be a restricted subsidiary in the homebuilding segment or ii) in the event of a sale or other disposition of such Guarantor Subsidiary, in compliance with the indenture, and such Guarantor Subsidiary ceases to guaranty any other debt of the Company.  Please see Note 20 for supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group.
 
In April 2017, the Company issued $225 million in aggregate principal amount of senior notes, consisting of $125 million aggregate principal amount of additional notes to the Company's existing 5.875% Senior Notes due 2024 and $100 million aggregate principal amount of additional notes to the Company's existing 5.25% Senior Notes due 2026, each of which are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.  A portion of the net proceeds of this issuance were used to repay the remaining $230 million principal balance of our 8.4% Senior Notes upon maturity in May 2017.
 
During June 2017, the Company issued $350 million in aggregate principal amount of 5.00% Senior Notes due 2027, which are senior unsecured obligations of the Company and are guaranteed by the guarantors of our other senior notes on a senior unsecured basis.
 

15.     Mortgage Credit Facility

At June 30, 2017, we had $149.8 million outstanding under our mortgage financing subsidiary's mortgage credit facility.  This mortgage credit facility consisted of a $300 million uncommitted repurchase facility with one lender, maturing in June 2018. This facility requires our mortgage financing subsidiary to maintain cash collateral accounts, which totaled $3.0 million as of June 30, 2017, and also contains financial covenants which require CalAtlantic 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 June 30, 2017, CalAtlantic Mortgage was in compliance with the financial and other covenants contained in this facility.
16.     Disclosures about Fair Value

ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), establishes a framework for measuring fair value, expands disclosures regarding fair value measurements and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Further, ASC 820 requires us to maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. The three levels of the hierarchy are as follows:

  Level 1 – quoted prices for identical assets or liabilities in active markets;

  Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

  Level 3 – valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable .

Financial instruments measured at fair value on a recurring basis:
 
       
Fair Value at
Description
 
Fair Value Hierarchy
 
June 30,
2017
 
December 31,
2016
        (Dollars in thousands) 
 
  
             
Marketable securities, available-for-sale
               
     Municipal debt securities
  
Level 2
  
$
 9,387
 
$
 9,387
     Metropolitan district bond securities
  
Level 3
 
$
15,142 
 
$
 8,711
Mortgage loans held for sale
  
Level 2
  
$
 158,804
 
$
 265,542
 
Marketable Securities, Available-for-sale

Marketable securities that are available-for-sale are comprised mainly of municipal debt securities and metropolitan district bond securities.  The Company's municipal debt securities are valued based on quoted market prices of similar instruments, which uses Level 2 inputs, and the metropolitan district bond securities are based on a discounted future cash flow model, which uses Level 3 inputs.  The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as homes drive increases to the taxpaying base for the metropolitan district, (2) the forecasted assessed value of those closed homes and (3) the discount rate.
 
 
Mortgage loans held for sale

Mortgage loans held for sale   consist of FHA, VA, USDA and agency first mortgages on single-family residences which are eligible for sale to FNMA/FHLMC, GNMA or other investors, as applicable.  Fair values of these loans are based on quoted prices from third party investors when preselling loans.

Financial instruments for which we have not elected the fair value option in accordance with ASC 825:
 
         
June 30, 2017
 
December 31, 2016
Description
 
Fair Value Hierarchy
 
 
Carrying
Amount
 
 
Fair Value
 
 
Carrying
Amount
 
 
Fair Value
          (Dollars in thousands) 
   
  
                         
Financial services assets:
  
                         
 
Mortgage loans held for investment, net
  
Level 2
  
$
 25,613
 
$
 25,613
 
$
 24,924
 
$
 24,924
Homebuilding liabilities:
  
                         
 
Senior and convertible senior notes payable, net
  
Level 2
  
$
 3,735,232
 
$
 4,014,703
 
$
 3,392,208
 
$
 3,617,838
 
Mortgage Loans Held for Investment – Fair value of these loans is based on the estimated market value of the underlying collateral based on market data and other factors for similar type properties as further adjusted to reflect the estimated net realizable value of carrying the loans through disposition.

Senior Notes Payable – The senior notes are traded over the counter and their fair values were estimated based upon the values of their last trade at the end of the period.

The fair value of our cash and equivalents, restricted cash, accounts payable and accrued liabilities, secured project debt and other notes payable, revolving credit facility, and mortgage credit facility approximate their carrying amounts due to the short-term nature and/or variable interest rate attribute of these assets and liabilities.

17.     Commitments and Contingencies
 
a. Land Purchase and Option Agreements

We are subject to 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 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 a letter of credit provided by us 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 June 30, 2017, we had non-refundable cash deposits outstanding of approximately $76.9 million and capitalized pre-acquisition and other development and construction costs of approximately $31.9 million relating to land purchase and option contracts having a total remaining purchase price of approximately $1,058.3 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.
 
b. Land Development and Homebuilding Joint Ventures
 
Our joint ventures have historically obtained secured acquisition, development and construction financing designed to reduce the use of funds from corporate financing sources.  As of June 30, 2017, we held ownership interests in 27 homebuilding and land development joint ventures, of which 13 were active and 14 were inactive or winding down.  As of such date, only two joint ventures had project specific debt outstanding, which totaled $30.2 million.  This joint venture bank debt is non-recourse to us and is scheduled to mature in September 2017.  At June 30, 2017, we had no joint venture surety bonds outstanding.
 
c. Surety Bonds
 
We obtain surety bonds in the normal course of business to ensure completion of the infrastructure of our communities.  At June 30, 2017, we had approximately $947.5 million in surety bonds outstanding, with respect to which we had an estimated $500.3 million remaining in cost to complete.
 
d. Mortgage Loans and Commitments
 
We commit to making mortgage loans to our homebuyers through our mortgage financing subsidiary, CalAtlantic Mortgage.  CalAtlantic Mortgage sells substantially all of the loans it originates in the secondary mortgage market and finances these loans under its mortgage credit facility for a short period of time (typically for 30 to 45 days), as investors complete their administrative review of applicable loan documents.  Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $338.6 million at June 30, 2017 and carried a weighted average interest rate of approximately 3.6%.  Interest rate risks related to these obligations are mitigated by CalAtlantic Mortgage through the preselling of loans to investors or through its interest rate hedging program.  As of June 30, 2017, CalAtlantic Mortgage had approximately $154.8 million in closed mortgage loans held for sale and $23.4 million of mortgage loans in process that we were committed to sell to investors subject to our funding of the loans and the investors' completion of their administrative review of the applicable loan documents.  In addition, as of June 30, 2017, CalAtlantic Mortgage had approximately $315.2 million of mortgage loans in process that were or are expected to be originated on a non-presold basis, substantially all of which were hedged by forward sale commitments of mortgage-backed securities prior to entering into loan sale transactions with third party investors.

Substantially all of the loans originated by CalAtlantic Mortgage are sold with servicing rights released on a non-recourse basis.  These sales are generally subject to CalAtlantic Mortgage's obligation to repay its 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 purchaser's underwriting guidelines are not met, or there is fraud in connection with the loan.  During the six months ended June 30, 2017 and 2016, CalAtlantic Mortgage recorded loan loss expense related to indemnification and repurchase allowances of $0.1 million and $0.1 million, respectively.  As of June 30, 2017 and December 31, 2016, CalAtlantic Mortgage had indemnity and repurchase allowances related to loans sold of approximately $3.7 million.  In addition, during the six months ended June 30, 2017 and 2016, CalAtlantic Mortgage made make-whole payments of $0 and $0.1 million, respectively.

e. Insurance and Litigation Accruals

Insurance and litigation accruals are established with respect to estimated future claims cost. We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related claims.  We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations.  However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy.  We record allowances to cover the estimated costs of our self-insurance liability based on an analysis performed by an independent third party actuary that uses our historical claim and expense data, as well as industry data to estimate these overall costs.  Our total insurance and litigation accruals as of June 30, 2017 and December 31, 2016 were $232.8 million and $233.5 million, respectively, which are included in accrued liabilities in the accompanying condensed consolidated balance sheets.  Because of the high degree of judgment required in determining these estimated accrual amounts, actual future claim costs could differ materially from our currently estimated amounts.

18.     Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes ("ASC 740").  ASC 740 requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are expected to be paid or recovered.  Changes to enacted tax rates could materially impact the recorded amount of our deferred tax asset.
 
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740.  We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable.  Our assessment considers, among other things, the nature, frequency and severity of our prior and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and tax planning alternatives.
 
Our 2017 second quarter provision for income taxes of $57.3 million primarily related to our $156.2 million of pretax income.  As of June 30, 2017, we had a $314.4 million deferred tax asset which was partially offset by a valuation allowance of $1.9 million related to state net operating loss carryforwards that are limited by shorter carryforward periods.  As of such date, $96.1 million of our deferred tax asset related to net operating loss carryforwards is subject to the Internal Revenue Code Section 382 gross annual deduction limitation of $15.6 million for both federal and state purposes.  Additionally, $15.3 million of our state deferred tax asset related to net operating losses is subject to 382 limitations resulting from our October 1, 2015 merger with Ryland, and $4.8 million related to state net operating loss carryforwards that are not limited by Section 382.  The remaining deferred tax asset balance of $198.2 million represented deductible timing differences, primarily related to inventory impairments and financial accruals, which have no expiration date.   As of June 30, 2017 and December 31, 2016, our liability for unrecognized tax benefits was $13.3 million and $12.1 million, respectively, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets. In addition, as of June 30, 2017, we remained subject to examination by various tax jurisdictions for the tax years ended December 31, 2012 through 2016.

19.     Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows

The following are supplemental disclosures to the condensed consolidated statements of cash flows:
 
             
Six Months Ended June 30,
             
2017
 
2016
             
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
  
       
 
Cash paid during the period for:
  
       
   
Income taxes
  
$
 116,638
 
$
 84,335

20.     Supplemental Guarantor Information

Certain of our 100% owned direct and indirect subsidiaries guarantee our outstanding senior notes payable (please see Note 14 "Senior Notes Payable").  Presented below are the condensed consolidated financial statements for our guarantor subsidiaries and non-guarantor subsidiaries.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
     
Three Months Ended June 30, 2017
 
     
CalAtlantic
Group, Inc.
   
Guarantor Subsidiaries
   
Non-
Guarantor Subsidiaries
   
Consolidating Adjustments
   
Consolidated
CalAtlantic
Group, Inc.
 
   
(Dollars in thousands)
 
Homebuilding:
                             
Revenues
 
$
731,311
   
$
662,781
   
$
227,022
   
$
   
$
1,621,114
 
Cost of sales
   
(592,162
)
   
(531,235
)
   
(173,859
)
   
     
(1,297,256
)
Gross margin
   
139,149
     
131,546
     
53,163
     
     
323,858
 
Selling, general and administrative expenses
   
(70,729
)
   
(83,694
)
   
(19,574
)
   
     
(173,997
)
Income (loss) from unconsolidated joint ventures
   
351
     
165
     
(70
)
   
     
446
 
Equity income of subsidiaries
   
58,400
     
     
     
(58,400
)
   
 
Interest income (expense), net
   
720
     
(525
)
   
(195
)
   
     
 
Other income (expense)
   
(3,911
)
   
(228
)
   
1,464
     
     
(2,675
)
Homebuilding pretax income
   
123,980
     
47,264
     
34,788
     
(58,400
)
   
147,632
 
Financial Services:
                                       
Financial services pretax income
   
     
     
8,616
     
     
8,616
 
Income before taxes
   
123,980
     
47,264
     
43,404
     
(58,400
)
   
156,248
 
Provision for income taxes
   
(24,986
)
   
(21,900
)
   
(10,368
)
   
     
(57,254
)
Net income
 
$
98,994
   
$
25,364
   
$
33,036
   
$
(58,400
)
 
$
98,994
 



   
Three Months Ended June 30, 2016
 
   
CalAtlantic
Group, Inc.
   
Guarantor Subsidiaries
   
Non-
Guarantor Subsidiaries
   
Consolidating Adjustments
   
Consolidated
CalAtlantic
Group, Inc.
 
   
(Dollars in thousands)
 
Homebuilding:
                             
Revenues
 
$
648,800
   
$
676,049
   
$
253,513
   
$
   
$
1,578,362
 
Cost of sales
   
(516,882
)
   
(535,832
)
   
(184,291
)
   
     
(1,237,005
)
Gross margin
   
131,918
     
140,217
     
69,222
     
     
341,357
 
Selling, general and administrative expenses
   
(71,235
)
   
(76,915
)
   
(17,544
)
   
     
(165,694
)
Income (loss) from unconsolidated joint ventures
   
57
     
256
     
(90
)
   
     
223
 
Equity income of subsidiaries
   
79,867
     
     
     
(79,867
)
   
 
Interest income (expense), net
   
1,273
     
(934
)
   
(339
)
   
     
 
Other income (expense)
   
(3,668
)
   
(668
)
   
(79
)
   
     
(4,415
)
Homebuilding pretax income
   
138,212
     
61,956
     
51,170
     
(79,867
)
   
171,471
 
Financial Services:
                                       
Financial services pretax income
   
     
     
8,146
     
     
8,146
 
Income before taxes
   
138,212
     
61,956
     
59,316
     
(79,867
)
   
179,617
 
Provision for income taxes
   
(25,452
)
   
(26,074
)
   
(15,331
)
   
     
(66,857
)
Net income
 
$
112,760
   
$
35,882
   
$
43,985
   
$
(79,867
)
 
$
112,760
 




20.     Supplemental Guarantor Information (continued)
 
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
     
Six Months Ended June 30, 2017
 
     
CalAtlantic
Group, Inc.
   
Guarantor Subsidiaries
   
Non-
Guarantor Subsidiaries
   
Consolidating Adjustments
   
Consolidated
CalAtlantic
Group, Inc.
 
   
(Dollars in thousands)
 
Homebuilding:
                             
Revenues
 
$
1,308,579
   
$
1,203,305
   
$
446,929
   
$
   
$
2,958,813
 
Cost of sales
   
(1,063,459
)
   
(962,787
)
   
(333,865
)
   
     
(2,360,111
)
Gross margin
   
245,120
     
240,518
     
113,064
     
     
598,702
 
Selling, general and administrative expenses
   
(135,437
)
   
(157,085
)
   
(37,751
)
   
     
(330,273
)
Income (loss) from unconsolidated joint ventures
   
1,025
     
298
     
3,011
     
     
4,334
 
Equity income of subsidiaries
   
115,997
     
     
     
(115,997
)
   
 
Interest income (expense), net
   
1,594
     
(1,205
)
   
(389
)
   
     
 
Other income (expense)
   
(5,898
)
   
(256
)
   
3,310
     
     
(2,844
)
Homebuilding pretax income
   
222,401
     
82,270
     
81,245
     
(115,997
)
   
269,919
 
Financial Services:
                                       
Financial services pretax income
   
     
     
16,197
     
     
16,197
 
Income before taxes
   
222,401
     
82,270
     
97,442
     
(115,997
)
   
286,116
 
Provision for income taxes
   
(40,787
)
   
(38,623
)
   
(25,092
)
   
     
(104,502
)
Net income
 
$
181,614
   
$
43,647
   
$
72,350
   
$
(115,997
)
 
$
181,614
 



   
Six Months Ended June 30, 2016
 
   
CalAtlantic
Group, Inc.
   
Guarantor Subsidiaries
   
Non-
Guarantor Subsidiaries
   
Consolidating Adjustments
   
Consolidated
CalAtlantic
Group, Inc.
 
   
(Dollars in thousands)
 
Homebuilding:
                             
Revenues
 
$
1,110,538
   
$
1,210,503
   
$
443,004
   
$
   
$
2,764,045
 
Cost of sales
   
(889,723
)
   
(965,834
)
   
(319,943
)
   
     
(2,175,500
)
Gross margin
   
220,815
     
244,669
     
123,061
     
     
588,545
 
Selling, general and administrative expenses
   
(126,286
)
   
(144,761
)
   
(31,348
)
   
     
(302,395
)
Income (loss) from unconsolidated joint ventures
   
746
     
400
     
266
     
     
1,412
 
Equity income of subsidiaries
   
134,034
     
     
     
(134,034
)
   
 
Interest income (expense), net
   
2,610
     
(1,899
)
   
(711
)
   
     
 
Other income (expense)
   
(7,283
)
   
(479
)
   
(61
)
   
     
(7,823
)
Homebuilding pretax income
   
224,636
     
97,930
     
91,207
     
(134,034
)
   
279,739
 
Financial Services:
                                       
Financial services pretax income
   
     
     
15,082
     
     
15,082
 
Income before taxes
   
224,636
     
97,930
     
106,289
     
(134,034
)
   
294,821
 
Provision for income taxes
   
(39,215
)
   
(43,548
)
   
(26,637
)
   
     
(109,400
)
Net income
 
$
185,421
   
$
54,382
   
$
79,652
   
$
(134,034
)
 
$
185,421
 

20.     Supplemental Guarantor Information (continued)

CONDENSED CONSOLIDATING BALANCE SHEET
 
   
June 30, 2017
 
   
CalAtlantic
Group, Inc.
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Consolidating
Adjustments
   
Consolidated
CalAtlantic
Group, Inc.
 
   
(Dollars in thousands)
 
ASSETS
                             
Homebuilding:
                             
Cash and equivalents
 
$
41,081
   
$
31,168
   
$
95,584
   
$
   
$
167,833
 
Restricted cash
   
     
     
32,367
     
     
32,367
 
Intercompany receivables
   
2,118,245
     
     
320,924
     
(2,439,169
)
   
 
Inventories:
                                       
Owned
   
2,970,751
     
2,278,861
     
1,405,378
     
     
6,654,990
 
Not owned
   
42,190
     
32,927
     
11,501
     
     
86,618
 
Investments in unconsolidated joint ventures
   
4,889
     
4,228
     
116,651
     
     
125,768
 
Investments in subsidiaries
   
2,069,205
     
     
     
(2,069,205
)
   
 
Deferred income taxes, net
   
319,114
     
     
     
(6,643
)
   
312,471
 
Goodwill
   
970,185
     
     
15,000