10-Q 1 mho-20180331x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
Commission File Number 1-12434

M/I HOMES, INC.
(Exact name of registrant as specified in it charter)
 
Ohio
 
31-1210837
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
3 Easton Oval, Suite 500, Columbus, Ohio 43219
(Address of principal executive offices) (Zip Code)
(614) 418-8000
(Registrant’s telephone number, including area code)

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 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 emerging growth company. See the 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
 
 
Accelerated filer
X
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 (Do not check if a 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. q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares, par value $.01 per share: 28,570,853 shares outstanding as of April 25, 2018.




M/I HOMES, INC.
FORM 10-Q
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
PART 1.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
M/I Homes, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the Three Months ended March 31, 2018 and 2017
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2018
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibit Index
 
 



2





M/I HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par values)
 
March 31,
2018
 
December 31,
2017
 
 
(unaudited)
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
53,577

 
$
151,703

Mortgage loans held for sale
 
110,612

 
171,580

Inventory
 
1,580,344

 
1,414,574

Property and equipment - net
 
25,872

 
26,816

Investment in unconsolidated joint venture arrangements
 
22,066

 
20,525

Deferred income tax asset
 
18,104

 
18,438

Goodwill
 
16,400

 

Other assets
 
67,398

 
61,135

TOTAL ASSETS
 
$
1,894,373

 
$
1,864,771

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
Accounts payable
 
$
118,839

 
$
117,233

Customer deposits
 
37,454

 
26,378

Other liabilities
 
102,758

 
131,534

Community development district obligations
 
12,499

 
13,049

Obligation for consolidated inventory not owned
 
18,199

 
21,545

Notes payable bank - homebuilding operations
 
162,300

 

Notes payable bank - financial services operations
 
102,711

 
168,195

Notes payable - other
 
10,011

 
10,576

Convertible senior subordinated notes due 2018 - net
 

 
86,132

Senior notes due 2021 - net
 
297,056

 
296,780

Senior notes due 2025 - net
 
246,181

 
246,051

TOTAL LIABILITIES
 
$
1,108,008

 
$
1,117,473

 
 
 
 
 
Commitments and contingencies (Note 6)
 

 

 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
 
Common shares - $.01 par value; authorized 58,000,000 shares at both March 31, 2018 and December 31, 2017; issued 30,137,141 and 29,508,626 shares at March 31, 2018 and December 31, 2017, respectively
 
301

 
295

Additional paid-in capital
 
325,780

 
306,483

Retained earnings
 
491,392

 
473,329

Treasury shares - at cost - 1,566,288 and 1,651,874 shares at March 31, 2018 and December 31, 2017, respectively
 
(31,108
)
 
(32,809
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
786,365

 
$
747,298

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,894,373

 
$
1,864,771


See Notes to Unaudited Condensed Consolidated Financial Statements.

3



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
Three Months Ended March 31,
(In thousands, except per share amounts)
2018
 
2017
 
 
 
 
Revenue
$
437,857

 
$
406,980

Costs and expenses:
 
 
 
Land and housing
348,702

 
320,281

General and administrative
27,951

 
27,760

Selling
30,063

 
27,283

Acquisition and integration costs
1,700

 

Equity in income of unconsolidated joint ventures
(310
)
 
(17
)
Interest
5,878

 
5,338

Total costs and expenses
413,984

 
380,645

 
 
 
 
Income before income taxes
23,873

 
26,335

 
 
 
 
Provision for income taxes
5,810

 
9,452

 
 
 
 
Net income
18,063

 
16,883

 
 
 
 
Preferred dividends

 
1,219

 
 
 
 
Net income available to common shareholders
$
18,063

 
$
15,664

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
0.64

 
$
0.63

Diluted
$
0.60

 
$
0.55

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
28,124

 
24,738

Diluted
30,544

 
30,329


See Notes to Unaudited Condensed Consolidated Financial Statements.

4



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 
Three Months Ended March 31, 2018
 
Common Shares
 
 
 
 
 
 
 
 
 
Shares Outstanding
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Shares
 
Total Shareholders’ Equity
(Dollars in thousands)
 
Amount
 
 
 
 
Balance at December 31, 2017
27,856,752

 
$
295

 
$
306,483

 
$
473,329

 
$
(32,809
)
 
$
747,298

Net income

 

 

 
18,063

 

 
18,063

Common share issuance for conversion of convertible notes
628,515

 
6

 
20,303

 

 

 
20,309

Stock options exercised
24,220

 

 
(56
)
 

 
482

 
426

Stock-based compensation expense

 

 
1,039

 

 

 
1,039

Deferral of executive and director compensation

 

 
185

 

 

 
185

Executive and director deferred compensation distributions
61,366

 

 
(2,174
)
 

 
1,219

 
(955
)
Balance at March 31, 2018
28,570,853

 
$
301

 
$
325,780

 
$
491,392

 
$
(31,108
)
 
$
786,365


See Notes to Unaudited Condensed Consolidated Financial Statements.

5



M/I HOMES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
(Dollars in thousands)
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income
$
18,063

 
$
16,883

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Equity in income of joint venture arrangements
(310
)
 
(17
)
Mortgage loan originations
(235,481
)
 
(217,346
)
Proceeds from the sale of mortgage loans
297,125

 
262,644

Fair value adjustment of mortgage loans held for sale
(676
)
 
(4,874
)
Capitalization of originated mortgage servicing rights
(1,066
)
 
(975
)
Amortization of mortgage servicing rights
297

 
448

Depreciation
2,570

 
2,281

Amortization of debt discount and debt issue costs
782

 
854

Stock-based compensation expense
1,039

 
1,028

Deferred income tax expense
335

 
426

Change in assets and liabilities:
 
 
 
Inventory
(70,119
)
 
(54,758
)
Other assets
(7,229
)
 
(348
)
Accounts payable
(8,914
)
 
(8,809
)
Customer deposits
6,790

 
4,524

Accrued compensation
(22,454
)
 
(20,159
)
Other liabilities
(11,942
)
 
(5,077
)
Net cash used in operating activities
(31,190
)
 
(23,275
)
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(130
)
 
(993
)
Acquisition
(100,763
)
 

Investment in unconsolidated joint ventures
(1,890
)
 
(3,197
)
Net proceeds from sale of mortgage servicing rights
5,111

 
7,396

Net cash (used in) provided by investing activities
(97,672
)
 
3,206

 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Repayment of convertible senior subordinated notes due 2018
(65,941
)
 

Proceeds from bank borrowings - homebuilding operations
233,500

 
162,000

Repayment of bank borrowings - homebuilding operations
(71,200
)
 
(91,400
)
Net repayment of bank borrowings - financial services operations
(65,484
)
 
(45,958
)
(Principal repayment of) proceeds from notes payable - other and community development district bond obligations
(565
)
 
607

Dividends paid on preferred shares

 
(1,219
)
Proceeds from exercise of stock options
426

 
496

Net cash provided by financing activities
30,736

 
24,526

Net (decrease) increase in cash, cash equivalents and restricted cash
(98,126
)
 
4,457

Cash, cash equivalents and restricted cash balance at beginning of period
151,703

 
34,441

Cash, cash equivalents and restricted cash balance at end of period
$
53,577

 
$
38,898

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the year for:
 
 
 
Interest — net of amount capitalized
$
13,905

 
$
10,503

Income taxes
$
122

 
$
72

 
 
 
 
NON-CASH TRANSACTIONS DURING THE PERIOD:
 
 
 
Community development district infrastructure
$
(550
)
 
$
5,801

Consolidated inventory not owned
$
(3,346
)
 
$
4,440

Distribution of single-family lots from joint venture arrangements
$
659

 
$
7,012

Common stock issued for conversion of convertible notes
$
20,309

 
$

 
 
 
 

See Notes to Unaudited Condensed Consolidated Financial Statements.

6



M/I HOMES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements (the “financial statements”) of M/I Homes, Inc. and its subsidiaries (the “Company”) and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The financial statements include the accounts of the Company. All intercompany transactions have been eliminated. Results for the interim period are not necessarily indicative of results for a full year. In the opinion of management, the accompanying financial statements reflect all adjustments (all of which are normal and recurring in nature) necessary for a fair presentation of financial results for the interim periods presented. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that period. Actual results could differ from these estimates and have a significant impact on the financial condition and results of operations and cash flows. With regard to the Company, estimates and assumptions are inherent in calculations relating to valuation of inventory and investment in unconsolidated joint ventures, property and equipment depreciation, valuation of derivative financial instruments, accounts payable on inventory, accruals for costs to complete inventory, accruals for warranty claims, accruals for self-insured general liability claims, litigation, accruals for health care and workers’ compensation, accruals for guaranteed or indemnified loans, stock-based compensation expense, income taxes, and contingencies. Items that could have a significant impact on these estimates and assumptions include the risks and uncertainties listed in “Item 1A. Risk Factors” in Part I of our 2017 Form 10-K, as the same may be updated from time to time in our subsequent filings with the SEC.

