What changed in this filing

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Item 1A. Risk Factors

2022-02-17 compared with 2021-02-19 · 50 added, 51 removed, 229 unchanged (31% of the section changed)

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Risks Related to Our Business and Industry

Although the homebuilding industry generally experienced improved conditions in 2020, a deterioration in industry conditions or in broader economic conditions could have adverse effects on our business and results of operations.

A deterioration in homebuilding industry conditions or in broader economic conditions could have adverse effects on our business and results of operations.

The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business conditions that could adversely affect our results of operations, financial condition and cash flows.

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To the extent a third party is unwilling or unable to perform such obligations, our financial condition, results of operations and/or cash flows could be negatively impacted.

Increased competition levels in the homebuilding and mortgage lending industries could result in a reduction in our new contracts and homes delivered, along with decreases in the average sales prices of sold and delivered homes and/or decreased mortgage originations, which would have a negative impact on our results of operations.

Increased competition levels in the homebuilding and mortgage lending industries could result in a reduction in our new contracts and homes delivered, along with decreases in the average sales prices of homes delivered and/or decreased mortgage originations, which would have a negative impact on our results of operations.

The homebuilding industry is fragmented and highly competitive.

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To the extent that we are unable to timely purchase land or enter into new contracts for the purchase of land at reasonable prices, our revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

During 2020, we experienced increased land prices but were generally able to offset the increase through increased prices and lower construction costs.

Our land investment exposes us to significant risks, including potential impairment charges, that could negatively impact our profits if the market value of our inventory declines.

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There is often a significant lag time between when we acquire land for development and when we sell homes in neighborhoods we have planned, developed and constructed.

The value of undeveloped land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions.

The value of undeveloped land, lots and housing inventories can fluctuate significantly as a result of changing market conditions.

In addition, inventory carrying costs can be significant, and fluctuations in value can reduce profits.

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We cannot make any assurances that the measures we employ to manage inventory risks and costs will be successful.

Supply shortages and risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

Supply shortages and risks related to the demand for labor and building materials could increase costs and delay deliveries.

The residential construction industry experiences labor and material shortages and risks from time to time, including:

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To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, developed lots, building materials, and other resources, through higher sales prices, our gross margins from home sales and results of operations could be adversely affected.

Due to the strong housing demand in 2020, we experienced periodic disruptions in our supply chain, including the availability of skilled labor and the timely availability of certain finishing products such as cabinets and appliances, which have lengthened the production cycles in certain markets.

In 2020, we were able to manage these disruptions, but we cannot predict whether any widespread supply chain disruptions will occur in 2021 or the extent to which any such disruptions will affect our business in 2021.

Increased costs of lumber, framing, concrete, steel and other building materials increase our construction costs.

Although the cost of lumber increased during 2020, we were able to minimize the effect of the cost increases by increased prices and implementing other cost saving changes.

Any future increased costs would put downward pressures on our gross margin if we are unable to continue to increase prices or manage through other cost saving changes.

However, we are generally unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may occur before construction begins.

Due to current strong overall housing demand, we have experienced disruptions in our supply chain, including the availability and shortage of labor and certain building materials and finishing products, such as cabinets and appliances, which have lengthened the production cycles in certain markets and caused increased costs for labor and building materials.

In 2021, we were able to manage through these disruptions and cost increases by raising prices, together with cost management.

However, if labor and building material shortages, and cost increases continue, our gross margins and results of operations could be adversely affected if we are unable to continue to increase prices or manage through other cost saving changes.

We depend on the continued availability of and satisfactory performance of subcontracted labor for the construction of our homes and to provide related materials.

As noted above, we have experienced, and may continue to experience, skilled labor and material shortages in certain of our markets as supply adjusts to demand.

As noted above, we have experienced, and may continue to experience, labor and material shortages in certain of our markets.

The cost of labor may also be adversely affected by shortages of qualified subcontractors and construction personnel, changes in laws and regulations relating to union activity and changes in immigration laws and trends in labor migration.

We cannot provide any assurance that there will be a sufficient supply of materials or a sufficient supply of, or satisfactory performance by, these unaffiliated third-party subcontractors, which could have a material adverse effect on our business.

We cannot provide any assurance that there will be a sufficient supply of, or satisfactory performance by, these unaffiliated third-party subcontractors, which could have a material adverse effect on our business.

Tax law changes could make home ownership more expensive and/or less attractive.

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In a highly inflationary environment, we may not be able to raise home prices enough to keep pace with the increased costs of land and house construction, which could reduce our profit margins.

