What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-04 · 200 added, 146 removed, 400 unchanged (46% of the section changed)

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Since commencing home building operations in 2003, we have constructed and closed over 40,000 homes.

During the six months ended June 30, 2020, we had 3,840 home closings, compared to 3,172 home closings during the six months ended June 30, 2019.

During the nine months ended September 30, 2020, we had 5,931 home closings, compared to 5,175 home closings during the nine months ended September 30, 2019.

We sell homes under the LGI Homes and Terrata Homes brands.

Our 117 active communities at June 30, 2020 included three Terrata Homes communities.

During the three months ended June 30, 2020, we recorded $38.1 million in wholesale revenues as a result of 199 home closings, representing 9.9% of the total homes closed during the three months ended June 30, 2020.

During the three months ended June 30, 2019, we recorded $18.4 million in wholesale revenues as a result of 82 wholesale home closings, representing 4.2% of the total homes closed during the three months ended June 30, 2019.

Our 110 active communities at September 30, 2020 included two Terrata Homes communities.

During the three months ended September 30, 2020, we recorded $19.0 million in wholesale revenues as a result of 92 home closings, representing 4.4% of the total homes closed during the three months ended September 30, 2020.

During the three months ended September 30, 2019, we recorded $26.0 million in wholesale revenues as a result of 127 wholesale home closings, representing 6.3% of the total homes closed during the three months ended September 30, 2019.

We believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire multiple homes for rental purposes, primarily through bulk sales agreements.

On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency.

In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, curfews, shelter-in-place orders and “stay-at-home” orders in certain of our markets.

State and local authorities have also implemented multi-step policies with the goal of re-opening.

However, certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases.

We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations.

In response to these declarations and the rapid spread of COVID-19, federal, state and local governments imposed varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, curfews, shelter-in-place orders and “stay-at-home” orders in certain of our markets.

State and local authorities have also implemented multi-step policies with the goal of re-opening various sectors of the economy.

However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases, while other jurisdictions are continuing to re-open or have nearly completed the re-opening process despite increases in COVID-19 cases.

The COVID-19 outbreak may significantly worsen in the United States during the upcoming winter months, which may cause federal, state and local governments to reconsider restrictions on business and social activities.

In the event governments increase restrictions, the re-opening of the economy may be further curtailed.

We have experienced some resulting disruptions to our business operations, as these restrictions have significantly impacted, and may continue to impact, many sectors of the economy, with various businesses curtailing or ceasing normal operations and subsequently attempting to resume operations.

In March 2020, certain markets in which we do business temporarily stopped our construction of homes.

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Although we continued to build and sell homes in all of our markets, the pace of sales declined and we experienced an increase in the rate of contract cancellations.

Since May 2020, the pace of sales has rebounded and we have experienced increased demand in our markets.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns.

Restrictions of this nature have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.

Since May 2020, the pace of sales has rebounded and we have experienced a sustained increase in demand in our markets.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other

measures implemented to try to slow the spread of COVID-19.

Such measures have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends.

These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control.

The outbreak of COVID-19 has caused the shutdown of large portions of our national economy.

The outbreak of COVID-19 caused the shutdown of large portions of our national economy during the first half of 2020.

The spread of COVID-19 has also caused significant volatility in U.S.

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In response to COVID-19, we continue to take steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including expanded safety policies and practices based on Center for Disease Control guidelines to reduce the spread of COVID-19.

Additionally, the majority of our corporate personnel continue to work remotely.

As a homebuilder and developer, we provide an important service to our customers.

During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above, will be to continue our efforts to sell homes and complete our homes under construction.

In addition to the measures discussed above, beginning in March 2020, we implemented certain cash management policies, including eliminating business air travel, cancelling group meetings, delaying or canceling land acquisitions, deferring new starts to manage our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.

In May 2020, we began to acquire land and release starts for home construction in addition to increasing marketing expenditures.

During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above is to continue our efforts to sell homes and complete our homes under construction.

In addition to the measures discussed above, beginning in March 2020, we implemented certain cash management policies, including eliminating business air travel, cancelling in-person group meetings, delaying or canceling land acquisitions, deferring new starts to manage our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.

In May 2020, we began to acquire land and release starts for home construction in addition to increasing marketing expenditures and later began reinstating some necessary travel.

From time to time during the COVID-19 outbreak, we have had to close individual sales offices for a limited period of time, as a result of potential or actual exposure to COVID-19 by one or more of our employees.

In September 2020, our employees working in our corporate headquarters returned to working under modified protocols to ensure health and safety at the office.

We cannot estimate with any degree of certainty the full impact of COVID-19 on our financial condition and future results of operations.

We also cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties.

The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19, the impact of government actions designed to prevent the spread of COVID-19, the development of effective treatments, actions taken by customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19, the impact of government actions designed to prevent the spread of COVID-19, the development and availability of effective treatments and vaccines, actions taken by customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A.

Risk Factors in Part II of this Quarterly Report on Form 10-Q.

While we expect COVID-19 to continue to have an influence on our future results, we believe that the desire for single-family homes outside of densely populated urban areas combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new homes.

While we expect COVID-19 to continue to influence our future results, we believe that the desire for single-family homes outside of densely populated urban areas combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new homes.

Recent Developments

During the three months ended June 30, 2020, we increased our market presence in three of our operating segments with the opening of additional communities in Northern California, Seattle, Denver, and Raleigh.

Key financial results as of and for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, were as follows:

On October 16, 2020, the Company paid a special one-time appreciation bonus, totaling $1.5 million, to approximately 760 eligible “frontline” employees whose roles and responsibilities required that they directly interact with the public on a daily basis.

The bonus was in recognition of the extraordinary efforts of such workers during the COVID-19 pandemic.

On October 30, 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million, increasing the available authorization under the program to purchase up to $317.2 million of shares of our common stock as of the date of this Quarterly Report on Form 10-Q.

Key financial results as of and for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, were as follows:

• Home sales revenues increased 10.6% to $534.2 million from $483.1 million.

• Homes closed increased 4.4% to 2,091 homes from 2,003 homes.

• Average sales price of our homes increased 1.1% to $240,200 from $237,567

• Average sales price per home closed increased 5.9% to $255,477 from $241,179

• Gross margin as a percentage of home sales revenues increased to 25.3% from 24.1%.

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• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 16.5% from 15.4%.

• Total owned and controlled lots decreased 11.9% to 44,307 lots at June 30, 2020 from 50,273 lots at March 31, 2020.

• Total owned and controlled lots increased 29.1% to 57,185 lots at September 30, 2020 from 44,307 lots at June 30, 2020.

For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “ —Non-GAAP Measures .”

Key financial results as of and for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, were as follows:

• Home sales revenues increased 24.9% to $936.3 million from $749.4 million.

Key financial results as of and for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, were as follows:

• Home sales revenues increased 19.3% to $1.5 billion from $1.2 billion.

• Homes closed increased 14.6% to 5,931 homes from 5,175 homes.

• Average sales price of our homes increased 3.2% to $243,836 from $236,262.

• Average sales price per home closed increased 4.1% to $247,940 from $238,165.

• Gross margin as a percentage of home sales revenues increased to 24.5% from 23.9%.

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• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 15.6% from 13.8%.

• Total owned and controlled lots decreased 7.8% to 44,307 lots at June 30, 2020 from 48,062 lots at December 31, 2019.

• Total owned and controlled lots increased 19.0% to 57,185 lots at September 30, 2020 from 48,062 lots at December 31, 2019.

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The following table sets forth our results of operations for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Cost of sales 398,971 366,431 1,110,763 938,240

363,629 350,519 711,792 571,809

Selling expenses 35,470 33,485 98,193 94,166

29,960 33,890 62,723 60,681

General and administrative 22,320 19,140 62,422 56,558

20,179 18,980 40,102 37,418

Operating income 77,441 64,025 199,153 143,541

67,834 58,441 121,712 79,516

Loss on extinguishment of debt — — — 169

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Net income before income taxes 77,815 64,732 201,301 146,961

68,597 60,535 123,486 82,229

Income tax provision 12,973 14,480 25,023 17,840

Income tax provision (benefit) (11,189) 15,383 13,834 33,223

Net income $ 89,004 $ 49,349 $ 187,467 $ 113,738

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Home closings 2,091 2,003 5,931 5,175

Average sales price of homes closed $ 240,200 $ 237,567 $ 243,836 $ 236,262

Average sales price per home closed $ 255,477 $ 241,179 $ 247,940 $ 238,165

Gross margin (1)

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We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales.

We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting.

We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on

extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting.

Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business.

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Please see “ —Non-GAAP Measures ” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable.

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Our home sales revenues, home closings, average sales price (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended June 30, 2020 and 2019 were as follows (revenues in thousands):

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended September 30, 2020 and 2019 were as follows (revenues in thousands):

Three Months Ended September 30, 2020

Revenues Home Closings ASP Average Community Count Average

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Total $ 534,202 2,091 $ 255,477 109.3 6.4

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Revenues Home Closings ASP Average Community Count Average

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Total $ 483,081 2,003 $ 241,179 101.3 6.6

As of June 30,

As of September 30,

Community count 2020 2019

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Total community count 110 103

While direct immediate impacts related to the COVID-19 pandemic remain short lived to date, we believe that the long term effects of the pandemic will take an extended time to work through our operational results.

Although our home closings for the second quarter of 2020 were higher than our home closing for the second quarter of 2019, shutdowns and stay-at-home orders slowed the pace of our sales in March 2020 and April 2020, which ultimately resulted in home closings during the second quarter of 2020 being lower than we would have predicted prior to the pandemic.

Additionally, as a result of reducing starts in March 2020 and April 2020 to preserve cash, our availability of completed homes was reduced, which could slow the pace of our home closings in later periods.

Home sales revenues for the three months ended June 30, 2020 were $481.6 million, an increase of $19.8 million, or 4.3%, from $461.8 million for the three months ended June 30, 2019.

The increase in home sales revenues is primarily due to a 3.1% increase in homes closed and an increase in the average sales price per home during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

The average sales price per home closed during the three months ended June 30, 2020 was $240,200, an increase of $2,633, or 1.1%, from the average sales price per home of $237,567 for the three months ended June 30, 2019.

This increase in the average sales price per home is primarily due to changes in product mix, higher price points in new markets and a favorable pricing environment.

The increase in homes closed was largely due to

deepening our presence within certain markets in the Southeast and Florida reportable segments during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Home sales revenues in our Central reportable segment decreased by $22.0 million, or 11.6%, during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to a 15.9% decrease in the number of homes closed, partially offset by an increase in the average sales price per home in this segment.

Home sales revenues for the three months ended September 30, 2020 were $534.2 million, an increase of $51.1 million, or 10.6%, from $483.1 million for the three months ended September 30, 2019.

The increase in home sales revenues is primarily due to a 4.4% increase in homes closed and an increase in the average sales price per home closed during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

The average sales price per home closed during the three months ended September 30, 2020 was $255,477, an increase of $14,298, or 5.9%, from the average sales price per home closed of $241,179 for the three months ended September 30, 2019.

This increase in the average sales price per home closed is primarily due to changes in product mix, higher price points in certain markets and a favorable pricing environment.

The overall increase in home closings was largely due to deepening our presence within certain markets in the Southeast and Florida reportable segments during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Home sales revenues in our Central reportable segment decreased by $7.0 million, or 3.6%, during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily due to a 7.3% decrease in the number of homes closed due to the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended September 30, 2020, partially offset by an increase in the average sales price per home

closed in this reportable segment.

Home sales revenues in our Southeast reportable segment increased by $38.7 million, or 42.3%, primarily due to an increase in community count within existing markets.

Home sales revenues in our Northwest reportable segment decreased by $22.6 million, or 28.6%, primarily due to a decrease in the number of homes closed and due to the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Home sales revenues in our West reportable segment decreased by $6.3 million, or 9.5%, during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to a 4.9% decrease in average sales price and a 4.8% decrease in the number of homes closed in this reportable segment, as a result of close out of or transition between, and to a lesser extent available inventory in, certain active communities.

Home sales revenues in our Florida reportable segment increased by $20.0 million, or 41.4%, largely due to an increase in the number of homes closed resulting from an increase in community count for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Our community count at June 30, 2020 increased to 117 from 93 at June 30, 2019.

All reportable segments added communities by deepening our presence within existing markets during the three months ended June 30, 2020.

Home sales revenues in our Northwest reportable segment decreased by $1.1 million, or 1.2%, primarily due to a decrease in the number of homes closed and due to the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended September 30, 2020.

Home sales revenues in our West reportable segment increased by $1.5 million, or 2.4%, during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily due to an 11.7% increase in average sales price per home closed, offset by an 8.3% decrease in the number of homes closed in this reportable segment, as a result of close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended September 30, 2020.

Home sales revenues in our Florida reportable segment increased by $19.0 million, or 43.1%, largely due to an increase in the number of homes closed resulting from an increase in community count for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Our community count at September 30, 2020 increased to 110 from 103 at September 30, 2019.

The overall increase in community count was primarily driven by deepening our existing market presence within the Southeast and Florida reportable segments, and partially offset by close out or transition between communities within certain markets located within our Central, Northwest and West reportable segments during the three months ended September 30, 2020.

Cost of Sales and Gross Margin (home sales revenues less cost of sales).

Cost of sales increased for the three months ended June 30, 2020 to $363.6 million, an increase of $13.1 million, or 3.7%, from $350.5 million for the three months ended June 30, 2019, primarily due to the increase in homes closed and product mix.

As a percentage of home sales revenues, we experienced higher lot costs offset by lower capitalized interest costs and operating leverage driven by the increase in home sales revenues benefiting our home construction costs during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Gross margin for the three months ended June 30, 2020 was $118.0 million, an increase of $6.7 million, or 6.0%, from $111.3 million for the three months ended June 30, 2019.

Gross margin as a percentage of home sales revenues was 24.5% for the three months ended June 30, 2020 and 24.1% for the three months ended June 30, 2019.

This increase in gross margin as a percentage of home sales revenues is primarily due to operating leverage and lower capitalized interest costs recognized for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Cost of sales increased for the three months ended September 30, 2020 to $399.0 million, an increase of $32.5 million, or 8.9%, from $366.4 million for the three months ended September 30, 2019, primarily due to the increase in homes closed and product mix.

As a percentage of home sales revenues, cost of sales decreased as a result of an increase in home sales revenues benefiting our home construction costs, lower capitalized interest and lower overhead, partially offset by higher lot costs during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Gross margin for the three months ended September 30, 2020 was $135.2 million, an increase of $18.6 million, or 15.9%, from $116.7 million for the three months ended September 30, 2019.

Gross margin as a percentage of home sales revenues was 25.3% for the three months ended September 30, 2020 and 24.1% for the three months ended September 30, 2019.

This increase in gross margin as a percentage of home sales revenues is primarily due to an increase in homes closed with a higher average sales price per home closed, lower capitalized interest and lower overhead, offset by higher lot costs for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Selling Expenses.

Selling expenses for the three months ended June 30, 2020 were $30.0 million, a decrease of $3.9 million, or 11.6%, from $33.9 million for the three months ended June 30, 2019.

Sales commissions remained flat at $18.0 million for both the three months ended June 30, 2020 and 2019.

Selling expenses as a percentage of home sales revenues were 6.2% and 7.3% for the three months ended June 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects cost saving measures implemented and the increased demand for our homes in response to the COVID-19 pandemic, as well as operating leverage realized from the increase in home sales revenues duri ng the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Selling expenses for the three months ended September 30, 2020 were $35.5 million, an increase of $2.0 million, or 5.9%, from $33.5 million for the three months ended September 30, 2019.

Sales commissions increased to $20.7 million for the three months ended September 30, 2020 from $17.7 million for the three months ended September 30, 2019, primarily due to a 10.6% increase in home sales revenues during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Selling expenses as a percentage of home sales revenues were 6.6% and 6.9% for the three months ended September 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects sustained cost saving measures implemented and the increased demand for our homes in response to the COVID-19 pandemic, as well as operating leverage realized from the increase in home sales revenues during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

General and Administrative.

General and administrative expenses for the three months ended June 30, 2020 were $20.2 million, an increase of $1.2 million, or 6.3%, from $19.0 million for the three months ended June 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.2% and 4.1% for the three months ended June 30, 2020 and 2019, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues reflects costs associated with an increase of active communities during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Operating Income, Net Income before Taxes and Net Income.

Operating income for the three months ended June 30, 2020 was $67.8 million, an increase of $9.4 million, or 16.1%, from $58.4 million for the three months ended June 30, 2019.

Net income before income taxes for the three months ended June 30, 2020 was $68.6 million, an increase of $8.1 million, or 13.3%, from $60.5 million for the three months ended June 30, 2019.

All reportable segments contributed to net income before income taxes during the three months ended June 30, 2020 as follows:

General and administrative expenses for the three months ended September 30, 2020 were $22.3 million, an increase of $3.2 million, or 16.6%, from $19.1 million for the three months ended September 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase in active communities during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.2% and 4.0% for the three months ended September 30, 2020 and 2019, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues reflects costs primarily related to the identification and certification of available federal energy efficient homes tax credits and, to a lesser extent, increased personnel associated with an increase in active communities during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Operating Income and Net Income before Taxes.

Operating income for the three months ended September 30, 2020 was $77.4 million, an increase of $13.4 million, or 21.0%, from $64.0 million for the three months ended September 30, 2019.

Net income before income taxes for the three months ended September 30, 2020 was $77.8 million, an increase of $13.1 million, or 20.2%, from $64.7 million for the three months ended September 30, 2019.

All reportable segments contributed to net income before income taxes during the three months ended September 30, 2020 as follows:

Central - $32.8 million or 42.2%;

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and Florida - $6.6 or 8.5%.

Net income for the three months ended June 30, 2020 was $55.6 million, an increase of $9.6 million, or 20.8%, from $46.1 million for the three months ended June 30, 2019.

The increases in operating income, net income before income taxes and net income is primarily attributed to operating leverage realized from the increase in home sales revenues, higher average sales price and retroactive tax benefit recognized for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Our home sales revenues, home closings, average sales price (ASP), average community count and average monthly absorption rate by reportable segment for the six months ended June 30, 2020 and 2019 were as follows (revenues in thousands):

Six Months Ended June 30, 2020

The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Income Taxes .

Income tax benefit for the three months ended September 30, 2020 was $11.2 million, an increase of $26.6 million, or 172.7%, from income tax provision of $15.4 million for the three months ended September 30, 2019.

The increase in

the amount of income tax benefit is primarily due to the change in our effective tax rate to a 14.4% effective tax benefit from a 23.8% effective tax provision as a result of the tax benefits relating to the federal energy efficient homes tax credits we recognized for the three months ended September 30, 2020, partially offset by the 20.2% increase in net income before taxes.

Federal energy efficient homes tax credits recognized during the three months ended September 30, 2020 totaled $29.4 million, of which $27.1 million related to homes closed in prior open tax years and homes closed in the first and second quarter of 2020.

This federal tax credit was extended to apply to homes closed through December 31, 2020.

We believe this tax credit will continue to impact our results of operations for the duration of 2020.

Net income for the three months ended September 30, 2020 was $89.0 million, an increase of $39.7 million, or 80.4%, from $49.3 million for the three months ended September 30, 2019.

The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues, higher average sales price per home closed and $29.4 million of tax benefit relating to the federal energy efficient homes tax credits recognized during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count and average monthly absorption rate by reportable segment for the nine months ended September 30, 2020 and 2019 were as follows (revenues in thousands):

Nine Months Ended September 30, 2020

Revenues Home Closings ASP Average Community Count Average

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Total $ 1,470,531 5,931 $ 247,940 111.3 5.9

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Revenues Home Closings ASP Average Community Count Average Monthly

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Total $ 1,232,505 5,175 $ 238,165 92.8 6.2

Home sales revenues for the six months ended June 30, 2020 were $936.3 million, an increase of $186.9 million, or 24.9%, from $749.4 million for the six months ended June 30, 2019.

The increase in home sales revenues is primarily due to a 21.1% increase in homes closed and an increase in the average sales price per home during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The average sales price per home closed during the six months ended June 30, 2020 was $243,836, an increase of $7,574, or 3.2%, from the average sales price per home of $236,262 for the six months ended June 30, 2019.

This increase in the average sales price per home was primarily due to changes in product mix and higher price points in certain new markets, partially offset by additional wholesale home closings.

All reportable segments experienced an increase in home closings during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The average monthly absorption rate fluctuations relate to timing associated with the opening, close out or transition between certain active communities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Home sales revenues in our Central reportable segment increased by $19.6 million, or 6.2%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 1.5% increase in the number of homes closed in this reportable segment, increased average sales price and increased community count at a slightly lower absorption rate.

Home sales revenues in our Southeast reportable segment increased by $86.8 million, or 66.6%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to an increase in community count associated with deepening our presence within existing markets and to a lesser extent our geographic expansion into certain markets in South Carolina and Virginia at June 30, 2020 as compared to June 30, 2019.

Home sales revenues in our Northwest reportable segment increased by $43.1 million, or 37.4%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 36.1% increase in the number of homes closed in this reportable segment, which is due to close out of or transition between certain active communities during the six months ended June 30, 2019.

Home sales revenues in our West reportable segment increased by $6.3 million, or 5.6%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 10.5% increase in the number of homes closed in this reportable segment, offset by a 4.5% decrease in average sales price as a result of close out of or transition between, and to a

lesser extent available inventory in, certain active communities.

Home sales revenues in the Florida reportable segment increased, largely due to increased community count at a slightly lower absorption rate during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Our results of operations for the nine months ended September 30, 2020 reflect a significant rebound following the slowdown related to the COVID-19 pandemic that occurred during March and April 2020.

Since May, we have seen a continued and material increase in the demand for our homes driven by a renewed interest in the benefits of homeownership, low interest rates and an undersupply of new and existing homes available for sale.

Despite high levels of demand, our closings in July and August were limited by our decision to pause our construction and land acquisition activities in March and April as we evaluated the potential impacts of the COVID-19 pandemic on our business.

In May, we resumed construction activities and accelerated the pace of our new home starts and by August, our production began to catch up to demand.

As result, our home closings for the nine months ended September 30, 2020 were higher than our home closings for the nine months ended September 30, 2019.

Home sales revenues for the nine months ended September 30, 2020 were $1.5 billion, an increase of $238.0 million, or 19.3%, from $1.2 billion for the nine months ended September 30, 2019.

The increase in home sales revenues is primarily due to a 14.6% increase in homes closed and an increase in the average sales price per home closed during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

The average sales price per home closed during the nine months ended September 30, 2020 was $247,940, an increase of $9,775, or 4.1%, from the average sales price per home closed of $238,165 for the nine months ended September 30, 2019.

This increase in the average sales price per home closed was primarily due to changes in product mix and higher price points in certain markets, partially offset by additional wholesale home closings.

The overall increase in home closings was primarily driven by deepening our presence within certain markets in the Southeast and Florida reportable segments during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

The average monthly absorption rate fluctuations relate to timing associated with the opening, close out or transition between certain active communities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Home sales revenues in our Central reportable segment increased by $12.7 million, or 2.5%, during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to an increase in average sales price per home closed and increased community count at a slightly lower absorption rate, offset by a 1.8% decrease in the

number of homes closed in this reportable segment.

Home sales revenues in our Southeast reportable segment increased by $125.5 million, or 56.6%, during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to an increase in community count associated with deepening our presence within existing markets and to a lesser extent our geographic expansion into certain markets in North Carolina and South Carolina at September 30, 2020 as compared to September 30, 2019.

Home sales revenues in our Northwest reportable segment increased by $42.0 million, or 20.2%, during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to a 15.5% increase in the number of homes closed in this reportable segment, as a result of increased demand during the nine months ended September 30, 2019.

Home sales revenues in our West reportable segment increased by $7.8 million, or 4.5%, during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to a 3.7% increase in the number of homes closed in this reportable segment.

Home sales revenues in our Florida reportable segment increased by $50.1 million, or 41.4%, largely due to an increased community count at a slightly lower absorption rate and an increase of 7.8% in the average sales price per home closed during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Cost of Sales and Gross Margin (home sales revenues less cost of sales).

Cost of sales increased for the six months ended June 30, 2020 to $711.8 million, an increase of $140.0 million, or 24.5%, from $571.8 million for the six months ended June 30, 2019.

Cost of sales increased for the nine months ended September 30, 2020 to $1.1 billion, an increase of $172.5 million, or 18.4%, from $938.2 million for the nine months ended September 30, 2019.

This overall increase is primarily due to a 14.6% increase in homes closed and product mix.

As a percentage of home sales revenues, we experienced higher lot costs offset by lower capitalized interest costs and operating leverage driven by the increase in home sales revenues benefiting our home construction costs during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Gross margin for the six months ended June 30, 2020 was $224.5 million, an increase of $46.9 million, or 26.4%, from $177.6 million for the six months ended June 30, 2019.

Gross margin as a percentage of home sales revenues was 24.0% for the six months ended June 30, 2020 and 23.7% for the six months ended June 30, 2019.

This increase in gross margin as a percentage of home sales revenues for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 is primarily due to higher average sales price fueled by our product mix, favorable pricing environments and operating leverage obtained, partially offset by an increase in wholesale home closings as a percentage of total home closings.

As a percentage of home sales revenues, cost of sales decreased as a result of the increase in home sales revenues benefiting our home construction costs, lower capitalized interest and lower overhead, partially offset by higher lot costs during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Gross margin for the nine months ended September 30, 2020 was $359.8 million, an increase of $65.5 million, or 22.3%, from $294.3 million for the nine months ended September 30, 2019.

Gross margin as a percentage of home sales revenues was 24.5% for the nine months ended September 30, 2020 and 23.9% for the nine months ended September 30, 2019.

This increase in gross margin as a percentage of home sales revenues for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 is primarily due to an increase in homes closed with a higher average sales price per home closed, which was driven by our product mix, favorable pricing environments and operating leverage obtained, partially offset by an increase in wholesale home closings as a percentage of total home closings.

Selling Expenses.

Selling expenses for the six months ended June 30, 2020 were $62.7 million, an increase of $2.0 million, or 3.4%, from $60.7 million for the six months ended June 30, 2019.

Sales commissions increased to $34.5 million for the six months ended June 30, 2020 from $29.7 million for the six months ended June 30, 2019, partially due to a 24.9% increase in home sales revenues during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Selling expenses as a percentage of home sales revenues were 6.7% and 8.1% for the six months ended June 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage obtained from the increase in home sales revenues, our cost saving measures implemented and the increased demand for our homes in response to the COVID-19 pandemic.

This decrease was partially offset by increased community count and increased personnel, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Selling expenses for the nine months ended September 30, 2020 were $98.2 million, an increase of $4.0 million, or 4.3%, from $94.2 million for the nine months ended September 30, 2019.

Sales commissions increased to $55.2 million for the nine months ended September 30, 2020 from $47.4 million for the nine months ended September 30, 2019, partially due to a 19.3% increase in home sales revenues during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Selling expenses as a percentage of home sales revenues were 6.7% and 7.6% for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues was driven primarily by lower advertising expenses and to a lesser extent operating leverage obtained from the increase in home sales revenues during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

General and Administrative.

General and administrative expenses for the six months ended June 30, 2020 were $40.1 million, an increase of $2.7 million, or 7.2%, from $37.4 million for the six months ended June 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.3% and 5.0% for the six months ended June 30, 2020 and 2019, respectively.

The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Operating Income, Net Income before Income Taxes and Net Income.

Operating income for the six months ended June 30, 2020 was $121.7 million, an increase of $42.2 million, or 53.1%, from $79.5 million for the six months ended June 30, 2019.

Net income before income taxes for the six months ended June 30, 2020 was $123.5 million, an increase of $41.3 million, or 50.2%, from $82.2 million for the six months ended June 30, 2019.

All reportable segments contributed to net income before income taxes during the six months ended June 30, 2020 as follows:

General and administrative expenses for the nine months ended September 30, 2020 were $62.4 million, an increase of $5.9 million, or 10.4%, from $56.6 million for the nine months ended September 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase in active communities during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.2% and 4.6% for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues and cost saving measures implemented as a result of COVID-19 during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Operating Income and Net Income before Income Taxes.

Operating income for the nine months ended September 30, 2020 was $199.2 million, an increase of $55.6 million, or 38.7%, from $143.5 million for the nine months ended September 30, 2019.

Net income before income taxes for the nine months ended September 30, 2020 was $201.3 million, an increase of $54.3 million, or 37.0%, from $147.0 million for the nine months ended September 30, 2019.

All reportable segments contributed to net income before income taxes during the nine months ended September 30, 2020 as follows:

Central - $86.7 million or 43.1%;

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and Florida - $17.0 million or 8.4%.

Net income for the six months ended June 30, 2020 was $98.5 million, an increase of $34.1 million, or 52.9%, from $64.4 million for the six months ended June 30, 2019.

The increases in operating income, net income before income taxes and net income is primarily attributed to an increase in the number of homes closed with an overall higher gross margin percentage, as a result of higher average sales price and retroactive tax benefit recognized during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Income Taxes .

Income tax provision for the nine months ended September 30, 2020 was $13.8 million, a decrease of $19.4 million, or 58.4%, from income tax provision of $33.2 million for the nine months ended September 30, 2019.

The decrease in the amount of income tax provision is primarily due to the change in our effective tax rate to 6.9% from 22.6%

effective tax provision as a result of the tax benefits relating to the federal energy efficient homes tax credits we recognized during the nine months ended September 30, 2020, partially offset by the 37.0% increase in net income before taxes.

Federal energy efficient homes tax credits recognized during the nine months ended September 30, 2020 totaled $32.9 million, of which $26.6 million related to homes closed in prior open tax years.

This federal tax credit was extended to apply to homes closed through December 31, 2020.

We believe this tax credit will continue to impact our results of operations for the duration of 2020.

Net income for the nine months ended September 30, 2020 was $187.5 million, an increase of $73.7 million, or 64.8%, from $113.7 million for the nine months ended September 30, 2019.

The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues, higher average sales price per home closed and $32.9 million of tax benefit relating to the federal energy efficient homes tax credits recognized during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Non-GAAP Measures

In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.

Adjusted Gross Margin

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The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income $ 89,004 $ 49,349 $ 187,467 $ 113,738

Income taxes 12,973 14,480 25,023 17,840

Income tax provision (benefit) (11,189) 15,383 13,834 33,223

Depreciation and amortization 192 161 509 487

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(2) Calculated as a percentage of home sales revenues.

Adjusted Net Income and Adjusted Earnings per Share

Adjusted net income and adjusted earnings per share are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance.

We define adjusted net income as net income less the federal energy efficient homes tax credits.

We define adjusted earnings per share as adjusted net income divided by weighted average shares outstanding.

Our management believes that the presentation of adjusted net income and adjusted earnings per share provides useful information to investors because such measures isolate the impact that material retroactive tax adjustments have on net income and earnings per share.

However, because adjusted net income and adjusted earnings per share information excludes the federal energy efficient homes tax credits, which have real economic effects and could impact our results, the utility of adjusted net income and adjusted earnings per share as measures of our operating performance may be limited.

In addition, other companies may not calculate adjusted net income and adjusted earnings per share in the same manner that we do.

Accordingly, adjusted net income and adjusted earnings per share information should be considered only as a supplement to net income and earnings per share information as measures of our performance.

The following table reconciles adjusted net income and adjusted earnings per share to net income and earnings per share, respectively, which are the GAAP measures that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Numerator (in thousands):

Net income (Numerator for basic and diluted earnings per share) $ 89,004 $ 49,349 $ 187,467 $ 113,738

Retroactive federal energy efficient homes tax credits 27,141 — 26,595 —

Adjusted net income (Numerator for adjusted basic and diluted earnings per share) $ 61,863 $ 49,349 $ 160,872 $ 113,738

Basic weighted average shares outstanding 25,089,424 22,939,907 25,162,162 22,870,948

Diluted weighted average shares outstanding 25,257,053 25,521,946 25,328,555 25,329,461

Basic earnings per share $ 3.55 $ 2.15 $ 7.45 $ 4.97

Diluted earnings per share $ 3.52 $ 1.93 $ 7.40 $ 4.49

Adjusted basic earnings per share $ 2.47 $ 2.15 $ 6.39 $ 4.97

Adjusted diluted earnings per share $ 2.45 $ 1.93 $ 6.35 $ 4.49

We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract.

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As a result of COVID-19, it has been, and may continue to be, more difficult for our homebuyers to qualify for and obtain mortgage financing to purchase a home.

Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is set to occur within the next six months.

Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete.

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As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands):

Backlog Data Six Months Ended June 30,

Backlog Data Nine Months Ended September 30,

Net orders (1)

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(2) Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.

(3) Ending backlog consists of homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is set to occur within the next six months.

Ending backlog is valued at the contract amount.

(4) As of June 30, 2020, we have 208 units related to bulk sales agreements associated with our wholesale business.

(5) As of June 30, 2019, we have 110 units related to bulk sales agreements associated with our wholesale business.

(4) As of September 30, 2020, we have 821 units related to bulk sales agreements associated with our wholesale business.

(5) As of September 30, 2019, we have 267 units related to bulk sales agreements associated with our wholesale business.

Land Acquisition Policies and Development

We increased our active communities to 117 as of June 30, 2020 from 106 as of December 31, 2019.

Our lot inventory decreased to 44,307 owned or controlled lots as of June 30, 2020 from 48,062 owned or controlled lots as of December 31, 2019 primarily due to certain cash management policies we implemented beginning in March 2020, which included delaying or canceling land acquisitions to manage our overall inventory.

The table below shows (i) home closings by reportable segment for the six months ended June 30, 2020 and (ii) our owned or controlled lots by reportable segment as of June 30, 2020.

Six Months Ended June 30, 2020 As of June 30, 2020

We increased our active communities to 110 as of September 30, 2020 from 106 as of December 31, 2019.

Our lot inventory increased to 57,185 owned or controlled lots as of September 30, 2020 from 48,062 owned or controlled lots as of December 31, 2019 primarily due to overall increased lot counts within the Central, Northwest and West reportable segments.

The table below shows (i) home closings by reportable segment for the nine months ended September 30, 2020 and (ii) our owned or controlled lots by reportable segment as of September 30, 2020.

Nine Months Ended September 30, 2020 As of September 30, 2020

Reportable Segment Home Closings Owned (1)

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Total 5,931 32,628 24,557 57,185

(1) Of the 31,788 owned lots as of June 30, 2020, 20,506 were raw/under development lots and 11,282 were finished lots.

(1) Of the 32,628 owned lots as of September 30, 2020, 19,814 were raw/under development lots and 12,814 were finished lots.

Homes in Inventory

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As homes are closed, we start more homes to maintain our inventory.

As of June 30, 2020, we had a total of 1,503 completed homes, including information centers, and 2,105 homes in progress.

As of September 30, 2020, we had a total of 1,163 completed homes, including information centers, and 4,029 homes in progress.

Raw Materials and Labor

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Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber.

Specifically, for the three months ended September 30, 2020, we saw a significant increase in the cost of our lumber related to undersupply as a result of increased demand and shutdowns of lumber mills due to the COVID-19 pandemic.

We could see additional cost pressures in lumber in future quarters.

In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry.

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Liquidity and Capital Resources

As of June 30, 2020, we had $49.1 million of cash and cash equivalents.

As of September 30, 2020, we had $46.3 million of cash and cash equivalents.

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

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On April 30, 2020, we entered into the Second Amendment to Fourth Amended and Restated Credit Agreement (the “Second Amendment”), which amends the Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended by the Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement, dated as of December 6, 2019, the “2019 Credit Agreement” and, together with the Second Amendment, the “Credit Agreement”), with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent.

In the Second Amendment, lenders with $520.0 million, or 80%, of the $650.0 million of commitments under the 2019 Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity of May 31, 2022.

In the Second Amendment, certain lenders agreed to extend the maturity of their commitments, while another lender agreed to extend the maturity of its commitment subsequent to the execution of the Second Amendment.

As of September 30, 2020, lenders with $566.0 million, or 87%, of the $650.0 million of commitments under the 2019 Credit Agreement agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity of May 31, 2022.

The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and established a London Interbank Offered Rate (“LIBOR”) floor of 0.70%.

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The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 6.875% Senior Notes due 2026 (the “Senior Notes”), may not exceed the borrowing base under the Credit Agreement.

As of June 30, 2020, the borrowing base under the Credit Agreement was $899.2 million, of which borrowings, including the Senior Notes, of $597.6 million were outstanding, $18.7 million of letters of credit were outstanding and $282.9 million was available to borrow under the Credit Agreement.

As of September 30, 2020, the borrowing base under the Credit Agreement was $949.4 million, of which borrowings, including the Senior Notes, of $627.6 million were outstanding, $15.3 million of letters of credit were outstanding and $306.5 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings under the Credit Agreement at LIBOR plus 2.35%.

The Credit Agreement applicable margin for LIBOR loans ranges from 2.35% to 2.75% based on our leverage ratio.

At June 30, 2020, LIBOR was 0.18%;

however, we are subject to the 0.70% LIBOR floor as stipulated in the Credit Agreement.

At September 30, 2020, LIBOR was 0.15%;

however, the Credit Agreement has a 0.70% LIBOR floor.

The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $625.0 million plus 75% of the net proceeds of all equity issuances plus 50.0% of the amount of our positive net income in any fiscal quarter after December 31, 2019, (ii) a leverage ratio of not greater than 60.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 1.75 to 1.00.

The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments.

At June 30, 2020, we were in compliance with all of the covenants contained in the Credit Agreement.

At September 30, 2020, we were in compliance with all of the covenants contained in the Credit Agreement.

In July 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021.

At the present time, the Credit Agreement has a term that extends beyond 2021, and borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin.

Agreement provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate.

The Credit Agreement provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate.

However, we have not yet pursued any technical amendment or other contractual alternative to address this matter.

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Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $120.0 million as of June 30, 2020.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $120.4 million as of September 30, 2020.

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

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of June 30, 2020 will be drawn upon.

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of September 30, 2020 will be drawn upon.

Stock Repurchase Program

In November 2018, we announced that the Board of Directors authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.

We did not repurchase any shares of our common stock during the three months ended September 30, 2020.

During the nine months ended September 30, 2020, we repurchased 567,028 shares of our common stock for $31.3 million to be held as treasury stock.

A total of 606,028 shares of our common stock has been repurchased since our stock repurchase program commenced.

As of September 30, 2020, we may purchase up to $17.2 million of shares of our common stock under our stock repurchase program.

On October 30, 2020, the Board approved an increase in our stock repurchase program by an additional $300 million, increasing the available authorization under the program to purchase up to $317.2 million of shares of our common stock as of the date of this Quarterly Report on Form 10-Q.

The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements.

Our stock repurchase program may be modified, discontinued or suspended at any time.

Operating Activities

Net cash provided by operating activities was $146.1 million for the six months ended June 30, 2020.

Net cash provided by operating activities was $113.0 million for the nine months ended September 30, 2020.

The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development.

Net cash provided by operating activities during the six months ended June 30, 2020 was primarily driven by net income of $98.5 million, and included cash inflow from the $41.7 million decrease in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $5.9 million.

Net cash used in operating activities was $18.9 million for the six months ended June 30, 2019, primarily driven by net income of $64.4 million, and included cash outlays for the $99.7 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $16.4 million.

Net cash provided by operating activities during the nine months ended September 30, 2020 was primarily driven

by net income of $187.5 million, and included cash outflow from the $48.8 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and to a lesser extent changes in non-inventory balances of $25.7 million.

Net cash used in operating activities was $104.2 million for the nine months ended September 30, 2019, primarily driven by net income of $113.7 million, and included cash outflow from the $249.9 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $32.0 million.

Investing Activities

Net cash used in investing activities was $1.7 million for the six months ended June 30, 2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.

Net cash used in investing activities was $0.3 million for the six months ended June 30, 2019, which reflects the purchase of property and equipment.

Net cash used in investing activities was $2.3 million for the nine months ended September 30, 2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.

Net cash used in investing activities was $1.6 million for the nine months ended September 30, 2019, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.

Financing Activities

Net cash used in financing activities was $133.6 million for the six months ended June 30, 2020, primarily driven by $235.0 million of payments on the Credit Agreement and by the $31.3 million payment for shares repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $133.0 million under the Credit Agreement.

Net cash provided by financing activities was $10.1 million for the six months ended June 30, 2019, primarily driven by net borrowings under the 2019 Credit Agreement.

Net cash used in financing activities was $102.7 million for the nine months ended September 30, 2020, primarily driven by $275.0 million of payments on the Credit Agreement and by the $31.3 million payment for shares repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $203.1 million under the Credit Agreement.

Net cash provided by financing activities was $96.2 million for the nine months ended September 30, 2019, primarily driven by net borrowings under the 2019 Credit Agreement.

Off-Balance Sheet Arrangements

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In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract.

As of June 30, 2020, we had $28.8 million of cash deposits pertaining to land purchase contracts for 12,519 lots with an aggregate purchase price of $436.6 million.

Approximately $20.4 million of the cash deposits as of June 30, 2020 are secured by third-party guarantees or indemnity mortgages on the related property.

As of September 30, 2020, we had $32.5 million of cash deposits pertaining to land purchase contracts for 24,557 lots with an aggregate purchase price of $663.2 million.

Approximately $21.8 million of the cash deposits as of September 30, 2020 are secured by third-party guarantees or indemnity mortgages on the related property.

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

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Contractual Obligations

As of June 30, 2020, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

As of September 30, 2020, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Critical Accounting Policies

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Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.

We believe that there have been no significant changes to our critical accounting policies during the six months ended June 30, 2020 as compared to those disclosed in Management ’ s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

We believe that there have been no significant changes to our critical accounting policies during the nine months ended September 30, 2020 as compared to those disclosed in Management ’ s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Cautionary Statement about Forward-Looking Statements

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and world financial markets, mortgage availability, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition relating to COVID-19;

• adverse economic changes either nationally or in the markets in which we operate, including, among other things, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;

• adverse economic changes either nationally or in the markets in which we operate, including, among other things, potential impacts from political uncertainty, civil unrest, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;

• a slowdown in the homebuilding industry;

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• increases in taxes or government fees;

• our ability to qualify for additional federal energy efficient homes tax credits;

• negative publicity or poor relations with the residents of our projects;

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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