Significant Accounting Policies

We believe that there have been no significant changes to our significant accounting policies during the quarter ended March 31, 2018 as compared to those disclosed in our 2017 Form 10-K, other than the changes described below.
Revenue Recognition.  On January 1, 2018, we adopted ASC 606, Revenue from Contracts from Customers (“ASC 606”), using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for existing contracts (those that are not completed) as of, and new contracts after, January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, Revenue Recognition (“ASC 605”). We did not have any material adjustments to our 2018 results under ASC 606.
Revenue from the sale of a home and revenue from the sale of land to third parties is recognized in the financial statements on the date of closing (point in time) if delivery has occurred, title has passed, all performance obligations have been met (please see definition of performance obligations below), and control of the home or land is transferred to the buyer in an amount that reflects the consideration we expect to be entitled to in exchange for the home or land.
We recognize the majority of the revenue associated with our mortgage loan operations when the mortgage loans are sold and/or related servicing rights are sold to third party investors or retained and managed under a third party subservice arrangement. The revenue recognized is reduced by the fair value of the related guarantee provided to the investor. The fair value of the guarantee is recognized in revenue when the Company is released from its obligation under the guarantee (note that guarantees are excluded from the scope of ASC 606). We recognize financial services revenue associated with our title operations as homes are delivered, closing services are rendered, and title policies are issued, all of which generally occur simultaneously as each home is delivered. All of the underwriting risk associated with title insurance policies is transferred to third-party insurers.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. All of our contracts to sell homes have a single performance obligation as the promise to transfer the home is not separately identifiable from other promises in the contract and, therefore, not distinct. Our third party land contracts may include multiple performance obligations; however, revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.


7



We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within general, selling and administrative expenses as part of our sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

The following table presents our revenues disaggregated by geography:
 
Three Months Ended March 31,
(In thousands)
2018 (a)
 
2017
 
 
 
 
Midwest homebuilding
$
158,620

 
$
146,422

Southern homebuilding
190,388

 
149,365

Mid-Atlantic homebuilding
73,823

 
96,886

Financial services (b)
15,026

 
14,307

Total revenue
$
437,857

 
$
406,980

(a)
As noted above, prior period amounts have not been adjusted under the cumulative catch-up transition method.
(b)
Revenues include $3.0 million and $4.6 million related to hedging gains for the three months ended March 31, 2018 and 2017, respectively, which do not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by revenue source:
 
Three Months Ended March 31,
(Dollars in thousands)
2018 (a)
 
2017
 
 
 
 
Housing
$
418,424

 
$
387,458

Land sales
4,407

 
5,215

Financial services (b)
15,026

 
14,307

Total revenue
$
437,857

 
$
406,980

(a)
As noted above, prior period amounts have not been adjusted under the cumulative catch-up transition method.
(b)
Revenues include $3.0 million and $4.6 million related to hedging gains for the three months ended March 31, 2018 and 2017, respectively, which do not represent revenues recognized from contracts with customers.

Goodwill. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. Because the purchase price allocation is subject to change within a measurement period of up to one year from the acquisition date pursuant to ASC 805, in connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan, the Company recorded a provisional amount of goodwill of approximately $16.4 million as of March 31, 2018, which is included as Goodwill in our Unaudited Condensed Consolidated Balance Sheets. This provisional amount was based on the estimated fair values of the acquired assets and assumed liabilities at the date of the acquisition in accordance with ASC 350, Intangibles, Goodwill and Other (“ASC 350”). Please see Note 7 to our financial statements for further discussion.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. As a result of this ASU, the Company will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.  ASU 2017-04 is effective beginning January 1, 2020, with early adoption permitted, and applied prospectively. The Company has elected to early adopt this ASU effective for the current reporting period in its impairment testing and analyses. The Company’s goodwill is described in Note 7 to our financial statements.

In accordance with ASC 350, the Company analyzes goodwill for impairment on an annual basis (or more often if indicators of impairment exist). The Company performs a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, the Company evaluates qualitative factors such as (1) macroeconomic conditions, such as a deterioration in general economic conditions; (2) industry and market considerations such as deterioration in the environment in which the entity operates; (3) cost factors such as increases in raw materials and labor costs; and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings, to determine if it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is

8



performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value.

The evaluation of goodwill for possible impairment includes estimating fair value using one or a combination of valuation techniques, such as discounted cash flows. These valuations require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Recently Adopted Accounting Standards

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 provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in ASC 605 and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
Subsequent to the issuance of ASU 2014-09, the FASB has issued several ASUs, such as ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of the guidance stated in ASU 2014-09. Instead, these amendments are intended to clarify and improve the operability of certain topics addressed by ASU 2014-09. These additional ASUs have the same effective date and transition requirements as ASU 2014-09, as amended.
We adopted the standard, and the subsequently issued standards mentioned above, on January 1, 2018 using the modified retrospective transition method, which includes a cumulative catch-up in retained earnings on the initial date of adoption for existing contracts (those that are not completed) as of, and new contracts after, January 1, 2018. The adoption did not have a material impact on our consolidated financial statements. The amount and timing of our housing and land revenue remained substantially unchanged, and we did not have significant changes to our business processes, systems, or internal controls as a result of adopting the standard. The Company has developed the additional expanded disclosures required (please see our Significant Accounting Policies section above and our Critical Accounting Policies section within Management’s Discussion and Analysis of Financial Condition and Results of Operations below); however, the adoption did not have a material impact on its consolidated results of operations, financial position and cash flows.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 is intended to clarify the scope of the original guidance within Subtopic 610-20 that was issued in connection with ASU 2014-09, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 additionally added guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We were required to adopt ASU 2017-05 concurrent with the adoption of ASU 2014-09. The adoption of ASU 2017-05 did not have a material impact on the Company’s consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. For public entities, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2016-15 did not modify the Company's current disclosures within the condensed consolidated statement of cash flows and did not have any impact on the Company’s consolidated financial statements and disclosures.

9



In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which provides a more robust framework for determining whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the standard on January 1, 2018. The adoption of ASU 2017-01 did not have an impact on the Company’s consolidated financial statements and disclosures as the Company’s acquisition during the first quarter of 2018 met all requirements to be accounted for as a business acquisition.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the standard on January 1, 2018. The adoption of ASU 2017-04 did not have an impact on the Company’s consolidated financial statements and disclosures as it will perform its annual goodwill impairment analysis during the fourth quarter of 2018 (as no indicators existed at March 31, 2018).
Impact of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require organizations that lease assets - referred to as “lessees” - to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities will be expanded to include qualitative and specific quantitative information. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. The Company continues to evaluate the potential impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and disclosures; however, because a large majority of our leases are for office space, which we have determined will be treated as operating leases under ASU 2016-02, we anticipate recording a right-of-use asset and related lease liability for these leases, but do not expect our expense recognition pattern to change.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not believe the adoption of ASU 2017-08 will have a material impact on the Company’s consolidated financial statements and disclosures.

In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01”), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This ASU is not expected to have a significant impact on the Company's expected impact of the adoption of ASU 2016-02 (discussed above) or its consolidated financial statements and disclosures.

In March 2018, the FASB issued ASU 2018-05, which amends Income Taxes (Topic 740) by incorporating the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118. Please see Note 10 to our financial statements for additional disclosures.


10



NOTE 2. Inventory and Capitalized Interest
Inventory
Inventory is recorded at cost, unless events and circumstances indicate that the carrying value of the land is impaired, at which point the inventory is written down to fair value (please see Note 4 to our financial statements for additional details relating to our procedures for evaluating our inventories for impairment). Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction, and common costs that benefit the entire community, less impairments, if any.
A summary of the Company’s inventory as of March 31, 2018 and December 31, 2017 is as follows:
(In thousands)
March 31, 2018
 
December 31, 2017
Single-family lots, land and land development costs
$
752,921

 
$
687,260

Land held for sale
3,571

 
6,491

Homes under construction
678,122

 
579,051

Model homes and furnishings - at cost (less accumulated depreciation: March 31, 2018 - $13,199;
   December 31, 2017 - $12,715)
78,869

 
74,622

Community development district infrastructure
12,499

 
13,049

Land purchase deposits
36,163

 
32,556

Consolidated inventory not owned
18,199

 
21,545

Total inventory
$
1,580,344

 
$
1,414,574


Single-family lots, land and land development costs include raw land that the Company has purchased to develop into lots, costs incurred to develop the raw land into lots, and lots for which development has been completed, but which have not yet been used to start construction of a home.
Homes under construction include homes that are in various stages of construction. As of March 31, 2018 and December 31, 2017, we had 1,104 homes (with a carrying value of $229.6 million) and 1,134 homes (with a carrying value of $242.7 million), respectively, included in homes under construction that were not subject to a sales contract.
Model homes and furnishings include homes that are under construction or have been completed and are being used as sales models. The amount also includes the net book value of furnishings included in our model homes. Depreciation on model home furnishings is recorded using an accelerated method over the estimated useful life of the assets, which is typically three years.
We own lots in certain communities in Florida that have Community Development Districts (“CDDs”). The Company records a liability for the estimated developer obligations that are probable and estimable and user fees that are required to be paid or transferred at the time the parcel or unit is sold to an end user.  The Company reduces this liability at the time of closing and the transfer of the property.  The Company recorded a $12.5 million and $13.0 million liability related to these CDD bond obligations as of March 31, 2018 and December 31, 2017, respectively, along with the related inventory infrastructure.

Land purchase deposits include both refundable and non-refundable amounts paid to third party sellers relating to the purchase of land. On an ongoing basis, the Company evaluates the land option agreements relating to the land purchase deposits. In the period during which the Company makes the decision not to proceed with the purchase of land under an agreement, the Company expenses any deposits and accumulated pre-acquisition costs relating to such agreement.
Capitalized Interest
The Company capitalizes interest during land development and home construction.  Capitalized interest is charged to land and housing costs and expensed as the related inventory is delivered to a third party.  The summary of capitalized interest for the three months ended March 31, 2018 and 2017 is as follows:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Capitalized interest, beginning of period
$
17,169

 
$
16,012

Interest capitalized to inventory
5,959

 
3,762

Capitalized interest charged to land and housing costs and expenses
(4,864
)
 
(3,766
)
Capitalized interest, end of period
$
18,264

 
$
16,008

 
 
 
 
Interest incurred
$
11,837

 
$
9,100


11



NOTE 3. Investment in Joint Venture Arrangements
Investment in Joint Venture Arrangements
In order to minimize our investment and risk of land exposure in a single location, we have periodically partnered with other land developers or homebuilders to share in the land investment and development of a property through joint ownership and development agreements, joint ventures, and other similar arrangements. During the three-month period ended March 31, 2018, we increased our total investment in such joint venture arrangements by $1.6 million from $20.5 million at December 31, 2017 to $22.1 million at March 31, 2018, which was driven primarily by our cash contributions to our unconsolidated joint ventures during the first quarter of 2018 of $1.9 million, offset, in part, by our increased lot distributions from unconsolidated joint ventures of $0.7 million.
We believe that the Company’s maximum exposure related to its investment in these joint venture arrangements as of March 31, 2018 is the amount invested of $22.1 million, which is reported as Investment in Joint Venture Arrangements on our Unaudited Condensed Consolidated Balance Sheets, although we expect to invest further amounts in these joint venture arrangements as development of the properties progresses.
We use the equity method of accounting for investments in unconsolidated joint ventures over which we exercise significant influence but do not have a controlling interest. Under the equity method, our share of the unconsolidated joint ventures’ earnings or loss, if any, is included in our consolidated statement of income. The Company assesses its investments in unconsolidated joint ventures for recoverability on a quarterly basis. Please see Note 4 to our financial statements for additional details relating to our procedures for evaluating our investments for impairment.
For joint venture arrangements where a special purpose entity is established to own the property, we generally enter into limited liability company or similar arrangements (“LLCs”) with the other partners. The Company’s ownership in these LLCs as of both March 31, 2018 and December 31, 2017 ranged from 25% to 97%. These entities typically engage in land development activities for the purpose of distributing or selling developed lots to the Company and its partners in the LLC.
Variable Interest Entities
With respect to our investments in these LLCs, we are required, under ASC 810-10, Consolidation (“ASC 810”), to evaluate whether or not such entities should be consolidated into our consolidated financial statements. We initially perform these evaluations when each new entity is created and upon any events that require reconsideration of the entity. Please see Note 1, “Summary of Significant Accounting Policies - Variable Interest Entities” in the Company’s 2017 Form 10-K for additional information regarding the Company’s methodology for evaluating entities for consolidation.
Land Option Agreements
In the ordinary course of business, the Company enters into land option or purchase agreements for which we generally pay non-refundable deposits. Pursuant to these land option agreements, the Company provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.  In accordance with ASC 810, we analyze our land option or purchase agreements to determine whether the corresponding land sellers are VIEs and, if so, whether we are the primary beneficiary, as further described in Note 1, “Summary of Significant Accounting Policies - Land Option Agreements” in the Company’s 2017 Form 10-K. If we are deemed to be the primary beneficiary of the VIE, we will consolidate the VIE in our consolidated financial statements and reflect such assets and liabilities in our Consolidated Inventory not Owned in our Unaudited Condensed Consolidated Balance Sheets. At both March 31, 2018 and December 31, 2017, we concluded that we were not the primary beneficiary of any VIEs from which we are purchasing land under option or purchase agreements.
NOTE 4. Fair Value Measurements
There are three measurement input levels for determining fair value: Level 1, Level 2, and Level 3. Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

12



Assets Measured on a Recurring Basis
The Company measures both mortgage loans held for sale and interest rate lock commitments (“IRLCs”) at fair value. Fair value measurement results in a better presentation of the changes in fair values of the loans and the derivative instruments used to economically hedge them.
In the normal course of business, our financial services segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates.  The commitments become effective when the borrowers “lock-in” a specified interest rate within established time frames.  Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to an investor.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  The Company does not engage in speculative trading or derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers or investors are undesignated derivatives, and accordingly, are marked to fair value through earnings.  Changes in fair value measurements are included in earnings in the accompanying statements of income.
The fair value of mortgage loans held for sale is estimated based primarily on published prices for mortgage-backed securities with similar characteristics.  To calculate the effects of interest rate movements, the Company utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  The Company sells loans on a servicing released or servicing retained basis, and receives servicing compensation.  Thus, the value of the servicing rights included in the fair value measurement is based upon contractual terms with investors and depends on the loan type. The Company applies a fallout rate to IRLCs when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which the Company does not close a mortgage loan and is based on management’s judgment and company experience.
The fair value of the Company’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date.  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
Interest Rate Lock Commitments. IRLCs are extended to certain home-buying customers who have applied for a mortgage loan and meet certain defined credit and underwriting criteria. Typically, the IRLCs will have a term of less than six months; however, in certain markets, the term could extend to nine months.
Some IRLCs are committed to a specific third party investor through the use of whole loan delivery commitments matching the exact terms of the IRLC loan. Uncommitted IRLCs are considered derivative instruments and are fair value adjusted, with the resulting gain or loss recorded in current earnings.
Forward Sales of Mortgage-Backed Securities. Forward sales of mortgage-backed securities (“FMBSs”) are used to protect uncommitted IRLC loans against the risk of changes in interest rates between the lock date and the funding date. FMBSs related to uncommitted IRLCs are classified and accounted for as non-designated derivative instruments and are recorded at fair value, with gains and losses recorded in current earnings.
Mortgage Loans Held for Sale. Mortgage loans held for sale consists primarily of single-family residential loans collateralized by the underlying property.  Generally, all of the mortgage loans and related servicing rights are sold to third-party investors shortly after origination.  During the period between when a loan is closed and when it is sold to an investor, the interest rate risk is covered through the use of a whole loan contract or by FMBSs.
The table below shows the notional amounts of our financial instruments at March 31, 2018 and December 31, 2017:
Description of Financial Instrument (in thousands)
March 31, 2018
 
December 31, 2017
Whole loan contracts and related committed IRLCs
$
3,350

 
$
2,182

Uncommitted IRLCs
109,800

 
50,746

FMBSs related to uncommitted IRLCs
110,000

 
53,000

Whole loan contracts and related mortgage loans held for sale
7,465

 
80,956

FMBSs related to mortgage loans held for sale
101,000

 
91,000

Mortgage loans held for sale covered by FMBSs
101,171

 
90,781


13



The table below shows the level and measurement of assets and liabilities measured on a recurring basis at March 31, 2018 and December 31, 2017:
Description of Financial Instrument (in thousands)
Fair Value Measurements
March 31, 2018
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
110,612