Given the inflation rates in 2021, we have experienced and may continue to experience in 2022, increases in the costs of land, materials and labor.

In addition, significant inflation is often accompanied by higher interest rates, which have a negative impact on demand for our homes, and would likely also increase our cost of capital.

Our limited geographic diversification could adversely affect us if the demand for new homes in our markets declines.

We have operations in Ohio, Indiana, Illinois, Michigan, Minnesota, North Carolina, Florida and Texas.

We have operations in Ohio, Indiana, Illinois, Michigan, Minnesota, North Carolina, Florida, Tennessee and Texas.

Our limited geographic diversification could adversely impact us if the demand for new homes or the level of homebuilding activity in our current markets declines, since there may not be a balancing opportunity in a stronger market in other geographic regions.

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Because of the high degree of judgment required in determining these liability reserves, our actual future liability could differ significantly from our reserves.

Given the inherent uncertainties, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our construction defect, product liability and warranty claims.

Given the inherent uncertainties, we cannot provide assurance that

our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our construction defect, product liability and warranty claims.

If the costs to resolve these claims exceed our estimates, our results of operations, financial condition and cash flows could be adversely affected.

We have received claims related to stucco installation from homeowners in certain of our communities in our Tampa and Orlando, Florida markets and have been named as a defendant in legal proceedings initiated by certain of such homeowners.

While we have estimated our overall future stucco repair costs, our review of the stucco-related issues in our Florida communities is ongoing.

Our estimate of our overall stucco repair costs is based on our judgment, various assumptions and internal data.

While we have estimated our overall future stucco repair costs, our estimate is based on our judgment, various assumptions and internal data.

Given the inherent uncertainties, we cannot provide assurance that the final costs to resolve these claims will not exceed our accrual and adversely affect our results of operations, financial condition and cash flows.

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The cost of complying with our warranty obligations may be significant if we are unable to recover the cost of repairs from subcontractors, materials suppliers and insurers.

We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with applicable laws, including laws involving things that are not within our control.

We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with applicable laws, including laws involving matters that are not within our control.

When we learn about potentially improper practices by subcontractors, we try to cause the subcontractors to discontinue them.

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These restrictions and/or our failure to comply with the terms of our indebtedness could have a material adverse effect on our results of operations, financial condition and ability to operate our business.

Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to a minimum consolidated tangible net worth requirement, a minimum interest coverage ratio or liquidity requirement, and a maximum leverage ratio.

Under the terms of the Credit Facility, we are required, among other things, to maintain compliance with various covenants, including financial covenants relating to a minimum consolidated tangible net worth, a minimum interest coverage ratio or liquidity, and a maximum leverage ratio.

Failure to comply with these covenants or any of the other restrictions of the Credit Facility, whether because of a decline in our operating performance or otherwise, could result in a default under the Credit Facility.

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This acceleration of our obligations under the 2030 Senior Notes and the 2028 Senior Notes could force us into bankruptcy or liquidation and we may be unable to repay those amounts without selling substantial assets, which might be at prices well below the long-term fair values and carrying values of the assets.

Our ability to comply with the foregoing restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

Our ability to

comply with the foregoing restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

Our indebtedness could adversely affect our financial condition, and we and our subsidiaries may incur additional indebtedness, which could increase the risks created by our indebtedness.

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If we are unable to renew or replace the warehousing facilities when they mature, the activities of our financial services segment could be impeded and our home sales and our homebuilding and financial services results of operations may be adversely affected.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets.

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There are a limited number of third-party purchasers of mortgage loans originated by our financial services operations.

The exit of third-party purchasers of mortgage loans from the business, reduced investor demand for mortgage loans and mortgage-backed securities in the secondary mortgage markets and increased investor yield requirements for those loans and securities may have an adverse impact on our results of operations, financial position and/or cash flows.

If our ability to resell mortgages to investors is impaired, we may be required to broker loans.

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We are subject to extensive government regulations, which could restrict our business and cause us to incur significant expense.

The homebuilding industry is subject to numerous local, state, and federal statutes, ordinances, rules, and regulations concerning building, zoning, sales, consumer protection, the environment, and similar matters.

The homebuilding industry is subject to numerous local, state, and federal statutes, ordinances, rules, and regulations concerning building, zoning, sales, consumer protection, and similar matters.

This regulation affects construction activities as well as sales activities, mortgage lending activities, land availability and other dealings with homebuyers.

These statutes, ordinances, rules, and regulations, and any failure to comply therewith, could give rise to additional liabilities or expenditures and have an adverse effect on our results of operations, financial condition or business.

We are also subject to various local, state, and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment, including the emission or discharge of materials into the environment, storm water and surface water management, soil, groundwater and wetlands protection, subsurface conditions and air quality protection and enhancement.

The environmental regulations applicable to each community in which we operate vary greatly depending on the location of the community site, the site’s environmental conditions and the present and former use of the site.

These statutes,

ordinances, rules and regulations may cause delays, may cause us to incur substantial compliance, remediation or other costs, and can prohibit or severely restrict development and homebuilding activity.

In addition, any failure to comply therewith could give rise to fines, penalties or other liabilities, obligations to remediate, permit revocations or other sanctions and have an adverse effect on our results of operations, financial condition or business.

Recently, there has been growing concern from advocacy groups, government agencies and the general public regarding the impact of climate change.

Transition risks, such as government restrictions, standards or regulations intended to reduce greenhouse gas emissions and potential climate change impacts, are emerging and may increase in the future in the form of additional restrictions or regulations on land development and home construction in certain areas.

Such restrictions and regulations could increase our operating and compliance costs and have an adverse effect on our results of operations, financial condition or business.

We must also obtain licenses, permits and approvals from various governmental authorities in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority.

Municipalities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps.

In some areas, municipalities may enact growth control initiatives, which restrict the number of building permits available in a given year.

Governmental authorities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps.

In some areas, governmental authorities may enact growth control initiatives, which restrict the number of building permits available in a given year.

In addition, we may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law.

If municipalities in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs, or limiting our ability to operate in those municipalities.

If governmental authorities in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs, or limiting our ability to operate in the applicable area.

We incur substantial costs related to compliance with legal and regulatory requirements.

Any increase in legal and regulatory requirements may cause us to incur substantial additional costs or, in some cases, cause us to determine that certain property is not feasible for development.

Government restrictions, standards, or regulations intended to reduce greenhouse gas emissions or potential climate change impacts are likely to result in restrictions on land development in certain areas and may increase energy, transportation, or raw material costs, which could reduce our gross margins and adversely affect our business.

Our results of operations, financial condition and cash flows could be adversely affected if pending or future legal claims against us are not resolved in our favor.

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Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

We have historically experienced noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels.

Although we are currently experiencing less seasonality than we have historically experienced as a result of limiting sales in nearly half of our communities and the supply chain and labor disruptions increasing cycle times, we have historically experienced seasonality and quarter-to-quarter variability in homebuilding activity levels.

In general, the number of homes delivered and associated home sales revenue have increased during the third and fourth quarters, compared with the first and second quarters.

We believe that this type of seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring and summer with deliveries scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets.

There can be no assurance that this

seasonality pattern will continue to exist in future reporting periods.

There can be no assurance that this seasonality pattern will continue to exist in future reporting periods.

In addition, as a result of such variability, our historical performance may not be a meaningful indicator of future results.

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In addition, our operations in the Northern Region can be impacted by severe storms, including tornadoes.

Also, the physical impacts of climate change may cause these occurrences to increase in frequency, severity and duration.

The occurrence of these or other natural disasters can cause delays in the completion of, or increase the cost of, developing one or more of our communities, and as a result could materially and adversely impact our results of operations.

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In addition, breaches of our information technology systems or data security systems, including cyber attacks, could result in the unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying and confidential information (including information we collect and retain in connection with our business about our homebuyers, business partners and employees), and require us to incur significant expense (that we may not be able to recover in whole or in part from our service providers or responsible parties, or their or our insurers) to address and remediate or otherwise resolve.

The unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying or confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings, could have a material and adverse effect on our financial position, results of operations and cash flows and harm our reputation.

In addition, the costs of maintaining adequate protection against such

threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or increasingly demanding government-mandated standards or obligations regarding information security and privacy, could be material to our consolidated financial statements in a particular period or over various periods.

The unintended and/or unauthorized public disclosure or the misappropriation of proprietary, personal identifying or confidential information may also lead to litigation or other proceedings against us by affected individuals and/or business partners and/or by regulators, and the outcome of such proceedings, which could include losses, penalties, fines, injunctions, expenses and charges recorded against our earnings, could have a material and adverse effect on our financial condition, results of operations and cash flows and harm our reputation.

In addition, the costs of maintaining adequate protection against such threats, based on considerations of their evolution, increasing sophistication, pervasiveness and frequency and/or increasingly

demanding government-mandated standards or obligations regarding information security and privacy, could be material to our consolidated financial statements in a particular period or over various periods.

We depend on the services of certain key employees, and the loss of their services could hurt our business.

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An epidemic, pandemic or similar public health issue, or fear of such an event, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a material adverse effect on our business, results of operations, financial condition and/or cash flows.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures.

On March 13, 2020, the United States declared a national emergency, and several states and municipalities have declared public health emergencies.

Numerous international, federal, state and local public health and governmental authorities have taken extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

In response, we have undertaken a number of actions to help ensure the health and safety of our employees, customers, and building partners and comply with health and safety standards required by governmental authorities.

While necessary and appropriate, these actions, together with the unprecedented uncertainty resulting from the COVID-19 pandemic and related factors, impacted our ability to operate our business in the ordinary course consistent with past practices and caused our sales pace to significantly decline, our cancellation rate to significantly increase and our home construction and deliveries in certain of our markets to be delayed commencing in the latter half of March 2020 and continuing through April 2020.

Conditions started to improve in May 2020 as state and local governments began to ease public health restrictions and we gradually resumed many of our normal operations and our sales and closings have rebounded significantly since May 2020.

However, the potential magnitude and duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 are uncertain, and we can provide no assurance that the positive trends we have experienced since May 2020 will continue.

In addition, we can provide no assurance that the COVID-19 public health effort will not be intensified to such an extent that we will not be able to conduct any business operations in certain of our markets or at all for an indefinite period, particularly in response to any resurgence in COVID-19 cases, whether due to the spread of variants of the virus or otherwise.

Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home, cause civil unrest, and/or precipitate a prolonged economic downturn, rise in unemployment and/or tempering of wage growth, any of which could lower demand for our homes and/or impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows, and/or access the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business;

increase the costs or decrease the supply of building materials or the availability of labor and subcontractors;

and/or result in us recognizing material charges in future periods for inventory impairments or land option contract abandonments, or both.

The unprecedented uncertainty surrounding COVID-19, due, in part, to rapidly changing governmental directives, public health challenges and progress, macroeconomic consequences and market reactions thereto also makes it more challenging for us to estimate the future performance of our business and develop strategies to generate growth and achieve our objectives.

Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we could experience, among other things, increases in our cancellation rate and decreases in our new contracts, homes delivered, revenues and profitability, as we experienced in the first several weeks of our second quarter of 2020.

Such impacts could be material to our business, results of operations, financial condition and cash flows in 2021 and subsequent reporting periods.

We could also be forced to reduce our average selling prices to generate demand or in response to actions taken by our

In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our markets, we could generate few or no new contracts and deliver few, if any, homes during the applicable period, which could be prolonged.

Also, if there are prolonged government restrictions on our business and customers and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business, comply with the covenants and other requirements under our Credit Facility, indentures governing our senior notes, mortgage financing arrangements, land contracts due to land sellers and other loans and/or service our outstanding debt.

Such a circumstance could, among other things, exhaust our available liquidity and ability to access additional liquidity sources and/or trigger an acceleration to pay a significant portion or all of our then-outstanding indebtedness, which we may be unable to do.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic.

Numerous international, federal, state and local governmental authorities took extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including quarantines, “stay-at-home” orders, social distancing guidelines and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

In response, we took a number of actions to help ensure the health and safety of our employees, customers and building partners and to comply with applicable health and safety requirements.

These actions, together with the uncertainty resulting from the pandemic, impacted our ability to operate in the ordinary course consistent with past practice and negatively impacted our business in the latter half of March 2020 and continuing through April 2020.

As state and local governments began to ease public health restrictions and economic activity resumed, we gradually resumed many of our normal operations.

This, combined with the strong demand for new homes, caused our sales and closings to improve significantly during the remainder of 2020, and they remained strong in 2021.

However, there is continuing uncertainty regarding the extent to which and how long the COVID-19 pandemic and the related governmental actions will impact the U.S.

economy, including the supply chain, the labor market, consumer confidence, capital markets, secondary mortgage markets, availability of mortgage loans and demand for homes.

The impact of the COVID-19 pandemic on our business will depend on future developments, including whether governmental authorities impose additional health and safety measures, the outbreak, duration and severity of new variants, the acceptance and effectiveness of vaccines, and the impact of the pandemic on our employees, customers, and building partners.

These developments are highly uncertain and outside of our control.

To the extent the COVID-19 pandemic has a significant adverse effect on the U.S.

economy, our business, results of operations, financial condition and/or cash flows could be materially adversely effected.

UNRESOLVED STAFF COMMENTS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors