LGI Homes, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries. Business Overview We are engaged in the design, construction and sale of new homes in the following markets: West Northwest Central Midwest Florida Southeast Mid-Atlantic Phoenix, AZ Seattle, WA Houston, TX Minneapolis, MN Tampa, FL Atlanta, GA Washington, D.C. Tucson, AZ Portland, OR Dallas Ft. Worth, TX Orlando, FL Charlotte, NC Norfolk, VA Albuquerque, NM Denver, CO San Antonio, TX Fort Myers, FL Raleigh, NC Richmond, VA Las Vegas, NV Austin, TX Jacksonville, FL Wilmington, NC Baltimore, MD Northern CA Oklahoma City, OK Fort Pierce, FL Winston-Salem, NC Southern CA Daytona Beach, FL Columbia, SC Sarasota, FL Greenville, SC Birmingham, AL Nashville, TN Our management team has been in the residential land development business since the mid-1990s. Since commencing home building operations in 2003, we have constructed and closed over 50,000 homes. Housing market conditions were generally favorable during the six months ended June 30, 2022, supported by a strong demand environment, limited inventory of new and existing homes for sale, strong household formations, low unemployment and historically attractive mortgage interest rates. However, during the second quarter of 2022, we experienced a rapid increase in mortgage interest rates resulting from the Federal Reserve’s actions to stem continued price inflation. As a result, demand for our homes decreased during the second quarter of 2022 as many potential homebuyers paused or reconsidered their purchase decisions. As these events occurred at the end of the second quarter of 2022, their potential impact is not fully reflected in our reported results as the majority of the contracts on the homes we closed included rate locks and were written prior to the rapid acceleration in mortgage interest rates. New orders weakened during the second quarter of 2022 in many of our markets and we experienced a higher than normal cancellation rate during the second quarter of 2022. We expect that mortgage interest rates will remain elevated until inflation subsides. Our strategy to combat these headwinds and drive continued sales is to increase our targeted advertising spend to connect with more potential homebuyers. We started executing on this strategy towards the end of the second quarter of 2022 and have seen favorable results in both the number of leads generated and new orders written. This gives us confidence that, despite the challenges of the market, there remains a strong pool of qualified buyers for our homes. We continue to sell homes later in the construction cycle to maximize profitability and provide a better customer experience. Additionally, during the second quarter of 2022, we slowed our pace of new home starts to match current levels of absorptions in all of our communities. During the three months ended June 30, 2022, we had 2,027 home closings, compared to 2,856 home closings during the three months ended June 30, 2021. During the six months ended June 30, 2022, we had 3,626 home closings, compared to 5,417 home closings during the six months ended June 30, 2021. The decline in home closings for both the three months and six months ended June 30, 2022 was attributable to the prior year’s strong comparable numbers and compounded by longer lead times relating to labor, materials and municipality activities that increased our construction and development cycle times and negatively impacted the timing of home closings. We expect continued cost inflation, building material shortages and longer municipality lead times will persist until demand for new homes normalizes and global supply chain constraints ease. At June 30, 2022, we had 92 active communities, including seven Terrata Homes communities. At June 30, 2021, we had 106 active communities, including two Terrata Homes communities. In June 2022, we experienced our first home closings in the state of Maryland and are now operating in 35 markets across 20 states. Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage 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 19 Table of Contents consumer confidence, can be significantly adversely affected by a variety of factors beyond our control. During the three months ended June 30, 2022, we continued to experience significant supply chain disruptions, stemming from COVID-19 and variants thereof (collectively, “COVID-19”), that extended construction and development cycles and delayed home closings and the opening of new communities. While we continue to carefully manage our supply chain to limit impacts to our business and customers, we believe these global shortages will continue to impact our operations as long as the dynamics surrounding the COVID-19 pandemic persist. We also believe that the desire for our single-family homes remains strong. For additional discussion regarding our operations and COVID-19, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Key Results Key financial results as of and for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, were as follows: • Home sales revenues decreased 8.6% to $723.1 million from $791.5 million. • Homes closed decreased 29.0% to 2,027 homes from 2,856 homes. • Average sales price per home closed increased 28.7% to $356,719 from $277,140. • Gross margin as a percentage of home sales revenues increased to 32.0% from 27.0%. • Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 33.1% from 28.5%. • Net income before income taxes increased 9.3% to $163.0 million from $149.1 million. • Net income increased 4.4% to $123.4 million from $118.1 million. • EBITDA (non-GAAP) as a percentage of home sales revenues increased to 23.4% from 20.2%. • Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 23.1% from 20.0%. For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “ —Non-GAAP Measures .” Key financial results as of and for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, were as follows: • Home sales revenues decreased 15.2% to $1.3 billion from $1.5 billion. • Homes closed decreased 33.1% to 3,626 homes from 5,417 homes. • Average sales price per home closed increased 26.6% to $350,005 from $276,438. • Gross margin as a percentage of home sales revenues increased to 30.7% from 27.0%. • Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 31.9% from 28.5%. • Net income before income taxes decreased 3.6% to $262.6 million from $272.4 million. • Net income decreased 7.2% to $202.1 million from $217.8 million. • EBITDA (non-GAAP) as a percentage of home sales revenues increased to 21.6% from 19.6%. • Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 21.3% from 19.5%. 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 .” We owned and controlled 89,984 lots at June 30, 2022 as compared to 93,270 lots at March 31, 2022 and 91,845 lots at December 31, 2021. 20 Table of Contents Results of Operations The following table sets forth our results of operations for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (dollars in thousands, except per share data and average home sales price) Statement of Income Data: Home sales revenues $ 723,069 $ 791,512 $ 1,269,119 $ 1,497,465 Expenses: Cost of sales 491,710 577,433 879,353 1,093,437 Selling expenses 43,269 44,796 77,667 87,579 General and administrative 29,084 23,276 57,373 47,999 Operating income 159,006 146,007 254,726 268,450 Loss on extinguishment of debt — 662 — 662 Other income, net (4,006) (3,776) (7,836) (4,609) Net income before income taxes 163,012 149,121 262,562 272,397 Income tax provision 39,636 30,987 60,500 54,605 Net income $ 123,376 $ 118,134 $ 202,062 $ 217,792 Basic earnings per share $ 5.24 $ 4.75 $ 8.53 $ 8.75 Diluted earnings per share $ 5.20 $ 4.71 $ 8.43 $ 8.66 Other Financial and Operating Data: Average community count 91.3 105.0 90.2 105.7 Community count at end of period 92 106 92 106 Home closings 2,027 2,856 3,626 5,417 Average sales price per home closed $ 356,719 $ 277,140 $ 350,005 $ 276,438 Gross margin (1) $ 231,359 $ 214,079 $ 389,766 $ 404,028 Gross margin % (2) 32.0 % 27.0 % 30.7 % 27.0 % Adjusted gross margin (3) $ 239,120 $ 225,967 $ 404,322 $ 427,401 Adjusted gross margin % (2)(3) 33.1 % 28.5 % 31.9 % 28.5 % EBITDA (4) $ 169,129 $ 159,812 $ 273,540 $ 294,049 EBITDA margin % (2)(4) 23.4 % 20.2 % 21.6 % 19.6 % Adjusted EBITDA (4) $ 167,149 $ 158,144 $ 270,012 $ 292,360 Adjusted EBITDA margin % (2)(4) 23.1 % 20.0 % 21.3 % 19.5 % (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 21 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. 22 Table of Contents Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 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 three months ended June 30, 2022 and 2021 were as follows (revenues in thousands): Three Months Ended June 30, 2022 As of June 30, 2022 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Community Count at End of Period Central $ 316,654 935 $ 338,667 31.0 10.1 32 Southeast 117,569 361 325,676 19.7 6.1 20 Northwest 70,792 133 532,271 8.3 5.3 8 West 123,956 301 411,814 12.7 7.9 12 Florida 94,098 297 316,828 19.6 5.1 20 Total $ 723,069 2,027 $ 356,719 91.3 7.4 92 Three Months Ended June 30, 2021 As of June 30, 2021 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Community Count at End of Period Central $ 347,963 1,348 $ 258,133 38.0 11.8 40 Southeast 159,714 632 252,712 25.7 8.2 25 Northwest 106,197 255 416,459 10.3 8.3 11 West 80,813 232 348,332 10.7 7.2 10 Florida 96,825 389 248,907 20.3 6.4 20 Total $ 791,512 2,856 $ 277,140 105.0 9.1 106 Home sales revenues for the three months ended June 30, 2022 were $723.1 million, a decrease of $68.4 million, or 8.6%, from $791.5 million for the three months ended June 30, 2021. The decrease in home sales revenues is primarily due to a 29.0% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The average sales price per home closed during the three months ended June 30, 2022 was $356,719, an increase of $79,579, or 28.7%, from the average sales price per home closed of $277,140 for the three months ended June 30, 2021. The increase in the average sales price per home closed in all reportable segments is primarily due to favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes. The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Our community count at June 30, 2022 decreased to 92 from 106 at June 30, 2021. The decrease in community count is due to the close out of or transition between certain active communities for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The overall decrease in absorption primarily relates to the normalization of demand, increased mortgage interest rates and increased cycle times stemming from pandemic related production disruptions. These disruptions have caused varying degrees of supply chain constraints in the markets we serve and have shifted the timing of when we put homes under contract with our customers. Within our home sales revenues for the three months ended June 30, 2022, we included $36.9 million in wholesale revenues as a result of 146 home closings, representing 7.2% of the 2,027 total homes closed during the three months ended June 30, 2022. Within our home sales revenues for the three months ended June 30, 2021, we included $94.7 million in wholesale revenues as a result of 430 home closings, representing 15.1% of the 2,856 total homes closed during the three months ended June 30, 2021. The decrease in home closings through our wholesale channel was primarily related to writing fewer wholesale contracts due to supply chain volatility that limited our ability to estimate input costs and the timing of home closings as well as a prioritization of retail sales. 23 Table of Contents Home sales revenues in our Central reportable segment decreased by $31.3 million, or 9.0%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 30.6% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Home sales revenues in our Southeast reportable segment decreased by $42.1 million, or 26.4%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 42.9% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Home sales revenues in our Northwest reportable segment decreased by $35.4 million, or 33.3%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 47.8% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Home sales revenues in our West reportable segment increased by $43.1 million, or 53.4%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 29.7% increase in the number of homes closed, an increase in the average sales price per home closed and an increase in the average community count at a higher absorption rate in this reportable segment. Home sales revenues in our Florida reportable segment decreased by $2.7 million, or 2.8%, during the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, primarily due to a 23.7% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales decreased for the three months ended June 30, 2022 to $491.7 million, a decrease of $85.7 million, or 14.8%, from $577.4 million for the three months ended June 30, 2021, primarily due to a 29.0% decrease in homes closed, offset by increased construction costs. Gross margin for the three months ended June 30, 2022 was $231.4 million, an increase of $17.3 million, or 8.1%, from $214.1 million for the three months ended June 30, 2021. Gross margin as a percentage of home sales revenues was 32.0% for the three months ended June 30, 2022 and 27.0% for the three months ended June 30, 2021. This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Selling Expenses. Selling expenses for the three months ended June 30, 2022 were $43.3 million, a decrease of $1.5 million, or 3.4%, from $44.8 million for the three months ended June 30, 2021. Sales commissions decreased to $29.6 million for the three months ended June 30, 2022 from $30.4 million for the three months ended June 30, 2021, primarily due to an 8.6% decrease in home sales revenues during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Selling expenses as a percentage of home sales revenues were 6.0% and 5.7% for the three months ended June 30, 2022 and 2021, respectively. The slight increase in selling expenses as a percentage of home sales revenues was driven primarily by third-party sales commissions during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. General and Administrative. General and administrative expenses for the three months ended June 30, 2022 were $29.1 million, an increase of $5.8 million, or 25.0%, from $23.3 million for the three months ended June 30, 2021. The increase in the amount of general and administrative expenses is primarily due to the timing of increased personnel and associated costs, as well as professional fees incurred during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. General and administrative expenses as a percentage of home sales revenues were 4.0% and 2.9% for the three months ended June 30, 2022 and 2021, respectively. The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to timing of increased personnel and associated costs incurred during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Loss on Extinguishment of Debt. There was no loss on extinguishment of debt for the three months ended June 30, 2022. Loss on extinguishment of debt for the three months ended June 30, 2021 was $0.7 million, due to the debt issuance costs previously capitalized that were associated with the 2021 Credit Agreement for the three months ended June 30, 2021. Other Income. Other income, net of other expenses was $4.0 million for the three months ended June 30, 2022, an increase of $0.2 million from $3.8 million for the three months ended June 30, 2021. Other income, net of other expenses, primarily reflects income associated with our investment in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations. Operating Income and Net Income before Income Taxes. Operating income for the three months ended June 30, 2022 was $159.0 million, an increase of $13.0 million, or 8.9%, from $146.0 million for the three months ended June 30, 2021. Net income before income taxes for the three months ended June 30, 2022 was $163.0 million, an increase of $13.9 million, or 9.3%, from $149.1 million for the three months ended June 30, 2021. All reportable segments contributed to net income before income taxes during the three months ended June 30, 2022 as follows: Central - $84.9 million or 52.1%; Southeast - $28.6 million or 17.6%; Northwest - $15.7 million or 9.6%; West - $19.2 million or 11.8%; and Florida - $15.8 million or 9.7%. The increases in operating income and net income before income taxes are primarily attributed to higher gross margins and higher 24 Table of Contents average sales price per home closed during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Income Taxes . Income tax provision for the three months ended June 30, 2022 was $39.6 million, an increase of $8.6 million, or 27.9%, from income tax provision of $31.0 million for the three months ended June 30, 2021. The increase in our effective tax rate to 24.3% from 20.8% for the three months ended June 30, 2021 results from an increase in the rate due to the expiration of the tax benefits relating to the federal energy efficient homes tax credits and an increase in the rate for the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended. Net Income . Net income for the three months ended June 30, 2022 was $123.4 million, an increase of $5.2 million, or 4.4%, from $118.1 million for the three months ended June 30, 2021. The increase in net income is primarily attributed to higher gross margins and higher average sales price per home closed recognized during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. 25 Table of Contents Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count and average monthly absorption rate by reportable segment for the six months ended June 30, 2022 and 2021 were as follows (revenues in thousands): Six Months Ended June 30, 2022 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Central $ 578,952 1,779 $ 325,437 30.5 9.7 Southeast 190,032 599 317,249 19.8 5.0 Northwest 173,666 334 519,958 9.3 6.0 West 179,539 443 405,280 11.3 6.5 Florida 146,930 471 311,953 19.3 4.1 Total $ 1,269,119 3,626 $ 350,005 90.2 6.7 Six Months Ended June 30, 2021 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Central $ 636,713 2,475 $ 257,258 37.6 11.0 Southeast 296,265 1,180 251,072 26.7 7.4 Northwest 224,388 551 407,238 10.5 8.7 West 161,961 481 336,717 10.7 7.5 Florida 178,138 730 244,025 20.2 6.0 Total $ 1,497,465 5,417 $ 276,438 105.7 8.5 Home sales revenues for the six months ended June 30, 2022 were $1.3 billion, a decrease of $0.2 billion, or 15.2%, from $1.5 billion for the six months ended June 30, 2021. The decrease in home sales revenues is primarily due to a 33.1% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The average sales price per home closed during the six months ended June 30, 2022 was $350,005, an increase of $73,567, or 26.6%, from the average sales price per home closed of $276,438 for the six months ended June 30, 2021. The increase in the average sales price per home closed in all reportable segments is primarily due to favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes. The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The overall decrease in absorption relates to the normalization of demand, increased mortgage interest rates and increased cycle times stemming from pandemic-related production disruptions. These disruptions have caused varying degrees of supply chain constraints in the markets we serve and have shifted the timing of when we put homes under contract with our customers. Within our home sales revenues for the six months ended June 30, 2022, we recorded $88.8 million in wholesale revenues as a result of 359 home closings, representing 9.9% of the 3,626 total homes closed during the six months ended June 30, 2022. Within our home sales revenues for the six months ended June 30, 2021, we recorded $157.1 million in wholesale revenues as a result of 713 home closings, representing 13.2% of the 5,417 total homes closed during the six months ended June 30, 2021. The decrease in home closings through our wholesale channel was primarily related to writing fewer wholesale contracts due to supply chain volatility that limited our ability to estimate input costs and the timing of home closings as well as a prioritization of retail sales. Home sales revenues in our Central reportable segment decreased by $57.8 million, or 9.1%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 28.1% decrease in the number of homes closed driven by a decrease in average community count at a lower absorption rate in this reportable segment, partially offset by 26 Table of Contents an increase in the average sales price per home closed. Home sales revenues in our Southeast reportable segment decreased by $106.2 million, or 35.9%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 49.2% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Home sales revenues in our Northwest reportable segment decreased by $50.7 million, or 22.6%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 39.4% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by a sharp increase in the average sales price per home closed. Home sales revenues in our West reportable segment increased by $17.6 million, or 10.9%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 20.4% increase in the average sales price per home closed, partially offset by a decrease in the number of homes closed and an increase in the average community count at a lower absorption rate in this reportable segment. Home sales revenues in our Florida reportable segment decreased by $31.2 million, or 17.5%, during the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, primarily due to a 35.5% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed. Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales decreased for the six months ended June 30, 2022 to $0.9 billion, a decrease of $0.2 billion, or 19.6%, from $1.1 billion for the six months ended June 30, 2021. This overall decrease is primarily due to a 33.1% decrease in homes closed, offset by increased construction costs. Gross margin for the six months ended June 30, 2022 was $389.8 million, a decrease of $14.3 million, or 3.5%, from $404.0 million for the six months ended June 30, 2021. Gross margin as a percentage of home sales revenues was 30.7% for the six months ended June 30, 2022 and 27.0% for the six months ended June 30, 2021. The increase in gross margin as a percentage of home sales revenues during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily due to raising prices higher than increases in input costs. Selling Expenses. Selling expenses for the six months ended June 30, 2022 were $77.7 million, a decrease of $9.9 million, or 11.3%, from $87.6 million for the six months ended June 30, 2021. Sales commissions decreased to $50.6 million for the six months ended June 30, 2022 from $56.7 million for the six months ended June 30, 2021, partially due to a 15.2% decrease in home sales revenues during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Selling expenses as a percentage of home sales revenues were 6.1% and 5.8% for the six months ended June 30, 2022 and 2021, respectively. The slight increase in selling expenses as a percentage of home sales revenues was driven primarily by third-party sales commissions during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. General and Administrative. General and administrative expenses for the six months ended June 30, 2022 were $57.4 million, an increase of $9.4 million, or 19.5%, from $48.0 million for the six months ended June 30, 2021. The increase in the amount of general and administrative expenses is primarily due to the timing of increased personnel and associated costs, as well as professional fees incurred during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. General and administrative expenses as a percentage of home sales revenues were 4.5% and 3.2% for the six months ended June 30, 2022 and 2021, respectively. The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to timing of increased personnel and associated costs incurred during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Loss on Extinguishment of Debt. There was no loss on extinguishment of debt for the six months ended June 30, 2022. Loss on extinguishment of debt for the six months ended June 30, 2021 was $0.7 million, due to the debt issuance costs previously capitalized that were associated with the 2021 Credit Agreement for the six months ended June 30, 2021. Other Income. Other income, net of other expenses was $7.8 million for the six months ended June 30, 2022, an increase of $3.2 million from $4.6 million for the six months ended June 30, 2021. The increase in other income primarily reflects income associated with our investment in unconsolidated entities and the gain realized from the sale of land not directly associated with our core homebuilding operations. Operating Income and Net Income before Income Taxes. Operating income for the six months ended June 30, 2022 was $254.7 million, a decrease of $13.7 million, or 5.1%, from $268.5 million for the six months ended June 30, 2021. Net income before income taxes for the six months ended June 30, 2022 was $262.6 million, a decrease of $9.8 million, or 3.6%, from $272.4 million for the six months ended June 30, 2021. The following reportable segments contributed to net income before income taxes during the six months ended June 30, 2022 as follows: Central - $142.6 million or 54.3%; Southeast - $38.8 million or 14.8%; Northwest - $43.3 million or 16.5%; West - $18.9 million or 7.2%; and Florida - $21.1 million or 8.1%. The decreases in operating income and net income before income taxes are primarily attributed to the decrease in home sales revenues, partially offset by higher average sales price per home closed at higher gross margins on a per home basis, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. 27 Table of Contents Income Taxes . Income tax provision for the six months ended June 30, 2022 was $60.5 million, an increase of $5.9 million, or 10.8%, from income tax provision of $54.6 million for the six months ended June 30, 2021. The increase in the amount of income tax provision is primarily due to the tax benefits relating to the federal energy efficient homes tax credits that expired in 2021. The increase in our effective tax rate to 23.1% from 20.0% results from an increase in the rate due to the expiration of the tax benefits relating to the federal energy efficient homes tax credits and an increase in the rate for the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, offset by a decrease in the rate for deductions in excess of compensation cost for share-based payments for the six months ended June 30, 2022. Net Income . Net income for the six months ended June 30, 2022 was $202.1 million, a decrease of $15.7 million, or 7.2%, from $217.8 million for the six months ended June 30, 2021. The decrease in net income is primarily attributed to overall lower homes closed, offset by higher average sales price per home closed at higher gross margins on a per home basis, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Non-GAAP Measures In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA. Adjusted Gross Margin 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): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Home sales revenues $ 723,069 $ 791,512 $ 1,269,119 $ 1,497,465 Cost of sales 491,710 577,433 879,353 1,093,437 Gross margin 231,359 214,079 389,766 404,028 Capitalized interest charged to cost of sales 5,735 10,442 10,248 21,115 Purchase accounting adjustments (1) 2,026 1,446 4,308 2,258 Adjusted gross margin $ 239,120 $ 225,967 $ 404,322 $ 427,401 Gross margin % (2) 32.0 % 27.0 % 30.7 % 27.0 % Adjusted gross margin % (2) 33.1 % 28.5 % 31.9 % 28.5 % (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. 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 28 Table of Contents 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. 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): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 123,376 $ 118,134 $ 202,062 $ 217,792 Income tax provision (benefit) 39,636 30,987 60,500 54,605 Depreciation and amortization 382 249 730 537 Capitalized interest charged to cost of sales 5,735 10,442 10,248 21,115 EBITDA 169,129 159,812 273,540 294,049 Purchase accounting adjustments (1) 2,026 1,446 4,308 2,258 Loss on extinguishment of debt — 662 — 662 Other income, net (4,006) (3,776) (7,836) (4,609) Adjusted EBITDA $ 167,149 $ 158,144 $ 270,012 $ 292,360 EBITDA margin % (2) 23.4 % 20.2 % 21.6 % 19.6 % Adjusted EBITDA margin % (2) 23.1 % 20.0 % 21.3 % 19.5 % (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. 29 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. During the first 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. In the first quarter of 2022, to mitigate continuing cost volatility, we further modified our traditional timing of when to enter into our sales contracts until later in the construction cycle to align with the dynamic pricing environment. Our net orders decreased in the first half of 2022 primarily due to the availability of finished lots, construction headwinds, and rising mortgage interest rates for our homebuyers. Additionally, our net orders decreased as a result of the timing of when we enter our sales contracts with our homebuyers. During the first half of 2022, the availability of finished lots were constrained. This constraint was brought on by the sustained demand and the rapid pace of rising costs for certain supplies and labor experienced in 2021. Throughout 2022, these cost constraints have started the process of normalization with the corresponding demand for home ownership. The number of homes in our backlog at June 30, 2022 decreased 73.6% compared to June 30, 2021. This decrease reflects the prior year’s strong comparable numbers, changes made to timing of sales contracts and available inventory in certain markets as compared to the first half of 2021. The increase in cancellation rates generally corresponds with the increase in mortgage interest rates for our homebuyers in the second quarter of 2022. We believe that, over time, our inventory levels and sales pace will return to our pre-pandemic levels as demand normalizes. As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands): Backlog Data Six Months Ended June 30, 2022 (4) 2021 (5) Net orders (1) 2,837 7,254 Cancellation rate (2) 20.8 % 14.8 % Ending backlog – homes (3) 1,266 4,801 Ending backlog – value (3) $ 445,120 $ 1,434,382 (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. 30 Table of Contents (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 June 30, 2022 , we had 412 units related to bulk sales agreements associated with our wholesale business. (5) As of June 30, 2021 , we had 940 units related to bulk sales agreements associated with our wholesale business. 31 Table of Contents Land Acquisition Policies and Development We had 92 and 101 active communities as of June 30, 2022 and December 31, 2021, respectively. The overall decrease in community count is seen as transitory, primarily due to the close out of active communities and to a lesser extent available finished lots in certain active markets. Generally, it takes us two to three years to turn raw or undeveloped land into an active community. Our lot inventory decreased to 89,984 owned or controlled lots as of June 30, 2022 from 91,845 owned or controlled lots as of December 31, 2021, primarily related to controlled lots that were delayed or terminated during the second quarter of 2022 to manage our overall inventory. The table below shows (i) home closings by reportable segment for the six months ended June 30, 2022 and (ii) our owned or controlled lots by reportable segment as of June 30, 2022. Six Months Ended June 30, 2022 As of June 30, 2022 Reportable Segment Home Closings Owned (1) Controlled Total Central 1,779 24,231 9,199 33,430 Southeast 599 16,591 5,186 21,777 Northwest 334 6,909 4,079 10,988 West 443 9,065 5,960 15,025 Florida 471 5,097 3,667 8,764 Total 3,626 61,893 28,091 89,984 (1) Of the 61,893 owned lots as of June 30, 2022, 49,595 were raw/under development lots and 12,298 were finished lots. Homes in Inventory When entering a new community, we build a sufficient number of move-in ready homes to meet our budgets. We base future home starts on home closings. As homes are closed, we start more homes to maintain our inventory. As of June 30, 2022, we had a total of 722 completed homes, including information centers, and 4,095 homes in progress. Raw Materials and Labor When constructing homes, we use various materials and components. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Typically, the raw materials and most of the components used in our business are readily available in the United States. In addition, the majority of our raw materials are supplied to us by our subcontractors, and are included in the price of our contract with such subcontractors. Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers. Substantially all of our construction work is done by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply markets to achieve the best prices possible. Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber. For the six months ended June 30, 2022, we have experienced delays and cost increases, to varying degrees, in our building materials and other construction costs. We could see additional cost pressures associated with lumber and other materials in future quarters. Generally, we have been able to increase the sales prices of our homes to absorb these increased costs. 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. 32 Table of Contents Liquidity and Capital Resources Overview As of June 30, 2022, we had $42.0 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 share 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 (as defined below) 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. As of the date of this Quarterly Report on Form 10-Q, 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, repurchase shares of our common stock, 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. Revolving Credit Facility On April 29, 2022, we entered into that certain Lender Addition and Acknowledgement Agreement and Second Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Second Amendment” and, as so amended, “the Credit Agreement”), which amended that certain Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2021 Credit Agreement”). The Credit Agreement contains revolving commitments of $1.1 billion, subject to a borrowing base primarily consisting of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company and its subsidiaries that guarantee the obligations under the 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, among others, 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 June 30, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.2 billion were outstanding, $26.9 million of letters of credit were outstanding and $203.7 million was available to borrow under the Credit Agreement. 33 Table of Contents For a further description of the Credit Agreement, please refer to Note 4, “Notes Payable” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Senior Notes Offering 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 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 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. The 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. 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 $284.6 million as of June 30, 2022. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and surety bonds are not generally released until all development and construction activities are completed. We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of June 30, 2022 will be drawn upon. Stock Repurchase Program In February 2022, our Board of Directors (the “Board”) approved a $200.0 million increase to our previously authorized stock repurchase program, pursuant to which we may purchase up to $550.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. During the six months ended June 30, 2022, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock. A total of 2,939,472 shares of our common stock has been repurchased since our stock repurchase program commenced. As of June 30, 2022, we may purchase up to $211.5 million of shares of our common stock under our stock repurchase program. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be modified, discontinued or suspended at any time. Cash Flows Operating Activities Net cash used in operating activities was $263.3 million for the six months ended June 30, 2022. 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 six months ended June 30, 2022 was primarily driven by cash outflow from the $547.6 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 partially offset by net income of $202.1 million, as well as the $19.4 million, $26.0 million, and $22.2 million increase in the net change in other assets, accounts payable, and accrued expenses and other liabilities, respectively. Net cash provided by operating activities was $139.9 million for the six months ended June 30, 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 six months ended June 30, 2021 was primarily driven by net income of $217.8 million, and included cash outflow from the $158.7 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and increases of $46.4 million and $43.9 million in the net change in accounts receivable and accounts payable, respectively. Investing Activities Net cash used in investing activities was $2.5 million for the six months ended June 30, 2022, primarily due to the purchase of property and equipment and additional investment in unconsolidated entities. 34 Table of Contents Net cash used in investing activities was $29.8 million for the six months ended June 30, 2021, primarily due to the payment for a business acquisition, additional investment in unconsolidated entities, and purchase of property and equipment. Financing Activities Net cash provided by financing activities was $257.2 million for the six months ended June 30, 2022, primarily driven by $371.2 million of borrowings under the 2021 Credit Agreement and the Credit Agreement, offset by the $95.1 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock. Net cash used in financing activities was $34.3 million for the six months ended June 30, 2021, primarily driven by $564.0 million of payments on our credit agreement then in effect and the 2021 Credit Agreement and by the $81.6 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by $617.7 million related to the proceeds received from the offering of the 2029 Senior Notes, and borrowings under our credit agreement then in effect and the 2021 Credit Agreement. 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 six months ended June 30, 2022, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue for the foreseeable future. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Material Cash Requirements As of June 30, 2022, there have been no material changes to our known contractual and other obligations appearing in the “Material Cash Requirements” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Critical Accounting Policies and Estimates 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. We believe that there have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2022 as compared to those disclosed in Management ’ s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Cautionary Statement about Forward-Looking Statements From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements: • adverse economic changes either nationally or in the markets in which we operate, including, among other things, potential impacts from political uncertainty, civil unrest, increases in unemployment, volatility of mortgage interest 35 Table of Contents rates, supply chain disruptions (including due to the conflict in Ukraine and the wide-ranging sanctions the United States and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials) and inflation and decreases in housing prices; • the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers (including associated supply chain disruptions), and the markets in which we operate, U.S. and world financial markets, mortgage availability, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition relating to COVID-19; • a slowdown in the homebuilding industry or changes in population growth rates in our markets; • volatility and uncertainty in the credit markets and broader financial markets; • disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets; • the cyclical and seasonal nature of our business; • our future operating results and financial condition; • our business operations; • changes in our business and investment strategy; • the success of our operations in recently opened new markets and our ability to expand into additional new markets; • our ability to successfully extend our business model to building homes with higher price points, developing larger communities and producing and selling multi-unit products, townhouses, wholesale products, and acreage home sites; • our ability to develop our projects successfully or within expected timeframes; • our ability to identify potential acquisition targets, close such acquisitions and realize the benefits of such acquisitions; • our ability to successfully integrate any acquisitions with our existing operations; • availability of land to acquire and our ability to acquire such land on favorable terms or at all; • availability, terms and deployment of capital and ability to meet our ongoing liquidity needs; • decisions of the Credit Agreement lender group; • decline in the market value of our land portfolio; • shortages of or increased prices for labor, land, or raw materials used in land development and housing construction, including due to changes in trade policies; • delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control; • uninsured losses in excess of insurance limits; • the cost and availability of insurance and surety bonds; • changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental laws and regulations; • the timing of receipt of regulatory approvals and the opening of projects; • the degree and nature of our competition; • increases in taxes or government fees; • our continued ability to qualify for additional federal energy efficient homes tax credits and the extension of the availability of such tax credits beyond December 31, 2021; • information system failures, cyber incidents or breaches in security; • negative publicity or poor relations with the residents of our projects; • existing and future litigation, arbitration or other claims; • availability of qualified personnel and third-party contractors and subcontractors; • our ability to retain our key personnel; • our leverage and future debt service obligations; • the impact on our business of any future government shutdown; • other risks and uncertainties inherent in our business; • other factors we discuss under the section entitled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ”; and • the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 36 Table of Contents You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.