 
$

 
$
110,612

 
$

 
Forward sales of mortgage-backed securities
(125
)
 

 
(125
)
 

 
Interest rate lock commitments
971

 

 
971

 

 
Whole loan contracts
(66
)
 

 
(66
)
 

 
Total
$
111,392

 
$

 
$
111,392

 
$

 
Description of Financial Instrument (in thousands)
Fair Value Measurements
December 31, 2017
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage loans held for sale
$
171,580

 
$

 
$
171,580

 
$

 
Forward sales of mortgage-backed securities
177

 

 
177

 

 
Interest rate lock commitments
271

 

 
271

 

 
Whole loan contracts
12

 

 
12

 

 
Total
$
172,040

 
$

 
$
172,040

 
$

 

The following table sets forth the amount of gain (loss) recognized, within our revenue in the Unaudited Condensed Consolidated Statements of Income, on assets and liabilities measured on a recurring basis for the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31,
Description (in thousands)
2018
 
2017
Mortgage loans held for sale
$
675

 
$
4,874

Forward sales of mortgage-backed securities
(302
)
 
(911
)
Interest rate lock commitments
705

 
842

Whole loan contracts
(83
)
 
(234
)
Total gain recognized
$
995

 
$
4,571


The following tables set forth the fair value of the Company’s derivative instruments and their location within the Unaudited Condensed Consolidated Balance Sheets for the periods indicated (except for mortgage loans held for sale which is disclosed as a separate line item):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
March 31, 2018
 
March 31, 2018
Description of Derivatives
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 
Balance Sheet Location
 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities
 
Other assets
 
$

 
Other liabilities
 
$
125

Interest rate lock commitments
 
Other assets
 
971

 
Other liabilities
 

Whole loan contracts
 
Other assets
 

 
Other liabilities
 
66

Total fair value measurements
 
 
 
$
971

 
 
 
$
191

 
 
Asset Derivatives
 
Liability Derivatives
 
 
December 31, 2017
 
December 31, 2017
Description of Derivatives
 
Balance Sheet
Location
 
Fair Value
(in thousands)
 
Balance Sheet Location
 
Fair Value
(in thousands)
Forward sales of mortgage-backed securities
 
Other assets
 
$
177

 
Other liabilities
 
$

Interest rate lock commitments
 
Other assets
 
271

 
Other liabilities
 

Whole loan contracts
 
Other assets
 
12

 
Other liabilities
 

Total fair value measurements
 
 
 
$
460

 
 
 
$

Assets Measured on a Non-Recurring Basis
Inventory. The Company assesses inventory for recoverability on a quarterly basis based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. Determining the fair value of a community’s inventory involves a number of variables, estimates and projections, which are Level 3 measurement inputs. Please see Note 1, “Summary of Significant Accounting Policies - Inventory” in the Company’s 2017 Form 10-K for additional information regarding the Company’s methodology for determining fair value.

14



The Company uses significant assumptions to evaluate the recoverability of its inventory, such as estimated average selling price, construction and development costs, absorption pace (reflecting any product mix change strategies implemented or to be implemented), selling strategies, alternative land uses (including disposition of all or a portion of the land owned), or discount rates. Changes in these assumptions could materially impact future cash flow and fair value estimates and may lead the Company to incur additional impairment charges in the future. Our analysis is conducted only if indicators of a decline in value of our inventory exist, which include, among other things, declines in gross margin on sales contracts in backlog or homes that have been delivered, slower than anticipated absorption pace, declines in average sales price or high incentive offers by management to improve absorptions, declines in margins regarding future land sales, or declines in the value of the land itself as a result of third party appraisals. If communities are not recoverable based on the estimated future undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. During the three months ended March 31, 2018 and 2017, the Company did not record any impairment charges on its inventory.
Investment in Unconsolidated Joint Ventures.  We evaluate our investments in unconsolidated joint ventures for impairment on a quarterly basis based on the difference in the investment’s carrying value and its fair value at the time of the evaluation. If the Company has determined that the decline in value is other than temporary, the Company would write down the value of the investment to its estimated fair value. Determining the fair value of investments in unconsolidated joint ventures involves a number of variables, estimates and assumptions, which are Level 3 measurement inputs. Please see Note 1, “Summary of Significant Accounting Policies - Investment in Unconsolidated Joint Ventures,” in the Company’s 2017 Form 10-K for additional information regarding the Company’s methodology for determining fair value. Because of the high degree of judgment involved in developing these assumptions, it is possible that changes in these assumptions could materially impact future cash flow and fair value estimates of the investments which may lead the Company to incur additional impairment charges in the future. During the three months ended March 31, 2018 and 2017, the Company did not record any impairment charges on its investments in unconsolidated joint ventures.
Financial Instruments
Counterparty Credit Risk. To reduce the risk associated with losses that would be recognized if counterparties failed to perform as contracted, the Company limits the entities with whom management can enter into commitments. This risk of accounting loss is the difference between the market rate at the time of non-performance by the counterparty and the rate to which the Company committed.
The following table presents the carrying amounts and fair values of the Company’s financial instruments at March 31, 2018 and December 31, 2017. The objective of the fair value measurement is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions.
 
 
March 31, 2018
 
December 31, 2017
(In thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
53,577

 
$
53,577

 
$
151,703

 
$
151,703

Mortgage loans held for sale
 
110,612

 
110,612

 
171,580

 
171,580

Split dollar life insurance policies
 
209

 
209

 
209

 
209

Commitments to extend real estate loans
 
971

 
971

 
271

 
271

Whole loan contracts for committed IRLCs and mortgage loans held for sale
 

 

 
12

 
12

Forward sales of mortgage-backed securities
 

 

 
177

 
177

Liabilities:
 
 
 
 
 
 
 
 
Notes payable - homebuilding operations
 
162,300

 
162,300

 

 

Notes payable - financial services operations
 
102,711

 
102,711

 
168,195

 
168,195

Notes payable - other
 
10,011

 
9,012

 
10,576

 
9,437

Convertible senior subordinated notes due 2018 (a)
 

 

 
86,250

 
93,581

Senior notes due 2021 (a)
 
300,000

 
308,625

 
300,000

 
310,875

Senior notes due 2025 (a)
 
250,000

 
238,750

 
250,000

 
252,500

Whole loan contracts for committed IRLCs and mortgage loans held for sale
 
66

 
66

 

 

Forward sales of mortgage-backed securities
 
125

 
125

 

 

Off-Balance Sheet Financial Instruments:
 
 
 
 
 
 
 
 
Letters of credit
 

 
972

 

 
1,083

(a)
Our senior notes and convertible senior subordinated notes are stated at the principal amount outstanding which does not include the impact of premiums, discounts, and debt issuance costs that are amortized to interest cost over the respective terms of the notes.

15



The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments at March 31, 2018 and December 31, 2017:
Cash, Cash Equivalents and Restricted Cash. The carrying amounts of these items approximate fair value because they are short-term by nature.
Mortgage Loans Held for Sale, Forward Sales of Mortgage-Backed Securities, Commitments to Extend Real Estate Loans, Whole loan Contracts for Committed IRLCs and Mortgage Loans Held for Sale, Convertible Senior Subordinated Notes due 2018, Senior Notes due 2021 and Senior Notes due 2025. The fair value of these financial instruments was determined based upon market quotes at March 31, 2018 and December 31, 2017. The market quotes used were quoted prices for similar assets or liabilities along with inputs taken from observable market data by correlation. The inputs were adjusted to account for the condition of the asset or liability.
Split Dollar Life Insurance Policy and Notes Receivable. The estimated fair value was determined by calculating the present value of the amounts based on the estimated timing of receipts using discount rates that incorporate management’s estimate of risk associated with the corresponding note receivable.
Notes Payable - Homebuilding Operations. The interest rate available to the Company during the quarter ended March 31, 2018 under the Company’s $475 million unsecured revolving credit facility, dated July 18, 2013, as amended (the “Credit Facility”), fluctuated daily with the one-month LIBOR rate plus a margin of 250 basis points, and thus the carrying value is a reasonable estimate of fair value. Please see Note 8 to our financial statements for additional information regarding the Credit Facility.
Notes Payable - Financial Services Operations. M/I Financial, LLC (“M/I Financial”) is a party to two credit agreements: (1) a $125 million secured mortgage warehousing agreement (which increases to $150 million during certain periods), dated June 24, 2016, as amended (the “MIF Mortgage Warehousing Agreement”); and (2) a $35 million mortgage repurchase agreement, as amended and restated on October 30, 2017 (the “MIF Mortgage Repurchase Facility”). For each of these credit facilities, the interest rate is based on a variable rate index, and thus their carrying value is a reasonable estimate of fair value. The interest rate available to M/I Financial during the first quarter of 2018 fluctuated with LIBOR. Please see Note 8 to our financial statements for additional information regarding the MIF Mortgage Warehousing Agreement and the MIF Mortgage Repurchase Facility.
Notes Payable - Other. The estimated fair value was determined by calculating the present value of the future cash flows using the Company’s current incremental borrowing rate.
Letters of Credit. Letters of credit of $51.2 million and $49.7 million represent potential commitments at March 31, 2018 and December 31, 2017, respectively. The letters of credit generally expire within one or two years. The estimated fair value of letters of credit was determined using fees currently charged for similar agreements.
NOTE 5. Guarantees and Indemnifications
In the ordinary course of business, M/I Financial, a 100%-owned subsidiary of M/I Homes, Inc., enters into agreements that guarantee certain purchasers of its mortgage loans that M/I Financial will repurchase a loan if certain conditions occur, primarily if the mortgagor does not meet the terms of the loan within the first six months after the sale of the loan. Loans totaling approximately $55.5 million and $46.8 million were covered under these guarantees as of March 31, 2018 and December 31, 2017, respectively.  The increase in loans covered by these guarantees from December 31, 2017 is a result of a change in the mix of investors and their related purchase terms.  A portion of the revenue paid to M/I Financial for providing the guarantees on these loans was deferred at March 31, 2018, and will be recognized in income as M/I Financial is released from its obligation under the guarantees. The risk associated with the guarantees above is offset by the value of the underlying assets.
M/I Financial has received inquiries concerning underwriting matters from purchasers of its loans regarding certain loans totaling approximately $1.0 million and $1.2 million at March 31, 2018 and December 31, 2017, respectively.
M/I Financial has also guaranteed the collectability of certain loans to third party insurers (U.S. Department of Housing and Urban Development and U.S. Veterans Administration) of those loans for periods ranging from five to thirty years. As of both March 31, 2018 and December 31, 2017, the total of all loans indemnified to third party insurers relating to the above agreements was $1.3 million. The maximum potential amount of future payments is equal to the outstanding loan value less the value of the underlying asset plus administrative costs incurred related to foreclosure on the loans, should this event occur.
The Company recorded a liability relating to the guarantees described above totaling $0.8 million at both March 31, 2018 and December 31, 2017 which is management’s best estimate of the Company’s liability.

16



NOTE 6. 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 delivered. 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 is delivered, 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 months ended March 31, 2018 and 2017 is as follows:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Warranty reserves, beginning of period
$
26,133

 
$
27,732

Warranty expense on homes delivered during the period
2,542

 
2,429

Changes in estimates for pre-existing warranties
(91
)
 
730

Settlements made during the period
(4,283
)
 
(5,911
)
Warranty reserves, end of period
$
24,301

 
$
24,980

We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets 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.
During 2015, 2016 and 2017, we recorded an aggregate total of $28.4 million of warranty charges for stucco-related repair costs for (1) homes in our Florida communities that we had identified as needing repair but had not yet completed the repair and (2) estimated repair costs for homes in our Florida communities that we had not yet identified as needing repair but that may require repair in the future.
We did not record any additional warranty charges for stucco-related repair costs during the first quarter of 2018. The remaining reserve for both known repair costs and an estimate of future costs of stucco-related repairs at March 31, 2018 included within our warranty reserve was $7.9 million. We believe that this amount is sufficient to cover both known and estimated future repair costs as of March 31, 2018.
Our review of the stucco-related issues in our Florida communities is ongoing. Our estimate of future costs of stucco-related repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for

17



variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate, including to reflect additional estimated future stucco-related repairs costs, which revision could be material.
We also are continuing to investigate 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 March 31, 2018, 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 March 31, 2018, the Company had outstanding approximately $179.9 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 September 2024. Included in this total are: (1) $121.0 million of performance and maintenance bonds and $43.5 million of performance letters of credit that serve as completion bonds for land development work in progress; (2) $7.7 million of financial letters of credit, of which $7.0 million represent deposits on land and lot purchase agreements; and (3) $7.7 million of financial bonds.

Land Option Contracts and Other Similar Contracts

At March 31, 2018, the Company also had options and contingent purchase agreements to acquire land and developed lots with an aggregate purchase price of approximately $757.7 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 March 31, 2018 and December 31, 2017, we had $0.3 million and $0.4 million reserved for legal expenses, respectively.
NOTE 7. Acquisition and Goodwill
Acquisition
In March 2018, we entered the Detroit, Michigan market through the acquisition of the homebuilding assets and operations of Pinnacle Homes. The purchase price was approximately $100.8 million. The results of Pinnacle Homes operations have been included in our financial statements since March 1, 2018, the effective date of the acquisition. As a result of the transaction, we recorded a provisional $16.4 million of goodwill (all of which is tax deductible) which relates to expected synergies from establishing a market presence in Detroit, the experience and knowledge of the acquired workforce and the capital efficient operating structure of the business acquired. The remaining basis of $84.4 million is almost entirely comprised of the fair value of the acquired inventory with an insignificant amount attributable to other assets and liabilities. In accordance with ASC 805-10, Business Combinations (“ASC 805”), we will update such balances, if necessary, upon further verification of the fair values on certain other assets, more relevant history on profitability of backlog, and further understanding of cost to complete activities, if any, on purchased communities.

Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired and liabilities assumed in business combinations. Because the purchase price allocation is subject to change within a measurement period of up to one year from the acquisition date pursuant to ASC 805, in connection with the Company’s acquisition of the homebuilding assets and operations of Pinnacle Homes in Detroit, Michigan described above, the Company recorded a provisional amount of goodwill of approximately $16.4 million as of March 31, 2018, which is included as Goodwill in our Unaudited Condensed Consolidated Balance Sheets. This provisional amount was based on the estimated fair values of the acquired assets and liabilities at the date of the acquisition in accordance with ASC 350, Intangibles, Goodwill and Other (“ASC 350”).


18



In accordance with ASC 350, the Company analyzes goodwill for impairment on an annual basis (or more often if indicators of impairment exist). The Company performs a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value. As of March 31, 2018, there were no indicators that our goodwill was impaired.
NOTE 8. Debt
Notes Payable - Homebuilding
The Credit Facility provides an aggregate commitment amount of $475 million, including a $125 million sub-facility for letters of credit. In addition, the Credit Facility has an accordion feature under which the Company may increase the aggregate commitment amount up to $500 million, subject to certain conditions, including obtaining additional commitments from existing or new lenders. The Credit Facility expires on July 18, 2021. Interest on amounts borrowed under the Credit Facility was payable at a rate which is adjusted daily and is equal to the sum of the one-month LIBOR rate plus a margin of 250 basis points. The margin is subject to adjustment in subsequent quarterly periods based on the Company’s leverage ratio. The Credit Facility also contains certain financial covenants. At March 31, 2018, the Company was in compliance with all financial covenants of the Credit Facility.
The available amount under the Credit Facility is computed in accordance with a borrowing base, which is calculated by applying various advance rates for different categories of inventory, and totaled $539.0 million of availability for additional senior debt at March 31, 2018. As a result, the full $475 million commitment amount of the Credit Facility was available, less any borrowings and letters of credit outstanding. At March 31, 2018, there were $162.3 million borrowings outstanding and $44.3 million of letters of credit outstanding, leaving net remaining borrowing availability of $268.4 million.
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s subsidiaries, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries (as defined in Note 12 to our financial statements), subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indentures for the Company’s $250.0 million aggregate principal amount of 5.625% Senior Notes due 2025 (the “2025 Senior Notes”) and the Company’s $300.0 million aggregate principal amount of 6.75% Senior Notes due 2021 (the “2021 Senior Notes”). The guarantors for the Credit Facility (the “Guarantor Subsidiaries”) are the same subsidiaries that guarantee the 2025 Senior Notes and the 2021 Senior Notes.
The Company’s obligations under the Credit Facility are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness. Our obligations under the Credit Facility are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
As of March 31, 2018, the Company was a party to a secured credit facility agreement for the issuance of letters of credit (the “Letter of Credit Facility”), with a maturity date of September 30, 2018 which allows for the issuance of letters of credit up to a total of $1.0 million. At March 31, 2018 and December 31, 2017, there was $0.3 million and $0.6 million, respectively, of outstanding letters of credit in aggregate under the Letter of Credit Facility, which were collateralized with $0.3 million and $0.6 million, respectively, of the Company’s cash.
Through the acquisition of Pinnacle Homes during the first quarter of 2018, the Company also assumed the obligation for $6.6 million of outstanding letters of credit under a separate facility, which was collateralized with $6.6 million of restricted cash.
Notes Payable — Financial Services
The MIF Mortgage Warehousing Agreement is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Mortgage Warehousing Agreement provides for a maximum borrowing availability of $125 million which increased to $150 million from September 25, 2017 to October 16, 2017 and from December 15, 2017 to February 2, 2018. The MIF Mortgage Warehousing Agreement expires on June 22, 2018. Interest on amounts borrowed under the MIF Mortgage Warehousing Agreement is payable at a per annum rate equal to the greater of (1) the floating LIBOR rate plus a spread of 237.5 basis points and (2) 2.75%. The MIF Mortgage Warehousing Agreement also contains certain financial covenants. At March 31, 2018, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Warehousing Agreement.

19



The MIF Mortgage Repurchase Facility is used to finance eligible residential mortgage loans originated by M/I Financial. The MIF Repurchase Facility provides for a mortgage repurchase facility with a maximum borrowing availability of $35 million which increased to $50 million from November 15, 2017 through February 1, 2018 (a period during which we typically experience higher mortgage origination volume). The MIF Mortgage Repurchase Facility expires on October 29, 2018. M/I Financial pays interest on each advance under the MIF Mortgage Repurchase Facility at a per annum rate equal to the floating LIBOR rate plus 250 or 275 basis points depending on the loan type. The MIF Mortgage Repurchase Facility also contains certain financial covenants. At March 31, 2018, M/I Financial was in compliance with all financial covenants of the MIF Mortgage Repurchase Facility.
At March 31, 2018 and December 31, 2017, M/I Financial’s total combined maximum borrowing availability under the two credit facilities was $160.0 million and $200.0 million, respectively. At March 31, 2018 and December 31, 2017, M/I Financial had $102.7 million and $168.2 million outstanding on a combined basis under its credit facilities, respectively.
Senior Notes
As of both March 31, 2018 and December 31, 2017, we had $250.0 million of our 2025 Senior Notes outstanding. The 2025 Senior Notes bear interest at a rate of 5.625% per year, payable semiannually in arrears on February 1 and August 1 of each year (commencing on February 1, 2018), and mature on August 1, 2025. We may redeem all or any portion of the 2025 Senior Notes on or after August 1, 2020 at a stated redemption price, together with accrued and unpaid interest thereon. The redemption price will initially be 104.219% of the principal amount outstanding, but will decline to 102.813% of the principal amount outstanding if redeemed during the 12-month period beginning on August 1, 2021, will further decline to 101.406% of the principal amount outstanding if redeemed during the 12-month period beginning on August 1, 2022 and will further decline to 100.000% of the principal amount outstanding if redeemed on or after August 1, 2023, but prior to maturity.
As of both March 31, 2018 and December 31, 2017, we had $300.0 million of our 2021 Senior Notes outstanding. The 2021 Senior Notes bear interest at a rate of 6.75% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2021. As of January 15, 2018, we may redeem all or any portion of the 2021 Senior Notes at 103.375% of the principal amount outstanding. This rate declines to 101.688% of the principal amount outstanding if redeemed during the 12-month period beginning on January 15, 2019, and will further decline to 100.000% of the principal amount outstanding if redeemed on or after January 15, 2020, but prior to maturity.
The 2025 Senior Notes and the 2021 Senior Notes contain certain covenants, as more fully described and defined in the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes, which limit the ability of the Company and the restricted subsidiaries to, among other things: incur additional indebtedness; make certain payments, including dividends, or repurchase any shares, in an aggregate amount exceeding our “restricted payments basket”; make certain investments; and create or incur certain liens, consolidate or merge with or into other companies, or liquidate or sell or transfer all or substantially all of our assets. These covenants are subject to a number of exceptions and qualifications as described in the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes. As of March 31, 2018, the Company was in compliance with all terms, conditions, and covenants under the indentures.
The 2025 Senior Notes and the 2021 Senior Notes are fully and unconditionally guaranteed jointly and severally on a senior unsecured basis by the Guarantor Subsidiaries. The 2025 Senior Notes and the 2021 Senior Notes are general, unsecured senior obligations of the Company and the Guarantor Subsidiaries and rank equally in right of payment with all our and the Guarantor Subsidiaries’ existing and future unsecured senior indebtedness.  The 2025 Senior Notes and the 2021 Senior Notes are effectively subordinated to our and the Guarantor Subsidiaries’ existing and future secured indebtedness with respect to any assets comprising security or collateral for such indebtedness.
The indenture governing our 2025 Senior Notes and the indenture governing the 2021 Senior Notes limits our ability to pay dividends on, and repurchase, our common shares and any of our preferred shares then outstanding to the amount of the positive balance in our “restricted payments basket,” as defined in the indentures. In each case, the “restricted payments basket” is equal to $125.0 million plus (1) 50% of our aggregate consolidated net income (or minus 100% of our aggregate consolidated net loss) from October 1, 2015, excluding income or loss from Unrestricted Subsidiaries, plus (2) 100% of the net cash proceeds from either contributions to the common equity of the Company after December 1, 2015 or the sale of qualified equity interests after December 1, 2015, plus other items and subject to other exceptions. The restricted payments basket was $202.0 million and $176.1 million at March 31, 2018 and December 31, 2017, respectively. The determination to pay future dividends on, or make future repurchases of, our common shares will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and compliance with debt covenants, and other factors deemed relevant by our board of directors.

20



Convertible Senior Subordinated Notes
On March 1, 2013, the Company issued $86.3 million in aggregate principal amount of 3.0% Convertible Senior Subordinated Notes due 2018 (the “2018 Convertible Senior Subordinated Notes”). The 2018 Convertible Senior Subordinated Notes were scheduled to mature on March 1, 2018 and the deadline for holders to convert the 2018 Convertible Senior Subordinated Notes was February 27, 2018. As a result of conversion elections made by holders of the 2018 Convertible Senior Subordinated Notes, (1) approximately $20.3 million in aggregate principal amount of the 2018 Convertible Senior Subordinated Notes were converted and settled through the issuance of approximately 0.629 million of our common shares (at a conversion price per common share of $32.31) and (2) the Company repaid in cash approximately $65.9 million in aggregate principal amount of the 2018 Convertible Senor Subordinated Notes at maturity. In accordance with the indenture governing the 2018 Convertible Senior Subordinated Notes, the Company paid interest on the 2018 Convertible Senior Subordinated Notes to, but excluding, March 1, 2018. On December 31, 2017, we had $86.3 million of our 2018 Convertible Senior Subordinated Notes outstanding.
Notes Payable - Other
The Company had other borrowings, which are reported in Notes Payable - Other in our Unaudited Condensed Consolidated Balance Sheets, totaling $10.0 million and $10.6 million as of March 31, 2018 and December 31, 2017, respectively.  The balance is made up of notes payable acquired in the normal course of business.
NOTE 9. Earnings Per Share
The table below presents a reconciliation between basic and diluted weighted average shares outstanding, net income available to common shareholders and basic and diluted income per share for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended
 
 
March 31,
(In thousands, except per share amounts)
 
2018
 
2017
NUMERATOR
 
 
 
 
Net income
 
$
18,063

 
$
16,883

Preferred stock dividends (a)
 

 
(1,219
)
Net income available to common shareholders
 
18,063

 
15,664

Interest on 3.25% convertible senior subordinated notes due 2017 (b)
 

 
392

Interest on 3.00% convertible senior subordinated notes due 2018 (c)
 
410

 
528

Diluted income available to common shareholders
 
$
18,473

 
$
16,584

DENOMINATOR
 
 
 
 
Basic weighted average shares outstanding
 
28,124

 
24,738

Effect of dilutive securities:
 
 
 
 
Stock option awards
 
466

 
332

Deferred compensation awards
 
211

 
174

3.25% convertible senior subordinated notes due 2017 (b)
 

 
2,416

3.00% convertible senior subordinated notes due 2018 (c)
 
1,743

 
2,669

Diluted weighted average shares outstanding - adjusted for assumed conversions
 
30,544

 
30,329

Earnings per common share:
 
 
 
 
Basic
 
$
0.64

 
$
0.63

Diluted
 
$
0.60

 
$
0.55

Anti-dilutive equity awards not included in the calculation of diluted earnings per common share
 

