What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-27 compared with 2020-05-01 · 251 added, 114 removed, 308 unchanged (54% of the section changed)

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Overview and Outlook

The world and United States economies as well as our business operations have been dramatically affected by COVID-19.

There has been inherent uncertainty surrounding COVID-19, due to rapidly changing governmental orders, public health concerns, the resulting market reactions and the psychology of potential homebuyers.

The United States and world economies have been dramatically affected by COVID-19 as there has been inherent uncertainty due to rapidly changing governmental orders, public health concerns, the resulting market reactions, related unemployment and the psychology of potential homebuyers.

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

Our primary concern is the health and well-being of our employees, customers, business partners and the communities we serve.

We are following applicable government orders and guidelines of public health agencies, and modifying our standards and protocols to safeguard all of our stakeholders as conditions change.

In order to address the changing environment, we instituted the following operational changes:

• Temporarily closed our corporate and divisional offices with work-from-home requirements in effect for all non-field employees in all of our markets;

• Temporarily closed our sales centers and model homes, as well as our Studio M design centers, to the general public, shifting to an appointment-only home sales process;

• Continued with home construction and land development as in nearly all of our markets residential construction has been deemed “essential” by most local governments;

• Temporarily shifted to an emergency-only model for interior warranty work, for the safety of our employees and owners of our homes.

We have also accelerated various digital initiatives to assist us in our operations during shelter-in-place orders, including:

However, the desire to have larger, safer single-family shelter with additional space with technological capabilities to accommodate work-from-home scenarios, coupled with low interest rates have contributed to an unanticipated spike in the demand for new home offerings as a whole, and particularly for readily-available inventory at lower price points, which aligns well with our strategy.

We have, therefore, experienced significant increases in demand across our geographies since latter April 2020.

We have also made significant progress in accelerating various company-wide digital initiatives that were already in progress to assist and facilitate the marketing, selling and closing of homes during shelter-in-place orders for buyers hesitant to leave their homes.

We believe the digital and online efforts helped us effectively navigate the current situation by allowing us to continue to operate efficiently, through:

• Offering virtual tours in all of our communities to prospective customers;

• Offering extensive online tools such as 3-D tours and dynamic floor plans to mimic the live experience of walking through a model home;

• Offering our homebuyers virtual tours of homes that are pending closing;

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• Offering drive-through or fully virtual closings in states where such services are permitted.

While our traffic has understandably slowed as a result of the widespread shelter-in-place orders throughout the nation, the traffic we are seeing appears to be more committed to a home purchase and we are continuing to build, sell and close homes during the current environment, albeit at a slower pace than pre-COVID-19.

In order to ensure we have sufficient liquidity to weather the upcoming uncertainty, we elected to supplement our strong cash balance with a $500 million draw on our Credit Facility, aggregating to total cash and cash equivalents of as of March 31, 2020 of $797.3 million with $211.4 million of additional capacity still available under our Credit Facility.

We are also taking proactive steps to maximize positive cash flow by tightly managing cash outlays through deferring the acquisition and development of certain new communities and we have materially pulled back on all discretionary expenses and by putting our share repurchase program on hold.

Additionally, we are managing our spec home building strategy as we continue to believe that today's buyer is looking for homes available for a quick move-in that aligns with a 90-day or less interest rate lock, to capitalize on the current low mortgage interest rates.

Consistent with our currently reduced order volume, we are appropriately slowing our starts of new spec homes in order to continue to operate with a four to five month average order supply of spec homes.

As of March 31, 2020 approximately 90% of our communities are targeted to first-time or first move-up buyers and those buyer segments represented approximately 94% of our orders in the first quarter of 2020, signaling the near completion of our strategic shift to cater to the entry-level and first-time move up buyers.

Throughout this ever changing environment, our primary concern has and continues to be the health and well-being of our employees, customers, business partners and the communities we serve.

We follow all applicable government orders and guidelines of public health agencies, and have been since the inception of this pandemic, modifying our standards and protocols to safeguard all of our stakeholders as conditions change.

In order to address the changing environment, we instituted the following operational changes:

• Temporarily closed our corporate and divisional offices with work-from-home requirements in effect for all non-field employees in all of our markets in March 2020;

all markets are re-opened to varying degrees based on local requirements;

• Temporarily closed our sales centers and model homes, as well as our Studio M design centers, to the general public, shifting to an appointment-only home sales process in March 2020;

all sales centers and Studio M centers are now open;

• Continued with home construction and land development in March 2020 as in nearly all of our markets residential construction has been deemed “essential” by most local governments;

• Temporarily shifted to an emergency-only model for interior warranty work, for the safety of our employees and owners of our homes in March 2020.

We have since opened our warranty work to service all calls as allowed by local authorities.

• We have implemented responsible hygiene, cleaning, social distancing and other processes in all of our operations to safeguard our employees, trade partners, customers and the communities we serve.

As of June 30, 2020 approximately 90% of our communities are targeted to first-time or first move-up buyers and those buyer segments represented approximately 96% of our orders in the second quarter of 2020, effectively completing our strategic shift to cater to entry-level and first-time move up buyers.

Summary Company Results

Our results for the first quarter of 2020 reflect continued strong growth in closings and orders pre-COVID-19, compared to the first quarter of 2019.

Total home closing revenue was $890.4 million on 2,316 homes closed for the three months ended March 31, 2020 compared to $698.7 million on 1,765 homes closed for the first quarter of 2019, 27.4% and 31.2% increases, respectively.

In addition to higher home closing revenue, first quarter results benefited from a 330 basis point increase in home closing gross margin that resulted in a $61.9 million year-over-year increase in home closing gross profit to $178.4 million compared to $116.5 million in the first quarter of 2019.

We attribute this gross profit improvement to our simplified product offerings with more efficient product designs which reduce both construction costs and construction cycle times, in addition to construction overhead leverage on higher home closing revenue.

Interest expense decreased $4.1 million year-over-year, reflecting a reduction in total interest incurred due to the December 2019 early redemption of $300 million 7.15% senior notes due in 2020.

Earnings before income taxes improved by $54.5 million year over year to $86.8 million for the first quarter of 2020.

These improved year-over-year results combined with a lower effective income tax rate of 18.1% as compared to 21.5% in 2019 led to Net earnings of $71.2 million in the first quarter of 2020 versus $25.4 million in the first quarter of 2019.

Orders for the first three months of 2020 were up 22.6% year over year.

Our order cancellation rate was relatively flat at 13% for the first quarter compared to 12% for the prior year period, with an increase in March cancellations to 16% in 2020 over 12% in 2019 due to weakening business conditions in the latter half of March associated with the spread of COVID-19 across the nation.

It is unclear how long these adverse conditions will persist or how they will impact future results.

We ended the first quarter of 2020 with 3,568 homes in backlog valued at $1.4 billion, an 11.6% increase in units and a 7.2% increase in value over March 31, 2019, reflecting lower average sales prices as noted above.

Our results for the second quarter of 2020 reflect continued strong growth in closings and orders, compared to the second quarter of 2019 as buyers took advantage of the low interest-rate environment and capitalized on their desire to move out of their existing home and transition to a larger, safer home with indoor space to accommodate work from home needs and outdoor space to enjoy while practicing social distancing.

Total home closing revenue was $1.0 billion on 2,770 homes closed for the three months ended June 30, 2020 compared to $863.1 million on 2,253 homes closed for the second quarter of 2019, 20.0% and 22.9% increases, respectively.

In addition to higher home closing revenue, second quarter results benefited from a 300 basis point increase in home closing gross margin that resulted in a $61.6 million year-over-year increase in home closing gross profit to $220.7 million compared to $159.1 million in the second quarter of 2019.

The impact from closings of our non-core product was fairly limited and only represented 6% of our closing volume.

Interest expense decreased $1.1 million year-over-year, reflecting a reduction in total interest incurred due to the December 2019 early redemption of $300 million 7.15% senior notes due in 2020 partially offset by the interest income on the $500 million credit facility draw in mid-March that was outstanding through May 26, 2020.

Earnings before income taxes improved by $48.2 million year over year to $115.9 million for the second quarter of 2020.

These improved year-over-year results combined with a lower effective income tax rate of 21.7% as compared to 24.9% in 2019 led to net earnings of $90.7 million in the second quarter of 2020 versus $50.8 million in the second quarter of 2019.

For the six months ended June 30, 2020, home closing revenue was $1.9 billion on 5,086 homes closed, 23.1% and 26.6% increases, respectively.

Similar to the second quarter, year-to-date results reflect an increase in home closing revenue of $360.3 and a $123.5 million increase in home closing gross profit versus the six months ended June 30, 2019.

Higher gross profit combined with a $5.2 million decrease in interest expense year-over year led to net income of $161.8 million for the six months ended June 30, 2019 compared to $76.2 million for the 2019 period.

Orders for the three and six months of 2020 were up 31.5% and 27.2%, respectively, over the prior year.

Our order cancellation rate was 15% for the second quarter of 2020 compared to 12% for the prior year period;

cancellation rates peaked at a high of 20% in April 2020 and then declined to 15% and 13% in May and June, 2020, respectively.

We ended the second quarter of 2020 with 4,395 homes in backlog valued at $1.6 billion, a 19.4% increase in units and an 11.6% increase in value over June 30, 2019, reflecting lower average sales prices.

Company Positioning

We believe that our prior investments in new communities, particularly those designed for the first-time and first move-up homebuyer, and industry-leading innovation in our energy-efficient product offerings, automation, and transformative customer buying experience, create a differentiated strategy that has aided us in our success in the highly-competitive new home market and will continue to do so in the long-term.

We believe that our on-going investments in new communities, particularly those designed for the first-time and first move-up homebuyer, and industry-leading innovation in our energy-efficient product offerings, automation, and transformative customer buying experience, create a differentiated strategy that has aided us in our success in the highly-competitive new home market and will continue to do so in the long-term.

Our focus includes the following strategic initiatives:

• Expanding the number of LiVE.NOW ® communities that target the growing first-time and first move-up homebuyers, although in the short-term we may delay or defer such growth in light of the economic events surrounding COVID-19;

• Ensuring sufficient speculative/started inventory is available in all communities to accommodate our customers' desire for a quick move-in home;

• Expanding the number of LiVE.NOW ® communities that target the growing first-time and first move-up homebuyers.

After a short delay in the latter part of the first quarter and the start of the second quarter due to COVID-19 uncertainties, we have been aggressively acquiring and contracting for lots and communities;

• Improving the overall customer experience, most recently through a simplification of the customer home purchase and option selection process for move-up buyers at Studio M;

• Demonstrating our commitment to innovation through a new fully-automated and secured digital loan pre-approval process available on our website;

• Enhancing our website and sales offices through investments in technology.

All of our LiVE.NOW ® communities feature interactive technology tools offering homebuyers the ability to electronically search for available homes with their desired home features and based on their preferred availability or move-in dates;

• Demonstrating our commitment to innovation through digital tours and solutions available to our customers that allow the entire home marketing, sales and in some geographies, the closing process to be conducted on-line;

• Simplifying our production process to allow us to more efficiently build our homes, shorten our construction timeline and reduce our construction costs, which in turn allows us to competitively price our homes;

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In order to maintain focus on growing our business, we also remain committed to the following:

• Increasing orders and order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities, acknowledging this goal may be difficult to achieve in the near and mid-term due to uncertainties relating to COVID-19;

• Increasing orders and order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;

• Becoming or maintaining our position of at least 5% market share in all of our markets;

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• Carefully managing our liquidity and a strong balance sheet, we ended the quarter with a 32.8% debt-to-capital ratio and a 20.4% net debt-to-capital ratio;

• Maximizing returns to our shareholders, most recently through our pre-COVID-19 improved financial performance and share repurchase program;

• Maximizing returns to our shareholders, most recently through our improved financial performance, debt repayment and share repurchase program;

• Promoting a positive environment for our employees with market-competitive benefits in order to develop and motivate them and to minimize turnover and to maximize recruitment efforts.

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The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, warranty reserves and valuation of deferred tax assets.

There have been no significant changes to our critical accounting policies during the three months ended March 31, 2020 compared to those disclosed in Item 7.

There have been no significant changes to our critical accounting policies during the six months ended June 30, 2020 compared to those disclosed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2019 Annual Report on Form 10-K.

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The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):

Three Months Ended March 31, Quarter over Quarter

Three Months Ended June 30, Quarter over Quarter

2020 2019 Change $ Change %

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Average sales price $ 354.5 $ 370.6 $ (16.1) (4.3) %

Three Months Ended March 31, Quarter over Quarter

Six Months Ended June 30, Quarter over Quarter

2020 2019 Chg $ Chg %

Home Closing Revenue

Dollars $ 1,922,008 $ 1,561,703 $ 360,305 23.1 %

Homes closed 5,086 4,018 1,068 26.6 %

Average sales price $ 377.9 $ 388.7 $ (10.8) (2.8) %

Dollars $ 293,603 $ 223,842 $ 69,761 31.2 %

Homes closed 886 686 200 29.2 %

Average sales price $ 331.4 $ 326.3 $ 5.1 1.6 %

Dollars $ 285,145 $ 169,291 $ 115,854 68.4 %

Homes closed 455 264 191 72.3 %

Average sales price $ 626.7 $ 641.3 $ (14.6) (2.3) %

Dollars $ 180,771 $ 178,805 $ 1,966 1.1 %

Homes closed 370 338 32 9.5 %

Average sales price $ 488.6 $ 529.0 $ (40.4) (7.6) %

West Region Totals

Dollars $ 759,519 $ 571,938 $ 187,581 32.8 %

Homes closed 1,711 1,288 423 32.8 %

Average sales price $ 443.9 $ 444.1 $ (0.1) — %

Central Region - Texas

Central Region Totals

Dollars $ 551,884 $ 481,445 $ 70,439 14.6 %

Homes closed 1,688 1,366 322 23.6 %

Average sales price $ 326.9 $ 352.4 $ (25.5) (7.2) %

Dollars $ 232,397 $ 202,560 $ 29,837 14.7 %

Homes closed 603 507 96 18.9 %

Average sales price $ 385.4 $ 399.5 $ (14.1) (3.5) %

Dollars $ 100,696 $ 85,456 $ 15,240 17.8 %

Homes closed 281 241 40 16.6 %

Average sales price $ 358.3 $ 354.6 $ 3.8 1.1 %

North Carolina

Dollars $ 178,155 $ 127,170 $ 50,985 40.1 %

Homes closed 510 352 158 44.9 %

Average sales price $ 349.3 $ 361.3 $ (12.0) (3.3) %

South Carolina

Dollars $ 47,611 $ 42,745 $ 4,866 11.4 %

Homes closed 151 127 24 18.9 %

Average sales price $ 315.3 $ 336.6 $ (21.3) (6.3) %

Dollars $ 51,746 $ 50,389 $ 1,357 2.7 %

Homes closed 142 137 5 3.6 %

Average sales price $ 364.4 $ 367.8 $ (3.4) (0.9) %

East Region Totals

Dollars $ 610,605 $ 508,320 $ 102,285 20.1 %

Homes closed 1,687 1,364 323 23.7 %

Average sales price $ 361.9 $ 372.7 $ (10.7) (2.9) %

Three Months Ended June 30, Quarter over Quarter

2020 2019 Change $ Change %

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We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed.

Three Months Ended March 31,

Six Months Ended June 30, Quarter over Quarter

2020 2019 Chg $ Chg %

Home Orders (1)

Dollars $ 2,470,391 $ 2,020,974 $ 449,417 22.2 %

Homes ordered 6,699 5,265 1,434 27.2 %

Average sales price $ 368.8 $ 383.9 $ (15.1) (3.9) %

Dollars $ 414,428 $ 333,613 $ 80,815 24.2 %

Homes ordered 1,307 1,039 268 25.8 %

Average sales price $ 317.1 $ 321.1 $ (4.0) (1.2) %

Dollars $ 449,571 $ 243,993 $ 205,578 84.3 %

Homes ordered 740 374 366 97.9 %

Average sales price $ 607.5 $ 652.4 $ (44.9) (6.9) %

Dollars $ 169,296 $ 215,562 $ (46,266) (21.5) %

Homes ordered 352 424 (72) (17.0) %

Average sales price $ 481.0 $ 508.4 $ (27.4) (5.4) %

West Region Totals

Dollars $ 1,033,295 $ 793,168 $ 240,127 30.3 %

Homes ordered 2,399 1,837 562 30.6 %

Average sales price $ 430.7 $ 431.8 $ (1.1) (0.3) %

Central Region - Texas

Central Region Totals

Dollars $ 735,492 $ 581,645 $ 153,847 26.5 %

Homes ordered 2,274 1,697 577 34.0 %

Average sales price $ 323.4 $ 342.7 $ (19.3) (5.6) %

Dollars $ 255,804 $ 258,032 $ (2,228) (0.9) %

Homes ordered 707 632 75 11.9 %

Average sales price $ 361.8 $ 408.3 $ (46.5) (11.4) %

Dollars $ 120,417 $ 102,204 $ 18,213 17.8 %

Homes ordered 346 293 53 18.1 %

Average sales price $ 348.0 $ 348.8 $ (0.8) (0.2) %

North Carolina

Dollars $ 207,638 $ 172,556 $ 35,082 20.3 %

Homes ordered 613 470 143 30.4 %

Average sales price $ 338.7 $ 367.1 $ (28.4) (7.7) %

South Carolina

Dollars $ 57,176 $ 48,020 $ 9,156 19.1 %

Homes ordered 182 150 32 21.3 %

Average sales price $ 314.2 $ 320.1 $ (6.0) (1.9) %

Dollars $ 60,569 $ 65,349 $ (4,780) (7.3) %

Homes ordered 178 186 (8) (4.3) %

Average sales price $ 340.3 $ 351.3 $ (11.1) (3.1) %

East Region Totals

Dollars $ 701,604 $ 646,161 $ 55,443 8.6 %

Homes ordered 2,026 1,731 295 17.0 %

Average sales price $ 346.3 $ 373.3 $ (27.0) (7.2) %

Three Months Ended June 30,

Ending Average Ending Average

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East Region Totals 90 89.0 100 99.0

Three Months Ended March 31,

Six Months Ended June 30,

Ending Average Ending Average

Active Communities

Total 237 240.5 254 263.0

Arizona 38 34.5 40 40.0

California 28 26.0 20 18.5

Colorado 13 15.5 21 20.5

West Region Totals 79 76.0 81 79.0

Central Region - Texas

Central Region Totals 68 72.5 73 84.0

Florida 36 34.5 36 33.5

Georgia 17 17.5 21 21.5

North Carolina 21 23.0 23 24.0

South Carolina 5 7.0 9 10.5

Tennessee 11 10.0 11 10.5

East Region Totals 90 92.0 100 100.0

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

2020 2019 2020 2019

Cancellation Rates (1)

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(1) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.

At March 31, Quarter over Quarter

At June 30, Quarter over Quarter

2020 2019 Change $ Change %

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Companywide .

In the first quarter of 2020, home closing volume improved by 31.2% to 2,316 closings valued at $890.4 million compared to 1,765 closings valued at $698.7 million in the first quarter of 2019.

The increase in closings year-over-year was driven primarily by entering the year with a higher backlog from strong orders in late 2019, a higher volume of orders in the current quarter as well as increased backlog conversion due to selling and closing more speculative inventory homes in the first quarter of 2020 compared to the prior year.

The higher volume of spec sales and a notably higher orders pace year-over-year are the outcome of our focus on the entry level and first move-up buyers, as our entry-level communities offer only spec homes for sale and in both our entry-level and first move-up communities, we have achieved shorter construction cycle times.

Home closing revenue increased by 27.4% over the first quarter of 2019 due entirely to the increase in closing volume as our average sales prices declined 2.9%, reflective of a higher percentage of lower-priced entry-level homes in our closing mix.

Home order volume improved by 22.6% to 3,102 homes valued at $1.2 billion in the first quarter of 2020 as compared to 2,530 homes valued at $977.0 million in the first quarter of 2019.

The improvement in orders was due to a 34.7% increase in orders pace year-over-year to 12.8 homes ordered per average active community, up from 9.5 in the first quarter of 2019, although the orders pace in the latter half of March was negatively impacted by COVID-19 concerns and shelter-in-place mandates.

We ended the quarter with 241 actively selling communities, a 7.3% decline from the prior year.

We ended the quarter with 3,568 homes in backlog valued at $1.4 billion, compared to 3,198 units also valued at $1.3 billion at March 31, 2019.

Order cancellation rates were relatively flat at 13% for the first three months of 2020, compared to 12% in the 2019 period, however during the month of March in 2020, cancellations rose to 16% as compared to 12% during the same month in 2019 due to weakening business conditions in the latter half of March associated with the spread of COVID-19 across the nation.

It is unclear how long these adverse conditions will persist or how they will impact future results.

The West Region closed 853 homes and generated $377.7 million in home closing revenue in the first quarter of 2020 compared to 598 homes and $273.0 million in home closing revenue in the comparable 2019 period.

The Region ended the first quarter of 2020 with 1,121 orders valued at $506.8 million versus 828 orders valued at $359.1 million in the first quarter of 2019, despite a decline in average active selling communities by 4.5%.

The 42.6% and 35.4% improvements in closing and order volume, respectively, were driven by the higher year-over-year orders pace per community, as many of homes that sold in the first quarter also closed in the first quarter of this year, a direct output of our strategy of focusing on entry-level and first move-up product that has shorter construction cycle times.

In the West Region, over 85% of our communities target the first-time or first move-up buyers at March 31, 2020 and we believe the high demand in this Region was directly attributable to the product offerings and desirable locations we have designed for these buyers.

In the second quarter of 2020, home closing volume improved by 22.9% to 2,770 closings valued at $1.0 billion compared to 2,253 closings valued at $863.1 million in the second quarter of 2019.

The increase in closings year-over-year was driven primarily by entering the quarter with a higher backlog as compared to prior year, a higher volume of orders in the current quarter as well as increased backlog conversion due to selling and closing more speculative inventory homes in the second quarter of 2020 compared to the prior year.

The higher volume of spec sales and a notably higher orders pace year-over-year are due to the heightened demand in today's market for available, new and safe single-family homes at affordable price points as previously discussed.

This customer demand is aligned with our focus on the entry level and first move-up buyers, as our entry-level communities offer only spec homes for sale, and in both our entry-level and first move-up communities we have achieved shorter construction cycle times.

Home closing revenue increased by 20.0% over the second quarter of 2019 due entirely to the increase in closing volume as our average sales prices declined 2.8%, reflective of a higher percentage of lower-priced entry-level homes in our closing mix.

Home order volume improved by 31.5% to 3,597 homes valued at $1.3 billion in the second quarter of 2020 as compared to 2,735 homes valued at $1.0 billion in the second quarter of 2019.

The improvement in orders was due to a 42.5% increase in orders pace year-over-year to 15.1 homes ordered per average active community, up from 10.6 in the second quarter of 2019.

We ended the quarter with 237 actively selling communities, a 6.7% decline from the prior year as communities experienced accelerated close-outs due to higher orders volume and timing of our delayed community openings due to COVID-19.

Order cancellation rates were 15% and 14% for the first three and six months of 2020, as compared to 12% during both the three and six month periods in 2019.

For the six months ended June 30, 2020, home closing volume grew by 1,068 units, and home closing revenue improved by $360.3 million on 5,086 closings valued at $1.9 billion.

Orders also increased by 1,434 units and $449.4 million to 6,699 orders valued at $2.5 billion for the six months ended June 30, 2020, 27.2% and 22.2% increases, respectively from prior year results.

Similar to second quarter results, demand for our affordable entry-level homes drove the increase in orders, as we experienced a 39.5% higher orders pace than in 2019.

We ended the quarter with 4,395 homes in backlog valued at $1.6 billion, compared to 3,680 units valued at $1.5 billion at June 30, 2019.

The West Region closed 858 homes and generated $381.8 million in home closing revenue in the second quarter of 2020 compared to 690 homes and $299.0 million in home closing revenue in the comparable 2019 period.

The Region ended the second quarter of 2020 with 1,278 orders valued at $526.5 million versus 1,009 orders valued at $434.0 million in the second quarter of 2019, despite a slight decline in average active selling communities by 3.1%.

The 24.3% and 26.7% improvements in closing and order volume, respectively, were driven by the higher year-over-year orders pace per community, as many of homes that were sold in the second quarter also closed in the second quarter of this year, a direct output of our strategy of focusing on entry-level and first move-up product that have shorter construction cycle times.

The exceptionally strong demand in Arizona offset some delays in California, which had the most restrictive COVID-19 measures in our geographic footprint, although community count helped in California as well.

In the West Region, approximately 90% of our communities target the first-time or first move-up buyers at June 30, 2020 and we believe the high demand in this Region was directly attributable to the product offerings and desirable locations we have designed for these buyers.

The West Region ended the first quarter of 2020 with 1,540 homes in backlog valued at $650.2 million, up from 1,168 units valued at $524.9 million in 2019.

In the first quarter of 2020, the Central Region, made up of our Texas markets, closed 774 homes and generated $255.9 million in home closing revenue, up 42.5% and 33.6%, respectively, from prior year comparable period results of 543 homes and $191.6 million of home closing revenue.

Average sales prices in the Region declined 6.3% year-over-year in the first quarter of 2020 resulting from our focus on the first-time and first move-up buyer.

Year-to-date results in the West Region were similar to those of the second quarter.

The number and value of homes closed versus prior year increased by 32.8%, while the average sales price was flat year over year with additional California volume in the mix.

Orders for the Region improved 30.6% year-to-date which resulted in 30.3% higher order value.

Orders pace improved by 35.6% despite the average number of actively selling communities declining by 3.8% in the Region for the six months ended June 30, 2020.

In the second quarter of 2020, the Central Region, made up of our Texas markets, closed 914 homes and generated $296.0 million in home closing revenue, up 11.1% and 2.1%, respectively, from prior year comparable period results of 823 homes and $289.8 million of home closing revenue.

Average sales prices in the Region declined 8.0% year-over-year resulting from our focus on the first-time and first move-up buyer.

Orders grew by 46.9%, which, partially offset by a 3.0% lower average sales price, led to order value increasing by 42.5%.

Order volume improved in the first quarter of 2020 due to a 41.2% increase in orders pace in the Region, more than offsetting the 13.4% decrease in average community count compared to the prior year period.

The Region ended the first quarter of 2020 with 1,059 units ordered valued at $343.0 million compared to 870 units valued at $306.3 million in the prior year quarter.

Order volume improved in the second quarter of 2020 due to a 58.1% increase in orders pace in the Region, more than offsetting the 7.0% decrease in average community count compared to the prior year period.

The Region ended the second quarter of 2020 with 1,215 units ordered valued at $392.5 million compared to 827 units valued at $275.4 million in the prior year quarter.

The fast absorption pace of our communities has resulted in us selling out of communities faster than we have been able to open replacement communities.

We are responding to the entry-level demand in this Region with a strong transition to first-time buyer product offerings and we attribute the pre-COVID-19 improved orders pace to that transition.

Over 90% of actively selling communities at March 31, 2020 were targeted toward the first time and first move-up buyers.

The higher volume of home closings outpaced the sales growth, which combined with flat year-over-year backlog entering the quarter led to nearly flat year-over-year ending backlog units.

The Central Region ended the quarter with 1,333 units in backlog, up 1.9 % with a value decline to $459.9 million, or 5.8%, compared to the prior year due to lower average sales prices.

During the three months ended March 31, 2020, the East Region delivered 689 closings and $256.8 million in home closing revenue compared to 624 closings and $234.1 million in home closing revenue in the comparable prior year period, improvements of 10.4% and 9.7%, respectively.

Orders and order value in the East Region improved by 10.8% and 6.0%, respectively, for the first quarter of 2020 with 922 units valued at $330.2 million compared to 832 units valued at $311.6 million in the prior year period.

We have responded to the entry-level demand in this Region with a strong transition to first-time buyer product offerings over the past several years.

Over 90% of actively selling communities at June 30, 2020 were targeted toward the first time and first move-up buyers.

We also saw overall improvements in the Region for the six months ended June 30, 2020.

Home closings and home closing revenue were up 23.6% and 14.6%, respectively, and orders and order value were up year-over-year by 34.0% and

26.5%, respectively.

Orders pace increased by 55.4%, helping the Region end the quarter with 1,634 units in backlog, up 24.5% and backlog value of $556.8 million, up 17.5%, compared to the prior year.

During the three months ended June 30, 2020, the East Region delivered 998 closings and $353.8 million in home closing revenue compared to 740 closings and $274.2 million in home closing revenue in the comparable prior year period, improvements of 34.9% and 29.0%, respectively.

Orders and order value in the East Region improved by 22.8% and 11.0%, respectively, for the second quarter of 2020 with 1,104 units valued at $371.4 million compared to 899 units valued at $334.6 million in the prior year period.

The improvement in orders is primarily due to a 36.3% increase in orders pace which more than offset the 10% decrease in average active communities.

While boasting positive year over year results, the growth the East Region experienced in the first quarter of 2020 was more tepid than that of the preceding several quarters, due in part to a drop in the number of actively selling communities as well as the impact from a devastating tornado that hit the Nashville market in the first week of March.

The East Region ended the quarter with 1,115 homes in backlog valued at $423.4 million compared to 1,041 homes valued at $417.5 million at March 31, 2019, 7.1% and 1.4% increases, respectively.

The year-to-date results of the East Region were similar to those of the second quarter, with 23.7% and 20.1% improvements in home closing volume and revenue, respectively, compared to 2019 providing 1,687 closings and $610.6 million in home closing revenue for the six month period ending June 30, 2020.

The number and value of orders also improved by 17.0% and 8.6%, respectively, due to a 27.2% increase in orders pace for the six months ended June 30, 2020 compared to prior year.

The East Region ended the quarter with 1,221 homes in backlog valued at $441.5 million compared to 1,200 homes valued at $478.1 million at June 30, 2019, a 1.8% increase in units with a value decline of 7.7% from the shift to more entry-level homes and lower average sales prices.

Land Closing Revenue and Gross Loss

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in the specific geography.

As a result of such sales, we recognized land closing revenue of $10.6 million and $9.5 million for the three months ending March 31, 2020 and 2019, respectively.

We recognized land closing gross profit of $0.4 million in the first quarters of both 2020 and 2019.

As a result of such sales, we recognized land closing revenue of $1.5 million and $1.6 million for the three months ending June 30, 2020 and 2019, respectively and losses of $1.5 million and $1.7 million for the second quarters of 2020 and 2019, respectively.

Year to date land sales resulted in losses of $1.1 million in 2020 and a $1.4 million loss in the prior year.

Land sales in 2020 primarily reflect the sale of land in communities that do not fit our current focus on entry-level and first move-up product offerings.

Other Operating Information (dollars in thousands)

Three Months Ended March 31,

Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue

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

2020 2019 2020 2019

Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue

Home Closing Gross Profit (1)

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Companywide .

Home closing gross margin for the first quarter of 2020 improved 330 basis points to 20.0% compared to 16.7% in the first quarter of 2019.

Home closing gross margin for the second quarter of 2020 improved 300 basis points to 21.4% compared to 18.4% in the second quarter of 2019.

The higher margin combined with higher revenue contributed to a $61.6 million improvement in home closing gross profit to end the quarter with $220.7 million compared to $159.1 million in 2019.

As expected with our shift to entry-level and first time move up product offerings, improved backlog conversion and simplified product that is less costly and more efficient to build are contributing to higher gross margin.

Home closing gross margin for the West Region improved by 310 basis points to 19.7% for the first quarter of 2020 versus 16.6% in the first quarter of 2019.

For the six months ended June 30, 2020, gross margin was up 320 basis points to 20.8% versus 17.6% for the same period in the prior year.

Margins for the second quarter 2020 were negatively impacted by 30 basis points due to terminated land contract costs for exiting non-core communities, with a charge of $3.3 million compared to $0.5 million of such charges in the 2019 period.

As expected with our shift to entry-level and first time move up product offerings, we have improved our backlog conversion and simplified our product which is less costly and more efficient to build all of which are contributing to higher gross margin.

higher volume also helped better leverage our fixed costs in gross margin and we also benefited in the quarter from some negotiated temporary cost concessions achieved due to COVID-19.

Home closing gross margin for the West Region improved by 310 basis points to 21.0% for the second quarter of 2020 versus 17.9% in the second quarter of 2019.

For the six months ended June 30, 2020, home closing gross margin also improved by 310 basis points to 20.4% versus 17.3% for the same period in the prior year.

Pricing power, particularly in Arizona, contributed significantly to the improved margins year over year, as demand has been very strong in our entry-level and first move-up communities.

In addition, greater leverage of our overhead costs on higher revenue combined with construction efficiencies driven by our simplified product offerings and shorter construction cycle times have favorably impacted margins across the West Region.

The Central Region continued to provide the highest home closing gross margin in the company at 21.2% for the first quarter of 2020, up 330 basis points from 17.9% in the prior year quarter.

The Central Region continued to provide the highest home closing gross margin in the company at 22.9% for the second quarter of 2020, up 300 basis points from 19.9% in the prior year quarter.

Construction efficiencies driven by our simplified product offerings and lower costs combined with higher closing volume have expanded our leverage of overhead costs to improve gross margin.

The lower 2019 home closing margin for the Central Region were also impacted by targeted incentives offered on speculative inventory homes in late 2018 and early 2019 that closed in the first half of 2019.

Home closing gross margin in the East Region reflect our most notable improvements, up 370 basis points year-over-year to 19.4% in the first quarter of 2020 versus 15.7% for the comparable 2019 period.

For the six months ended June 30, 2020, gross margin was also up 300 basis points to 22.1% as compared to 19.1% for the same 2019 period.

Home closing gross margin in the East Region reflect our most notable improvements, up 310 basis points year-over-year to 20.6% in the second quarter of 2020 versus 17.5% for the comparable 2019 period.

For the six months ended June 30, 2020, gross margin was up 340 basis points to 20.1% versus 16.7% for the same period in the prior year.

The year-over-year improvement in gross margin for the three month period is the result of more efficient plan designs with shorter construction cycle times combined with greater leverage of overhead costs on higher closing volume as compared to the prior year period.

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Financial Services Profit (in thousands)

Three Months Ended March 31,

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

2020 2019 2020 2019

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

Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title company, Carefree Title, as well as our portion of earnings from a mortgage joint venture and to a lesser degree the limited activity from our wholly owned insurance company, which is still in its infancy.

Financial services profit declined $1.9 million in the first quarter of 2020 to $2.8 million versus $4.7 million in 2019.

The lower financial services profit year-over-year is due to a change in the structure of customer incentives offered by our mortgage joint venture.

The profits associated with these incentives in the first quarter of 2020 are captured as part of home closing revenue, whereas in the first quarter of 2019 these incentives were captured through financial services earnings.

Financial services profit represents the net profit of our financial services operations, including:

(1) the operating profit generated by our wholly-owned title company, Carefree Title, (2) our portion of earnings from a mortgage joint venture and (3) to a lesser degree, the limited activity from our wholly owned insurance company, which is still in its infancy.

Financial services profit declined $2.2 million in the second quarter of 2020 to $3.8 million versus $6.0 million in 2019 and by $4.1 million for the six months ended June 30, 2020 to $6.6 million versus $10.7 million for the same period in 2019.

The lower financial services profit year-over-year both for the quarter and year to date results is due to a change in the structure of customer incentives offered by our mortgage joint venture.

The profits associated with these incentives in the 2020 periods are captured as part of home closing revenue, whereas in the 2019 periods these incentives were recorded as financial services earnings.

This change was effective in the fourth quarter of 2019.

Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)

Three Months Ended March 31,

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

2020 2019 2020 2019

Commissions and other sales costs

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Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs.

These costs were $61.2 million for the three months ended March 31, 2020, $8.6 million higher than the prior year comparable period.

As a percentage of home closing revenue, commissions and other sales costs decreased 60 basis points to 6.9% for the first quarter of 2020 compared to prior year period.

The increase in commissions and other sales costs in dollars compared to prior year is largely related to the increased commissions paid out as a function of home closing revenue, whereas the decline as a percentage of home closing revenue is due to the combination of leverage from higher closing volume and the more efficient sales and marketing structure of our entry-level and first-time move-up communities.

These costs were $70.4 million for the three months ended June 30, 2020, $10.3 million higher than the prior year comparable period, although as a percentage of home closing revenue, decreased 20 basis points to 6.8% for the second quarter of 2020 compared to prior year period.

For the six months ended June 30, 2020, commissions and other sales costs decreased 40 basis points, but were $18.9 million higher than the corresponding prior year period.

The increase in commissions and other sales costs in dollars compared to prior year reflects higher home closing revenue as well as certain increased commission incentives that were temporarily offered during COVID-19 sales events.

The decline as a percentage of home closing revenue is due to the combination of leverage from higher closing volume and the more efficient sales and marketing structure of our entry-level and first-time move-up communities.

General and Administrative Expenses.

General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses.

For the three months ended March 31, 2020, general and administrative expenses were $34.2 million, slightly higher than the $33.6 million for the 2019 period, although as a percentage of home closing revenue, these expenses decreased by 100 basis points.

We continually strive to optimize overhead leverage through cost control efforts and higher closing volume at both the corporate and divisional levels.

For the three months ended June 30, 2020, general and administrative expenses were $36.2 million, $1.4 million higher than $34.8 million for the 2019 period, although as a percentage of home closing revenue, these expenses decreased by 50 basis points.

For the six months ended June 30, 2020 and 2019, general and administrative expenses were $70.3 million or 3.7% of home closing revenue, as compared to $68.3 million or 4.4% of home closing revenue in 2019.

The increased leveraging of costs against higher revenue and the pull-back on certain corporate expenditures due to COVID-19 aided in the improvement.

We continually strive to optimize overhead leverage through cost control efforts and expect some long-term improvements to result from the technological enhancements achieved during COVID-19.

Interest Expense.

Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our amended and restated unsecured revolving credit facility ("Credit Facility").

Interest expense for the three months ended March 31, 2020 totaled $16,000 compared to $4.1 million in the corresponding prior year period.

Interest expense for the three months ended June 30, 2020 totaled $2.1 million compared to $3.2 million in the corresponding prior year period.

We experienced similar decreases in year to date interest expense with $2.1 million in 2020 compared to $7.3 million in the prior year.

This year-over-year decrease is the result of less interest charges incurred resulting from the early tender of $300.0 million Senior Notes that were due in the first quarter of 2020, which we redeemed in the fourth quarter of 2019 partially offset by interest charges from our Credit Facility which had $500.0 million outstanding for the first half of second quarter 2020.

Other Income, Net.

Other income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures.

For the three months ended March 31, 2020, Other income, net was $0.6 million, compared to $1.0 million in the 2019 comparable period.

For the three months ended June 30, 2020, Other income, net was $1.5 million, compared to $2.4 million in the 2019 comparable period.

For the six months ended June 30, 2020, Other income, net was $2.1 million compared to $3.4 million in the 2019 period.

Income Taxes.

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

The reduced rate at March 31, 2020, is due to availability of the IRC §45L energy efficient homes credits from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act on December 20, 2019, which extended the energy credit tax benefit to 2020.

We also recorded a larger amount of tax benefit from equity-based compensation for stock awards that vested in the three months ended March 31, 2020 as compared to the same period in 2019.

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

The reduced rate at June 30, 2020, is due to availability of the IRC §45L energy efficient homes credits from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act on December 20, 2019, which extended the energy credit tax benefit to 2020.

We also recorded a larger amount of tax benefit from equity-based compensation for stock awards that vested in the six months ended June 30, 2020 as compared to the same period in 2019.

Liquidity and Capital Resources

Our principal uses of capital in the first three months of 2020 were acquisition and development of new and strategic lot positions, home construction, operating expenses, the payment of routine liabilities, and repurchasing our common stock.

Our principal uses of capital in the first six months of 2020 were acquisition and development of new and strategic lot positions, home construction, operating expenses, the payment of routine liabilities, and repurchases of our common stock.

We used funds generated by operations to meet our short-term working capital requirements.

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Operating Cash Flow Activities

During the three months ended March 31, 2020, net cash provided by operating activities totaled $43.9 million versus $32.3 million during the three months ended March 31, 2019.

During the six months ended June 30, 2020, net cash provided by operating activities totaled $237.4 million versus $113.3 million during the six months ended June 30, 2019.

Operating cash flows in 2020 and 2019 benefited from cash generated by net earnings of $161.8 million and $76.2 million, respectively.

For the three months ended March 31, 2020, operating cash flows were primarily offset by an increase in real estate of $45.2 million.

For the three months ended March 31, 2019, net earnings were offset mainly by a decrease in accounts payable and accrued liabilities of $12.2 million.

For the six months ended June 30, 2020, operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $34.8 million due to timing of payments for routine transactions.

Investing Cash Flow Activities

During the three months ended March 31, 2020, net cash used in investing activities totaled $4.2 million as compared to $6.3 million for the same period in 2019.

Cash used in investing activities in the first three months of 2020 and 2019 is mainly attributable to the purchases of property and equipment of $5.3 million and $5.2 million for the 2020 and 2019 periods, respectively.

During the six months ended June 30, 2020, net cash used in investing activities totaled $9.1 million as compared to $5.8 million for the same period in 2019.

Cash used in investing activities in the first six months of 2020 and 2019 is mainly attributable to the purchases of property and equipment of $10.3 million and $12.1 million for the 2020 and 2019 periods, respectively.

Financing Cash Flow Activities

During the three months ended March 31, 2020, net cash provided by financing activities totaled $438.2 million as compared to net cash used in financing activities of $9.9 million for the same period in 2019.

The activity in 2020 is the result of $500.0 million in proceeds from our Credit Facility offset by $60.8 million in share repurchases.

The net cash used in financing activities in 2019 primarily reflects repurchases of our common stock of $9.0 million.

During the six months ended June 30, 2020, net cash used in financing activities totaled $63.2 million as compared to$11.6 million for the same period in 2019.

The activity in 2020 is primarily from $60.8 million in share repurchases.

Similarly in 2019, the net cash used in financing activities in 2019 primarily reflects repurchases of our common stock of $9.0 million.

Overview of Cash Management

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In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred.

From a liquidity standpoint, pre-COVID-19, we were actively acquiring and developing lots in our markets to grow our lot supply and active community count.

We have since significantly slowed our spend on land acquisition and development to a notably slower pace until additional clarity after the impact and duration of COVID-19 is available.

During the three months ended March 31, 2020, we closed 2,316 homes, purchased about 3,100 lots for $122.5 million, spent $110.0 million on land development and started construction on 2,756 homes.

From a liquidity standpoint, with the exception of a limited pause due to COVID-19 uncertainties in late first quarter and early second quarter, we are actively acquiring and developing lots in our markets to grow our lot supply and active community count.

During the six months ended June 30, 2020, we closed 5,086 homes, purchased about 5,600 lots for $240.6 million, spent $219.4 million on land development and started construction on approximately 5,600 homes.

We primarily purchase undeveloped land or partially-finished lots requiring development dollars in order to bring them to a finished status ready for home construction.

We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development .

We ended the first quarter of 2020 with $797.3 million of cash and cash equivalents, an increase of $477.9 million from December 31, 2019 and had $500.0 million in outstanding borrowings on our Credit Facility at March 31, 2020 with no such borrowings at December 31, 2019.

Between our available cash and liquidity remaining in our Credit Facility, we believe that we currently have sufficient liquidity to manage through the current COVID-19 environment.

We ended the second quarter of 2020 with $484.6 million of cash and cash equivalents, an increase of $165.2 million from December 31, 2019.

During the six months ended June 30, 2020, we had gross borrowings and repayments on our Credit Facility of $500 million, each, and had no outstanding borrowings on our Credit Facility at June 30, 2020 and December 31, 2019.

Between our available cash and liquidity in our Credit Facility, we believe that we currently have sufficient liquidity to manage through both our strategic growth goals and the uncertainties of the current COVID-19 environment.

Nevertheless, we may seek additional capital to strengthen our liquidity position.

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There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs.

We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase or redeem our outstanding senior notes although we do not currently intend to do so until the economy and our business stabilizes from COVID-19.

On February 13, 2019, the Company's Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock.

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The Company intends to retire any shares repurchased.

In the first quarter of 2020, we purchased and retired 1,000,000 shares of our common stock at an aggregate purchase price of $60.8 million and as of March 31, 2020, $23.2 million remained available under this program, although this program is currently on hold until our business stabilizes from COVID-19.

In the six months ended June 30, 2020, we purchased and retired 1,000,000 shares of our common stock at an aggregate purchase price of $60.8 million and as of June 30, 2020, $23.2 million remained available under this program.

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management.

Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Notes payable and other borrowings $ 1,017,437 $ 1,018,981

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We have never declared cash dividends, nor do we intend to declare cash dividends in the foreseeable future.

We plan to retain our cash to manage our liquidity and in the longer term, following stabilization of the economy and our business post COVID-19, we intend to utilize our cash to grow community count.

We plan to utilize our cash to manage our liquidity and to grow community count.

Future cash dividends, if any, will depend upon economic and financial conditions, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors

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In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined in the credit facility) of at least 1.50 to 1.00 or (ii) liquidity (as defined in the credit facility) 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.

Our actual financial covenant calculations as of March 31, 2020 are reflected in the table below.

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

Our actual financial covenant calculations as of June 30, 2020 are reflected in the table below.

Financial Covenant (dollars in thousands):

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We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy seasonally higher deliveries in the second half of the year.

Although the current year's trends will likely be impacted by COVID-19, we expect this seasonal pattern to continue over the long term.

Recent Issued Accounting Pronouncements

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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 2. Management’s Discussion and Analysis