What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 153 added, 204 removed, 343 unchanged (51% of the section changed)

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Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:

 the impact of the COVID-19 pandemic on our business operations

 uncertainties related to and the impact, if any, of the U.S.

presidential, congressional, and numerous state and local elections on our business, our industry and the economy in general;

 economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;

the impact of the COVID-19 pandemic on our business operations, operating results and financial condition, as well as the general economy and housing market in particular;

 econo mic changes, either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;

 shortages of or increased prices for labor, land or raw materials, including lumber, used in housing construction;

 a downturn in the homebuilding industry , including a reduction in demand or a decline in real estate values or market conditions resulting in impairment of our assets ;

 changes in assumptions used to make industry forecasts or trends affecting housing demand or prices;

 a downturn in the homebuilding industry, including a reduction in demand or a decline in real estate values or market conditions resulting in an adverse impact on our business, operating results and financial conditions, including an impairment of our assets;

 changes in assumptions used to make industry forecasts, population growth rates, or trends affecting housing demand or prices;

 continued volatility and uncertainty in the credit markets and broader financial markets;

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 changes in our business and investment strategy;

 availability of land to acquire, and our ability to acquire such land on favorable terms or at all;

 availability and price of land to acquire, and our ability to acquire such land on favorable terms or at all;

 availability, terms and deployment of capital;

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 changes in, or the failure or inability to comply with, governmental laws and regulations;

 the timing of receipt of regulatory approvals and the opening of projects;

 the impact and cost of compliance with evolving environmental laws and regulations and third-party challenges to required permits and other approvals;

 the timing of r eceipt of regulatory approvals and the opening of projects;

 the i mpact and cost of compliance with evolving environmental, health and safety and other laws and regulations and third-party challenges to required permits and other approvals and potential legal liability in connection therewith;

 the degree and nature of our competition;

 our leverage, debt service obligations and exposure to changes in interest rates;

 our ability to continue to fund and succeed in our mortgage lending business;

 availability of qualified personnel and our ability to retain our key personnel;

 t axation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance;

 our ability to continue to fund and succeed in our mortgage lending business and the additional risks involved in that business;

 availability of qualified personnel and contractors and our ability to retain key personnel and contractor relationships;

 taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance;

 changes in United States generally accepted accounting principles (which we refer to as “GAAP”).

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New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us.

Except as required by law, we are not obligated to, and do not intend to, update or

revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.

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Some of the numbers included herein have been rounded for the convenience of presentation.

Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states.

Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 17 states.

In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.

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Our Century Communities brand targets a wide range of buyer profiles including:

first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections.

Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet and provides no option or upgrade selections.

entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade opportunities.

Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet and provides no option or upgrade opportunities.

Our homebuilding operations are organized into the following five reportable segments:

West, Mountain, Texas, Southeast, and Century Complete.

Additionally, our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment.

We build and sell an extensive range of home types across a variety of price points .

Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, primarily to our homebuyers have been identified as our Financial Services segment.

While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments.

Additionally, we prefer building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the homes.

Impact of COVID-19 Pandemic

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The homebuilding industry started to experience slowing sales trends in mid-March through April of 2020 at the outset of the widespread uncertainty concerning the pandemic.

However, home sales sharply rebounded in May and June of 2020, aided by historically low interest rates, lack of supply, and potentially renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic.

These positive trends continued throughout the third quarter of 2020.

In response to the pandemic and government restrictions, we shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols.

Construction and sale of residential real estate were deemed essential businesses in almost all of our markets;

and accordingly, our operations, other than in certain markets during the first weeks of April, were exempted from applicable health orders.

While these circumstances did not materially adversely affect our second or third quarter 2020 financial results, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry have yet to be known.

However, home sales sharply rebounded in May and June of 2020, aided by historically low

interest rates, lack of supply, and renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic.

These positive trends and market dynamics continued throughout the remainder of 2020 and throughout the first quarter of 2021.

While the COVID-19 pandemic did not materially adversely affect our full year 2020 or first quarter 2021 financial results, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry have yet to be known.

There is still uncertainty regarding the extent and duration of the COVID-19 pandemic as the situation has continued to evolve and associated government and consumer responses have remained in a state of flux.

Recent increases in COVID-19 positive cases have resulted and could continue to result in the slowing or altering of the “re-opening” plans of numerous state and local municipalities.

Despite overall strong demand and sales of our homes during the second and third quarters of 2020, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, which remain at historically high levels, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S.

Increases in COVID-19 positive cases could result in the slowing or altering of the “re-opening” plans of numerous state and local municipalities.

Despite overall strong demand and sales of our homes during the first quarter of 2021, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S.

economy, unemployment levels, financial markets, credit and mortgage markets, consumer confidence, availability of mortgage loans to homebuyers, and other factors, including those described elsewhere in this report.