 
95


21



(a)
The Company’s Articles of Incorporation authorize the issuance of up to 2,000,000 preferred shares, par value $.01 per share.  On March 15, 2007, the Company issued 4,000,000 depositary shares, each representing 1/1000th of a 9.75% Series A Preferred Share of the Company (the “Series A Preferred Shares”), or 4,000 Series A Preferred Shares in the aggregate.  On April 10, 2013, the Company redeemed 2,000 of its Series A Preferred Shares (and the 2,000,000 related depositary shares) for an aggregate redemption price of approximately $50.4 million in cash. On October 16, 2017, the Company redeemed the remaining 2,000 outstanding Series A Preferred Shares (and the 2,000,000 related depositary shares) for an aggregate redemption price of approximately $50.4 million in cash. The Company declared and paid a quarterly cash dividend of $609.375 per share on its then outstanding Series A Preferred Shares in the first quarter of 2017 for an aggregate dividend payment on the Series A Preferred Shares of $1.2 million in the first quarter of 2017.
(b)
On September 11, 2012, the Company issued $57.5 million in aggregate principal amount of 3.25% Convertible Senior Subordinated Notes due 2017 (the “2017 Convertible Senior Subordinated Notes”). The 2017 Convertible Senior Subordinated Notes were scheduled to mature on September 15, 2017 and the deadline for holders to convert the 2017 Convertible Senior Subordinated Notes was September 13, 2017. As a result of conversion elections made by holders of the 2017 Convertible Senior Subordinated Notes, all $57.5 million in aggregate principal amount of the 2017 Convertible Senior Subordinated Notes were converted and settled through the issuance of our common shares. In total, we issued approximately 2.4 million common shares (at a conversion price per common share of $23.80).
(c)
On March 1, 2013, the Company issued $86.3 million in aggregate principal amount of 2018 Convertible Senior Subordinated Notes. The 2018 Convertible Senior Subordinated Notes were scheduled to mature on March 1, 2018 and the deadline for holders to convert the 2018 Convertible Senior Subordinated Notes was February 27, 2018. As a result of conversion elections made by holders of the 2018 Convertible Senior Subordinated Notes, (1) approximately $20.3 million in aggregate principal amount of the 2018 Convertible Senior Subordinated Notes were converted and settled through the issuance of approximately 0.629 million of our common shares (at a conversion price per common share of $32.31) and (2) the Company repaid in cash approximately $65.9 million in aggregate principal amount of the 2018 Convertible Senor Subordinated Notes at maturity.
For the three months ended March 31, 2018 and 2017, the effect of our convertible debt then outstanding was included in the diluted earnings per share calculations.
NOTE 10. Income Taxes
During the three months ended March 31, 2018, the Company recorded a tax provision of $5.8 million, which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three months ended March 31, 2018 was 24.3%, which included the new 21% corporate tax rate and tax expense related to the repeal of the section 162(m) performance-based compensation exception, both as a result of the Tax Act, and excess tax benefits from employee share-based payment transactions exercised during the first three months of 2018 per ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The Company is still analyzing certain aspects of the Tax Act and the retroactive reinstatement of expired energy tax credits under the Bipartisan Budget Act of 2018. The final impact is yet to be determined. During the three months ended March 31, 2017, the Company recorded a tax provision of $9.5 million, which reflects income tax expense related to the period’s income before income taxes. The effective tax rate for the three months ended March 31, 2017 was 35.9%, which included the former 35% corporate tax rate and tax expense related to the expected tax benefits for the domestic production activities deduction.
The Company had $4.6 million of state NOL carryforwards, net of the federal benefit, at March 31, 2018. Our state NOLs may be carried forward from one to 15 years, depending on the tax jurisdiction, with $1.4 million expiring between 2022 and 2027 and $3.2 million expiring between 2028 and 2032, absent sufficient state taxable income.
NOTE 11. Business Segments
The Company’s chief operating decision makers evaluate the Company’s performance in various ways, including: (1) the results of our 16 individual homebuilding operating segments and the results of our financial services operations; (2) the results of our three homebuilding reportable segments; and (3) our consolidated financial results.
In accordance with ASC 280, Segment Reporting (“ASC 280”), we have identified each homebuilding division as an operating segment as each homebuilding division engages in business activities from which it earns revenue, primarily from the sale and construction of single-family attached and detached homes, acquisition and development of land, and the occasional sale of lots to third parties. Our financial services operations generate revenue primarily from the origination, sale and servicing of mortgage loans and title services primarily for purchasers of the Company’s homes and are included in our financial services reportable segment. In accordance with the aggregation criteria defined in ASC 280, we have identified each homebuilding division as an operating segment and have determined our reportable segments are as follows: Midwest homebuilding; Southern homebuilding; Mid-Atlantic homebuilding; and financial services operations.  The homebuilding operating segments that are included within each reportable segment have been aggregated because they share similar aggregation characteristics as prescribed in ASC 280 in the following regards: (1) long-term economic characteristics; (2) historical and expected future long-term gross margin percentages; (3) housing products, production processes and methods of distribution; and (4) geographical proximity.  

22



The homebuilding operating segments that comprise each of our reportable segments are as follows:
Midwest
Southern
Mid-Atlantic
Chicago, Illinois
Orlando, Florida
Charlotte, North Carolina
Cincinnati, Ohio
Sarasota, Florida
Raleigh, North Carolina
Columbus, Ohio
Tampa, Florida
Washington, D.C.
Indianapolis, Indiana
Austin, Texas
 
Minneapolis/St. Paul, Minnesota
Dallas/Fort Worth, Texas
 
Detroit, Michigan
Houston, Texas
 
 
San Antonio, Texas
 

The following table shows, by segment: revenue, operating income and interest expense for the three months ended March 31, 2018 and 2017, as well as the Company’s income before income taxes for such periods:
 
Three Months Ended March 31,
(In thousands)
2018
 
2017
Revenue:
 
 
 
Midwest homebuilding
$
158,620

 
$
146,422

Southern homebuilding
190,388

 
149,365

Mid-Atlantic homebuilding
73,823

 
96,886

Financial services (a)
15,026

 
14,307

Total revenue
$
437,857

 
$
406,980

 
 
 
 
Operating income:
 
 
 
Midwest homebuilding (b)
$
12,217

 
$
14,859

Southern homebuilding
14,850

 
8,712

Mid-Atlantic homebuilding
2,592

 
7,253

Financial services (a)
9,540

 
9,230

Less: Corporate selling, general and administrative expense
(8,058
)
 
(8,398
)
Total operating income (b)
$
31,141

 
$
31,656

 
 
 
 
Interest expense:
 
 
 
Midwest homebuilding
$
2,066

 
$
1,377

Southern homebuilding
2,287

 
2,377

Mid-Atlantic homebuilding
756

 
916

Financial services (a)
769

 
668

Total interest expense
$
5,878

 
$
5,338

 
 
 
 
Equity in income of joint venture arrangements
(310
)
 
(17
)
Acquisition and integration costs (c)
1,700

 

 
 
 
 
Income before income taxes
$
23,873

 
$
26,335

(a)
Our financial services operational results should be viewed in connection with our homebuilding business as its operations originate loans and provide title services primarily for our homebuying customers, with the exception of an immaterial amount of mortgage refinancing.
(b)
Includes $0.9 million of charges related to purchase accounting adjustments taken during the first quarter of 2018 as a result of our acquisition of Pinnacle Homes in Detroit, Michigan on March 1, 2018.
(c)
Represents costs which include, but are not limited to, legal fees and expenses, travel and communication expenses, cost of appraisals, accounting fees and expenses, and miscellaneous expenses related to our recent acquisition of Pinnacle Homes. As these costs are not eligible for capitalization as initial direct costs, such amounts are expensed as incurred.

23



The following tables show total assets by segment at March 31, 2018 and December 31, 2017:
 
March 31, 2018
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
6,253

 
$
23,163

 
$
6,747

 
$

 
$
36,163

Inventory (a)
615,973

 
686,632

 
241,576

 

 
1,544,181

Investments in joint venture arrangements
4,972

 
10,169

 
6,925

 

 
22,066

Other assets
20,198

 
41,147

(b) 
11,305

 
219,313

 
291,963

Total assets
$
647,396

 
$
761,111

 
$
266,553

 
$
219,313

 
$
1,894,373


 
December 31, 2017
(In thousands)
Midwest
 
Southern
 
Mid-Atlantic
 
Corporate, Financial Services and Unallocated
 
Total
Deposits on real estate under option or contract
$
4,933

 
$
20,719

 
$
6,904

 
$

 
$
32,556

Inventory (a)
500,671

 
636,019

 
245,328

 

 
1,382,018

Investments in joint venture arrangements
4,410

 
9,677

 
6,438

 

 
20,525

Other assets
13,573

 
38,784

(b) 
13,311

 
364,004

 
429,672

Total assets
$
523,587

 
$
705,199

 
$
271,981

 
$
364,004

 
$
1,864,771

(a)
Inventory includes single-family lots, land and land development costs; land held for sale; homes under construction; model homes and furnishings; community development district infrastructure; and consolidated inventory not owned.
(b)
Includes development reimbursements from local municipalities.
NOTE 12. Supplemental Guarantor Information
The Company’s obligations under the 2025 Senior Notes and the 2021 Senior Notes are not guaranteed by all of the Company’s subsidiaries and therefore, the Company has disclosed condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The Guarantor Subsidiaries of the 2025 Senior Notes and the 2021 Senior Notes are the same.
The following condensed consolidating financial information includes balance sheets, statements of income and cash flow information for M/I Homes, Inc. (the parent company and the issuer of the aforementioned guaranteed notes), the Guarantor Subsidiaries, collectively, and for all other subsidiaries and joint ventures of the Company (the “Unrestricted Subsidiaries”), collectively. Each Guarantor Subsidiary is a direct or indirect 100%-owned subsidiary of M/I Homes, Inc. and has fully and unconditionally guaranteed the (a) 2025 Senior Notes on a joint and several senior unsecured basis and (b) 2021 Senior Notes on a joint and several senior unsecured basis.
There are no significant restrictions on the parent company’s ability to obtain funds from its Guarantor Subsidiaries in the form of a dividend, loan, or other means.
As of March 31, 2018, each of the Company’s subsidiaries is a Guarantor Subsidiary, with the exception of subsidiaries that are primarily engaged in the business of mortgage financing, title insurance or similar financial businesses relating to the homebuilding and home sales business, certain subsidiaries that are not 100%-owned by the Company or another subsidiary, and other subsidiaries designated by the Company as Unrestricted Subsidiaries, subject to limitations on the aggregate amount invested in such Unrestricted Subsidiaries in accordance with the terms of the Credit Facility and the indenture governing the 2025 Senior Notes and the indenture governing the 2021 Senior Notes.
In the condensed financial tables presented below, the parent company presents all of its 100%-owned subsidiaries as if they were accounted for under the equity method. All applicable corporate expenses have been allocated appropriately among the Guarantor Subsidiaries and Unrestricted Subsidiaries.

24



UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
Revenue
 
$

$
422,831

$
15,026

$

$
437,857

Costs and expenses:
 
 
 
 
 
 
Land and housing
 

348,702



348,702

General and administrative
 

22,171

5,780


27,951

Selling
 

30,063



30,063

Acquisition and integration costs
 

1,700



1,700

Equity in income of joint venture arrangements
 


(310
)

(310
)
Interest
 

5,108

770


5,878

Total costs and expenses
 

407,744

6,240


413,984

 
 
 
 
 
 
 
Income before income taxes
 

15,087

8,786


23,873

 
 
 
 
 
 
 
Provision for income taxes
 

3,906

1,904


5,810

 
 
 
 
 
 
 
Equity in subsidiaries
 
18,063



(18,063
)

 
 
 
 
 
 
 
Net income
 
$
18,063

$
11,181

$
6,882

$
(18,063
)
$
18,063


 
 
Three Months Ended March 31, 2017
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
Revenue
 
$

$
392,673

$
14,307

$

$
406,980

Costs and expenses:
 
 
 
 
 
 
Land and housing
 

320,281



320,281

General and administrative
 

22,460

5,300


27,760

Selling
 

27,283



27,283

Equity in income of joint venture arrangements
 


(17
)

(17
)
Interest
 

4,670

668


5,338

Total costs and expenses
 

374,694

5,951


380,645

 
 
 
 
 
 
 
Income before income taxes
 

17,979

8,356


26,335

 
 
 
 
 
 
 
Provision for income taxes
 

6,489

2,963


9,452

 
 
 
 
 
 
 
Equity in subsidiaries
 
16,883



(16,883
)

 
 
 
 
 
 
 
Net income
 
16,883

11,490

5,393

(16,883
)
16,883

 
 
 
 
 
 
 
Preferred dividends
 
1,219




1,219

 
 
 
 
 
 
 
Net income available to common shareholders
 
$
15,664

$
11,490

$
5,393

$
(16,883
)
$
15,664



25



UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
 
 
 
 
 
 
 
 
 
March 31, 2018
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$

$
30,416

$
23,161

$

$
53,577

Mortgage loans held for sale
 


110,612


110,612

Inventory
 

1,580,344



1,580,344

Property and equipment - net
 

24,915

957


25,872

Investment in joint venture arrangements
 

14,784

7,282


22,066

Deferred income tax asset
 

18,104



18,104

Investment in subsidiaries
 
737,821



(737,821
)

Intercompany assets
 
588,850



(588,850
)

Goodwill
 

16,400



16,400

Other assets
 
2,931

56,700

7,767


67,398

TOTAL ASSETS
 
$
1,329,602

$
1,741,663

$
149,779

$
(1,326,671
)
$
1,894,373

 
 
 
 
 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 
 
 
 
 

LIABILITIES:
 
 
 
 
 

Accounts payable
 
$

$
118,482

$
357

$

$
118,839

Customer deposits
 

37,454



37,454

Intercompany liabilities
 

581,356

7,494

(588,850
)

Other liabilities
 

97,363

5,395


102,758

Community development district obligations
 

12,499



12,499

Obligation for consolidated inventory not owned
 

18,199



18,199

Notes payable bank - homebuilding operations
 

162,300



162,300

Notes payable bank - financial services operations
 


102,711


102,711

Notes payable - other
 

10,011



10,011

Senior notes due 2021 - net
 
297,056




297,056

Senior notes due 2025 - net
 
246,181




246,181

TOTAL LIABILITIES
 
543,237

1,037,664

115,957

(588,850
)
1,108,008

 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
786,365

703,999

33,822

(737,821
)
786,365

 
 
 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,329,602

$
1,741,663

$
149,779

$
(1,326,671
)
$
1,894,373




26



CONDENSED CONSOLIDATING BALANCE SHEET
 
 
 
 
 
 
 
 
 
December 31, 2017
(In thousands)
 
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
 
ASSETS:
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$

$
131,522

$
20,181

$

$
151,703

Mortgage loans held for sale
 


171,580


171,580

Inventory
 

1,414,574



1,414,574

Property and equipment - net
 

25,815

1,001


26,816

Investment in joint venture arrangements
 

13,930

6,595


20,525

Deferred income tax asset
 

18,438



18,438

Investment in subsidiaries
 
722,508



(722,508
)

Intercompany assets
 
650,599



(650,599
)

Other assets
 
3,154

48,430

9,551


61,135

TOTAL ASSETS
 
$
1,376,261

$
1,652,709

$
208,908

$
(1,373,107
)
$
1,864,771

 
 
 
 
 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 
 
 
 
 

LIABILITIES:
 
 
 
 
 

Accounts payable
 
$

$
116,773

$
460

$

$
117,233

Customer deposits
 

26,378



26,378

Intercompany liabilities
 

645,048

5,551

(650,599
)

Other liabilities
 

126,522

5,012


131,534

Community development district obligations
 

13,049



13,049

Obligation for consolidated inventory not owned
 

21,545



21,545

Notes payable bank - financial services operations
 


168,195


168,195

Notes payable - other
 

10,576



10,576

Convertible senior subordinated notes due 2018 - net
 
86,132




86,132

Senior notes due 2021 - net
 
296,780




296,780

Senior notes due 2025 - net
 
246,051




246,051

TOTAL LIABILITIES
 
628,963

959,891

179,218

(650,599
)
1,117,473

 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
747,298

692,818

29,690

(722,508
)
747,298

 
 
 
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,376,261

$
1,652,709

$
208,908

$
(1,373,107
)
$
1,864,771




27



UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
(In thousands)
M/I Homes, Inc.
Guarantor Subsidiaries
Unrestricted Subsidiaries
Eliminations
Consolidated
 
 
 
 
 
 
OPERATING ACTIVITIES:
 
 
 
 
 
Net cash provided by (used in) operating activities
$
2,750

$
(96,116
)
$
64,926

$
(2,750
)
$
(31,190
)
 
 
 
 
 
 
INVESTING ACTIVITIES: