What changed in this filing

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Item 1. Financial Statements

2020-07-27 compared with 2020-05-01 · 110 added, 110 removed, 587 unchanged (27% of the section changed)

3 unchanged sentences

(in thousands, except share amounts)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Cash and cash equivalents $ 484,622 $ 319,466

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Authorized 10,000,000 shares;

none issued and outstanding at March 31, 2020 and December 31, 2019

none issued and outstanding at June 30, 2020 and December 31, 2019

Common stock, par value $ 0.01 .

Authorized 125,000,000 shares;

37,597,457 and 38,199,111 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

37,603,517 and 38,199,111 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 454,138 505,352

6 unchanged sentences

(in thousands, except per share amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Homebuilding:

6 unchanged sentences

Home closing gross profit 220,696 159,118 399,056 275,580

Land closing gross profit 383 366

Land closing gross loss ( 1,448 ) ( 1,742 ) ( 1,065 ) ( 1,376 )

Total closing gross profit 219,248 157,376 397,991 274,204

3 unchanged sentences

Earnings from financial services unconsolidated entities and other, net

1,069 3,591 1,730 6,569

Financial services profit 3,789 6,031 6,627 10,733

16 unchanged sentences

(in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

7 unchanged sentences

Changes in assets and liabilities:

Increase in real estate ( 45,207 ) ( 1,753 )

(Increase)/decrease in deposits on real estate under option or contract ( 3,266 ) 6,583

Decrease in real estate 9,655 5,439

Decrease in deposits on real estate under option or contract 2,225 5,096

Decrease/(increase) in other receivables, prepaids and other assets 3,469 ( 28 )

Decrease in accounts payable and accrued liabilities ( 1,956 ) ( 12,211 )

Increase in home sale deposits 1,856 535

Increase/(decrease) in accounts payable and accrued liabilities 34,772 ( 6,439 )

(Decrease)/increase in home sale deposits ( 999 ) 3,613

Net cash provided by operating activities 237,445 113,349

8 unchanged sentences

Cash flows from financing activities:

Proceeds from Credit Facility, net 500,000 —

Repayment of loans payable and other borrowings ( 2,389 ) ( 2,629 )

Repurchase of shares ( 60,813 ) ( 8,957 )

Net cash provided by/(used in) financing activities 438,178 ( 9,945 )

Net cash used in financing activities ( 63,202 ) ( 11,586 )

Net increase in cash and cash equivalents 165,156 95,961

22 unchanged sentences

In limited cases, we also offer luxury homes under the brand name of Monterey Homes that are currently in close-out stages.

At March 31, 2020, we were actively selling homes in 241 communities, with base prices ranging from approximately $ 195,000 to $ 1,286,000 .

At June 30, 2020, we were actively selling homes in 237 communities, with base prices ranging from approximately $ 183,000 to $ 1,300,000 .

Basis of Presentation .

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Liquid investments with an initial maturity of three months or less are classified as cash equivalents.

Amounts in transit from title companies or closing agents for home closings of approximately $ 43.0 million and $ 54.5 million are included in cash and cash equivalents at March 31, 2020 and December 31, 2019, respectively.

Amounts in transit from title companies or closing agents for home closings of approximately $ 68.4 million and $ 54.5 million are included in cash and cash equivalents at June 30, 2020 and December 31, 2019, respectively.

Real estate is stated at cost unless the asset is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”) .

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It is possible that actual results could differ from budgeted amounts for various reasons, including construction and weather delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other

unanticipated issues encountered during construction and development and other factors beyond our control.

unanticipated issues or delays encountered during construction and development and other factors beyond our control.

To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.

12 unchanged sentences

Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of the non-refundable deposits and any ancillary capitalized costs.

Our Deposits on real estate under option or contract were $ 54.2 million and $ 50.9 million as of March 31, 2020 and December 31, 2019, respectively.

Our Deposits on real estate under option or contract were $ 47.8 million and $ 50.9 million as of June 30, 2020 and December 31, 2019, respectively.

In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test.

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We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable.

See Note 9 for additional information on our goodwill balance.

See Note 9 for additional information on our goodwill assets.

We lease certain office space and equipment for use in our operations.

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Leases that meet the criteria of ASC 842 are recorded on our consolidated balance sheet as right-of-use ("ROU") assets and lease liabilities.

ROU assets are classified within Prepaids, other assets and goodwill on our consolidated balance sheet, while ROU liabilities are classified within Accrued liabilities on our consolidated balance sheet.

ROU assets are classified within Prepaids, other assets and goodwill on our consolidated balance sheet, while lease liabilities are classified within Accrued liabilities on our consolidated balance sheet.

The table below outlines our ROU assets and lease liabilities (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

ROU assets $ 23,936 $ 26,332

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In the normal course of business, we may acquire lots from various development entities pursuant to option and purchase agreements.

The purchase price generally approximates the market price

at the date the contract is executed (with possible future escalators).

The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators).

See Note 3 for additional information on these off-balance sheet arrangements.

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The table below outlines our surety bond and letter of credit obligations (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Outstanding Estimated work

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Accrued Liabilities .

Accrued liabilities at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):

March 31, 2020 December 31, 2019

Accrued liabilities at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):

June 30, 2020 December 31, 2019

Accruals related to real estate development and construction activities $ 78,210 $ 74,448

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We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available.

Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three months ended March 31, 2020 or 2019.

Included in the warranty reserve balances at March 31, 2020 and December 31, 2019 reflected in the table below are case-specific reserves for a warranty matter related to alleged stucco defects in Florida and water drainage issues in a single community in Florida.

Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three or six months ended June 30, 2020 or 2019.

Included in the warranty reserve balances at June 30, 2020 and December 31, 2019 reflected in the table below are case-specific reserves for a warranty matter related to alleged stucco defects in Florida and water drainage issues in a single community in Florida.

See Note 15 in the accompanying unaudited financial statements for additional information regarding these case-specific reserves.

A summary of changes in our warranty reserves follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Balance, beginning of period $ 22,090 $ 23,213 $ 22,015 $ 24,552

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• Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

Revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

Home closing and land sale revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material.

Revenue from financial services includes estimated insurance policy renewal commissions.

Our performance obligations are satisfied upon issuance of the initial policy with a third party broker, accordingly, related contract assets for these estimated future renewal commissions are included in Prepaids, other assets and goodwill totaling $ 0.5 million at June 30, 2020, with no such assets at December 31, 2019.

Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

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Real estate consists of the following (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Homes under contract under construction (1)

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A summary of our capitalized interest is as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Capitalized interest, beginning of period $ 78,162 $ 89,414 $ 82,014 $ 88,454

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Some of our option deposits may be refundable to us if certain contractual conditions are not performed by the party selling the lots.

The table below presents a summary of our lots under option at March 31, 2020 (dollars in thousands):

The table below presents a summary of our lots under option at June 30, 2020 (dollars in thousands):

Projected Number

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(3) Except for our specific performance contracts recorded on our balance sheet as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.

(4) Amount is reflected on our unaudited consolidated balance sheet in Deposits on real estate under option or contract as of March 31, 2020.

(4) Amount is reflected on our unaudited consolidated balance sheet in Deposits on real estate under option or contract as of June 30, 2020.

Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement.

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Based on the structure of each joint venture, it may or may not be consolidated into our results.

As of March 31, 2020, we had one active equity-method land venture with limited operations.

As of March 31, 2020, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers.

Our investment in this mortgage joint venture as of March 31, 2020 and December 31, 2019 was $ 0.5 million and $ 0.7 million, respectively.

As of June 30, 2020, we had one active equity-method land venture with limited operations.

As of June 30, 2020, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers.

Our investment in this mortgage joint venture as of June 30, 2020 and December 31, 2019 was $ 0.4 million and $ 0.7 million, respectively.

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

$ 8,842 $ 6,329

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Total liabilities and equity $ 18,407 $ 17,365

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Revenue $ 10,550 $ 10,846 $ 17,273 $ 19,844

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Loans payable and other borrowings consist of the following (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Other borrowings, real estate notes payable (1)

$ 20,889 $ 22,876

$ 780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.99 % at March 31, 2020) plus 1.375 % or Prime ( 3.25 % at March 31, 2020) plus 0.375 %

$ 780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.16 % at June 30, 2020) plus 1.375 % or Prime ( 3.25 % at June 30, 2020) plus 0.375 %

Total $ 20,889 $ 22,876

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Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base.

proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60 %.

The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $ 1.1 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60 %.

In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months.

We were in compliance with all Credit Facility covenants as of March 31, 2020.

We had $ 500.0 million outstanding borrowings under the Credit Facility as of March 31, 2020 and $ 0 at December 31, 2019.

During the three months ended March 31, 2020 we borrowed $ 500.0 million and had no repayments.

There were no borrowings or repayments in the same three month period of 2019.

As of March 31, 2020, we had outstanding letters of credit issued under the Credit Facility totaling $ 68.6 million, leaving $ 211.4 million available under the Credit Facility to be drawn.

We were in compliance with all Credit Facility covenants as of June 30, 2020.

We had no outstanding borrowings under the Credit Facility as of June 30, 2020 and December 31, 2019.

During the second quarter of 2020 we repaid the entire $ 500.0 million outstanding balance on our Credit Facility, and had no additional borrowings during the three months ended June 30, 2020.

There were no borrowings or repayments in the second quarter of 2019.

As of June 30, 2020, we had outstanding letters of credit issued under the Credit Facility totaling $ 70.5 million, leaving $ 709.5 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR NOTES, NET

Senior notes, net consist of the following (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

7.00 % senior notes due 2022

1 unchanged sentence

6.00 % senior notes due 2025.

At March 31, 2020 and December 31, 2019 there was approximately $ 4,227 and $ 4,432 in net unamortized premium, respectively.

At June 30, 2020 and December 31, 2019 there was approximately $ 4,023 and $ 4,432 in net unamortized premium, respectively.

404,023 404,432

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The indentures for all of our senior notes contain covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers.

We believe we are in compliance with all such covenants as of March 31, 2020.

We believe we are in compliance with all such covenants as of June 30, 2020.

Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation.

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The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (level 2 inputs as per the discussion above) and is as follows (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Principal Estimated Fair

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$ 300,000 $ 308,490 $ 300,000 $ 319,500

One of the effects of the COVID-19 pandemic has been unstable financial markets, conditions typically associated with an economic downturn.

The fluctuation of the fair value in our fixed rate debt from December 31, 2019 through March 31, 2020 is indicative of this volatility.

This instability and concerns about liquidity and financial stability in the high-yield market resulted in a temporary decline in the fair value of our Senior Notes.

The financial markets have begun to return to more normalized levels subsequent to March 31, 2020.

Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

1 unchanged sentence

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Basic weighted average number of shares outstanding 37,599 38,266 37,842 38,136

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In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

In light of recent economic events resulting from the COVID-19 pandemic, we evaluated our goodwill balance as of March 31, 2020 and determined that there are no impairment indicators at this time.

However, as this is a rapidly changing environment, we will continue to monitor and review for goodwill impairment indicators on an ongoing, more frequent basis as required by ASC 350.

A summary of the carrying amount of goodwill follows (in thousands):

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Additions — — — — — —

Balance at March 31, 2020 $ — $ — $ 32,962 $ — $ — $ 32,962

Balance at June 30, 2020 $ — $ — $ 32,962 $ — $ — $ 32,962

NOTE 10 — STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity is presented below (in thousands):

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

(In thousands)

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Balance at March 31, 2020 37,597 $ 376 $ 450,982 $ 1,539,408 $ 1,990,766

Three Months Ended March 31, 2019

Net earnings — — — 90,678 90,678

Stock-based compensation expense — — 3,157 — 3,157

Issuance of stock 6 1 ( 1 ) — —

Balance at June 30, 2020 37,603 $ 377 $ 454,138 $ 1,630,086 $ 2,084,601

Six Months Ended June 30, 2019

(In thousands)

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Balance at March 31, 2019 38,264 $ 383 $ 498,683 $ 1,244,005 $ 1,743,071

Net earnings — — — 50,828 50,828

Stock-based compensation expense — — 4,201 — 4,201

Issuance of stock 3 — — — —

Balance at June 30, 2019 38,267 $ 383 $ 502,884 $ 1,294,833 $ 1,798,100

NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION

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The 2018 Plan is administered by our Board of Directors and allows for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options.

Effective May 2019, our prior stock compensation plan, the Amended and Restated 2006 Stock Incentive Plan (the “2006 Plan”) expired, and all available shares from expired, terminated, or forfeited awards that remained under the 2006 Plan and prior plans were available for grant under the 2018 Plan.

The 2018 Plan authorizes awards to officers, key employees, non-employee directors and consultants.

The 2018 Plan authorizes 6,600,000 shares of stock to be awarded, of which 1,288,325 shares remain available for grant at March 31, 2020.

The 2018 Plan authorizes 6,600,000 shares of stock to be awarded, of which 1,303,194 shares remain available for grant at June 30, 2020.

We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders.

4 unchanged sentences

A portion of the performance-based restricted stock awards granted to our executive officers contain market conditions as defined by ASC 718.

The guidance in ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period.

ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period.

We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight-line over the service period of the awards.

Below is a summary of compensation expense and stock award activity (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Stock-based compensation expense $ 3,157 $ 4,201 $ 9,594 $ 10,062

6 unchanged sentences

The following table includes additional information regarding our Stock Plans (dollars in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Unrecognized stock-based compensation cost $ 28,233 $ 22,341

5 unchanged sentences

We do not currently offer a contribution match on the deferred compensation plan.

All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three months ended March 31, 2020 or 2019, other than minor administrative costs.

All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the six months ended June 30, 2020 or 2019, other than minor administrative costs.

NOTE 12 — INCOME TAXES

Components of the income tax provision are as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Federal $ 20,528 $ 13,926 $ 32,902 $ 19,668

1 unchanged sentence

Total $ 25,184 $ 16,846 $ 40,865 $ 23,804

The effective tax rate for the three months ended March 31, 2020 and March 31, 2019 was 18.1 % and 21.5 %, respectively.

The three months ended March 31, 2020 tax rate reflects the Taxpayer Certainty and Disaster Tax Relief Act of 2019 enacted into law on December 20, 2019.

The effective tax rate for the three and six months ended June 30, 2020 was 21.7 % and 20.2 %, and for the three and six months ended June 30, 2019 was 24.9 % and 23.8 %, respectively.

The six months ended June 30, 2020 tax rate reflects the Taxpayer Certainty and Disaster Tax Relief Act of 2019 enacted into law on December 20, 2019.

That act extended eligibility for the Internal Revenue Code ("IRC") §45L new energy efficient homes credit for years 2018 through 2020.

For the three months ended March 31, 2020, we recorded a tax benefit from the new law based on estimates for qualifying new energy efficient homes that are projected to close in 2020.

For the three months ended March 31, 2019, the tax benefit from the new law was not reflected in the tax rate due to the December enactment date.

There is a small amount of §45L tax benefit in the first three months ended March 31, 2019, from our efforts to capture additional energy credits from 2016 and 2017.

In the three months ended March 31, 2019 and 2020, we recorded tax benefits from equity-based compensation for stock awards vested in the quarter.

For the first half of 2020, we recorded a tax benefit from the new law based on estimates for qualifying new energy efficient homes.

For the first half of 2019, the tax benefit from the new law was not reflected in the tax rate due to the December enactment date.

There is a small amount of §45L tax benefit in the first half of 2019, from our efforts to capture additional energy credits from 2016 and 2017 home closings.

In the first half of 2019 and 2020, we recorded tax benefits from equity-based compensation for stock awards vested in the quarter.

These tax benefits have a favorable impact on our effective tax rates.

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Although the CARES Act has several provisions which may benefit our company and its employees, these provisions are not expected to have a material impact on our tax rate in 2020.

We will continue to monitor the CARES Act and will take advantage of favorable tax related provisions when applicable.

At March 31, 2020 and December 31, 2019, we have no unrecognized tax benefits.

We will continue to monitor the CARES Act and will take advantage of favorable tax-related provisions if and when applicable.

At June 30, 2020 and December 31, 2019, we have no unrecognized tax benefits.

We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change.

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This assessment considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives.

We have no valuation allowance on our deferred tax assets or NOL carryovers at March 31, 2020.

At March 31, 2020, we had no remaining federal NOL carry forward or un-utilized federal tax credits.

At March 31, 2020 and December 31, 2019, we had tax benefits for state NOL carry forwards of $ 0.8 million, net of federal benefit, that begin to expire in 2030.

At March 31, 2020, we have income taxes payable of $ 5.9 million and income taxes receivable of $ 5.0 million.

We have no valuation allowance on our deferred tax assets or NOL carryovers at June 30, 2020.

At June 30, 2020, we had no remaining federal NOL carry forward or un-utilized federal tax credits.

At June 30, 2020 and December 31, 2019, we had tax benefits for state NOL carry forwards of $ 0.8 million, net of federal benefit, that begin to expire in 2030.

At June 30, 2020, we have income taxes payable of $ 31.7 million and income taxes receivable of $ 5.0 million.

The income taxes payable primarily consists of current federal and state tax accruals, net of estimated tax payments.

This amount is recorded in Accrued liabilities on the accompanying unaudited balance sheet at March 31, 2020.

The income taxes receivable primarily consists of energy tax credits related to homes that closed through 2017 and is recorded in Other receivables on the accompanying unaudited balance sheet at March 31, 2020.

This amount is recorded in Accrued liabilities on the accompanying unaudited balance sheet at June 30, 2020.

We conduct business and are subject to tax in the U.S.

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The tax benefits from NOLs, built-in losses, and tax credits would be materially reduced or potentially eliminated if we experience an “ownership change” as defined under IRC §382.

Based on our analysis performed as of March 31, 2020 we do not believe that we have experienced an ownership change.

As a protective measure, our stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain transfers

of our common stock.

Based on our analysis performed as of June 30, 2020 we do not believe that we have experienced an ownership change.

As a protective measure, our stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain transfers of our common stock.

The amendment is intended to help us avoid an unintended ownership change and thereby preserve the value of any tax benefit for future utilization.

1 unchanged sentence

The following table presents certain supplemental cash flow information (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Cash paid during the year for:

Interest, net of interest capitalized $ ( 16,088 ) $ ( 16,907 )

Interest capitalized, net $ 1,089 $ 6,179

Income taxes paid $ — $ 16,536

Non-cash operating activities:

Real estate acquired through notes payable $ 402 $ 23

NOTE 14 — OPERATING AND REPORTING SEGMENTS

10 unchanged sentences

The following segment information is in thousands:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Homebuilding revenue (1) :

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(1) Homebuilding revenue includes the following land closing revenue, by segment, as outlined in the table below:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Land closing revenue:

4 unchanged sentences

(2) Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.

At March 31, 2020

At June 30, 2020

West Central East Financial Services Corporate and

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Historically, most disputes regarding warranty claims are resolved prior to litigation.

We believe there are no pending legal or warranty matters as of March 31, 2020 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

As discussed in Note 1 under the heading “Warranty Reserves”, within our $ 22.1 million of total warranty reserves we have case specific reserves related to alleged stucco defects in homes in certain Florida communities we developed prior to 2016 and for water drainage issues in a single community in Florida that we developed in 2016.

We believe there are no pending legal or warranty matters as of June 30, 2020 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

As discussed in Note 1 under the heading “Warranty Reserves”, within our $ 21.6 million of total warranty reserves at June 30, 2020 we have case specific reserves related to alleged stucco defects in homes in certain Florida communities we developed prior to 2016 and for water drainage issues in a single community in Florida that we developed in 2016.

Our review and handling of these two matters is ongoing and our estimate of and reserves for resolving these matters is based on internal data, our judgement and various assumptions and estimates.

Due to the degree of judgment and the potential for variability in our underlying assumptions and estimates, as we obtain additional information, we may revise our estimates and thus our related reserves.

As of March 31, 2020, after considering potential recoveries from the contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matters.

As of June 30, 2020, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matters.

See Note 1 for information related to our warranty obligations.

NOTE 16 — SUBSEQUENT EVENTS

The COVID-19 pandemic ("COVID-19") has significantly impacted major economic and financial markets beginning in the latter part of March 2020 and up though the date of this report.

The impact to the general economy has been very volatile as major developments occur almost daily.

Such a fluid environment makes it challenging to estimate the impact that this pandemic may have on the future performance of our business.

Through the date of this report, residential homebuilding has been recognized as an essential service in nearly all of the markets in which we build and sell homes.

As such, our construction crews and trade partners have been working steadily, following social distancing guidelines, to ensure that we deliver completed homes on schedule for our homebuyers.

With shelter-in-place orders in place across most of our markets, we are offering home tours virtually or by appointment-only.

Leveraging our mortgage pre-approval and remote earnest money deposit tools on-line, our customers are able to move through the process of purchasing a home remotely.

We have experienced significant declines in demand for new home orders and have also experienced an increase in cancellations on previous home orders stemming from large parts of the economic shut down, causing record job losses, fear and uncertainty about the future.

While the extent to which COVID-19 impacts our results will depend on future developments, the outbreak and associated economic impacts could result in a material impact to the our future financial condition, results of operations and cash flows.

Special Note of Caution Regarding Forward-Looking Statements

Special Note of Caution Regarding Forward-Looking Statements [LEGAL TO UPATE]

In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements.

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Forward-looking statements in this Quarterly Report include:

statements concerning the impact of COVID-19, including our expectations for our financial results, business, operations, government imposed restrictions, and the economy and society in general ;

trends and economic factors in the homebuilding industry in general, and our markets and results specifically;

our operating strategy and initiatives, including our actions in light of COVID-19 including our strategy to expand the number of communities that target the first-time and first move-up buyers;

statements concerning our expectations for our financial results, business, operations, government imposed restrictions, and the economy and society in general ;

trends and economic factors in the homebuilding industry in general, and our markets and results specifically, including the impact thereon of COVID-19 and governmental imposed restrictions and reaction thereto;

our operating strategy and initiatives, including our actions in light of COVID-19, including our strategy to expand the number of communities that target the first-time and first move-up buyers and the benefits of our virtual tours and solutions;

demand and pricing trends in the short-term throughout our geographies;

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shortages in the availability and cost of labor;

the success of our strategic initiatives to focus on the entry-level and first-move-up buyer;

the ability of our potential buyers to sell their existing homes;

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changes in tax laws that adversely impact us or our homebuyers;

a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits;

a change to the feasibility of projects under option or contract that could result in the write-off of earnest or option deposits;

our potential exposure to and impacts from natural disasters or severe weather conditions;

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failures in health and safety performance;

our success in prevailing on contested tax positions;

our ability to obtain performance and surety bonds in connection with our development work;

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our ability to obtain financing if our credit ratings are downgraded;

our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions;

our compliance with government regulations, the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures;

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

What changed 10-Q

Item 1. Financial Statements