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In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventories in the future.

Given the significant uncertainty regarding the impact of COVID-19, and in particular during the late March and April 2020 timeframe, we took significant steps to preserve cash and ensure we were positioned appropriately from a working capital perspective, including but not limited to initially extending the timing of certain land acquisitions, slowing or altering our land development activities, drawing additional amounts on our revolving line of credit, and implementing a reduction in our workforce, along with other cost savings measures.

As a result, and aided by strong demand for our homes during the second and third quarters of 2020, we ended the third quarter of 2020 with no amounts outstanding on our revolving line of credit, $288.3 million of cash and cash equivalents, $26.3 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 32.9%.

Driven by the strong housing market, we increased our land acquisition and development activities during the third quarter of 2020 to bolster our lot pipeline and support future community growth, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020.

Although the trajectory and strength of our markets continues to remain strong, we experienced some building cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods.

While the impact of the COVID-19 pandemic will continue to evolve and at any given time recovery could be slowed or reversed by a number of factors, we believe we are well positioned from a cash and liquidity standpoint not only to operate in an uncertain environment, but also continue to grow with the market, pay down debt and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.

Driven by the continued strong demand for our homes throughout the first quarter of 2021, we ended the first quarter of 2021 with no amounts outstanding under our revolving line of credit, $502.9 million of cash and cash equivalents, $54.2 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 19.9%.

Additionally, we increased our land acquisition and development activities during the first quarter of 2021 to bolster our lot pipeline and support future community growth, which resulted in 57,536 lots owned and controlled at March 31, 2021, a 60.6% increase as compared to March 31, 2020 and a 15.2% increase as compared to December 31, 2020.

Although the trajectory and strength of our markets continue to remain strong and have allowed us to pass on increased costs through price increases and maintain and even increase our margins, we continued to experience materials and labor supply cost pressures during the first quarter of 2021, particularly with respect to lumber and increases in the price of land, that could negatively impact our margins in future periods.

While the impact of the COVID-19 pandemic will continue to evolve and at any given time recovery could be slowed or reversed by a number of factors, we believe we are well positioned from a cash and liquidity standpoint not only to operate in an uncertain environment, but also to continue to grow with the market and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.

Results of Operations

During the three and nine months ended September 30, 2020, we delivered 2,283 and 6,627 homes, respectively, with an average sales price of $333.0 thousand and $313.9 thousand, respectively.

These deliveries represent increases of 20.7% and 20.0%, respectively, as compared to the three and nine months ended September 30, 2019.

During the three and nine months ended September 30, 2020, we generated approximately $760.2 million and $2,080.4 million in home sales revenues, respectively, approximately $64.9 million and $149.1 million in income before income tax expense, respectively, and approximately $49.8 million and $114.3 million, respectively, in net income, in each case representing substantial increases over the respective prior year periods.

For the three and nine months ended September 30, 2020, our new home contracts, net of cancelations, totaled 3,204 and 8,256, respectively, a 56.6% and 35.7% increase over the same respective periods in 2019.

As of September 30, 2020, we had a backlog of 3,699 homes, a 34.7% increase as compared to September 30, 2019, representing approximately $1,309.4 million in sales value, a 53.2% increase as compared to September 30, 2019.

The following table summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019.

During the three months ended March 31, 2021, we delivered 2,797 homes with an average sales price of $343.0 thousand, representing an 50.1% increase in deliveries and an 11.7% increase in average sales price as compared to the three months ended March 31, 2020.

During the three months ended March 31, 2021, we generated approximately $959.3 million in home sales revenues, approximately $131.0 million in income before income tax expense, and approximately $101.7 million in net income, in each case representing substantial increases over the prior year period.

For the three months ended March 31, 2021, our new home contracts, net of cancelations, totaled 3,455, a 44.7% increase over the same period in 2020.

As of March 31, 2021, we had a backlog of 4,097 homes, a 57.9% increase as compared to March 31, 2020, representing approximately $1,579.6 million in sales value, a 83.4% increase as compared to March 31, 2020.

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020.

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Increase (Decrease)

Consolidated Statements of Operations:

Home sales revenues

Land sales revenues

Land sales and other revenues

Financial services revenues

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Selling, general, and administrative

Loss on debt extinguishment

Inventory impairment and other

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Homebuilding gross margin percentage (2)

Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1)

Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1)

Backlog at end of period, number of homes

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See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures .” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP .

(2) Homebuilding gross margin percentage is inclusive of a $0 million and $1.7 million inventory impairment for the three and nine months ended September 30, 2020, respectively, included within inventory impairment and other on our consolidated financial statements.

(3) As Century Complete does not sell homes by community, but through studios and online, that segment is excluded from the count of selling communities.

(2) Homebuilding gross margin percentage is inclusive of a $0.8 million inventory impairment for the three months ended March 31, 2020, which is included within inventory impairment and other on our condensed consolidated financial statements.

