What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-15 compared with 2021-02-25 · 124 added, 155 removed, 605 unchanged (32% of the section changed)

24 unchanged sentences

Land development costs

Description of the Matter At December 31, 2020, the Company’s cost of sales was approximately $1.8 billion, which includes construction costs of each closed home and allocable land acquisition and land development costs, capitalized interest, and other related costs.

Description of the Matter For the year ended December 31, 2021, the Company’s cost of sales was approximately $2.2 billion, which includes construction costs of each closed home and allocable land acquisition and land development costs, capitalized interest, and other related costs.

As discussed in Note 2 to the consolidated financial statements, land development costs that are not specifically identifiable to a home are allocated on a pro rata basis.

At the time of home closings, land development activities are not yet finalized.

At the time of home closings, land development activities may not be finalized.

To recognize the appropriate amount of cost of sales, the Company estimates the total remaining development costs.

Estimates are affected by changes to the land development project’s schedule;

the cost of labor, material, and subcontractors;

the cost of labor, materials, and subcontractors;

and potential cost reimbursements from various municipalities.

Auditing the Company's land development cost measurement and allocation to unsold lots and homes was complex and subjective due to the significant estimation required to determine the costs to complete land development.

Specifically, the land development cost estimate is sensitive to significant management assumptions, including the project’s schedule, estimated cost of labor and potential reimbursements.

Auditing the Company's land development cost measurement to unsold lots and homes was complex and subjective due to the significant estimation required to determine the costs to complete land development.

Specifically, the land development cost estimate is sensitive to significant management assumptions, including the project’s schedule, estimated cost of materials and labor and potential reimbursements.

How We Addressed the Matter in Our Audit We obtained an understanding and tested the design and operating effectiveness of the Company's process and controls over its land development cost measurement and allocation to unsold lots and homes, including controls over management's review of the estimated costs to complete.

To test the Company's land development cost measurement and allocation to unsold lots and homes, our audit procedures included, among others, testing the significant assumptions used to develop the estimated costs to complete the land development projects and testing the completeness and accuracy of the underlying data and allocation calculation.

For example, we compared the estimated land development costs to actual costs of similar communities developed by the Company;

agreed the estimated development costs and cost reimbursements to supporting documentation, including underlying contracts;

For example, we sampled the Company’s land development project budgets and agreed the estimated development costs and cost reimbursements to supporting documentation, including underlying contracts;

and performed observational procedures to understand the completeness of development activities included in the estimated land development costs.

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CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(In thousands, except share and per share data)

Cash and cash equivalents $ 50,514 $ 35,942

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Issuance of shares in settlement of Convertible Notes 2,381,751 24 ( 24 ) — — —

Issuance of shares, Wynn Homes Acquisition 70,746 1 3,999 — — 4,000

Repurchase of shares — — — — ( 1,506 ) ( 1,506 )

Issuance of restricted stock units in settlement of accrued bonuses — — 181 — — 181

Restricted stock units granted for accrued annual bonuses — — 217 — — 217

Compensation expense for equity awards — — 7,539 — — 7,539

2 unchanged sentences

Net income — — — 323,895 — 323,895

Issuance of shares in settlement of Convertible Notes 2,381,751 24 ( 24 ) — — —

Issuance of restricted stock units in settlement of accrued bonuses — — 217 — — 217

Stock repurchase — — — — ( 48,081 ) ( 48,081 )

Restricted stock units granted for accrued annual bonuses — — 222 — — 222

Compensation expense for equity awards — — 13,517 — — 13,517

2 unchanged sentences

Net income — — — 429,645 — 429,645

Repurchase of shares — — — — ( 48,081 ) ( 48,081 )

Issuance of restricted stock units in settlement of accrued bonuses — — 222 — — 222

Stock repurchase — — — — ( 193,783 ) ( 193,783 )

Restricted stock units granted for accrued annual bonuses — — 272 — — 272

Compensation expense for equity awards — — 13,595 — — 13,595

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Cash flows from investing activities:

Purchases of property and equipment, net ( 2,692 ) ( 734 ) ( 475 )

Investment in unconsolidated entity ( 2,956 ) ( 1,059 ) —

Payment for business acquisition — — ( 74,463 )

Purchases of property and equipment ( 1,729 ) ( 2,692 ) ( 734 )

Investment in unconsolidated entities ( 1,692 ) ( 2,956 ) ( 1,059 )

Payment for business acquisitions ( 66,970 ) — —

Net cash used in investing activities ( 70,391 ) ( 5,648 ) ( 1,793 )

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Payments on notes payable ( 969,000 ) ( 530,000 ) ( 273,762 )

Redemption premium ( 10,314 ) — —

Loan issuance costs ( 10,572 ) ( 2,155 ) ( 2,984 )

Proceeds from sale of stock, net of offering expenses 7,114 4,259 2,886

Stock repurchase ( 48,081 ) — ( 1,506 )

Payment for offering costs — — ( 76 )

Payment for earnout obligation — — ( 132 )

Stock repurchases ( 193,783 ) ( 48,081 ) —

Net cash provided by (used in) financing activities 63,263 ( 198,913 ) 35,448

Net decrease in cash and cash equivalents ( 2,403 ) ( 8,279 ) ( 20,947 )

Net increase (decrease) in cash and cash equivalents 14,572 ( 2,403 ) ( 8,279 )

Cash and cash equivalents, beginning of year 35,942 38,345 46,624

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LGI Homes, Inc., a Delaware corporation (the “Company”, “we,” “us,” or “our”), is headquartered in The Woodlands, Texas.

We engage in the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania.

On August 2, 2018, we acquired certain homebuilding assets owned by Crosswind Properties, LLC, Wynn Construction, Inc., Crosswind Development, Inc., Crosswind Investments, Inc.

and First Continental Communities, Inc.

(collectively, “Wynn Homes”), and assumed certain related liabilities.

As a result of the Wynn Homes acquisition, we expanded our North Carolina presence in the Raleigh market, as well as established an immediate presence in the Wilmington market.

We engage in the development of communities and the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania.

On May 6, 2021, we acquired certain real estate assets owned by KenRoe Inc.

and its affiliated entities, including R Home LLC and Paxmar Land Development (collectively, “KenRoe”), and assumed certain related liabilities.

As a result of the KenRoe acquisition, we expanded our Minnesota presence in the Minneapolis market.

We acquired approximately 100 homes under construction and more than 3,000 owned and controlled lots.

The total purchase price for the Wynn Homes acquisition was approximately $ 78.5 million, consisting of approximately $ 74.5 million in cash and $ 4.0 million in shares of our common stock.

The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”).

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

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.

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.

While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the United States could materially impact our consolidated financial statements in 2021 and beyond.

The total purchase price for the KenRoe assets, primarily consisting of inventory, was approximately $ 27.3 million in cash, subject to certain potential post-closing adjustments.

The acquisition is accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”).

Our purchase accounting for KenRoe as of December 31, 2021 is preliminary and we expect to complete the working capital adjustment and valuation of the tangible assets, intangible assets and liabilities assumed as of the acquisition date within one year from the acquisition date.

On July 14, 2021, we acquired the real estate assets of Buffington Homebuilding Group, Ltd.

(“Buffington”) and assumed certain related liabilities.

The total purchase price for the Buffington assets, primarily consisting of inventory, was approximately $ 39.1 million in cash, subject to certain potential post-closing adjustments.

This acquisition further expands our land position in the Austin, Texas market.

The acquired assets include over 100 homes under construction, and more than 500 owned and controlled lots.

The acquisition is accounted for in accordance with ASC 805.

Our purchase accounting for Buffington as of December 31, 2021 is preliminary and we expect to complete the working capital adjustment and valuation of the tangible assets, intangible assets and liabilities assumed as of the acquisition date within one year from the acquisition date.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Actual results

could differ from those estimates, and these differences could have a significant impact on the financial statements.

The significant accounting estimates include real estate inventory and cost of sales, impairment of real estate inventory and property and equipment, warranty reserves, loss contingencies, incentive compensation expense, and income taxes.

Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements.

The significant accounting estimates include land development cost of sales, impairment of real estate inventory, warranty reserves, loss contingencies, incentive compensation expense, and income taxes.

Cash and Cash Equivalents and Concentration of Credit Risk

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Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value.

Inventory costs for completed homes are expensed to cost of sales as homes are closed.

Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis.

Inventory costs for completed homes are expensed to cost of sales as homes are closed.

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.

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Upon execution of the purchase, these deposits are applied to the acquisition price of the land and recorded as a cost component of the land in real estate inventory.

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

are charged to general and administrative expenses.

To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and related pre-acquisition costs are charged to general and administrative expenses.

Management reviews the likelihood of the acquisition of contracted lots in conjunction with its periodic real estate impairment analysis.

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Deferred loan costs represent debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.

Other assets consist primarily of prepaid insurance, prepaid expenses, security deposits, right-of-use (“ROU”) assets, municipal utility district reimbursements, and income tax receivables related to the federal energy efficient homes tax credit.

Other assets consist primarily of municipal utility district reimbursements, income tax receivables related to the federal energy efficient homes tax credit, prepaid insurance, prepaid expenses, right-of-use (“ROU”) assets, investments in unconsolidated entities and other receivables.

Our prepaid insurance and prepaid expenses were $ 12.0 million and $ 6.5 million as of December 31, 2021 and 2020, respectively.

Investment in Unconsolidated Entities

We have investments in unconsolidated entities with independent third parties.

The equity method of accounting is used for unconsolidated entities over which we have significant influence;

generally, this represents ownership interests of at least 20% and not more than 50%.

Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of this entity.

In the event we buy land from this entity we intend to defer the recognition of profits from such activities until the time we ultimately sell the related land.

Additionally, in 2021, we entered into a mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our retail homebuyers.

We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures .

If we determine that a loss in the value of any of the investments is other than temporary, we write down the investment to its estimated fair value.

Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income, net.

Property and Equipment, Net

Property, building, software, computer equipment and leasehold improvements are stated at cost, less accumulated depreciation.

Property and equipment are stated at cost, less accumulated depreciation.

Depreciation expense is recorded in general and administrative expenses.

Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in other income, net.

Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets, ranging from two to five years for property and equipment and 30 years for our building.

Leasehold improvements are depreciated over the shorter of the asset life or the term of the lease.

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There were no impairments of property, equipment and leasehold improvements recorded during the years ended December 31, 2021, 2020 and 2019.

Investment in Unconsolidated Entity

We have an investment in a unconsolidated entity with an independent third party.

The equity method of accounting is used for unconsolidated entities over which we have significant influence;

generally, this represents ownership interests of at least 20% and not more than 50%.

Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of this entity.

In the event we buy land from this entity we intend to defer the recognition of profits from such activities until the time we ultimately sell the related land.

We evaluate our investment in the unconsolidated entity for recoverability in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures .

If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value.

Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income, net.

Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates.

Goodwill and Intangible Assets

The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC 805, Business Combinations .

Goodwill and intangible assets that do not have finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators are present.

Goodwill that do not have finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators are present.

The $ 12.0 million of goodwill is related to the reorganization transactions completed in connection with the initial public offering of our common stock in November 2013.

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Under the optional qualitative 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.

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, we determine it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing a quantitative test is necessary.

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Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding.

In accordance with ASC 260-10, Earnings Per Share , we calculated the dilutive effect of our 4.25 % Convertible Notes due 2019 (the “Convertible Notes”) using the treasury stock method, since we had the intent and ability to settle the principal amount of

the outstanding Convertible Notes in cash.

The Convertible Notes matured and were repaid in full on November 15, 2019.

Prior to the maturity of the Convertible Notes, we included the effect of the additional potential dilutive shares if our common stock price exceeded the conversion price of $ 21.52 per share under the treasury stock method.

Diluted earnings per share excludes all dilutive potential shares of common stock if their effect is antidilutive.

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Once the performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, to recognize compensation expense on a straight-line basis over the award’s requisite service period.

Recently Adopted Accounting Standards

On January 1, 2020, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No.

2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance.

ASU 2018-15 was effective for us beginning January 1, 2020.

The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption.

The adoption of ASU 2018-15 did not have a material effect on our consolidated financial statements or disclosures.

On January 1, 2020, we adopted the FASB ASU No.

2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements.

ASU 2018-13 was effective for us beginning January 1, 2020.

Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis.

The adoption of ASU 2018-13 did not have a material effect on our consolidated financial statements or disclosures.

On January 1, 2020, we adopted the FASB ASU No.

2017-04, “Intangibles - Goodwill and Other (Topic 350):

Simplifying the Accounting for Goodwill Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment.

A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

ASU 2017-04 was effective for us beginning January 1, 2020, with early adoption permitted, and applied prospectively.

The adoption of ASU 2017-04 did not have a material effect on our consolidated financial statements or disclosures.

On January 1, 2020, we adopted the FASB ASU No.

2016-13, “ Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an “incurred loss” approach to a new “expected credit loss” methodology.

ASU 2016-13 was effective for us beginning January 1, 2020, with early adoption permitted.

The adoption of ASU 2016-13 did not have a material effect on our consolidated financial statements or disclosures.

Revenue Recognition

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Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with standardized features within favorable markets that meet certain demographic and economic conditions.

Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our luxury Terrata Homes brand primarily markets to move-up homebuyers.

Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our Terrata Homes brand primarily markets to move-up homebuyers.

Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single-family homes as rental properties.

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Furniture and fixtures 2 - 5

Rental properties 30

Leasehold improvements 5 - 10

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Property and equipment, net $ 16,944 $ 3,618

During the year ended December 31, 2021, we transferred $ 13.2 million of home assets from real estate inventory to rental properties within property and equipment.

We are lessors of homes.

Contracts are typically one year or less.

Depreciation expense incurred for the years ended December 31, 2021, 2020 and 2019 was $ 1.1 million, $ 0.7 million and $ 0.6 million, respectively.

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Accrued and other liabilities consist of the following (in thousands):

Taxes payable $ 26,181 $ 28,679

Real estate inventory development and construction payable 48,656 29,938

Accrued compensation, bonuses and benefits 24,914 28,579

Taxes payable 11,604 26,181

Contract deposits 12,182 17,151

Accrued interest 7,431 10,853

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Warranty reserve 7,850 5,350

Contract deposits 17,151 2,502

Other 9,836 7,154

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This obligation for infrastructure development is attached to the land, which is typically payable over a 30-year period, and is ultimately assumed by the homebuyer when home sales are closed.

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

The obligations assumed by the homebuyer represent a non-cash cost of the lots.

Estimated Warranty Reserve

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Revolving Credit Agreement

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.

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 %.

On April 28, 2021, we entered into that certain Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”), which amends and restates that certain Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”).

The Credit Agreement (a) increases the commitments to $ 850.0 million, (b) allows the Company to increase the commitments by up to $ 100.0 million, subject to terms and conditions, (c) extends the maturity to April 28, 2025 for all lenders, (d) increases the sublimit for letters of credit to $ 50.0 million, (e) adds unrestricted cash in excess of $ 10.0 million as a component of the borrowing base and removes certain exclusions from the borrowing base, (f) reduces the applicable margin for LIBOR loans to a range of 1.45 % to 2.10 %, based on our leverage ratio, (g) reduces the LIBOR floor to 0.50 %, (h) increases the minimum tangible net worth requirement to $ 850.0 million plus 75 % of the net proceeds of equity issuances after December 31, 2020 and 50 % of consolidated earnings for each quarter ending after March 31, 2021 and (i) provides for a “hardwired” transition from LIBOR loan pricing that is intended to be economically neutral to the Company;

otherwise, the Credit Agreement is on substantially the same terms as the 2020 Credit Agreement.

As of December 31, 2021, the borrowing base under the Credit Agreement was $ 1.1 billion, of which borrowings, including the 2029 Senior Notes (as defined herein), of $ 817.4 million were outstanding, $ 9.1 million of letters of credit were outstanding and $ 321.3 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings at LIBOR plus 1.45 %.

The Credit Agreement applicable margin for LIBOR loans ranges from 1.45 % to 2.10 % based on our leverage ratio.

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At December 31, 2021, we were in compliance with all of the covenants contained in the Credit Agreement.

Senior Notes Offering

On July 6, 2018, we issued $ 300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S.

persons in transactions outside the United States pursuant to Regulation S under the Securities Act.

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 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

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

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.

Senior Notes Offerings

On June 28, 2021, we issued $ 300.0 million aggregate principal amount of our 4.000 % Senior Notes due 2029 (the “2029 Senior Notes”) in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A (“Rule 144A”) under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S.

persons in transactions outside the United States pursuant to Regulation S (“Regulation S”) under the Securities Act.

Interest on the 2029 Senior Notes accrues at a rate of 4.000 % per annum, payable semi-annually in arrears on January 15 and July 15 of each year.

The 2029 Senior Notes mature on July 15, 2029.

Terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, 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.

On July 6, 2018, we issued $ 300.0 million aggregate principal amount of our 6.875 % Senior Notes due 2026 (the “2026 Senior Notes”) in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A and to certain non-U.S.

persons in transactions outside the United States pursuant to Regulation S.

On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in the principal payment of $ 300.0 million and a redemption premium of $ 10.3 million.

Additionally, we expensed $ 3.0 million of deferred financing costs and discounts that were being previously amortized in association with the 2026 Senior Notes.

We financed the redemption of the 2026 Senior Notes with a portion of the net proceeds from the offering of the 2029 Senior Notes, together with cash on hand.

Notes payable consist of the following (in thousands):

Notes payable under the Credit Agreement ($ 650.0 million revolving credit facility at December 31, 2020) maturing in part on May 31, 2022 and in part on May 31, 2023;

Notes payable under the Credit Agreement ($ 850.0 million revolving credit facility at December 31, 2021) maturing on April 28, 2025;

interest paid monthly at LIBOR plus 1.45 %.

net of debt issuance costs of approximately $ 4.9 million and $ 5.0 million at December 31, 2020 and December 31, 2019, respectively

$ 517,439 $ 246,621

1 unchanged sentence

interest paid semi-annually at 4.000 %.

net of debt issuance costs of approximately $ 1.9 million and $ 2.2 million at December 31, 2020 and December 31, 2019, respectively;

and approximately $ 1.4 million and $ 1.8 million in unamortized discount at December 31, 2020 and December 31, 2019, respectively

296,681 296,028

6.875 % Senior Notes due July 15, 2026;

interest paid semi-annually at 6.875 %.

Net discount and debt issuance costs ( 12,203 ) ( 8,223 )

Total notes payable $ 805,236 $ 538,398

2 unchanged sentences

Total notes payable 817,439

Debt discount ( 1,438 )

Debt issuance costs ( 12,203 )

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Cash paid for interest $ 28,850 $ 34,924 $ 42,438

Included in interest incurred for the year ended December 31, 2020 was amortization of deferred financing costs for notes payable and amortization of the Senior Notes discounts of $ 2.9 million.

Included in interest incurred for the years ended December 31, 2019 and 2018 was amortization of deferred financing costs for notes payable and amortization of the Convertible Notes and Senior Notes discounts of $ 4.1 million and $ 4.6 million, respectively.

Included in interest incurred was amortization of deferred financing costs and discounts for notes payable of $ 2.9 million for each of the years ended December 31, 2021 and 2020 and $ 4.1 million for the year ended December 31, 2019.

The provision for income taxes consisted of the following (in thousands):

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State 37 ( 229 ) ( 194 )

Deferred tax benefit ( 2,365 ) ( 1,831 ) ( 724 )

Deferred tax provision (benefit) 788 ( 2,365 ) ( 1,831 )

Total income tax provision $ 113,130 $ 43,954 $ 53,224

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Tax at effective rate $ 113,130 20.8 % $ 43,954 11.9 % $ 53,224 23.0 %

The 2021 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019 and the deductions in excess of compensation cost (“windfalls”) for share-based payments, partially offset by state income tax expense on current year earnings and non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended.

The 2020 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019, partially offset by state income tax expense on current year earnings.

The 2019 effective tax rate differs from the federal statutory rate primarily due to non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended, and state income tax expense on current year earnings offset by the windfalls for share-based payments.

Income tax expense for 2021 includes a benefit of $ 16.2 million associated with the extension of federal energy efficient homes tax credits.

Income tax expense for 2020 includes a benefit of $ 41.2 million associated with the extension of federal energy efficient homes tax credits, including $ 29.7 million related to homes closed in prior open tax years.

This provision, which had previously expired in 2017, has been extended to apply to homes closed through December 31, 2021.

The 2018 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, partially offset by windfalls for share-based payments.

The federal energy efficient homes tax credit provision applies to qualifying homes closed through December 31, 2021.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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Stock-based compensation 4,397 4,347

Debt Extinguishment — 134

Total deferred tax assets 11,299 10,737

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and state income tax returns in jurisdictions with varying statutes of limitations.

The statute of limitations with regard to our federal income tax filings is three years.

The statute of limitations with regards to our federal income tax filings is three years.

The statute of limitations for our state tax jurisdictions is three to four years depending on the jurisdiction.

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Shelf Registration Statement

We have an effective shelf registration statement on Form S-3 (Registration No.

333-227012) that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities.

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.

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

For the year ended December 31, 2021, we repurchased 1,288,563 shares of our common stock for $ 193.8 million to be held as treasury stock.

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.

For the year ended December 31, 2018, we repurchased 39,000 shares of

our common stock for $ 1.5 million to be held as treasury stock.

A total of 2,046,556 shares of our common stock has been repurchased since our stock repurchase program commenced.

As of December 31, 2021, we may purchase up to $ 106.6 million of shares of our common stock under our stock repurchase program.

On February 11, 2022, the Board approved an increase in our stock repurchase program by an additional $ 200.0 million, increasing the available authorization under the program to purchase up to $ 306.6 million of shares of our common stock as of the date of this Annual Report on Form 10-K.

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.

Earnings Per Share

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Throughout each fiscal year presented to the maturity date of the Convertible Notes, the average market price of our common stock exceeded the conversion price of $ 21.52 per share;

therefore, the calculation of diluted earnings per share for all years presented prior to the maturity date includes the effect of our common stock related to the conversion spread of the Convertible Notes.

Throughout 2019 to the maturity date of the Convertible Notes, the average market price of our common stock exceeded the conversion price of $ 21.52 per share;

therefore, the calculation of diluted earnings per share for 2019 prior to the maturity date includes the effect of our common stock related to the conversion spread of the Convertible Notes.

STOCK-BASED COMPENSATION

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Total 229,820 46,027 ( 60,040 ) — 215,807

At December 31, 2020, management estimates that the recipients will receive approximately 200 %, 191 %, and 200 % of the 2020, 2019, and 2018 target number of PSUs, respectively, at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics.

The 2017 - 2019 performance period grants vested and issued on March 15, 2020 at 199 % of the target number.

At December 31, 2021, management estimates that the recipients will receive approximately 200 % of the 2021, 2020, and 2019 target number of PSUs at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics.

We recognized $ 9.0 million, $ 9.2 million, and $ 4.8 million of total stock-based compensation expense related to PSUs for the years ended December 31, 2021, 2020 and 2019, respectively.

The 2018 - 2020 performance period PSUs vested and issued on March 15, 2021 at 200 % of the target number.

At December 31, 2021, we had unrecognized compensation cost of $ 12.1 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.9 years.

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As of December 31, 2021, the Credit Agreement’s carrying value approximates market value since it has a floating interest rate, which increases or decreases with market interest rates and our leverage ratio.

In order to determine the fair value of the Senior Notes, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar senior notes within the homebuilding industry (Level 2 measurement).

In order to determine the fair value of the 2029 Senior Notes and the 2026 Senior Notes, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar senior notes within the homebuilding industry (Level 2 measurement).

The following table below shows the level and measurement of liabilities at December 31, 2021 and 2020 (in thousands):

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Fair Value Hierarchy Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value

Senior Notes Level 2

2029 Senior Notes (1)

Level 2 $ 300,000 $ 299,302 $ — $ —

2026 Senior Notes (2)

$ — $ — $ 300,000 $ 340,388

(1) On June 28, 2021, we completed an offering of $ 300.0 million aggregate principal amount of the 2029 Senior Notes.

See Note 7 for more details regarding this offering.

(2) On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes.

See Note 7 for more details regarding the redemption.

RELATED PARTY TRANSACTIONS

Land Purchases from Affiliates

As of December 31, 2020, we have a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida from an affiliate of one of our directors for a total base purchase price of approximately $ 4.0 million.

The lots will be purchased in takedowns, subject to a maximum price escalation of 6 % per annum, and may provide for additional payments to the seller at the time of sale to the homebuyer.

We have a $ 0.2 million non-refundable deposit at December 31, 2020 related to this land purchase contract.

For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida from an affiliate of one of our directors for a total base purchase price of approximately $ 4.0 million.

The lots were purchased in takedowns, subject to a maximum price escalation of 6 % per annum, and provide for additional payments to the seller at the time of sale to the homebuyer.

In August 2019, we purchased our first takedown of 58 lots under the Pasco County contract for a base purchase price of approximately $ 2.1 million.

In April 2021, we purchased the remaining land in a takedown of 52 lots under the Pasco County contract for a base purchase price of approximately $ 1.9 million.

For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 25 finished lots in Burnet County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $ 2.5 million.

For the year ended December 31, 2020, we purchased in three separate transactions a total of 55 finished lots in Montgomery County and Travis County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $ 4.7 million.

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ROU assets, as included in other assets on the consolidated balance sheets, were $ 5.1 million and $ 4.9 million as of December 31, 2021 and 2020, respectively.

Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $ 5.3 million and $ 5.6 million as of December 31, 2020 and 2019, respectively.

Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $ 5.3 million as of December 31, 2021 and 2020.

Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, totaled $ 1.7 million, $ 1.6 million and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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Management does not believe that draws upon the letters of credit, surety bonds, or financial guarantees if any, will have a material effect on our consolidated financial position, results of operations, or cash flows.

Investment in Unconsolidated Entity

In July 2019, we entered into a real estate investment fund as a limited partner with a maximum $ 30.0 million commitment.

Investment in Unconsolidated Entities

In 2019, we became a limited partner in a real estate investment fund with a maximum $ 30.0 million commitment.

The term of the commitment is eight years and includes renewals of up to two additional years.

As of December 31, 2020 and 2019, we have a total investment of $ 3.9 million and $ 1.1 million, respectively, within other assets on the balance sheet.

Contributions into the unconsolidated entity are used by the entity to invest in certain real estate transactions.

Additionally, during 2021, we entered into a joint venture with a mortgage lender.

As of December 31, 2021 and 2020, we have a total of $ 5.6 million and $ 3.9 million, respectively, within other assets on the balance sheet relating to our investment in the real estate investment fund and the mortgage joint venture.

Contributions into these unconsolidated entities are used by the entities to invest in certain real estate transactions and to provide residential mortgage services, respectively.

SEGMENT INFORMATION

We operate one principal homebuilding business that is organized and reports by division.

We have seven operating segments (our Central, Midwest, Southeast, Mid-Atlantic, Northwest, West and Florida divisions) that we aggregate into five reportable segments at December 31, 2020:

We have seven operating segments (our Central, Midwest, Southeast, Mid-Atlantic, Northwest, West and Florida divisions) that we aggregate into five qualifying reportable segments at December 31, 2021:

our Central, Southeast, Northwest, West and Florida divisions.

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The Central division is our largest division and comprised approximately 41.1 %, 35.9 % and 39.4 % of total home sales revenues for the years ended December 31, 2021, 2020 and 2019, respectively.

In accordance with ASC Topic 280, Segment Reporting , operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance.

In accordance with ASC 280, Segment Reporting , operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance.

The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price per home closed.

The seven operating segments qualify as our five reportable segments.

In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply.

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( 21,150 ) ( 5,970 ) ( 7,213 )

Total net income (loss) before income taxes $ 367,849 $ 231,832 $ 199,098

Total net income before income taxes $ 542,775 $ 367,849 $ 231,832

(1) The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve and loss on extinguishment of debt.

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Total assets $ 2,351,865 $ 1,826,087

(1) As of December 31, 2020, the Corporate balance consists primarily of cash, prepaid insurance, ROU assets, prepaid expenses and income tax receivables related to the federal energy efficient homes tax credit.

As of December 31, 2019, the Corporate balance consists primarily of cash, prepaid insurance, ROU assets and prepaid expenses.

(1) The Corporate balance consists primarily of cash, prepaid insurance, ROU assets, prepaid expenses, investments in unconsolidated entities and income tax receivables related to the federal energy efficient homes tax credit .

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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Basic earnings per share (1)

3.99 4.75 4.10 4.61

Diluted earnings per share (1)

3.95 4.71 4.05 4.53

Quarter Second

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Basic earnings per share (1)

1.69 2.22 3.55 5.45

Diluted earnings per share (1)

1.67 2.21 3.52 5.34

(1) Quarterly and year-to-date computations of per share amounts are made independently.

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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-K

Item 8. Financial Statements and Supplementary Data