LGI Homes, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Key Results Key financial results as of and for the year ended December 31, 2021, as compared to the year ended December 31, 2020, were as follows: • Home sales revenues increased 28.8% to $3.1 billion from $2.4 billion. • Homes closed increased 11.8% to 10,442 homes from 9,339 homes. 34 Table of Contents • Average sales price per home closed increased 15.2% to $292,104 from $253,553. • Gross margin as a percentage of home sales revenues increased to 26.8% from 25.5%. • Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 28.2% from 27.4%. • Net income before income taxes increased 47.6% to $542.8 million from $367.8 million. • Net income increased 32.6% to $429.6 million from $323.9 million. • EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.1% from 17.3%. • Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.4% from 17.3%. • Active communities at the end of 2021 decreased to 101 from 116. • Total owned and controlled lots increased 49.3% to 91,845 lots at December 31, 2021 from 61,504 lots at December 31, 2020. For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “— Non-GAAP Measures .” COVID-19 Impact and Strategy The outbreak of COVID-19 and its development into a global pandemic in March 2020 resulted in federal, state and local governments imposing varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, shelter-in-place orders and “stay-at-home” orders in certain of our markets. 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. While many of the restrictions and measures initially implemented during 2020 have since been softened or lifted in varying degrees in the United States, and the manufacture and distribution of COVID-19 vaccines during 2021 helped to initiate a recovery from the pandemic, recent increases in COVID-19 cases, the uncertainty regarding new variants of COVID-19 and the success of any vaccines in respect thereof may in the future cause a significant reduction in economic activity or prompt the re-imposition of certain restrictions and measures. Such measures have previously caused, and may in the future 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 emergence of more infectious variants of 35 Table of Contents COVID-19, the impact of government actions designed to prevent the spread of COVID-19 or the decrease in such actions and resulting increased business and social activities, the availability and timely distribution of, and willingness to accept, effective treatments and vaccines, vaccine hesitancy, 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. Additionally, during the year ended December 31, 2021 and the beginning of 2022, significant supply chain disruptions extended construction cycles across our markets. While we have carefully managed our supply chain to limit impacts to our business and customers, we believe these global shortages are directly related to COVID-19 and will continue to impact our operations as long as the pandemic persists. Although, 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. Current Homebuilding and Inventory Environment Despite the 10,442 home closings we delivered in 2021, representing an 11.8% increase over our 2020 home closings, numerous challenges, including impacts from the COVID-19 pandemic, supply chain issues, volatile cost increases for certain supplies, tight labor markets and a shortage of available finished lots, impacted operations and extended our cycle times. Our average home completion time was approximately 90 to 135 days during 2021 as compared to 80 to 105 days in 2020. In light of these factors, among others, during the second half of 2021, we elected to delay entering into sales contracts until vertical construction had begun and our costs for the home were readily determined. In recent years, it has become more difficult to acquire finished lots. As a result, more of the land we have acquired is raw land that will require significant development before home construction can begin. This shift in our land portfolio has extended the time period between when the land is purchased and when construction of homes can begin. During 2021, we experienced a decrease in our overall active community count driven by the accelerated pace of absorptions, the time lag between the closing of certain communities and opening of their replacements and the limited availability of finished lots in certain markets in 2021 as compared to 2020. We expect that many of these challenges will persist in 2022. Recent Developments 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. 36 Table of Contents Results of Operations The following table sets forth our results of operations for the years ended December 31, 2021, 2020 and 2019. Year Ended December 31, 2021 2020 2019 (dollars in thousands, except per share data and average home sales price) Statement of Income Data: Home sales revenues $ 3,050,149 $ 2,367,929 $ 1,838,154 Expenses: Cost of sales 2,232,115 1,764,832 1,401,675 Selling expenses 170,005 148,366 131,561 General and administrative 100,331 90,021 77,380 Operating income 547,698 364,710 227,538 Loss on extinguishment of debt 13,976 — 169 Other income, net (9,053) (3,139) (4,463) Net income before income taxes 542,775 367,849 231,832 Income tax provision 113,130 43,954 53,224 Net income $ 429,645 $ 323,895 $ 178,608 Basic earnings per share $ 17.46 $ 12.89 $ 7.70 Diluted earnings per share $ 17.25 $ 12.76 $ 7.02 Other Financial and Operating Data: Average community count 104.4 111.9 95.8 Community count at end of period 101 116 106 Home closings 10,442 9,339 7,690 Average sales price per home closed $ 292,104 $ 253,553 $ 239,032 Gross margin (1) $ 818,034 $ 603,097 $ 436,479 Gross margin % (2) 26.8 % 25.5 % 23.7 % Adjusted gross margin (3) $ 860,544 $ 648,350 $ 475,033 Adjusted gross margin % (2)(3) 28.2 % 27.4 % 25.8 % EBITDA (4) $ 581,475 $ 408,940 $ 267,705 EBITDA margin % (2)(4) 19.1 % 17.3 % 14.6 % Adjusted EBITDA (4) $ 591,362 $ 410,673 $ 266,735 Adjusted EBITDA margin % (2)(4) 19.4 % 17.3 % 14.5 % (1) Gross margin is home sales revenues less cost of sales. (2) Calculated as a percentage of home sales revenues. (3) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “ —Non-GAAP Measures ” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable. (4) EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our 37 Table of Contents 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. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see “ —Non-GAAP Measures ” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable. 38 Table of Contents Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Homes Sales. 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, 2021 and 2020 were as follows (revenues in thousands): Year Ended December 31, 2021 At December 31, 2021 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Community Count at End of Period Central $ 1,252,782 4,665 $ 268,549 36.5 10.7 35 Southeast 594,742 2,279 260,966 25.6 7.4 25 Northwest 510,497 1,166 437,819 11.1 8.8 11 West 351,219 995 352,984 11.4 7.3 11 Florida 340,910 1,337 254,981 19.8 5.6 19 Total $ 3,050,149 10,442 $ 292,104 104.4 8.3 101 Year Ended December 31, 2020 At December 31, 2020 Revenues Home Closings ASP Average Community Count Average Monthly 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 Home Sales Revenues . Home sales revenues for the year ended December 31, 2021 were $3.1 billion, an increase of $682.2 million, or 28.8%, from $2.4 billion for the year ended December 31, 2020. The increase in home sales revenues is primarily due to an 11.8% increase in homes closed and an increase in the average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020. We closed 10,442 homes during 2021, as compared to 9,339 homes closed during 2020. The average sales price per home closed during the year ended December 31, 2021 was $292,104, an increase of $38,551, or 15.2%, from the average sales price per home closed of $253,553 for the year ended December 31, 2020. This increase in the average sales price per home closed was primarily due to higher price points in certain markets, partially offset by additional wholesale home closings. The overall increase in home closings was primarily driven by strong demand in all reportable segments during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the year ended December 31, 2021 as compared to the year ended December 31, 2020. We increased our home sales revenues in our reportable segments other than our Central reportable segment by $279.8 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, representing a 1.6% increase in the number of homes closed in these reportable segments and increased average sales price per home closed on a consolidated basis during 2021 as compared to 2020. Home sales revenues in our Central reportable segment increased by $402.4 million, or 47.3%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in the number of homes closed at a higher average sales price per home closed and increased average community count at a higher absorption rate in this reportable segment. Home sales revenues in our Southeast reportable segment increased by $35.5 million, or 6.4%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased closings in certain markets in North Carolina and 39 Table of Contents South Carolina, partially offset by lower community count at December 31, 2021 as compared to December 31, 2020. Home sales revenues in our Northwest reportable segment increased by $121.0 million, or 31.1%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to a 16.6% increase in the number of homes closed in this reportable segment, as a result of increased demand. Home sales revenues in our West reportable segment increased by $65.1 million, or 22.7%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in this reportable segment, partially offset by lower average community count. Home sales revenues in our Florida reportable segment increased by $58.2 million, or 20.6%, largely due to an increase of 13.7% in the average sales price per home closed as a result of strong demand and complemented by increased average community count during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended December 31, 2021 to $2.2 billion, an increase of $467.3 million, or 26.5%, from $1.8 billion for the year ended December 31, 2020. This increase is primarily due to an 11.8% increase in homes closed, higher construction costs and product mix during 2021 as compared to 2020. Gross margin for the year ended December 31, 2021 was $818.0 million, an increase of $214.9 million, or 35.6%, from $603.1 million for the year ended December 31, 2020. Gross margin as a percentage of home sales revenues was 26.8% for the year ended December 31, 2021 and 25.5% for the year ended December 31, 2020. This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to raising prices higher than increases in input costs. Selling Expenses. Selling expenses for the year ended December 31, 2021 were $170.0 million, an increase of $21.6 million, or 14.6%, from $148.4 million for the year ended December 31, 2020. Sales commissions increased to $115.4 million for the year ended December 31, 2021 from $89.2 million for the year ended December 31, 2020 partially due to a 28.8% increase in home sales revenues during 2021 as compared to 2020. Selling expenses as a percentage of home sales revenues were 5.6% and 6.3% for the years ended December 31, 2021 and 2020, respectively. The decrease in selling expenses as a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent lower advertising expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020. General and Administrative. General and administrative expenses for the year ended December 31, 2021 were $100.3 million, an increase of $10.3 million, or 11.5%, from $90.0 million for the year ended December 31, 2020. The increase in the amount of general and administrative expenses is primarily due to increased overhead. General and administrative expenses as a percentage of home sales revenues were 3.3% and 3.8% for the years ended December 31, 2021 and 2020, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Loss on extinguishment of debt. Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 primarily due to the redemption premium associated with the optional redemption of our 6.875% Senior Notes due 2026 (the “2026 Senior Notes”), as well as debt issuance costs and discount previously capitalized that were associated with our 2026 Senior Notes and debt issuance costs previously capitalized that were associated with our 2020 Credit Agreement (as defined herein). There was no loss on extinguishment of debt for the year ended December 31, 2020. Other Income. Other income, net of other expenses was $9.1 million for the year ended December 31, 2021, an increase of $5.9 million from $3.1 million for the year ended December 31, 2020. The increase in other income primarily reflects the gain realized from the sale of lots not directly associated with our core homebuilding operations. Operating Inco me and Net Income before Income Taxes. Operating income for the year ended December 31, 2021 was $547.7 million, an increase of $183.0 million, or 50.2%, from $364.7 million for the year ended December 31, 2020. Net income before income taxes for the year ended December 31, 2021 was $542.8 million, an increase of $174.9 million, or 47.6%, from $367.8 million for the year ended December 31, 2020. Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2021: Central - $242.6 million or 44.7%; Southeast - $105.6 million or 19.5%; Northwest - $115.0 million or 21.2%; West - $50.8 million or 9.4%; and Florida - $49.9 million or 9.2%. The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Income Taxes . Income tax provision for the year ended December 31, 2021 was $113.1 million, an increase of $69.2 million, or 157.4%, from income tax provision of $44.0 million for the year ended December 31, 2020. The increase in the amount of income tax provision is primarily due to the retroactive tax benefits relating to the federal energy efficient homes tax credits we recognized during 2020 and the 47.6% increase in net income before taxes, which resulted in an increase in our effective tax rate for the year ended December 31, 2021 to 20.8% from 11.9% for the year ended December 31, 2020. 40 Table of Contents Net Income . Net income for the year ended December 31, 2021 was $429.6 million, an increase of $105.8 million, or 32.6%, from $323.9 million for the year ended December 31, 2020. The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized for the year ended December 31, 2020. 41 Table of Contents Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Homes Sales. 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 Monthly 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 Monthly 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. 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 $404.4 million during the year ended 42 Table of Contents 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, 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 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 $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 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 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 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. Net income before income taxes for the year ended December 31, 2020 was $367.8 million, an increase of $136.0 million, or 58.7%, from $231.8 million for the year ended December 31, 2019. Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2020: Central - $154.8 million or 42.1%; Southeast - $79.4 million or 21.6%; 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 43 Table of Contents 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 . 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 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. Non-GAAP Measures In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this 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. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands): Year Ended December 31, 2021 2020 2019 Home sales revenues $ 3,050,149 $ 2,367,929 $ 1,838,154 Cost of sales 2,232,115 1,764,832 1,401,675 Gross margin 818,034 603,097 436,479 Capitalized interest charged to cost of sales 37,546 40,381 35,230 Purchase accounting adjustments (1) 4,964 4,872 3,324 Adjusted gross margin $ 860,544 $ 648,350 $ 475,033 Gross margin % (2) 26.8 % 25.5 % 23.7 % Adjusted gross margin % (2) 28.2 % 27.4 % 25.8 % (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. (2) Calculated as a percentage of home sales revenues. EBITDA and Adjusted EBITDA EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting included in cost of sales. 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, 44 Table of Contents 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. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are: (i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land; (ii) they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; (iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements or improvements; (iv) they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; (v) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and (vi) other companies in our industry may calculate them differently than we do, limiting their usefulness as a comparative measure. Because of these limitations, our EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA and adjusted EBITDA along with other comparative tools, together with GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our EBITDA or adjusted EBITDA. EBITDA and adjusted EBITDA are not intended as alternatives to net income as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flows as a measure of liquidity. You should therefore not place undue reliance on our EBITDA or adjusted EBITDA calculated using these measures. The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands): Year Ended December 31, 2021 2020 2019 Net income $ 429,645 $ 323,895 $ 178,608 Income tax provision 113,130 43,954 53,224 Depreciation and amortization 1,154 710 643 Capitalized interest charged to cost of sales 37,546 40,381 35,230 EBITDA 581,475 408,940 267,705 Purchase accounting adjustments (1) 4,964 4,872 3,324 Loss on extinguishment of debt 13,976 — 169 Other income, net (9,053) (3,139) (4,463) Adjusted EBITDA $ 591,362 $ 410,673 $ 266,735 EBITDA margin % (2) 19.1 % 17.3 % 14.6 % Adjusted EBITDA margin % (2) 19.4 % 17.3 % 14.5 % (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. (2) Calculated as a percentage of home sales revenues. 45 Table of Contents 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, 2021 2020 2019 Numerator (in thousands): Net income (Numerator for basic and diluted earnings per share) $ 429,645 $ 323,895 $ 178,608 Retroactive federal energy efficient homes tax credits — 29,703 — Adjusted net income (Numerator for adjusted basic and diluted earnings per share) $ 429,645 $ 294,192 $ 178,608 Denominator: Basic weighted average shares outstanding 24,607,231 25,135,077 23,191,595 Effect of dilutive securities: Convertible Notes - treasury stock method — — 1,966,639 Stock-based compensation units 301,760 245,483 272,607 Diluted weighted average shares outstanding 24,908,991 25,380,560 25,430,841 Basic earnings per share $ 17.46 $ 12.89 $ 7.70 Diluted earnings per share $ 17.25 $ 12.76 $ 7.02 Adjusted basic earnings per share $ 17.46 $ 11.70 $ 7.70 Adjusted diluted earnings per share $ 17.25 $ 11.59 $ 7.02 46 Table of Contents Backlog 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 (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. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. 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 generally set to occur within the next six to twelve months . Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. 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 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. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract. Our net orders decreased in 2021 primarily due to the availability of finished lots brought on by sustained demand and the rapid pace of fluctuating rising costs for certain supplies and labor, experienced in 2021. During the second half of 2021, due to limited supply, we elected to not enter into sales contracts until construction on the home had begun and our costs for the home were readily determined. Similarly, wholesale orders decreased 57.8% to 481 units from 1,139 units for the year ended December 31, 2021, as compared to the year ended December 31, 2020. As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars in thousands): Backlog Data Year Ended December 31, 2021 (4) 2020 (5) 2019 (6) Net orders (1) 9,533 11,070 8,299 Cancellation rate (2) 19.3 % 21.6 % 20.6 % Ending backlog - homes (3) 2,055 2,964 1,233 Ending backlog - value (3) $ 659,234 $ 775,468 $ 290,438 (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. (3) Ending backlog consists of retail 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. (4) As of December 31, 2021, we had 481 units related to bulk sales agreements associated with our wholesale business. (5) As of December 31, 2020, we had 1,139 units related to bulk sales agreements associated with our wholesale business. (6) As of December 31, 2019, we had 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. 47 Table of Contents Land Acquisition Policies and Development See discussion included in “ Business—Land Acquisition Policies and Development .” Homes in Inventory See discussion included in “ Business—Homes in Inventory .” Raw Materials and Labor See discussion included in “ Business—Raw Materials and Labor .” Seasonality In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in 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. We expect this seasonal pattern to continue in the long term. Liquidity and Capital Resources Overview As of December 31, 2021, we had $50.5 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings. Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase shares of our common stock. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred. Short-term Liquidity and Capital Resources We generally rely on our ability to finance our operations by generating operating cash flows and borrowing under the Credit Agreement to adequately fund our short-term working capital obligations and to purchase land and other assets, develop lots and homes and repurchase shares of our common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We also rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects. 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. Long-term Liquidity and Capital Resources We believe that our long-term principal uses of liquidity and capital resources will be inventory related purchases concerning land, lot development, other capital expenditures, and principal and interest payments on our debt obligations maturing in 2025 and 2029. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available to borrow under the Credit Agreement or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available when needed or on terms that we find attractive. To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs. 48 Table of Contents Material Cash Requirements The following is a summary of our material cash requirements from known contractual and other obligations as of December 31, 2021 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Payments due by period (in thousands) Total < 1 year 1 - 3 years 3 - 5 yrs More than 5 years Borrowings: Credit Agreement (a) $ 517,439 — — $ 517,439 — Senior Notes (b) 300,000 — — — 300,000 Interest and fees (c) 129,319 24,453 48,906 25,954 30,006 Operating Leases 6,136 1,423 2,298 1,411 1,004 Total $ 952,894 $ 25,876 $ 51,204 $ 544,804 $ 331,010 (a) Represents borrowings under the Credit Agreement, which matures on April 28, 2025. Interest calculated using the effective rate as of December 31, 2021. 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. (b) Represents $300.0 million aggregate principal amount of our 4.000% 2029 Senior Notes. The 2029 Senior Notes mature on July 15, 2029. 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. (c) 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, 2021 was LIBOR plus 1.45%. Fees under the Credit Agreement are approximately $0.1 million per year. 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. In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development entitlements or the completion of development activities and the delivery of finished lots. We also utilize contracts with land sellers as a method of acquiring lots and land in staged takedowns, which helps us manage the financial and market risk associated with land holdings and minimize the use of funds from our corporate financing sources. Such contracts generally require a non-refundable deposit for the right to acquire land or lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller. In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract. As of December 31, 2021, we had $37.5 million of cash deposits pertaining to land purchase contracts for 36,978 lots with an aggregate purchase price of $921.3 million. Approximately $19.3 million of the cash deposits as of December 31, 2021 are secured by third-party guarantees or indemnity mortgages on the related property. Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing conditions, and local market dynamics. Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets. Revolving Credit Facility 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 49 Table of Contents “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. The Credit Agreement matures on April 28, 2025. 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 of at least $0.5 million. The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”), may not exceed the borrowing base under the 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, 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. At December 31, 2021, LIBOR was 0.10%; however, the Credit Agreement has a 0.50% LIBOR floor. The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $850.0 million plus 75% of the net proceeds of all equity issuances after December 31, 2020 plus 50.0% of the amount of our positive net income in each fiscal quarter ending after March 31, 2021, (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, 2021, we were in compliance with all of the covenants contained in the Credit Agreement. In July 2017, 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 certain LIBOR tenors to June 30, 2023 for legacy contracts only. The Credit Agreement, which, at the present time, has a term that extends to April 28, 2025, provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate. However, we have not yet pursued any technical amendment or other contractual alternative to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate on the Credit Agreement. Senior Notes Offerings On June 28, 2021, we issued $300.0 million aggregate principal amount of 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 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. 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. 50 Table of Contents Letters of Credit, Surety Bonds and Financial Guarantees We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts, development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $206.8 million as of December 31, 2021. 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, 2021 will be drawn upon. Stock Repurchase Program In November 2018, we announced that 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. 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. 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. Cash Flows Operating Activities Net cash provided by operating activities was $21.7 million during the year ended December 31, 2021. 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, 2021 was primarily driven by net income of $429.6 million, and included cash outflows from the $463.6 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 and a $58.0 million decrease in the net change in accounts receivable. 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. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash used in operating activities during the year ended December 31, 2019 was primarily driven by net income of $178.6 million, and included cash outlays for the $266.7 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity, offset by changes in non-inventory balances of $46.1 million. Investing Activities Net cash used in investing activities was $70.4 million during the year ended December 31, 2021, primarily due to the business acquisitions of certain real estate assets owned by KenRoe Inc. and its affiliated entities, including R Home LLC and Paxmar Land Development, and the real estate assets of Buffington Homebuilding Group, Ltd. in 2021. 51 Table of Contents Net cash used in investing activities was $5.6 million and $1.8 million during the years ended December 31, 2020 and 2019, respectively, which reflects the purchase of property and equipment and investment in unconsolidated entity. Financing Activities Net cash provided by financing activities during the year ended December 31, 2021 was $63.3 million, primarily driven by borrowings of $1.2 billion under the Credit Agreement, offset by $969.0 million of payments associated with the 2026 Senior Notes and under the 2020 Credit Agreement and the Credit Agreement and by the $193.8 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock. 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 2020 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 2020 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 2020 Credit Agreement, offset by the principal payment of $70.0 million on the Convertible Notes upon their maturity. Inflation Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. During the year ended December 31, 2021, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue throughout 2022. Generally, we have been able to increase the sales prices of our homes to absorb such increased costs. See “Industry and Economic Risks—Inflation could adversely affect our business and financial results” in Item 1A. Risk Factors in Part I of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates, judgments and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our estimates, judgments and assumptions on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board. Discussed below are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant judgment in their application. Home Sales Revenue Recognition We recognize home sales revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the following five-step process: • Identify the contract(s) with a customer • Identify the performance obligations • Determine the transaction price • Allocate the transaction price • Recognize revenue when the performance obligations are met Our contracts with customers include a single performance obligation to transfer a completed home to the customer. 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. 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. Home sales proceeds are generally received from the title company within a few business days after closing. Little to no estimation is involved in recognizing such revenues. Real Estate Inventory and Cost of Home Sales Inventory consists of land, land under development, finished lots, information centers, homes in progress and completed homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value. 52 Table of Contents Pre-acquisition costs, land, development and other project costs, including interest and property taxes, incurred during development and home construction, and net of expected reimbursements of development costs, are capitalized to real estate inventory. Pre-acquisition costs, land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate, 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. We use judgements and assumptions to recognize the appropriate amount of cost of sales by estimating the total land development costs. We use estimates which are affected by changes to the land development project’s schedule; the cost of labor, materials, and subcontractors; and potential cost reimbursements from various municipalities. Changes to estimated total remaining development costs subsequent to initial home closings in a community are allocated to the remaining unsold homes in the community on a prospective basis. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method and are capitalized as they are incurred. Capitalized interest, property taxes, and other carrying costs are generally capitalized to real estate inventory from the point development begins to the point construction is completed. Costs associated with homes closed are charged to cost of sales simultaneously with revenue recognition. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of land development and home construction costs. Impairment of Real Estate Inventories 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. 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 experienced limited circumstances during 2021, 2020 or 2019 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. For individual communities with indicators of impairment, we perform additional analysis to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the asset, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model; 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 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 and whether the property was purchased as raw land or finished lots. We are currently experiencing a shift towards more lots being acquired as raw land as compared to finished lots. As a result of this shift within our inventory and the time to develop raw land to finished lots, a longer life cycle of a community is expected, to range from seven to nine years. Sustained changes in the life cycle of a community, which is an indicator used for impairment, may negatively impact our results of operations. Impairment of Land and Land Under Development For raw land, land under development and completed lots that our management anticipates will be utilized for future homebuilding activities or to be sold as finished lots to individuals, the recoverability of assets is measured by comparing the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets based on home or lot sales, consistent with the evaluation of operating communities discussed above. As of December 31, 2021, we had not identified any raw land, land under development or completed lots that management intends to market for sale in bulk to a third-party. Pre-acquisition Costs and Controlled Lots Not Owned We enter into land purchase agreements in the ordinary course of business in order to secure land for the construction of homes in the future. Pursuant to these agreements, we typically provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. We do not have title to the property and our obligations with respect to the contracts are generally limited to the forfeiture of the related nonrefundable cash deposits. 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 general and 53 Table of Contents administrative expense. Assessments are made on each agreement based on criteria including, but not limited to, market absorption, historical and current average sales price per home, timing of purchase and size of land parcel. We terminated $2.4 million, $2.1 million and $1.5 million of nonrefundable pre-acquisition costs or controlled lots deposits for the years ended December 31, 2021, 2020 and 2019, respectively. We regularly review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis. Warranty Reserves We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements. Estimated future direct warranty costs are assessed monthly on a consistent basis as part of our policy and accrued and charged to cost of sales in connection with our home sales. The primary assumption to record amounts accrued for our warranty liability is based upon a trailing 120 month period of historical warranty cost experience on a per house basis established based on (i) trends in historical warranty payment levels, (ii) the historical range of amounts paid per house, (iii) any warranty expenditures not considered to be normal and recurring, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our expansion. Our analysis also considers improvements in quality control and construction techniques expected to impact future warranty expenditures and the expertise of our personnel. 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 increased our warranty reserve by $2.5 million, $1.9 million and $0.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Business Acquisitions We account for certain homebuilding asset purchases as business combinations using the acquisition method of accounting and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with excess recorded as goodwill. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair value of the acquired assets. We determine the estimated fair values of the real estate inventory with the assistance of appraisals performed by independent third-party specialists and estimates by management. Assumptions utilized in our estimates of the fair value of the assets acquired may include market comparisons, gross margin comparisons, future development costs and the timing of the completion of development activities, absorption rates, and mix of products sold in each community. Stock-based Compensation We account for both non-performance and performance based compensation. Our compensation costs for non-performance-based restricted stock awards are measured using the closing price of our common stock on the date of grant and are expensed on a straight-line basis over the requisite service period of the award. Compensation costs for performance-based restricted stock awards also contain a market condition. These costs are measured using the derived grant date fair value, based on a third party valuation analysis and an assessment of probability of attainment of the performance target based on assumptions that factor in historical data and volatility. Once the performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, based on estimates to recognize compensation expense on a straight-line basis over the award’s requisite service period. Taxes We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, changes in tax rate are recognized in the year of enactment. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We compute our provision for income taxes based on the statutory tax rates. Judgment is required in evaluating our tax positions and determining our annual tax provision. 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. 54 Table of Contents