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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-25 · 264 added, 140 removed, 313 unchanged (56% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms when used in a historical context refer to LGI Homes, Inc.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition.

Our historical consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K contain additional information that should be referred to when reviewing this material.

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc.

and its subsidiaries.

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• Homes closed increased 21.4% to 9,339 homes from 7,690 homes.

Average sales price of our homes increased $8,012 to $ 239,032 from $231,020 .

Gross margin as a percentage of home sales revenues decreased to 23.7% from 25.3% .

Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to 25.8% from 27.0% .

• Average sales price per home closed increased 6.1% to $253,553 from $239,032.

• Gross margin as a percentage of home sales revenues increased to 25.5% from 23.7%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 27.4% from 25.8%.

• Net income before income taxes increased 58.7% to $367.8 million from $231.8 million.

• Net income increased 81.3% to $323.9 million from $178.6 million.

EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 14.6% from 14.9% .

Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 14.5% from 15.1% .

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 17.3% from 14.6%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 17.3% from 14.5%.

• Active communities at the end of 2020 increased to 116 from 106.

Total owned and controlled lots decreased 6.6% to 48,062 lots at December 31, 2019 from 51,442 lots at December 31, 2018 .

• Total owned and controlled lots increased 28.0% to 61,504 lots at December 31, 2020 from 48,062 lots at December 31, 2019.

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 .”

Recent Developments

During November 2019 , our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in the principal payment of $70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes.

COVID-19 Impact and Strategy

On March 11, 2020, the World Health Organization declared the current outbreak of 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 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 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, we were required to temporarily stop our construction of homes in certain markets in which we do business.

Beginning in April 2020, we resumed construction of homes in those markets.

Although we continued to build and sell homes in all of our markets, at that time 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 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 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.

and international debt and equity markets, which can negatively impact consumer confidence.

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.

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 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 availability and timely distribution 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 I of this Annual Report on Form 10-K.

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.

Results of Operations

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Year Ended December 31,

2020 2019 2018

(dollars in thousands, except per share data and average home sales price)

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Income tax provision 43,954 53,224 43,812

Net income $ 323,895 $ 178,608 $ 155,286

Basic earnings per share $ 12.89 $ 7.70 $ 6.89

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Other Financial and Operating Data:

Active communities at end of year

Average community count 111.9 95.8 80.6

Community count at end of period 116 106 88

Home closings 9,339 7,690 6,512

Average sales price of homes closed

Average sales price per home closed $ 253,553 $ 239,032 $ 231,020

Gross margin (1)

$ 603,097 $ 436,479 $ 379,916

Gross margin % (2)

25.5 % 23.7 % 25.3 %

Adjusted gross margin (3)

$ 648,350 $ 475,033 $ 405,635

Adjusted gross margin % (2)(3)

27.4 % 25.8 % 27.0 %

$ 408,940 $ 267,705 $ 224,120

EBITDA margin % (2)(4)

17.3 % 14.6 % 14.9 %

Adjusted EBITDA (4)

$ 410,673 $ 266,735 $ 226,541

Adjusted EBITDA margin % (2)(4)

17.3 % 14.5 % 15.1 %

(1) Gross margin is home sales revenues less cost of sales.

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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.

EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates,

levels of depreciation or amortization and items considered to be unusual or non-recurring.

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.

EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring.

Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period.

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Year Ended December 31, 2020 Compared to Year Ended December 31, 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 years ended December 31, 2019 and 2018 were as follows (Revenues in thousands):

Year Ended December 31, 2019

Home Closings

Average Community Count

Absorption Rate

Year Ended December 31, 2018

Home Closings

Average Community Count

Absorption Rate

At December 31,

Community count

Total community count

Home sales revenues for the year ended December 31, 2019 were $1,838.2 million , an increase of $333.8 million , or 22.2% , from $1,504.4 million for the year ended December 31, 2018 .

The increase in home sales revenues is primarily due to an 18.1% increase in homes closed and an increase in the average sales price per home during the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

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 years ended December 31, 2020 and 2019 were as follows (revenues in thousands):

Year Ended December 31, 2020 At December 31, 2020

Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 850,375 3,654 $ 232,724 34.6 8.8 38

Southeast 559,226 2,382 234,772 33.5 5.9 31

Northwest 389,523 1,000 389,523 11.9 7.0 13

West 286,130 1,043 274,334 13.9 6.2 13

Florida 282,675 1,260 224,345 18.0 5.8 21

Total $ 2,367,929 9,339 $ 253,553 111.9 7.0 116

Year Ended December 31, 2019 At December 31, 2019

Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 724,981 3,304 $ 219,425 33.0 8.3 33

Southeast 347,817 1,592 218,478 24.5 5.4 29

Northwest 304,294 827 367,949 12.4 5.6 13

West 271,186 1,056 256,805 12.8 6.9 14

Florida 189,876 911 208,426 13.1 5.8 17

Total $ 1,838,154 7,690 $ 239,032 95.8 6.7 106

Our results of operations for the year ended December 31, 2020 reflect a significant rebound following the slowdown related to the COVID-19 pandemic that occurred during March and April 2020.

Since May 2020, 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 2020 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.

Beginning in May 2020, we resumed construction activities and accelerated the pace of our new home starts.

Home Sales Revenues .

Home sales revenues for the year ended December 31, 2020 were $2.4 billion, an increase of $529.8 million, or 28.8%, from $1.8 billion for the year ended December 31, 2019.

The increase in home sales revenues is primarily due to a 21.4% increase in homes closed, a 16.8% increase in average community count and an increase in the average sales price per home closed during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

We closed 9,339 homes during 2020, as compared to 7,690 homes closed during 2019.

This increase in home closings was largely due to the increase in the number of active communities in 2019 .

The average sales price per home closed during the year ended December 31, 2019 was $239,032 , an increase of $8,012 , or 3.5% , from the average sales price per home of $231,020 for the year ended December 31, 2018 .

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

The increase in homes closed was largely due to our geographic expansion in the West reportable segment and deepening our presence within certain markets in the Southeast reportable segment during the year ended December 31, 2019 as compared to the year ended December 31, 2018.

The average sales price per home closed during the year ended December 31, 2020 was $253,553, an increase of $14,521, or 6.1%, from the average sales price per home closed of $239,032 for the year ended December 31, 2019.

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

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 year ended December 31, 2020 as compared to the year ended December 31, 2019 and strong demand resulting in an increase in the number of homes closed on average on a per community basis.

We continued to diversify our operations outside of our Central reportable segment during 2020.

We increased our home sales revenues in our reportable segments other than our Central reportable segment by $232.5 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018 , representing a 22.7% increase in the number of homes closed in these reportable segments during 2019 as compared to 2018 .

Our active selling communities at December 31, 2019

increased to 106 from 88 at December 31, 2018 .

Seventeen of the eighteen active selling communities added during 2019 were outside of our Central reportable segment, contributing to the further geographic diversification of our business.

Home sales revenues in our West reportable segment increased by $120.1 million , or 79.5% , primarily due to an increase in community count associated with our continued geographic expansion into our California and Nevada markets.

Home sales revenues in our Southeast reportable segment increased by $76.7 million , or 28.3% , during the year ended December 31, 2019 as compared to the year ended December 31, 2018 , primarily due to a 20.2% increase in the number of homes closed in this reportable segment and partially due to increased community count stemming from the acquisition of Wynn Homes in 2018.

All reportable segments added communities by expanding into new markets or deepening existing markets during the year ended December 31, 2019.

We increased our home sales revenues in our reportable segments other than our Central reportable segment by $404.4 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019, representing a 29.6% increase in the number of homes closed in these reportable segments and increased average community count on a consolidated basis during 2020 as compared to 2019.

Home sales revenues in our Central reportable segment increased by $125.4 million, or 17.3%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in the average sales price per home closed and increased community count at a higher absorption rate.

Home sales revenues in our Southeast reportable segment increased by $211.4 million, or 60.8%, during the year ended December 31, 2020 as compared to the year ended December 31, 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 December 31, 2020 as compared to December 31, 2019.

Home sales revenues in our Northwest reportable segment increased by $85.2 million, or 28.0%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to a 20.9% increase in the number of homes closed in this reportable segment, as a result of increased demand slightly offset by a lower average community count at a higher absorption rate.

Home sales revenues in our West reportable segment increased by $14.9 million, or 5.5%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase of 6.8% in the average sales price per home closed in this reportable segment offset by lower home closings, largely due to 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 $92.8 million, or 48.9%, primarily due to an increased community count with an increase of 7.6% in the average sales price per home closed during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

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

Cost of sales increased for the year ended December 31, 2019 to $1,401.7 million , an increase of $277.2 million , or 24.7% , from $1,124.5 million for the year ended December 31, 2018 .

This increase is primarily due to an 18.1% increase in homes closed, higher lot costs recognized and, to a lesser extent, increased capitalized interest costs for homes closed during 2019 as compared to 2018 .

Cost of sales increased for the year ended December 31, 2020 to $1.8 billion, an increase of $363.2 million, or 25.9%, from $1.4 billion for the year ended December 31, 2019.

This increase is primarily due to a 21.4% increase in homes closed, as well as higher vertical and lot costs recognized as a percentage of revenues during 2020 as compared to 2019.

Gross margin for the year ended December 31, 2020 was $603.1 million, an increase of $166.6 million, or 38.2%, from $436.5 million for the year ended December 31, 2019.

Gross margin as a percentage of home sales revenues was 25.5% for the year ended December 31, 2020 and 23.7% for the year ended December 31, 2019.

This decrease in gross margin as a percentage of home sales revenues is primarily due to higher lot costs and higher capitalized interest costs recognized for the year ended December 31, 2019 as compared to the year ended December 31, 2018 and, to a lesser extent, to 583 wholesale home closings during 2019 , compared to 466 wholesale home closings during 2018 .

This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2020 as compared to the year ended December 31, 2019 is primarily due to an increase in homes closed with a higher average sales price per home closed, which was primarily driven by a favorable pricing environment, operating leverage obtained and product mix, partially offset by an increase in wholesale home closings as a percentage of total home closings.

Selling Expenses.

Selling expenses for the year ended December 31, 2020 were $148.4 million, an increase of $16.8 million, or 12.8%, from $131.6 million for the year ended December 31, 2019.

Sales commissions increased to $68.1 million for the year ended December 31, 2019 from $57.3 million during 2018 largely due to a 22.2% increase in home sales revenues during 2019 as compared to 2018 .

Sales commissions increased to $89.2 million for the year ended December 31, 2020 from $68.1 million for the year ended December 31, 2019 largely due to a 28.8% increase in home sales revenues during 2020 as compared to 2019.

Selling expenses as a percentage of home sales revenues were 6.3% and 7.2% for the years ended December 31, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

The decrease in selling expenses as a percentage of home sales revenues was driven primarily by 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 year ended December 31, 2020 as compared to the year ended December 31, 2019.

General and Administrative.

General and administrative expenses for the year ended December 31, 2020 were $90.0 million, an increase of $12.6 million, or 16.3%, from $77.4 million for the year ended December 31, 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 2019 as compared to 2018 .

The increase in the amount of general and administrative expenses is primarily due to increased personnel and other costs associated with an increase of active communities during 2020 as compared to 2019.

General and administrative expenses as a percentage of home sales revenues were 3.8% and 4.2% for the years ended December 31, 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 retail and wholesale home sales revenues during the year ended December 31, 2019 as compared to the year ended December 31, 2018 .

Loss on extinguishment of debt.

Loss on extinguishment of debt was $0.2 million for the year ended December 31, 2019 due to debt issuance costs previously capitalized that were associated with that certain Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended, the “Credit Agreement”).

Loss on extinguishment of debt was $ 3.6 million for the year ended December 31, 2018 due to debt issuance costs previously capitalized that were associated with our third amended and restated credit agreement, dated as of May 2018 (the “2018 Credit Agreement”).

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

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 year ended December 31, 2020 as compared to the year ended December 31, 2019.

Operating Income and Net Income before Income Taxes.

Operating income for the year ended December 31, 2020 was $364.7 million, an increase of $137.2 million, or 60.3%, from $227.5 million for the year ended December 31, 2019.

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Central - $154.8 million or 42.1%;

Northwest - $46.9 million or 20.2% ;

Florida - $16.0 million or 6.9% ;

Southeast - $79.4 million or 21.6%;

and West - $28.5 million or 12.3% .

Northwest - $71.3 million or 19.4%;

West - $35.8 million or 9.7%;

and Florida - $32.6 million or 8.8%.

The increases in operating income and net income before income taxes are primarily attributed to higher gross margins during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

Income Taxes .

Income tax provision for the year ended December 31, 2020 was $44.0 million, a decrease of $9.3 million, or 17.4%, from income tax provision of $53.2 million for the year ended December 31, 2019.

The decrease in the amount of income tax provision is primarily due to the change in our effective tax rate to 11.9% from 23.0% effective tax provision as a result of the tax benefits relating to the federal energy efficient homes tax credits we recognized during the year ended December 31, 2020, partially offset by the 58.7% increase in net income before taxes.

Federal energy efficient homes tax credits recognized during the year ended December 31, 2020 totaled $41.2 million, of which $29.7 million related to homes

closed in prior open tax years.

We believe this tax credit will continue, at a lesser extent, to impact our results of operations during 2021.

Net income for the year ended December 31, 2020 was $323.9 million, an increase of $145.3 million, or 81.3%, from $178.6 million for the year ended December 31, 2019.

The increases are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price, offset by lower gross margin percentage during 2019 as compared to 2018 .

The increase in net income is primarily attributed to overall stronger gross margins driven by the 28.8% increase in home sales revenues, 6.1% higher average sales price per home closed and the $41.2 million of tax benefits relating to the federal energy efficient homes tax credits recognized during 2020 as compared to 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

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 years ended December 31, 2018 and 2017 were as follows (Revenues in thousands):

Year Ended December 31, 2018

Home Closings

Average Community Count

Absorption Rate

Year Ended December 31, 2017

Home Closings

Average Community Count

Absorption Rate

At December 31,

Community count

Total community count

Home sales revenues for the year ended December 31, 2018 were $1,504.4 million, an increase of $246.4 million, or 19.6%, from $1,258.0 million for the year ended December 31, 2017.

The increase in home sales revenues is primarily due to an 11.4% increase in homes closed and an increase in the average selling price per home during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

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 years ended December 31, 2019 and 2018 were as follows (Revenues in thousands):

Year Ended December 31, 2019 At December 31, 2019

Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 724,981 3,304 $ 219,425 33.0 8.3 33

Southeast 347,817 1,592 218,478 24.5 5.4 29

Northwest 304,294 827 367,949 12.4 5.6 13

West 271,186 1,056 256,805 12.8 6.9 14

Florida 189,876 911 208,426 13.1 5.8 17

Total $ 1,838,154 7,690 $ 239,032 95.8 6.7 106

Year Ended December 31, 2018 At December 31, 2018

Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 623,751 2,937 $ 212,377 30.7 8.0 32

Southeast 271,073 1,324 204,738 18.7 5.9 21

Northwest 277,567 760 365,220 10.3 6.1 11

West 151,059 627 240,923 9.3 5.6 10

Florida 180,950 864 209,433 11.6 6.2 14

Total $ 1,504,400 6,512 $ 231,020 80.6 6.7 88

Home Sales Revenues .

Home sales revenues for the year ended December 31, 2019 were $1.8 billion, an increase of $333.8 million, or 22.2%, from $1.5 billion for the year ended December 31, 2018.

The increase in home sales revenues is primarily due to an 18.1% increase in homes closed and an increase in the average sales price per home closed during the year ended December 31, 2019 as compared to the year ended December 31, 2018.

We closed 7,690 homes during 2019, as compared to 6,512 homes closed during 2018.

This increase in home closings was largely due to the increase in the number of active communities in 2019.

The average sales price per home closed during the year ended December 31, 2018 was $231,020, an increase of $15,800, or 7.3%, from the average selling price per home of $215,220 for the year ended December 31, 2017.

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

The average sales price per home closed during the year ended December 31, 2019 was $239,032, an increase of $8,012, or 3.5%, from the average sales price per home closed of $231,020 for the year ended December 31, 2018.

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

We continued to diversify our operations outside of our Central reportable segment during 2019.

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Our active selling communities at December 31, 2019 increased to 106 from 88 at December 31, 2018.

Seven of the ten active selling communities added during 2018 were outside of our Central reportable segment, contributing to the further geographic diversification of our business.

Seventeen of the eighteen active selling communities added during 2019 were outside of our Central reportable segment, contributing to the further geographic diversification of our business.

Home sales revenues in our West reportable segment increased by $120.1 million, or 79.5%, primarily due to an increase in community count associated with our continued geographic expansion into our California and Nevada markets.

reportable segment and partially due to increased community count stemming from the acquisition of Wynn Homes in 2018.

All reportable segments added communities by expanding into new markets or deepening existing markets during the year ended December 31, 2019.

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

Cost of sales increased for the year ended December 31, 2018 to $1,124.5 million, an increase of $186.9 million, or 19.9%, from $937.5 million for the year ended December 31, 2017.

This increase is primarily due to a 11.4% increase in homes closed during 2018 as compared to 2017 and, to a lesser degree, product mix.

The increase in average cost of sales per home is primarily due to changes in construction costs associated with product mix and lot costs.

Cost of sales increased for the year ended December 31, 2019 to $1.4 billion, an increase of $277.2 million, or 24.7%, from $1.1 billion for the year ended December 31, 2018.

Gross margin for the year ended December 31, 2019 was $436.5 million, an increase of $56.6 million, or 14.9%, from $379.9 million for the year ended December 31, 2018.

Gross margin as a percentage of home sales revenues was 23.7% for the year ended December 31, 2019 and 25.3% for the year ended December 31, 2018.

This decrease in gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs and lot costs partially offset by higher average home sales price for the year ended December 31, 2018 as compared to the year ended December 31, 2017 and, to a lesser extent, to 466 wholesale home closings during 2018, compared to 201 wholesale home closings during 2017.

This decrease in gross margin as a percentage of home sales revenues is primarily due to higher lot costs and higher capitalized interest costs recognized for the year ended December 31, 2019 as compared to the year ended December 31, 2018 and, to a lesser extent, to 583 wholesale home closings during 2019, compared to 466 wholesale home closings during 2018.

Selling Expenses.

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Selling expenses as a percentage of home sales revenues were 7.3% and 7.5% for the years ended December 31, 2018 and 2017, respectively, and generally reflect operating leverage realized relating to advertising costs.

Selling expenses as a percentage of home sales revenues were 7.2% and 7.3% for the years ended December 31, 2019 and 2018, respectively.

General and Administrative.

General and administrative expenses for the year ended December 31, 2019 were $77.4 million, an increase of $7.0 million, or 10.0%, from $70.3 million for the year ended December 31, 2018.

The increase in the amount of general and administrative expenses is primarily due to additional general and administrative compensation costs associated with an increase of active communities and home closings during 2018 as compared to 2017.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during 2019 as compared to 2018.

General and administrative expenses as a percentage of home sales revenues were 4.2% and 4.7% for the years ended December 31, 2019 and 2018, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues reflects additional costs realized from the increase in community count and one-time acquisition related transaction expenses associated with the Wynn Homes acquisition during the year ended December 31, 2018 as compared to the year ended December 31, 2017.

Loss on extinguishment of debt.

Loss on extinguishment of debt for the year ended December 31, 2018 was $3.6 million, due to debt issuance costs previously capitalized that were associated with the revolving credit facility.

There was no loss on extinguishment of debt for the year ended December 31, 2017.

Loss on extinguishment of debt was $0.2 million for the year ended December 31, 2019 due to debt issuance costs previously capitalized that were associated with the Credit Agreement.

Loss on extinguishment of debt was $3.6 million for the year ended December 31, 2018 due to debt issuance costs previously capitalized that were associated with our third amended and restated credit agreement, dated as of May 25, 2018 (the “2018 Credit Agreement”).

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

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Central - $117.4 million or 50.6%;

Southeast - $29.1 million or 14.6%;

Northwest - $46.9 million or 20.2%;

West - $13.6 million or 6.8%;

and Florida - $21.3 million or 10.7%.

Florida - $16.0 million or 6.9%;

Southeast - $30.3 million or 13.1%;

and West - $28.5 million or 12.3%.

Net income for the year ended December 31, 2019 was $178.6 million, an increase of $23.3 million, or 15.0%, from $155.3 million for the year ended December 31, 2018.

The increases are primarily attributed to a 11.4% increase in homes closed, a higher average sales price per home, and a decrease in the effective tax rate realized during 2018 as compared to 2017.

The increases are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed, offset by lower gross margin percentage during 2019 as compared to 2018.

Non-GAAP Measures

In addition to the results reported in accordance with U.S.

GAAP, we have provided information in this Annual Report on Form 10-K relating to adjusted gross margin, EBITDA and adjusted EBITDA.

Gross Margin and Adjusted Gross Margin

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

Adjusted Gross Margin

Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance.

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Year Ended December 31,

2020 2019 2018

Home sales revenues $ 2,367,929 $ 1,838,154 $ 1,504,400

Cost of sales 1,764,832 1,401,675 1,124,484

Gross margin 603,097 436,479 379,916

Capitalized interest charged to cost of sales 40,381 35,230 24,311

Purchase accounting adjustments (1)

4,872 3,324 1,408

Adjusted gross margin $ 648,350 $ 475,033 $ 405,635

Gross margin % (2)

25.5 % 23.7 % 25.3 %

Adjusted gross margin % (2)

27.4 % 25.8 % 27.0 %

(1) Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.

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Year Ended December 31,

2020 2019 2018

Net income $ 323,895 $ 178,608 $ 155,286

Income taxes 43,954 53,224 43,812

Depreciation and amortization 710 643 711

Capitalized interest charged to cost of sales 40,381 35,230 24,311

EBITDA 408,940 267,705 224,120

Purchase accounting adjustments (1)

4,872 3,324 1,408

Loss on extinguishment of debt — 169 3,599

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EBITDA margin % (2)

17.3 % 14.6 % 14.9 %

Adjusted EBITDA margin % (2)

17.3 % 14.5 % 15.1 %

(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 retroactive 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 retroactive 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):

Year Ended December 31,

2020 2019 2018

Numerator (in thousands):

Net income (Numerator for basic and diluted earnings per share) $ 323,895 $ 178,608 $ 155,286

Retroactive federal energy efficient homes tax credits 29,703 — —

Adjusted net income (Numerator for adjusted basic and diluted earnings per share) $ 294,192 $ 178,608 $ 155,286

Basic weighted average shares outstanding 25,135,077 23,191,595 22,551,762

Effect of dilutive securities:

Convertible Notes - treasury stock method — 1,966,639 2,030,023

Stock-based compensation units 245,483 272,607 310,489

Diluted weighted average shares outstanding 25,380,560 25,430,841 24,892,274

Basic earnings per share $ 12.89 $ 7.70 $ 6.89

Diluted earnings per share $ 12.76 $ 7.02 $ 6.24

Adjusted basic earnings per share $ 11.70 $ 7.70 $ 6.89

Adjusted diluted earnings per share $ 11.59 $ 7.02 $ 6.24

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.

The amount of the required deposit is minimal (generally $1,000).

The deposits are refundable if the retail homebuyer is unable to obtain mortgage financing.

The amount of the required deposit is minimal (typically $1,000 to $5,000).

We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract.

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Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.

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 .

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.

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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Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings.

Homes in backlog are generally closed within one to two months, although we may experience cancellations of purchase contracts at any time prior to closing.

Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be, delayed during the COVID-19 pandemic.

In addition, we may experience cancellations of purchase contracts at any time prior to closing.

It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance.

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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):

Year Ended December 31,

Backlog Data Year Ended December 31,

Net orders (1)

11,070 8,299 6,320

Cancellation rate (2)

21.6 % 20.6 % 24.2 %

Ending backlog - homes (3)

2,964 1,233 624

Ending backlog - value (3)

$ 775,468 $ 290,438 $ 156,109

(1) Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.

(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.

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 the required deposit has been made.

(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 generally set to occur within the next six to twelve months.

Ending backlog is valued at the contract amount.

As of December 31, 2019, we have 481 units related to bulk sales agreements associated with our wholesale business, of which 117 units and values are not included in the table above.

(4) As of December 31, 2020, we have 1,139 units related to bulk sales agreements associated with our wholesale business.

(5) As of December 31, 2019, we have 481 units related to bulk sales agreements associated with our wholesale business, of which 117 units and values are not included in the table above.

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See discussion included in “ Business—Homes in Inventory .”

Raw Materials

Raw Materials and Labor

See discussion included in “ Business—Raw Materials and Labor .”

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We generally close more homes in our second, third and fourth quarters.

Thus, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels.

Our revenue and capital requirements are generally similar across our second, third and fourth quarters.

Thus, our revenues may fluctuate on a quarterly basis, and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels.

Our revenues and capital requirements are generally similar across our second, third and fourth quarters.

As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end.

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Under the shelf registration statement, we have the ability to access the debt and equity capital markets as needed as part of our ongoing financing strategy.

We believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations, and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed.

While the COVID-19 pandemic and related mitigation efforts have created significant uncertainty as to general economic and housing market conditions, as of the date of this Annual Report on Form 10-K, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed.

However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

Revolving Credit Facility

On May 6, 2019, we entered into the Credit Agreement with several financial institutions and Wells Fargo Bank, National Association, as administrative agent.

The Credit Agreement has substantially similar terms and provisions to our third amended and restated credit agreement entered into in May 2018 with several financial institutions and Wells Fargo Bank, National Association, as administrative agent (the “2018 Credit Agreement”), but, among other things, provides for a revolving credit facility of $550.0 million , which could be increased at our request by up to $100.0 million if the lenders make additional commitments, subject to the terms and conditions of the Credit Agreement (which was requested in December 2019).

On December 6, 2019, we entered into a Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement with certain lenders and Wells Fargo Bank, National Association, as an increasing lender and administrative agent, whereby the aggregate revolving commitments under the Credit Agreement increased by $100.0 million from $550.0 million to $650.0 million in accordance with the relevant provisions of the Credit Agreement.

The Credit Agreement matures on May 31, 2022 .

Before each anniversary of the Credit Agreement, we may request a one-year extension of the maturity date.

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, 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.

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%.

The Credit Agreement

otherwise has substantially similar terms and provisions to the 2019 Credit Agreement and continues to provide for a $650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement.

The Credit Agreement matures on May 31, 2023 with respect to 87% of the commitments thereunder and on May 31, 2022 with respect to 13% of the commitments thereunder.

Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date.

The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or greater than $0.5 million.

As of December 31, 2019 , the borrowing base under the Credit Agreement was $940.1 million , of which borrowings, including our 6.875% Senior Notes due 2026 (the “Senior Notes”), of $699.6 million were outstanding, $11.6 million of letters of credit were outstanding and $228.0 million was available to borrow under the Credit Agreement, net of deferred purchase price obligations.

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 December 31, 2020, the borrowing base under the Credit Agreement was $949.6 million, of which borrowings, including the Senior Notes, of $546.6 million were outstanding, $10.5 million of letters of credit were outstanding and $392.5 million was available to borrow under the Credit Agreement.

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

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At December 31, 2020, LIBOR was 0.15%;

The Credit Agreement requires us to maintain (i) a tangible net worth of not less than approximately $486.9 million plus 75% of the net proceeds of all equity issuances plus 50% of the amount of our positive net income in any fiscal quarter after December 31, 2018, (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 2.50 to 1.0 0.

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 December 31, 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.

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

On November 30, 2020, the FCA and ICE Benchmark Administration, which administers LIBOR quotations, announced a consultation on the extension of the quotation of most LIBOR tenors to June 30, 2023 for legacy contracts only.

At the present time, the Credit Agreement has a term that extends to May 31, 2023 with respect to 87% of the commitments thereunder and to May 31, 2022 with respect to 13% of the commitments thereunder, and borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin.

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.

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Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026.

Terms of the Senior Notes are governed by an indenture and supplemental indenture, each dated as of July 6, 2018, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

We received net proceeds from the offering of the Senior Notes of approximately $296.2 million , after deducting the initial purchasers’ discounts and commissions and offering expenses.

The net proceeds from the offering were used to repay a portion of the borrowings under the 2018 Credit Agreement.

Terms of the Senior Notes are governed by an Indenture and First Supplemental Indenture thereto, each dated as of July 6, 2018, and a Second Supplemental Indenture thereto, dated as of April 30, 2020, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

Convertible Notes

We issued $85.0 million aggregate principal amount of the Convertible Notes in November 2014 pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act.

During the fourth quarter of 2017, we received notice from holders of $15.0 million principal amount of the Convertible Notes to convert their Convertible Notes.

The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the issuance of 486,679 shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2 million loss on the extinguishment of debt and a cash payment of $15.0 million for the principal amount of such Convertible Notes.

On November 15, 2019, the Convertible Notes matured, which resulted in the principal payment of $70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes.

On November 15, 2019, our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in the principal payment of $70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes.

Letters of Credit, Surety Bonds and Financial Guarantees

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Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $143.8 million as of December 31, 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.

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 December 31, 2020 will be drawn upon.

Stock Repurchase Program

In November 2018, we announced that our Board of Directors (the “Board”) 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.

On October 30, 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million.

For the year ended December 31, 2020, we repurchased 718,993 shares of our common stock for $48.1 million to be held as treasury stock.

For the year ended December 31, 2019, we did not repurchase any shares of our common stock.

A total of 757,993 shares of our common stock has been repurchased since our stock repurchase program commenced.

As of December 31, 2020, we may purchase up to $300.4 million of shares of our common stock under our stock repurchase program.

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 $202.2 million during the year ended December 31, 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 year ended December 31, 2020 was primarily driven by net income of $323.9 million, offset by cash outflows from the $70.2 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 a $59.5 million increase in the net change in accounts receivable.

Net cash used in operating activities was $41.9 million during the year ended December 31, 2019.

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Net cash used in operating activities was $116.7 million during the year ended December 31, 2018, was primarily driven by net income of $155.3 million, and included cash outlays for the $234.7 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 and additional cash outlays due to changes in non-inventory balances of $37.3 million.

Net cash used in operating activities was $68.5 million during the year ended December 31, 2017 , was primarily driven by net income of $113.3 million , and included cash outlays for the $200.6 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 $18.8 million.

Investing Activities

Net cash used in investing activities was $5.6 million during the year ended December 31, 2020, which reflects the purchase of property and equipment.

Net cash used in investing activities was $74.9 million during the year ended December 31, 2018 , primarily due to the business acquisition of Wynn Homes in 2018.

Net cash used in investing activities was $1.8 million during the year ended December 31, 2019, which reflects the purchase of property and equipment.

Net cash used in investing activities was $74.9 million during the year ended December 31, 2018, primarily due to the business acquisition of Wynn Homes in 2018.

Financing Activities

Net cash provided by financing activities during the year ended December 31, 2019 was $35.4 million primarily driven by net borrowings of $105.5 million under the Credit Agreement offset by $70.0 million payment on the Convertible Notes upon their maturity.

Net cash used by financing activities during the year ended December 31, 2020 was $198.9 million, primarily driven by $530.0 million of payments under the Credit Agreement and by the $48.1 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $377.1 million under the Credit Agreement.

Net cash provided by financing activities during the year ended December 31, 2019 was $35.4 million, primarily driven by net borrowings of $105.5 million under the Credit Agreement, offset by the principal payment of $70.0 million on the Convertible Notes upon their maturity.

Net cash provided by financing activities during the year ended December 31, 2018 was $170.7 million, primarily driven by net borrowings from the issuance of $300.0 million aggregate principal amount of the Senior Notes, net payments of $106.2 million under the 2018 Credit Agreement and payments of $15.0 million on the Convertible Notes, partially offset by loan issuance costs.

Net cash provided by financing activities during the year ended December 31, 2017 was $87.0 million , primarily driven by net borrowings of $75.0 million under our credit agreement in place at that time and $17.1 million in net proceeds related to sale of stock partially offset by loan issuance costs.

Off-Balance Sheet Arrangements

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Approximately $24.0 million of the cash deposits as of December 31, 2020 are secured by third-party guarantees or indemnity mortgages on the related property.

intermediaries to finance the development of optioned lots, general housing conditions, and local market dynamics.

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.

Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.

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Contractual Obligations

years More than

Credit Agreement (a)

$ 246,621 $ — 246,621 $ — $ —

Senior Notes (b)

300,000 — — — 300,000

Inventory related obligations (c)

4,515 82 211 230 3,992

Interest and fees (d)

145,749 31,013 49,371 41,744 23,621

Operating leases 6,290 1,223 2,013 1,284 1,770

Represents borrowings under the Credit Agreement, which matures on May 31, 2022.

Total $ 703,175 $ 32,318 $ 298,216 $ 43,258 $ 329,383

(a) Represents borrowings under the Credit Agreement, which matures on May 31, 2023 with respect to 87% of the commitments thereunder and on May 31, 2022 with respect to 13% of the commitments thereunder.

See Note 7 “ Notes Payable ” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

Represents $300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026.

(b) Represents $300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026.

The Senior Notes mature on July 15, 2026.

See Note 7 “ Notes Payable ” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

The Company owns lots in certain communities that have Community Development Districts or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot.

(c) The Company owns lots in certain communities that have Community Development Districts or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot.

Such obligations represent a non-cash cost of the lots.

All of the outstanding borrowings under the Credit Agreement are at variable rates based on LIBOR, or subject to an interest rate floor.

(d) All of the outstanding borrowings under the Credit Agreement are at variable rates based on LIBOR, or subject to an interest rate floor.

The interest rate for our variable rate indebtedness as of December 31, 2020 was LIBOR plus 2.35%.

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We generally determine selling price per home on the expected cost plus margin.

Our contracts contain no significant financing terms

as customers who finance do so through a third party.

Our contracts contain no significant financing terms as customers who finance do so through a third party.

Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing.

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In accordance with Accounting Standards Codification Topic 360, Property, Plant, and Equipment , real estate inventory is evaluated for indicators of impairment by each community during each reporting period.

In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been closed, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land.

estimated fair value of the land.

We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales prices and/or margins are trending downward and are anticipated to continue to trend downward.

Due largely to the relatively short development and construction periods for our communities and our growth, we have not experienced circumstances during 2019, 2018 or 2017 that are indicators of impairment.

Due largely to the relatively short development and construction periods for our communities and our growth, we have experienced limited circumstances during 2020, 2019 or 2018 that are indicators of impairment.

Our future sales and margins may be impacted by our inability to realize continued growth, increased cost associated with holding and developing land, local economic factors, pressure on home sales prices, increased carrying costs, and insufficient access to labor and materials at reasonable costs.

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changes to the expected cash flows may lead to changes in the outcome of our impairment analysis.

The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing through the land development phase, and concluding with the construction, sale, and delivery of homes.

The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing through the land development phase and concluding with the construction and sale of homes.

A constructed home is used as the community information center during the life of the community and then sold.

Actual individual community lives will vary based on the size of the community, the sales absorption rate, whether we purchased the property as raw land or finished lots, and the timing and phasing of development on larger projects.

Actual individual community lives will vary based on the size of the community, the sales absorption rate and whether the property was purchased as raw land or finished lots.

Impairment of Land and Land Under Development

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To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and any related pre-acquisition costs (e.g.

due diligence costs) are charged to other income, net.

due diligence costs) are charged to general and administrative expense.

We review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis.

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Our warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and we make adjustments to the balance of the pre-existing reserves, as needed, to reflect changes in trends and historical data as information becomes available.

We record goodwill associated with our acquisitions of businesses when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired.

We evaluate our goodwill balances for potential impairment on an annual basis.

In applying the goodwill impairment test, we have the option to perform a qualitative test (also known as “Step 0”) or a two-step quantitative test (consisting of “Step 1” and “Step 2”).

Under the Step 0 test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than their carrying value.

Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events.

If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the two-step quantitative test is necessary.

During 2019, 2018 and 2017, we performed a Step 0 analysis and determined that it is not “more likely than not” that the fair values of the reporting units were less than their carrying amounts.

We utilize the liability method of accounting for income taxes.

2 unchanged sentences

Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required.

We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position.

We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical

merits of the position.

We recognize potential interest and penalties related to uncertain tax positions in income tax expense, as applicable.

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What changed 10-K

Item 7. Management’s Discussion and Analysis