We recognized no inventory impairment for the three months ended March 31, 2021.

(3) The selling communities as of March 31, 2020 has been adjusted from prior year presentations to reflect selling communities in our Century Complete segment of 102, which business was acquired in 2018, and for which selling communities was previously not disclosed.

Results of Operations by Segment

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Average Sales Price of Homes Delivered

Income before Income Tax

Three Months Ended September 30,

Home Sales Revenues

Three Months Ended September 30,

Century Complete

Financial Services

New Homes Delivered

Average Sales Price of Homes Delivered

Income before Income Tax

Nine Months Ended September 30,

Home Sales Revenues

Nine Months Ended September 30,

Three Months Ended March 31,

Century Complete

Financial Services

In our West segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $4.6 million and $15.1 million, respectively, to $13.6 million and $42.7 million, respectively, compared to the same periods in 2019.

These increases were primarily due to increases in new home deliveries of 38.6% and 26.2%, respectively, compared to the same periods in 2019, and the benefit of non-recurring land sales in the current year periods.

During the three and nine months ended September 30, 2020, we delivered 316 homes and 862 homes, respectively, with an average sales price of $596.5 thousand and $558.2 thousand, respectively, and generated $188.5 million and $481.1 million, respectively, in home sales revenue.

In our Mountain segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $8.1 million and $5.4 million, respectively, to $28.7 million and $67.8 million, respectively, compared to the same periods in 2019.

These increases were primarily related to increases in new home deliveries of 31.8% and 13.6%, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019.

In our Texas segment, for the three months ended September 30, 2020, our income before income tax decreased by $1.4 million to $6.9 million compared to the same period in 2019, and for the nine months ended September 30, 2020 our income before tax increased by $4.4 million to $22.0 million compared to the same period in 2019.

The decrease for the three month comparison was primarily due to a 10.6% decrease in average home sales prices as we continued to shift towards first time homebuyers, partially offset by a 24.3% increase in number of homes delivered.

The increase for the nine month comparison was primarily related to a 51.9% increase in the number of homes delivered during the nine months ended September 30, 2020 as compared to the same period in 2019, which was

partially offset by the decrease in the average sales price.

For the nine months ended September 30, 2020, the increase in income before income tax was partially offset by a $0.9 million impairment charge reflected during the nine months ended September 30, 2020.

In our Southeast segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $6.3 million and $16.3 million, respectively, to $13.4 million and $33.7 million, respectively, as compared to $7.1 million and $17.5 million for the same periods in 2019.

These increases were primarily related to 23.5% and 25.9% increases in the number of homes delivered during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019.

Our West segment generated income before income tax of $27.5 million for the quarter ended March 31, 2021, a 79.0% increase over the prior year period.

The increase was driven by the increase in homes sales revenue of $59.2 million and an increase of 270 basis points in the percentage of income before income tax to home sales revenues, as a result of increased revenues on a partially fixed cost base.

The increase in revenue was generated by both an increase in the number of homes delivered of 36.9%, as well as an increase of 7.2% in the average price per home.

The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 30.2%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics.

Our Mountain segment generated income before income tax of $52.0 million for the quarter ended March 31, 2021, a 181.0% increase over the prior year period.

The increase was driven by the increase in homes sales revenue of $133.5 million and an increase of 610 basis points in the percentage of income before income tax to home sales revenues, as a result of increased revenues on a partially fixed cost base, as well as the benefit of a non-recurring land sale which contributed $5.0 million of pre-tax income during the quarter.

The increase in revenue was generated by both an increase in the number of homes delivered of 73.0%, as well as an increase of 7.1% in the average price per home.

The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 50.0%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics.

Our Texas segment generated income before income tax of $8.5 million for the quarter ended March 31, 2021, a 55.6% increase over the prior year period.

The increase was driven by the increase in homes sales revenue of $27.6 million and an increase of 60 basis points in the percentage of income before income tax to home sales revenues, as a result of increased revenues on a partially fixed cost base.

The increase in revenue was generated by both an increase in the number of homes delivered of 34.4%, as well as an increase of 8.5% in the average price per home.

The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 209.3%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics.

Our Southeast segment generated income before income tax of $23.4 million for the quarter ended March 31, 2021 a 182.1% increase over the prior year period.

The increase was driven by the increase in homes sales revenue of $88.7 million and an increase of 430 basis points in the percentage of income before income tax to home sales revenues, as a result of increased revenues on a partially fixed cost base.

The increase in revenue was generated by both an increase in the number of homes delivered of 54.3%, as well as an increase of 8.5% in the average price per home.

The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 88.1%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics.

Century Complete

In our Century Complete segment, for the three and nine months ended September 30, 2020, we delivered 725 homes and 2,183 homes, respectively, with an average price of $168.2 thousand and $162.0 thousand, respectively, and generated $122.0 million and $353.7 million in home sales revenues, respectively.

Our income before income tax for the three and nine months ended September 30, 2020 was $7.8 million and $17.2 million, respectively, as compared to $6.0 million and $18.3 million for the same periods in 2019.

The increase in income before income tax for the three month comparison is primarily attributable to a 5.8% increase in new home deliveries in conjunction with a 10.7% increase in average sales price.

The decrease in income before income tax for the nine month comparison is primarily attributable to an increase in certain fixed costs and $0.8 million in inventory impairment charges.

Our Century Complete segment generated income before income tax of $21.7 million for the quarter ended March 31, 2021 an increase of $21.0 million over the prior year period.

The increase was driven by the increase in homes sales revenue of $77.5 million and an increase of 1,160 basis points in the percentage of income before income tax to home sales revenues, as a result of increased revenues on a partially fixed cost base.

The increase in revenue was generated by both an increase in the number of homes delivered of 44.0%, as well as an increase of 24.4% in the average price per home.

The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 100.0%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics.

Financial Services

Our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment.

Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days.

During the three and nine months ended September 30, 2020, income before income tax for our Financial Services segment increased $15.3 million and $24.7 million, respectively, to $17.5 million and $30.7 million, respectively, compared to the same periods in 2019.

These increases were primarily the result of $21.6 million and $38.8 million overall increases in financial services revenue during the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The increases in financial services revenue from the prior year periods were directly attributable to increases in the volume of loans sold during the three and nine month periods ended September 30, 2020 as compared to the same period in the previous year, of 116% and 97%, respectively.

Our Financial Services segment primarily originates mortgages for our homebuyers, and as such, performance correlates to the increase in the number of homes delivered.

During the three months ended March 31, 2021, income before income tax for our Financial Services segment increased $15.1 million to $15.3 million compared to the same period in 2020.

This increase was primarily the result of a $23.8 million overall increase in financial services revenue during the three months ended March 31, 2021, compared to the same period in 2020.

The increase in financial services revenue was directly attributable to a 118.9% increase in the volume of loans sold during the three-month period ended March 31, 2021 as compared to the same period in 2020.

Our Financial Services segment primarily originates mortgages for our homebuyers, and as such, performance typically correlates to the increase in the number of homes delivered.

The following table presents selected operational data for our Financial Services segment in relation to our loan origination activities (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Total originations:

Number of loans

Capture rate of Century homebuyers

Century Complete

Average FICO score

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Number of loans sold

During the three and nine months ended September 30, 2020, our Corporate segment generated losses of $23.1 million and $65.0 million, respectively, as compared to losses of $18.4 million and $70.8 million, respectively, for the same periods in 2019.

The increase for the three month comparison was primarily attributed to the following:

a $7.3 million increase in salaries and wages related to higher bonus and stock compensation expense, partially offset by (1) a decrease in legal costs of $0.4 million, (2) a decrease in IT expenses of $0.5

million, and (3) a decrease in other taxes and licenses of $0.5 million.

The decrease for nine month comparison was primarily attributed to the loss on debt extinguishment of $10.8 million that occurred during the prior year period in conjunction with decreases in other taxes and licenses of $0.9 million and travel and entertainment costs of $0.8 million, partially offset by an $8.5 million increase in salaries and wages related to higher bonus and stock compensation expense.

During the three months ended March 31, 2021, our Corporate segment generated a loss of $17.4 million, as compared to a loss of $14.5 million for the same period in 2020.

This increase was primarily attributed to higher compensation costs, including estimated bonuses.

Homebuilding Gross Margin

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Homebuilding gross margin represents home sales revenues less cost of home sales revenues.

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three months ended September 30, 2020 to 17.5% as compared to 18.1% for the same period in 2019, which was primarily driven by 0.6% increase in cost of home sales revenues as a percentage of home sales revenues.

Our homebuilding gross margin decreased for the nine months ended September 30, 2020 to 17.3% compared to 17.5% for the same period in 2019.

In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and other, interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory.

Three Months Ended September 30,

Home sales revenues

Cost of home sales revenues

Gross margin from home sales

Interest in cost of home sales revenues

Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1)

Purchase price accounting for acquired work in process inventory

Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1)

Nine Months Ended September 30,

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased during the three months ended March 31, 2021 to 21.1% as compared to 17.7% for the same period in 2020.

This increase was primarily driven by the positive homebuilding sales environment, which resulted in our ability to increase sales price in excess of an increase in our labor and direct costs period over period.

In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and other and interest in cost of home sales revenues.

Three Months Ended March 31,

Home sales revenues

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Adjusted homebuilding gross margin excluding interest and inventory impairment and other

Purchase price accounting for acquired work in process inventory

Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1)

(1) This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP.

See the reconciliations to the most comparable GAAP measure and other information under “—Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

For the three and nine months ended September 30, 2020, excluding impairment and other, interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 20.0% and 19.9%, respectively, as compared to 20.6% and 20.0% for the same periods in 2019.

We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

For the three months ended March 31, 2021, excluding inventory impairment and other, and interest in cost of home sales revenues, our adjusted homebuilding gross margin percentage was 23.1%, as compared to 20.2% for the same period in 2020.

We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions (if applicable) have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

Selling, General and Administrative Expense

(dollars in thousands)

Three Months Ended September 30,

Three Months Ended March 31,

Selling, general and administrative

As a percentage of home sales revenue

Nine Months Ended September 30,

Selling, general and administrative

As a percentage of homes sales revenue

Our selling, general and administrative expense increased $13.0 million and $29.1 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019.

The increase for the three months ended September 30, 2020 was primarily attributable to the following:

(1) an increase of $6.0 million in commission expense due to the 32.5% increase in home sales revenues, and (2) an increase of $7.7 million in our estimate of bonuses for 2020 as a result of our third quarter 2020 results.

The increase for the nine months ended September 30, 2020 was primarily attributable to the following:

(1) an increase of $16.5 million in commission expense due to the 22.0% increase in home sales revenues, (2) an increase of $8.8 million in our estimate of bonuses for 2020 as a result of our year to date results, and (3) an increase of $3.0 million in our stock-based compensation expense.

Our selling, general and administrative expense increased $18.5 million for the three months ended March 31, 2021 as compared to the same period in 2020.

This increase was primarily attributable to the following:

(1) an increase of $12.1 million in internal and external commission expense, which is directly related to our increase in home sales revenues and (2) an increase of $9.5 million in salaries and wages, primarily related to increased bonus expense as compared to the first quarter of 2020.

These increases were partially offset by decreases in expenses in numerous areas including:

advertising, legal expenses, and travel and entertainment.

Additionally, our selling, general and administrative expense decreased 330 basis points as a percentage of home sales revenue as compared to the quarter ended March 31, 2020, as a result of increased revenues on a partially fixed cost base.

Income Tax Expense

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Our 2021 estimated annual effective tax rate of 23.6% is driven by our blended federal and state statutory rate of 24.7%, and certain other permanent differences between GAAP and tax which decreased our rate by 1.1%.

For the nine months ended September 30, 2020, our estimated annual rate of 23.4% was impacted by discrete items which had a net impact of decreasing our rate by 0.1%, including excess tax benefits for vested stock-based compensation.

For the three months ended September 30, 2020 and 2019, we recorded income tax expense of $15.1 million and $7.8 million, respectively.

For the nine months ended September 30, 2020 and 2019, we recorded income tax expense of $34.7 million and $19.0 million, respectively .

For the three months ended March 31, 2021, our estimated annual rate of 23.6% was impacted by discrete items which had a net impact of decreasing our rate by 1.2%, including excess tax benefits for vested stock-based compensation.

For the three months ended March 31, 2021 and 2020, we recorded income tax expense of $29.4 million and $8.0 million, respectively.

Segment Assets

(dollars in thousands)

September 30,

Increase (Decrease)

1 unchanged sentence

Financial Services

Total assets increased by $91.4 million, or 3.7%, to $2.6 billion at September 30, 2020 as compared to December 31, 2019.

The increase is driven by a 281.7% increase in corporate assets related to excess cash generated partially offset by a decrease in inventories across our markets, which are both attributable to our record home sales during the current year period.

Lots owned and

September 30, 2020

Total assets increased moderately by $106.6 million, or 3.7%, to $3.0 billion at March 31, 2021 as compared to December 31, 2020, primarily as a result of the overall growth of the Company

Lots owned and controlled

March 31, 2021

December 31, 2020

Century Complete

Of our total lots owned and controlled as of September 30, 2020, 44.4% were owned and 55.6% were controlled, as compared to 48.1% owned and 51.9% controlled as of December 31, 2019.

Of our total lots owned and controlled as of March 31, 2021, 35.6% were owned and 64.4% were controlled, as compared to 41.6% owned and 58.4% controlled as of December 31, 2020.

Other Homebuilding Operating Data

Three Months Ended

Nine Months Ended

Net new home contracts

September 30,

Increase (Decrease)

Century Complete

Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2020 increased by 1,158 homes, or 56.6%, to 3,204, compared to 2,046 for the same period in 2019.

Net new home contracts for the nine months ended September 30, 2020 increased by 2,170 homes, or 35.7%, to 8,256, compared to 6,086 for the same period in 2019.

The increases in our net new home contracts were primarily driven by stronger sales across all of our segments as the homebuilding industry continued to experience positive trends.

Since market conditions and future impacts from COVID-19 remain uncertain, it is difficult to predict our future net new home contracts .

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and nine months ended September 30, 2020 by segment are included in the tables below:

Three Months Ended September 30,

Increase (Decrease)

Century Complete

Nine Months Ended September 30,

Net new home contracts (new home contracts net of cancellations) for the three months ended March 31, 2021 increased by 1,067 homes, or 44.7%, to 3,455, compared to 2,388 for the same period in 2020.

This increase was primarily driven by stronger sales across

all of our segments as the homebuilding industry continued to experience positive trends during the first quarter of 2021.

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three months ended March 31, 2021 by segment are included in the table below:

Three Months Ended March 31,

Century Complete

During the three and nine months ended September 30, 2020, our absorption rates increased by 83.3% and 68.6%, respectively, to 6.6 and 5.9 per month, respectively, as compared to the same periods in 2019.

These increases are attributable to historically low interest rates and strong demand for new homes during current year periods, in particular during the three months ended September 30, 2020.

During the three months ended March 31, 2021, our absorption rate increased by 74.3% to 6.1 per month as compared to the same period in 2020.

The increase was attributable to continued historically low interest rates and strong demand for new homes during current year period.

Furthermore, our absorption rate during the three months ended March 31, 2020 was negatively impacted by the initial outbreak of COVID-19.

Selling communities at period end

As of September 30,

As of March 31,

Increase/(Decrease)

Century Complete

N/A – Not Applicable

Our selling communities decreased to 110 communities at September 30, 2020 as compared to 129 at September 30, 2019.

As Century Complete does not sell homes by community, but through studios and online, there are no communities or absorptions presented for that segment.

Our selling communities decreased to 188 communities at March 31, 2021 as compared to 228 at March 31, 2020.

This decrease was a result of the strong sales environment, which outpaced new community openings.

Century Complete sells primarily from retail studios and online via the internet, instead of from traditional model homes.

While Century Complete has historically purchased land and constructed homes within traditional communities similar to our Century Communities brand, we also purchase land and construct a significant number of homes on scattered lots outside of traditional communities.

As the Century Complete brand has grown, entered new markets and expanded its land pipeline, we have increasingly operated within traditional communities, and now rely, to a lesser degree, on scattered lots.

Additionally, we have organized our construction and sales operations for scattered lot positions within “pods” which are clustered together lot positions, which we operate more like a traditional community.

Accordingly, our selling communities at period end for the 2020 period have been updated from amounts previously disclosed to include communities for our Century Complete brand.

(dollars in thousands)

As of September 30,

As of March 31,

Average Sales Price

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Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home.

At September 30, 2020, we had 3,699 homes in backlog with a total value of $1,309.4 million, which represents an increase of 34.7% and 53.2%, respectively, as compared to September 30, 2019.

The increase in backlog dollar value is primarily attributable to the increases in backlog units and a 13.7% increase in the backlog average sales price.

At March 31, 2021, we had 4,097 homes in backlog with a total value of $1,579.6 million, which represents an increase of 57.9% and 83.4%, respectively, as compared to March 31, 2020.

The increase in backlog dollar value is primarily attributable to the increase in backlog units and a 16.1% increase in the average sales price of homes in backlog.

Supplemental Guarantor Information

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In addition, our former 6.875% senior notes due 2022 which were extinguished during the second quarter of 2019, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.

As of September 30, 2020, Century Communities, Inc.

As of March 31, 2021, Century Communities, Inc.

had outstanding $900.0 million in total principal amount of Senior Notes.

Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged:

(1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective

indentures) or is made in compliance with applicable provisions of the applicable indenture;

(2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture;

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Summarized Balance Sheet Data (in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

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Summarized Statement of Operations Data (in thousands)

Nine Months Ended

September 30, 2020

December 31, 2019

Three Months Ended March 31, 2021

Year Ended December 31, 2020

Total homebuilding revenues

1 unchanged sentence

Selling, general and administrative

Loss on debt extinguishment

Inventory impairment and other

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Liquidity and Capital Resources

Our principal uses of capital for the three and nine months ended September 30, 2020 were our land purchases, land development, home construction, and the payment of routine liabilities.

We use funds generated by operations, available borrowings under our revolving line of credit, and from time to time proceeds from sales of our common stock, including under our current at-the-market facility, and debt securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.

Our principal uses of capital for the three months ended March 31, 2021 were our land purchases, land development, home construction, and the payment of routine liabilities.

We use funds generated by operations, available borrowings under our revolving line of credit, and proceeds from sales of common stock, including our current at-the-market facility, to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.

Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings.

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In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred.

From a liquidity standpoint, we are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities.

As we continue to expand our business, our cash outlays for land purchases and land development to grow our lot inventory may exceed our cash generated by operations.

In response to the COVID-19 pandemic, we took certain measures to ensure we are positioned with cash flow and liquidity to endure an extended period of lower demand for our homes, should it arise.

Specifically commencing in mid-March of 2020, we slowed our land development activities and instituted a variety of actions designed to reduce our operating expenses, including a reduction in the size of our workforce through a targeted layoff in April 2020.

