What changed in this filing

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Item 1. Financial Statements

2020-10-27 compared with 2020-07-27 · 114 added, 111 removed, 586 unchanged (28% of the section changed)

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(in thousands, except share amounts)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Cash and cash equivalents $ 609,979 $ 319,466

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Authorized 10,000,000 shares;

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

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

Common stock, par value $ 0.01 .

Authorized 125,000,000 shares;

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

37,612,127 and 38,199,111 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in capital 460,268 505,352

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(in thousands, except per share amounts)

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Home closing gross profit 243,567 186,117 642,623 461,697

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

Land closing gross profit/(loss) 510 ( 26 ) ( 555 ) ( 1,402 )

Total closing gross profit 244,077 186,091 642,068 460,295

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(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

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Changes in assets and liabilities:

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 real estate 9,080 ( 110,295 )

(Increase)/decrease in deposits on real estate under option or contract ( 12,910 ) 5,773

Decrease/(increase) in other receivables, prepaids and other assets 4,933 ( 3,108 )

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

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

Increase in accounts payable and accrued liabilities 60,039 84,632

Increase in home sale deposits 1,263 2,808

Net cash provided by operating activities 373,082 167,360

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Meritage Homes is a leading designer and builder of single-family homes.

We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal primarily to first-time and first move-up buyers.

We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal to the first-time and first move-up markets.

We have homebuilding operations in three regions:

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We commenced our homebuilding operations in 1985 through our predecessor company known as Monterey Homes.

Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and was merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets.

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

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

At September 30, 2020, we were actively selling homes in 204 communities, with base prices ranging from approximately $ 188,000 to $ 1,300,000 .

Basis of Presentation .

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Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

These financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.

These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.

The unaudited consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”).

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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 $ 68.4 million and $ 54.5 million are included in cash and cash equivalents at June 30, 2020 and December 31, 2019, respectively.

Amounts in transit from title companies or closing agents for home closings of approximately $ 58.9 million and $ 54.5 million are included in cash and cash equivalents at September 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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In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred.

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.

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

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.

Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes.

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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 $ 47.8 million and $ 50.9 million as of June 30, 2020 and December 31, 2019, respectively.

Our Deposits on real estate under option or contract were $ 63.0 million and $ 50.9 million as of September 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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In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration.

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 lease liabilities are classified within Accrued liabilities on our consolidated balance sheet.

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

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

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

ROU assets $ 22,881 $ 26,332

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Outstanding Estimated work

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Accrued Liabilities .

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

June 30, 2020 December 31, 2019

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

September 30, 2020 December 31, 2019

Accruals related to real estate development and construction activities $ 97,028 $ 74,448

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The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home.

With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our communities.

With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and our historical data and trends for our communities.

We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion.

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 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.

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

Included in the warranty reserve balances at September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements.

These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials.

We believe that our total reserves, coupled with our contractual relationships and rights with our trade partners and the general liability insurance we maintain, are sufficient to cover our general warranty obligations.

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(4) allocate the transaction price to the performance obligations in the contract, if applicable;

and (5) recognize revenue when (or as) we satisfy the performance obligation.

The performance obligation and subsequent revenue recognition for our three sources of revenue are outlined below:

and (5) recognize revenue when (or as) we satisfy the performance obligations.

The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:

• Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow.

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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.

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.

Home closing and land sale revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated 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 future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker.

The related contract assets for these estimated future renewal commissions are no t material at September 30, 2020 and December 31, 2019.

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

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Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

Entities will need to consider both the nature of the costs and the phase of development in which the implementation costs are incurred to determine whether the costs should be capitalized or expensed.

Entities need to consider both the nature of the costs and the phase of development in which the implementation costs are incurred to determine whether the costs should be capitalized or expensed.

ASU 2018-15 was effective for us beginning January 1, 2020 on a prospective basis to all implementation costs incurred after the date of adoption.

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Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which eliminates, adds, and modifies certain disclosure requirements for fair value measurements.

Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

ASU 2018-13 was effective for us beginning January 1, 2020.

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Real estate consists of the following (in thousands):

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Homes under contract under construction (1)

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property taxes, homeowner association dues, etc.) are expensed as incurred.

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred in connection with our real estate development and construction activities.

We capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities.

Capitalized interest is allocated to active real estate when incurred and charged to cost of closings when the related property is delivered.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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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 June 30, 2020 (dollars in thousands):

The table below presents a summary of our lots under option at September 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 June 30, 2020.

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

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

As of September 30, 2020, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to our homebuyers.

Our investment in this mortgage joint venture as of September 30, 2020 and December 31, 2019 was $ 0.6 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):

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

$ 4,662 $ 6,329

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Total liabilities and equity $ 14,473 $ 17,365

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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(1) Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures.

This balance may differ from the balance reported in our consolidated financial statements due to the following reconciling items:

This balance may differ from the balance reported in our unaudited consolidated financial statements due to the following reconciling items:

(i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Other borrowings, real estate notes payable (1)

$ 23,031 $ 22,876

$ 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 %

$ 780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.15 % at September 30, 2020) plus 1.375 % or Prime ( 3.25 % at September 30, 2020) plus 0.375 %

Total $ 23,031 $ 22,876

(1) Reflects balance of non-recourse non-interest bearing notes payable in connection with land purchases .

(1) Reflects non-recourse non-interest bearing notes payable in connection with land purchases .

The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time.

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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 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.

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

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

During the first quarter of 2020 we borrowed $ 500.0 million on our Credit Facility, which we repaid in full during the second quarter of 2020.

There were no borrowings or repayments during the three months ended September 30, 2020.

There were no borrowings or repayments during the three and nine months ended September 30, 2019.

As of September 30, 2020, we had outstanding letters of credit issued under the Credit Facility totaling $ 74.6 million, leaving $ 705.4 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR NOTES, NET

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

7.00 % senior notes due 2022

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6.00 % senior notes due 2025.

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

At September 30, 2020 and December 31, 2019 there was approximately $ 3,818 and $ 4,432 in net unamortized premium, respectively.

403,818 404,432

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Total $ 996,770 $ 996,105

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 June 30, 2020.

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

We were in compliance with all such covenants as of September 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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NOTE 7 — FAIR VALUE DISCLOSURES

We account for non-recurring fair value measurements of our non-financial assets and liabilities in accordance with ASC 820-10 Fair Value Measurement ("ASC 820").

This guidance defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements.

ASC 820-10 Fair Value Measurement ("ASC 820") defines fair value and establishes a framework for measuring fair value and addresses required disclosures about fair value measurements.

This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value.

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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):

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Principal Estimated Fair

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Our acquisitions were recorded in accordance with ASC 805, Business Combinations , and ASC 820, using the acquisition method of accounting.

The purchase price for acquisitions is allocated based on estimated fair value of the assets and liabilities at the date of the acquisition.

The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on our consolidated balance sheet in Prepaids, other assets and goodwill.

The purchase price for acquisitions was allocated based on estimated fair value of the assets and liabilities at the date of the acquisition.

The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on our unaudited consolidated balance sheet in Prepaids, other assets and goodwill.

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

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Additions — — — — — —

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

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

NOTE 10 — STOCKHOLDERS’ EQUITY

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

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(In thousands)

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

Six Months Ended June 30, 2019

Net earnings — — — 109,118 109,118

Stock-based compensation expense — — 6,130 — 6,130

Issuance of stock 9 — — — —

Balance at September 30, 2020 37,612 $ 377 $ 460,268 $ 1,739,204 $ 2,199,849

Nine Months Ended September 30, 2019

(In thousands)

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

Net earnings — — — 69,809 69,809

Stock-based compensation expense — — 5,657 — 5,657

Issuance of stock 32 — — — —

Balance at September 30, 2019 38,299 $ 383 $ 508,541 $ 1,364,642 $ 1,873,566

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 merged into and became available for grant under the 2018 Plan.

All available shares from expired, terminated, or forfeited awards that remained under prior plans were merged into and became 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 1,303,194 shares remain available for grant at June 30, 2020.

The 2018 Plan authorizes 6,600,000 shares of stock to be awarded, of which 1,304,796 shares remain available for grant at September 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.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Performance-based shares issued in excess of target shares granted (1)

— — 24,054 21,039

Restricted stock awards vested (includes performance-based awards) 8,610 32,369 413,016 435,292

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Unrecognized stock-based compensation cost $ 26,568 $ 22,341

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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 six months ended June 30, 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 three or nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Total $ 26,388 $ 22,557 $ 67,253 $ 46,361

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 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.

The effective tax rate for the three and nine months ended September 30, 2020 was 19.5 % and 19.9 %, and for the three and nine months ended September 30, 2019 was 24.4 % and 24.1 %, respectively.

The nine months ended September 30, 2020 tax rate reflects credits earned under the Taxpayer Certainty and Disaster Tax Relief Act of 2019 ("the Act") enacted into law on December 20, 2019.

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

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

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

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

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

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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.

At September 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 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.

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

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

At September 30, 2020 and December 31, 2019, we had tax benefits for state NOL carry forwards of $ 0.5 million, net of federal benefit, that begin to expire in 2030.

At September 30, 2020, we have income taxes payable of $ 9.7 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 June 30, 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 June 30, 2020.

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

The income taxes receivable primarily consists of energy tax credits and is recorded in Other receivables on the accompanying unaudited balance sheet at September 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 June 30, 2020 we do not believe that we have experienced an ownership change.

Based on our analysis performed as of September 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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Cash paid during the year for:

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

Interest, net of interest capitalized $ ( 14,756 ) $ ( 13,622 )

Income taxes paid $ 49,103 $ 39,491

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The following segment information is in thousands:

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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(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 June 30, 2020

At September 30, 2020

West Central East Financial Services Corporate and

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(1) Balance consists primarily of cash and property and equipment .

(2) Balance consists primarily of development reimbursements from local municipalities and prepaid expenses and other assets.

(3) Balance consists primarily of goodwill (see Note 9), prepaid expenses and other assets and property and equipment.

(2) Balance consists primarily of cash, development reimbursements from local municipalities and prepaid expenses and other assets.

(3) Balance consists primarily of cash, goodwill (see Note 9), prepaid expenses and other assets and property and equipment.

(4) Balance consists primarily of cash, our deferred tax asset and prepaid expenses and other assets.

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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 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.

We believe there are no pending legal or warranty matters as of September 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 $ 23.3 million of total warranty reserves at September 30, 2020 we have case specific reserves related to alleged stucco defects in homes in certain Florida communities we developed between 2006 and 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 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.

As of September 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.

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

Special Note of Caution Regarding Forward-Looking Statements

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

statements concerning our expectations for our financial results, business, operations, 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;

our operating strategy and initiatives, 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 including our actions in light of COVID-19;

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

that we may opportunistically repurchase or redeem our debt;

the benefits of our land acquisition strategy and structures, including the use and the benefits of option contracts and joint ventures;

the benefits of our land acquisition strategy and structures, including the use and the benefits of option contracts;

our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on;

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the expected outcome of legal proceedings we are involved in and the sufficiency of our reserves relating thereto;

the sufficiency of our liquidity and capital resources to support our business strategy and manage throughout the COVID-19 environment;

our ability and willingness to acquire land under option or contract;

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Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following:

disruptions to our business by COVID-19, fears of a similar event, and measures that federal, state and local governments and/or health authorities implement to address it;

disruptions to our business by COVID-19, fear of a similar event, and measures that federal, state and local governments and/or health authorities implement to address it;

the availability and cost of finished lots and undeveloped land;

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changes in interest rates and the availability and pricing of residential mortgages;

our exposure to information technology failures and security breaches;

our exposure to information technology failures and security breaches and the impact thereof;

legislation related to tariffs;

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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-off of earnest or option deposits;

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;

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

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

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;

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;

legislation relating to energy and climate change;

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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