Commitments and Contingencies

Warranty

We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims. Warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home closed. Warranty reserves are recorded for warranties under our Home Builder’s Limited Warranty (“HBLW”), and our 30-year (offered on all homes sold after April 25, 1998 and on or before December 1, 2015 in all of our markets except our Texas markets), 15-year (offered on all homes sold after December 1, 2015 in all of our markets except our Texas markets) or 10-year (offered on all homes sold in our Texas markets) transferable structural warranty in Other Liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheets.

The warranty reserves for the HBLW are established as a percentage of average sales price and adjusted based on historical payment patterns determined, generally, by geographic area and recent trends. Factors that are given consideration in determining the HBLW reserves include: (1) the historical range of amounts paid per average sales price on a home; (2) type and mix of amenity packages added to the home; (3) any warranty expenditures not considered to be normal and recurring; (4) timing of payments; (5) improvements in quality of construction expected to impact future warranty expenditures; and (6) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects. Changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter. Actual future warranty costs could differ from our current estimated amount.

Our warranty reserves for our transferable structural warranty programs are established on a per-unit basis. While the structural warranty reserve is recorded as each house closes, the sufficiency of the structural warranty per unit charge and total reserve is re-evaluated on an annual basis, with the assistance of an actuary, using our own historical data and trends, industry-wide historical data and trends, and other project specific factors. The reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis. These reserves are subject to variability due to uncertainties regarding structural defect claims for products we build, the markets in which we build, claim settlement history, insurance and legal interpretations, among other factors.

While we believe that our warranty reserves are sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs.

A summary of warranty activity for the three and six months ended June 30, 2016 and 2015 is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Warranty reserves, beginning of period	$	15,295		$	11,551		$	14,281		$	12,671
Warranty expense on homes delivered during the period	2,482			2,044			4,522			3,583
Changes in estimates for pre-existing warranties	2,108			413			4,946			676
Settlements made during the period	(4,070		)	(3,370		)	(7,934		)	(6,292		)
Warranty reserves, end of period	$	15,815		$	10,638		$	15,815		$	10,638

We have received claims related to stucco installation from homeowners in certain of our Florida (Tampa and Orlando) communities and have been named as a defendant in legal proceedings initiated by certain of such homeowners. These claims primarily relate to homes built prior to 2014 which have second story elevations with frame construction. The issues are typically limited to stucco installation on the second stories of these homes and generally involve the cracking of stucco beyond normal expansion cracks or the separation of stucco from the exterior sheeting. We attribute the geographic concentration of stucco related claims in our Florida communities primarily to local construction practices employed by independent contractors in these areas.

Through 2015, we repaired certain of the affected homes and accrued for the estimated future cost of repairs for the other identified homes on which repairs had yet to be completed. The aggregate amounts of such repair costs and accruals were not material, and the reserve for identified homes in need of more than minor repair at December 31, 2015 was $0.5 million. During the first quarter of 2016, we received an increased number of stucco related claims in our Florida communities, and we recorded an additional accrual of $2.2 million as a change in estimate to our warranty reserves for homes that we had identified during the quarter as requiring more than minor repairs. At March 31, 2016, the remaining reserve was $1.8 million, covering the estimated repair costs for the approximately 138 identified homes on which repairs had yet to be completed.

During the second quarter of 2016, we continued to receive stucco related claims in certain of our Florida communities. During the second quarter, we identified 130 additional homes that require more than minor stucco repairs, we completed repairs on 90 of the identified homes, and we recorded an additional accrual of $2.8 million as a change in estimate to our warranty reserves (which change is reflected in “Changes in estimates for pre-existing warranties” in the above table) for homes that we identified during the quarter as requiring more than minor repairs. At June 30, 2016, the remaining reserve was $2.9 million, covering the estimated repair costs for the approximately 178 identified homes on which repairs had yet to be completed. This reserve does not include any estimate of the future stucco repair costs for homes for which we have not received claims.

Based on our ongoing receipt of additional claims, we have expanded the scope of our review of the stucco issues in our Florida communities and we are in the process of collecting and analyzing information to enable us to reasonably estimate the number of additional homes in our Florida communities that will require stucco repairs in the future and the nature and cost of those repairs. While, based on our analysis to date, we believe that it is probable that we will identify additional homes in our Florida communities that will require stucco repairs in the future, as of June 30, 2016, we are unable to reasonably estimate: (a) the number of such additional homes; (b) the cost to repair those homes; or (c) the ultimate amount of our liability. As we obtain additional information, we expect to revise our warranty reserves for these estimated future stucco repairs costs, which could be material.

During the second quarter of 2016, we also continued our investigation of the extent to which we may be able to recover a portion of our stucco repair and claims handling costs from other sources, including our direct insurers, the subcontractors involved with the construction of the homes and their insurers. As of June 30, 2016, we are unable to estimate an amount (if any) that we believe is probable that we will recover from these sources and, accordingly, we have not recorded a receivable for estimated recoveries nor included an estimated amount of recoveries in determining our warranty reserves.

Performance Bonds and Letters of Credit

At June 30, 2016, the Company had outstanding approximately $130.2 million of completion bonds and standby letters of credit, some of which were issued to various local governmental entities that expire at various times through May 2024. Included in this total are: (1) $85.5 million of performance and maintenance bonds and $30.2 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $7.1 million of financial letters of credit, of which $5.2 million represent deposits on land and lot purchase agreements; and (3) $7.4 million of financial bonds.

Land Option Contracts and Other Similar Contracts

At June 30, 2016, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $533.1 million. Purchase of properties under these agreements is contingent upon satisfaction of certain requirements by the Company and the sellers.

Legal Matters

In addition to the legal proceedings related to stucco, the Company and certain of its subsidiaries have been named as defendants in certain other legal proceedings which are incidental to our business. While management currently believes that the ultimate resolution of these other legal proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial position, results of operations and cash flows, such legal proceedings are subject to inherent uncertainties. The Company has recorded a liability to provide for the anticipated costs, including legal defense costs, associated with the resolution of these other legal proceedings. However, the possibility exists that the costs to resolve these legal proceedings could differ from the recorded estimates and, therefore, have a material effect on the Company’s net income for the periods in which they are resolved. At June 30, 2016 and December 31, 2015, we had $0.2 million and $0.6 million reserved for legal expenses, respectively.