Specifically commencing in mid-March of 2020, we slowed our land acquisition and development activities and instituted a variety of actions designed to reduce our operating expenses, including a reduction in the size of our workforce through a targeted layoff in April 2020.

In addition, given the uncertainty surrounding the COVID-19 pandemic, we initially increased our borrowings under our revolving line of credit during the end of the first quarter of 2020 and into the beginning of the second quarter of 2020 as a proactive measure in order to expand our financial flexibility at that time.

We repaid these borrowings during the second quarter of 2020 in light of our second quarter 2020 operating results and to decrease our interest expense.

As of September 30, 2020, we continued to have no amounts outstanding under our revolving line of credit.

We increased our land acquisition and development activities during the third quarter, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020

As of March 31, 2021, we continued to have no amounts outstanding under our revolving line of credit.

We increased our land acquisition and development activities during the first quarter of 2021, which resulted in 57,536 lots owned and controlled at March 31, 2021, a 15.2% increase as compared to December 31, 2020.

Our Financial Services operations use funds generated from operations and availability under our mortgage repurchase facilities to finance operations including originations of mortgage loans to our homebuyers.

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Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

As of September 30, 2020, we had no amounts outstanding under the credit facility and were in compliance with all covenants.

As of March 31, 2021, we had no amounts outstanding under the credit facility and were in compliance with all covenants.

Mortgage Repurchase Facilities – Financial Services

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Morgan, and Wells Fargo, respectively.

The mortgage warehouse lines of credit (which we refer to as the “repurchase facilities”) provide Inspire with uncommitted repurchase facilities of up to an aggregate of $275 million, secured by the mortgage loans financed thereunder.

The mortgage warehouse lines of credit (which we refer to as the “repurchase facilities”), which were increased during 2020, provide Inspire with uncommitted repurchase facilities of up to an aggregate of $350 million as of March 31, 2021, secured by the mortgage loans financed thereunder.

Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type.

As of September 30, 2020, we had $173.4 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder.

During the three and nine months ended September 30, 2020, we incurred interest expense on the repurchase facilities of $0.8 million and $2.0 million, respectively.

During the same periods in 2019, we incurred interest expense on the repurchase facilities of $0.6 million and $2.1 million, respectively.

As of March 31, 2021, we had $285.1 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder.

During the three months ended March 31, 2021 and 2020, we incurred interest expense on the repurchase facilities of $0.8 million and $0.7 million, respectively.

Interest expense on mortgage repurchase facilities is included in financial services costs on our condensed consolidated statements of operations .

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(which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement.

This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, had all $100 million available for sale as of September 30, 2020.

We did not sell or issue any shares of our common stock during the three and nine months ended September 30, 2020.

During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million and 0.9 million, respectively, shares of our common stock under the previous distribution agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total commissions and fees to the sales agents of $0.6 million and $0.7 million, respectively.

This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, had all $100 million available for sale as of March 31, 2021.

We did not sell or issue any shares of our common stock during the three months ended March 31, 2021 and 2020, respectively.

The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement.

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In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities.

As of September 30, 2020, and December 31, 2019, we had $360.1

million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

As of March 31, 2021, and December 31, 2020, we had $441.2 million and $402.7 million, respectively, in letters of credit and performance bonds issued and outstanding.

Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance bonds are not generally released until all development and construction activities are completed.

Our outstanding debt obligations included the following as of September 30, 2020 and December 31, 2019 (in thousands):

September 30,

Our outstanding debt obligations included the following as of March 31, 2021 and December 31, 2020 (in thousands):

6.750% senior notes, due May 2027 (1)

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All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock.

During the three and nine months ended September 30, 2020, we did not repurchase any shares of common stock.

During the three months ended September 30, 2019, we did not repurchase any shares of common stock while during the nine months ended September 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $1.4 million .

The maximum number of shares available to be purchased under the stock repurchase program as of September 30, 2020 is 3,812,939.

Cash Flows— Nine months Ended September 30, 2020 Compared to the Nine months Ended September 30, 2019

For the nine months ended September 30, 2020 and 2019, the comparison of cash flows is as follows:

No shares were repurchased during the three months ended March 31, 2021 and 2020, respectively.

The maximum number of shares available to be purchased under the stock repurchase program as of March 31, 2021 is 3,812,939.

Cash Flows— Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

For the three months ended March 31, 2021 and 2020, the comparison of cash flows is as follows:

 Our primary sources of cash flows from operations are from the sale of single-family attached and detached homes and mortgages .

Our primary uses of cash flows from operations is the acquisition of land and expenditures associated with the construction of our single-family attached and detached homes and the origination of mortgages held for sale.

During the nine months ended September 30, 2020 and 2019, we generated $315.8 million and used $149.0 million in cash from operations, respectively.

The increase in cash provided by operations is primarily a result of a $54.7 million increase in

net income and comparatively favorable changes in assets and liabilities for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

 Net cash used in investing activities decreased to $6.6 million during the nine months ended September 30, 2020, compared to $11.6 million used during the same period in 2019.

The decrease was primarily related to less purchases of property and equipment.

 Net cash used in financing activities was $76.8 million during the nine months ended September 30, 2020, compared to $165.7 million provided by financing activities during the same period in 2019.

The change for the nine months ended September 30, 2020 was primarily attributable to a $145.0 million increase in net payments under our revolving line of credit and a $108.1 million decrease in proceeds from issuance and extinguishments of senior notes.

As of September 30, 2020, our cash and cash equivalents and restricted cash balance was $290.9 million.

During the three months ended March 31, 2021 and 2020, we generated $96.1 million and used $12.4 million in cash from operations, respectively.

The increase in cash provided by operations is primarily a result of a $75.5 million increase in net income and comparatively favorable changes in assets and liabilities for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

 Net cash used in investing activities increased to $2.9 million during the three months ended March 31, 2021, compared to $2.6 million used during the same period in 2020.

The increase was primarily related to more purchases of property and equipment.

 Net cash provided in financing activities decreased to $16.3 million during the three months ended March 31, 2021, compared to $410.0 million provided during the same period in 2020.

The change for the three months ended March 31, 2021 was primarily attributable to a $453.2 million decrease in net payments under our revolving line of credit.

As of March 31, 2021, our cash and cash equivalents and restricted cash balance was $507.6 million.

Off-Balance Sheet Arrangements

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Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits.

As of September 30, 2020, we had outstanding purchase contracts and option contracts for 24,996 lots with a total purchase price of approximately $999.4 million and had $31.3 million of non-refundable cash deposits pertaining to land option contracts.

While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contracts occurring in future periods, if at all.

As of March 31, 2021, we had outstanding purchase contracts and option contracts for 37,030 lots with a total purchase price of approximately $1.5 billion and had $35.6 million of non-refundable cash deposits pertaining to land option contracts.

While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on the substantial majority of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contracts occurring in future periods.

Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics.

Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities.

As of September 30, 2020, and December 31, 2019, we had $360.1 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

As of March 31, 2021, and December 31, 2020, we had $441.2 million and $402.7 million, respectively, in letters of credit and performance bonds issued and outstanding.

We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.

Contractual Obligations

For the three and nine months ended September 30, 2020, there were no material changes to the contractual obligations we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that was filed with the SEC on February 7, 2020.

For the three months ended March 31, 2021, there were no material changes to the contractual obligations we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 that was filed with the SEC on February 5, 2021.

Non-GAAP Financial Measures

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EBITDA and Adjusted EBITDA

The following table presents EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2020, and 2019.

The following table presents EBITDA and Adjusted EBITDA for the three months ended March 31, 2021 and 2020.

Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance.

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Our Adjusted EBITDA is limited as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP .

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Income tax expense

2 unchanged sentences

Depreciation and amortization expense

Loss on debt extinguishment

Inventory impairment and other

Restructuring costs

Purchase price accounting for acquired work in process inventory

Adjusted EBITDA

5 unchanged sentences

We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing .

September 30,

Total homebuilding debt

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Three Months Ended

Nine Months Ended

September 30,

Weighted average common shares outstanding - basic

5 unchanged sentences

Inventory impairment and other

Restructuring costs

Loss on debt extinguishment

Purchase price accounting for acquired work in process inventory

Adjusted income before income tax expense

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Adjusted diluted earnings per share

(1) The tax rate used in calculating adjusted net income for the three and nine months ended September 30, 2020 was 23.3%, which is reflective of the Company’s GAAP tax rate for the applicable period, as adjusted for certain discrete items.

For the three and nine months ended September 30, 2019 the tax rate utilized was 22.4% and 24.2%, respectively, representing our GAAP tax rate adjusted for certain discrete items.

(1) The tax rate used in calculating adjusted net income for the three months ended March 31, 2021 and March 31, 2020 was 22.4% and 23.4%, respectively, which is reflective of the Company’s GAAP tax rate for the applicable period.

QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Our primary exposure to market risk is interest rate risk associated with our Amended and Restated Credit Agreement.

Borrowings under the Amended and Restated Credit Agreement, which bears interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.

The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement.

1 unchanged sentence

For fixed rate debt, such as our senior notes, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows.

In our Financial Services business, we utilize mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates.

To mitigate interest risk associated with loans held-for-sale, we use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized.

We also hedge our interest rate exposure through entering into interest rate swap futures .

Our Financial Services business utilizes mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates.

To mitigate interest risk associated with loans held-for-sale, we typically use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized.

We also typically hedge our interest rate exposure through entering into interest rate swap futures .

Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis