What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-12 compared with 2020-02-18 · 123 added, 145 removed, 787 unchanged (25% of the section changed)

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For certain communities that did not have actual recent home closings, we compared to historical home sales and closings in nearby communities taking into consideration factors such as location, size, and type of community.

In addition, we met with management to understand how recent trends in home sales and closings, and any unique factors have been considered in the Company’s evaluation of the recoverability of real estate assets.

In addition, we met with management to understand how recent trends in home sales and closings, and any unique factors, such as COVID-19 considerations or change in the intended use of the assets, have been considered in the Company’s evaluation of the recoverability of real estate assets.

/s/ DELOITTE & TOUCHE LLP

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Property and equipment, net 38,933 50,606

Deferred tax asset 25,917 26,465

Deferred tax assets, net 36,040 25,917

Prepaids, other assets and goodwill 103,308 114,063

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Home closing gross profit 980,408 680,660 631,950

Land closing gross (loss)/profit ( 1,045 ) ( 2,797 ) 4,360

Land closing gross loss ( 20,794 ) ( 1,045 ) ( 2,797 )

Total closing gross profit 959,614 679,615 629,153

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Balance at January 1, 2018 40,331 $ 403 $ 584,578 $ 991,844 $ 1,576,825

Adoption of ASU 2014-09 — — — ( 583 ) ( 583 )

Net earnings — — — 227,332 227,332

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Equity award compensation expense — — 17,181 — 17,181

Share repurchases ( 2,584 ) ( 26 ) ( 99,974 ) — ( 100,000 )

Balance at December 31, 2018 38,073 381 501,781 1,218,593 1,720,755

Adoption of ASU 2014-09 — — — ( 583 ) ( 583 )

Net earnings — — — 249,663 249,663

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Net earnings $ 423,475 $ 249,663 $ 227,332

Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 31,052 27,923 26,966

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Changes in assets and liabilities:

Decrease/(increase) in real estate 3,621 ( 19,426 ) ( 301,477 )

Decrease in deposits on real estate under option or contract 453 12,444 21,355

(Increase)/decrease in receivables, prepaids and other assets ( 9,112 ) 3,042 ( 17,775 )

(Increase)/decrease in real estate ( 40,089 ) 3,621 ( 19,426 )

(Increase)/decrease in deposits on real estate under option or contract ( 9,477 ) 453 12,444

Decrease/(increase) in receivables, prepaids and other assets 2,130 ( 9,112 ) 3,042

Increase/(decrease) in accounts payable and accrued liabilities 88,942 42,654 ( 12,820 )

(Decrease)/increase in home sale deposits ( 4,390 ) ( 5,423 ) 5,711

Net cash provided by/(used in) operating activities 346,820 262,200 ( 87,132 )

Increase/(decrease) in home sale deposits 828 ( 4,390 ) ( 5,423 )

Net cash provided by operating activities 530,360 346,820 262,200

Cash flows from investing activities:

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Cash flows from financing activities:

(Repayment of)/proceeds from Credit Facility, net — — ( 15,000 )

Repayment of loans payable and other borrowings ( 16,379 ) ( 3,676 ) ( 15,755 )

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Repurchase of shares ( 69,592 ) ( 16,035 ) ( 100,000 )

Net cash (used in)/provided by financing activities ( 325,331 ) ( 87,953 ) 143,248

Net increase/(decrease) in cash and cash equivalents 8,000 140,720 39,044

Net cash used in financing activities ( 85,971 ) ( 325,331 ) ( 87,953 )

Net increase in cash and cash equivalents 426,155 8,000 140,720

Cash and cash equivalents, beginning of year 319,466 311,466 170,746

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Organization.

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

Meritage Homes Corporation ("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 for the first-time and first move-up buyers.

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Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

We also operate a wholly-owned title company, Carefree Title Agency, Inc.

("Carefree Title").

Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers.

Beginning in the fourth quarter of 2019, we commenced operations of wholly owned Meritage Homes Insurance Agency, Inc.

(“Meritage Insurance”).

Meritage Insurance works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers.

Through our successors, we commenced our homebuilding operations in 1985.

Meritage Homes Corporation was incorporated in 1988 in the state of Maryland.

These three regions are our principal homebuilding reporting segments.

We also operate a financial services reporting segment.

In this segment, we offer title and escrow, mortgage, and insurance services.

Carefree Title Agency, Inc.

("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers.

Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue.

Beginning in the fourth quarter of 2019, we commenced operations of a wholly-owned insurance broker, Meritage Homes Insurance Agency (“Meritage Insurance”).

Meritage Insurance works in collaboration with insurance companies nationwide to offer homeowners' insurance and other various insurance products to our homebuyers.

Our financial services operations also provide mortgage loans to our homebuyers indirectly through an unconsolidated joint venture.

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 merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

Since that time, we have engaged in homebuilding and related activities and ceased to operate as a real estate investment trust.

Meritage Homes Corporation operates as a holding company and has no independent assets or operations.

Its homebuilding construction, development and sales activities are conducted through its subsidiaries.

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 in some markets under the name of Monterey Homes that are in close-out stages.

At December 31, 2020, we were actively selling homes in 195 communities, with base prices ranging from approximately $ 191,000 to $ 921,000 .

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Amounts in transit from title companies for home closings of approximately $ 61.3 million and $ 54.5 million are included in cash and cash equivalents at December 31, 2020 and 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.

Real estate is stated at cost unless the community or land 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").

Inventory includes the costs of land acquisition, land development, home construction, capitalized interest, real estate taxes, and capitalized direct overhead costs incurred during development, less impairments, if any.

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Home construction costs are accumulated on a per-home basis, while selling costs are expensed as incurred.

Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase.

Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) and are allocated based upon the total number of homes expected to be closed in each community or phase.

Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in the community or phase.

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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.

Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control.

Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, slower absorptions, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated

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

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.

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.

Actual community lives will vary based on the size of the community, the sales absorption rate and whether the land

purchased was raw, partially-developed or in finished status.

Actual community lives will vary based on the size of the community, the sales absorption rate and whether the land purchased was raw, partially-developed or in finished status.

Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.

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The impairment of a community is allocated to each lot on a straight-line basis.

See Note 2 for additional information related to real estate and impairments.

Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased.

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Deferred Costs.

At December 31, 2019 and 2018, deferred costs representing debt issuance costs related to our Credit Facility totaled approximately $ 3.3 million and $ 3.6 million, net of accumulated amortization of approximately $ 8.6 million and $ 7.6 million respectively, and are included on our consolidated balance sheets within Prepaids, other assets and goodwill.

At December 31, 2020 and 2019, deferred costs representing debt issuance costs related to our Credit Facility of approximately $ 4.7 million and $ 3.3 million, net of accumulated amortization, are included on our consolidated balance sheets within Prepaids, other assets and goodwill.

The costs are primarily amortized to interest expense using the straight line method which approximates the effective interest method.

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We use the equity method of accounting for investments in unconsolidated entities over which we exercise significant influence but do not have a controlling interest.

Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in Other income net, or Earnings from financial services

unconsolidated entities and other, net, in our income statements.

Under the equity method, our share of the unconsolidated entities’ earnings or loss is included in Other income net, or Earnings from financial services unconsolidated entities and other, net, in our income statements.

We use the cost method of accounting for investments in unconsolidated entities over which we do not have significant influence, if any.

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Warranty reserves 23,743 22,015

Lease liability (1)

Lease liabilities (1)

28,254 34,231

Other accruals 20,256 10,363

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Revenue Recognition.

In accordance with Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (Topic 606), we apply the following steps in determining the timing and amount of revenue to recognize:

In accordance with ASC 606 , Revenue from Contracts with Customers , we apply the following steps in determining the timing and amount of revenue to recognize:

(1) identify the contract with our customer;

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• Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

• Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which generally occurs as each home is closed.

Revenues associated with our insurance company operations represent insurance brokerage commissions from home and other insurance policies placed with third party carriers.

Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy.

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

Home sale contract assets consist of cash from home closings that are in transit from title companies, which are considered cash in transit and are classified as cash on our accompanying consolidated balance sheet.

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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 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 not material.

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

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If we determine that we will not be able to realize our deferred tax assets in the future, we will record a valuation allowance, which increases the provision for income taxes.

We recognize interest and penalties related to unrecognized tax benefits within the Provision for income taxes line in the accompanying consolidated income statement.

Accrued interest and penalties are included within the Accrued liabilities line in the accompanying consolidated balance sheets.

We recognize interest and penalties related to unrecognized tax benefits within Provision for income taxes in the accompanying consolidated income statement.

Accrued interest and penalties are included within Accrued liabilities in the accompanying consolidated balance sheets.

See Note 12 for additional information related to income taxes.

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Surety Bonds and Letters of Credit.

We provide letters of credit in support of our obligations relating to the development of our projects and other corporate purposes.

Surety bonds are generally posted in lieu of letters of credit or cash deposits.

We provide surety bonds and letters of credit in support of our obligations relating to the development of our projects and other corporate purposes, in lieu of cash deposits.

The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities.

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Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the twelve months ended December 31, 2020 and 2019.

Included in the warranty reserve balances at December 31, 2019 and December 31, 2018 reflected in the table below are case-specific reserves for a warranty matter related to alleged stucco defects in Florida.

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

See Note 16 for additional information regarding these case-specific reserves.

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

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However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.

We have received claims related to stucco installation from homeowners in certain Florida communities and based on the information available to us we have established reserves to cover our anticipated net exposure related to these claims.

Our review of these stucco related matters is ongoing and our estimate of future costs of repairs is based on our judgment, various assumptions and internal data.

Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate.

As of December 31, 2019, after taking into account potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the repairs related to the existing stucco claims.

Additionally, we have received claims related to a foundation design and performance matter affecting a single community in Texas requiring repairs to be made to homes within that community.

A significant amount of the identified repairs have been made, however, repair efforts are ongoing and our estimate of costs to resolve this matter are updated regularly as progress is made.

As of December 31, 2019, taking into account sources of future potential recovery from contractors involved with the design and construction of

the homes and their insurers as well as from our general liability insurer, we believe our reserves are sufficient to cover repairs and related claims.

See Note 16 in the accompanying consolidated financial statements for additional information regarding both of these matters.

Recent Accounting Pronouncements.

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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.

ASU 2018-15 is effective for us beginning January 1, 2020.

ASU 2018-15 may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

We plan to adopt ASU 2018-15 prospectively.

We do not expect adoption to have a material impact on our financial statement disclosures.

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.

The adoption of ASU 2018-15 did not have a material impact on our financial statement disclosures.

In August 2018, the FASB issued ASU No.

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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.

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

As we currently only have Level 2 financial instruments, we do not expect adoption to have a material impact on our financial statement disclosures.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) ("ASU 2016-02").

ASU 2016-02 amended the previous accounting standards for lease accounting and resulted in the requirement that lessees recognize leases with lease terms of greater than twelve months on their balance sheets.

We adopted ASU 2016-02 on January 1, 2019 using a modified retrospective method and did not restate prior period financial statements.

We elected the practical expedient package which allows us to carry forward our original assessment of whether contracts contained leases, lease classification and the initial direct costs.

We also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets.

The adoption of ASU 2016-02 resulted in a gross up on our consolidated balance sheet for right-of-use ("ROU") assets and lease liabilities of $ 20.5 million and $ 28.7 million, respectively, as of January 1, 2019.

Our ROU assets are included in the Prepaids, other assets and goodwill line item and the corresponding lease obligations are included in the Accrued liabilities line item on our consolidated balance sheet.

The adoption of ASU 2016-02 had no impact on our consolidated income statements.

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

As we currently only have Level 2 financial instruments, the adoption of ASU 2018-13 did not have a material impact on our financial statement disclosures.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

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

(3) Includes land held for sale of $ 72.7 million and $ 36.6 million as of December 31, 2020 and 2019, respectively.

As previously noted, in accordance with ASC 360-10, each of our land inventory and related real estate assets is reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP.

ASC 360-10 requires impairment charges to be recorded if the asset is not deemed recoverable and the fair value of such assets is less than their carrying amounts.

Our determination of fair value is based on projections and estimates.

We also evaluate alternative product offerings in communities where impairment indicators are present and other strategies for the land exist, such as selling or holding the land for sale.

We recorded impairment charges of approximately $ 24.9 million and $ 7.3 million for the years ended December 31, 2020 and 2019, respectively.

The majority of the impairment charges during the year ended December 31, 2020 are the result of upcoming dispositions of certain assets that no longer fit our strategy of entry-level and first move-up communities.

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

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Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into an option or purchase agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created.

We evaluate all option and purchase agreements for land to determine whether they are a VIE.

We evaluate all option and purchase agreements and amendments for land to determine whether they are a VIE.

ASC 810, Consolidation , requires that for each VIE, we assess whether we are the primary beneficiary and, if we are, we consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned.

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The exercise of these lease renewal options is generally at our discretion.

In accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the ROU asset is based on the lease liability, subject to adjustment, such as for lease incentives.

In accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the right of use ("ROU") asset is based on the lease liability, subject to adjustment, such as for lease incentives.

Our leases do not provide a readily determinable implicit interest rate and therefore, we must estimate our incremental borrowing rate.

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Our short-term lease costs and sublease income are de minimis.

Twelve Months Ended December 31, 2019

Years Ended December 31,

Operating lease expense $ 7,657 $ 6,981

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Lease liabilities $ 28,254 $ 34,231

Weighted-average remaining lease term 4.8 years

Weighted-average remaining lease term 4.0 years 4.8 years

Weighted-average discount rate (incremental borrowing rate) 4.54 % 4.53 %

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Accounts payable and other liabilities $ 5,588 $ 6,580

Notes and mortgages payable — 26,808

Meritage (1) 5,330 5,678

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Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

The joint venture assets and liabilities noted in the table above represent the one active land venture, one mortgage and various inactive ventures.

Our total investment in all of these joint ventures is $ 4.4 million as of December 31, 2020.

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Total $ 23,094 $ 22,876

(1) Reflects balance of non-recourse non-interest bearing notes payable in connection with land purchases as of December 31, 2019.

(1) Reflects balance of 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.

In June 2019, the aggregate commitment was increased to $ 780.0 million and the maturity date extended to July 2023.

The accordion feature was refreshed permitting the size of the facility to increase to a maximum of $ 880.0 million, subject to certain conditions, including the availability of additional bank commitments.

In December 2020, the Credit Facility was amended to extend the maturity date to December 22, 2025 and provide for the replacement of LIBOR in the event such rate is no longer available.

The Credit Facility's aggregate commitment is $ 780.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $ 880.0 million, subject to certain conditions, including the availability of additional bank commitments.

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

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During the twelve months ended December 31, 2019, we had $ 90.0 million of gross borrowings and repayments.

Borrowings and repayments during the twelve months ended December 31, 2017 totaled $ 415.0 million and $ 430.0 million, respectively.

During the twelve months ended December 31, 2018, we had $ 285.0 million of gross borrowings and repayments.

As of December 31, 2020 we had outstanding letters of credit issued under the Credit Facility totaling $ 97.4 million, leaving $ 682.6 million available under the Credit Facility to be drawn.

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7.00 % senior notes due 2022

At December 31, 2018 there was approximately $ 711 in net unamortized premium.

7.00 % senior notes due 2022

$ 300,000 $ 300,000

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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 believe we are in compliance with all such covenants as of December 31, 2019.

We were in compliance with all such covenants as of December 31, 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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Subsidiaries of Meritage Homes Corporation that are nonguarantor subsidiaries, if any, are, individually and in the aggregate, minor.

During 2010, we completed an offering of $ 200.0 million aggregate principal amount of 7.15 % senior notes due 2020.

The notes were issued at 97.567 % of par value to yield 7.50 %.

In the fourth quarter of 2013, we completed a $ 100.0 million add-on offering to the existing 7.50 % senior notes due 2020.

The add-on was issued at 106.699 % of par value to yield 5.875 %.

During 2010, we completed an offering of $ 200.0 million aggregate principal amount of 7.15 % senior notes due 2020 (the "2020 Notes").

During 2013, we completed a $ 100.0 million add-on offering to the existing 7.50 % senior notes due 2020.

In the fourth quarter of 2019, we redeemed the 2020 Notes, incurring $ 5.6 million in charges reflected as Loss on early extinguishment of debt in the accompanying income statements.

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Using the proceeds from the 2027 Notes offering, we retired all $ 126.5 million of our convertible senior notes through a repurchase of $ 51.9 million in privately negotiated transactions and a redemption of the remaining $ 74.6 million through a combination of holder redemptions and an exercise of our call option at a redemption price equal to 100 % of the principal amount of the notes redeemed, plus accrued and unpaid interest.

As a result, we incurred a loss on early extinguishment of debt of $ 0.3 included in the accompanying consolidated income statement for the twelve months ended December 31, 2017.

Scheduled principal maturities of our senior and notes as of December 31, 2020 follow (in thousands):

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NOTE 8 — 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 .

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 defines fair value, 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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If the only observable inputs are from inactive markets or for transactions which the Company evaluates as “distressed”, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.

Refer to Notes 1 and 2 for additional information regarding the valuation of our non-financial assets.

Financial Instruments :

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7.00 % senior notes

N/A N/A $ 300,000 $ 307,500

7.00 % senior notes

$ 300,000 $ 319,758 $ 300,000 $ 327,390

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

Non-Financial Instruments :

Our Real estate assets are Level 3 instruments that are required to be recorded at fair value on non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable.

Refer to Notes 1 and 2 for information regarding the valuation of these assets.

Our Real estate assets measured at fair value are as follows (in thousands):

Year Ended December 31,

Adjusted basis of long-lived real estate assets $ 46,917 $ 42,949

Impairments $ 24,852 $ 7,293

Initial basis of long-lived real estate assets $ 71,769 $ 50,242

At December 31, 2020, we remeasured these assets at fair value because of a decision to sell certain assets that are no longer aligned with our focus on first-time and first move-up homebuyers.

The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

NOTE 9 — EARNINGS PER SHARE

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Effect of dilutive securities:

Convertible debt (1) — — 1,311

Stock options and unvested restricted stock 791 621 630

Unvested restricted stock 766 791 621

Diluted average shares outstanding 38,484 38,891 40,728

Net earnings as reported $ 423,475 $ 249,663 $ 227,332

Interest attributable to convertible senior notes, net of income taxes — — 941

Net earnings for diluted earnings per share $ 249,663 $ 227,332 $ 144,196

Basic earnings per share $ 11.23 $ 6.55 $ 5.67

Diluted earnings per share $ 11.00 $ 6.42 $ 5.58

(1) In accordance with ASC 260-10, Earnings Per Share , we calculated the dilutive effect of convertible securities using the "if-converted" method based on the number of days the Convertible Notes were outstanding during the 2018 period.

All of the Convertible Notes were retired in 2017.

NOTE 10 — ACQUISITIONS AND GOODWILL

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performance share awards and performance-based awards in addition to non-qualified and incentive stock options.

We have not granted any stock options since 2009.

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

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.

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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.

Non-vested stock awards are usually granted with a five -year ratable vesting period for employees and with a three -year cliff vesting for both non-vested stock and performance-based awards granted to senior executive officers and non-employee directors.

Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for non-vested stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.

Summary of Nonvested (Restricted) Shares and Units Activity:

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These shares vested in March 2019.

(3) Performance-based shares granted for the year ended December 31, 2020 includes 24,054 shares that were issued as a result of the performance achievement exceeding the performance targets related to grants to our executive officers for the year ended December 31, 2017.

These shares vested in February 2020.

Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award.

Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718, which requires an assessment of probability of attainment of the performance target.

As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense and recorded on a straight-line basis through the end of the award’s vesting period.

recorded on a straight-line basis through the end of the award’s vesting period.

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

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Total equity awards outstanding (1) 1,098,545 1,240,529

(1) Includes unvested restricted stock, performance-based awards (assuming 100 % payout) and restricted stock units.

We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees.

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Total $ 110,091 $ 53,282 $ 55,922

Income taxes differ for the years ended December 31, 2019, 2018 and 2017, from the amounts computed using the expected federal statutory income tax rate of 21 %, 21 % and 35 %, respectively, as a result of the following (in thousands):

Income taxes for the years ended December 31, 2020, 2019 and 2018, differ from the expected amounts computed using the federal statutory income tax rate of 21 % as a result of the following (in thousands):

Years Ended December 31,

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Tax Act revaluation of deferred tax balances — — ( 2,741 )

Manufacturing deduction — — ( 7,580 )

Federal tax credits ( 16,523 ) ( 20,582 ) ( 10,330 )

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The effective tax rate was 20.6 %, 17.6 %, and 19.7 % for 2020, 2019 and 2018, respectively.

The reduced rates in 2019 and 2018 are due to lower corporate tax rates under tax reform, extension of the Internal Revenue Code §45L new energy efficient homes credit for homes closed in 2019 and 2018, and additional energy tax credits obtained by qualifying more homes in open prior tax years.

In 2018 there was also a favorable revaluation adjustment to our deferred tax assets in accordance with the SEC Staff Accounting Bulletin No.

118, based on completion of our 2017 tax returns in 2018.

The 2017 effective tax rate does not include the benefit of 2017 energy tax credits due to the legislation being passed in 2018, but does include additional energy tax credits obtained by qualifying more homes from prior open tax years.

The 2017 effective tax rate was reduced by the homebuilder manufacturing deduction which was eliminated in tax reform.

The 2017 effective tax rate was higher due to a revaluation adjustment to our deferred tax assets as a result of tax reform which was estimated at that time and revised in 2018 when our accounting for the income tax effects of tax reform was completed.

The rates in all three years are due to extension of the Internal Revenue Code ("IRC") §45L new energy efficient homes credits, and additional energy tax credits obtained by qualifying more homes in open prior tax years.

The rate in 2019 also reflects the additional benefit of energy tax credit for the 2018 tax year that was realized in the 2019 tax year due to the retroactive application of the 2019 Act.

Deferred tax assets and liabilities are netted on our balance sheet by tax jurisdiction.

Net overall tax assets for all jurisdictions are grouped and included as a separate asset.

Net overall deferred tax assets for all jurisdictions are grouped and included as a separate asset.

Net overall deferred tax liabilities for all jurisdictions are grouped and included in Accrued liabilities.

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Real estate $ 18,710 $ 12,090

Goodwill — 862

Warranty reserve 5,588 5,190

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Deferred tax liabilities:

Goodwill 879 3

Prepaids 1,487 2,113

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Deferred tax assets, net 36,040 25,917

Other deferred tax liability - state franchise taxes 4,449 4,378

Other deferred tax liabilities - state franchise taxes 4,476 4,449

Net deferred tax assets and liabilities $ 31,564 $ 21,468

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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 carryforward periods, experiences with operating losses and experiences of utilizing tax credit carryforwards and tax planning alternatives.

We have no valuation allowance on our deferred tax assets and NOL carryovers at December 31, 2019.

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

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act ("Tax Act").

Under ASC 740, the effects of new legislation are recognized in the period that includes the date of enactment.

The estimated impact on 2017 was to reduce the value of our deferred tax asset by $ 19.7 million, which is reflected in our effective tax rate reconciliation.

This impact was our most reasonable estimate at that time based on our understanding of the Tax Act as it applied to our business and changed as more information became available.

At December 31, 2018, we had completed our accounting for the income tax effects of the Tax Act on our deferred tax assets.

The estimated impact on 2017 was to reduce the value of our deferred tax asset by $ 19.7 million, which was reflected in our effective tax rate reconciliation for that year.

The impact was our most reasonable estimate at that time based on our understanding of the Tax Act as it applied to our business and changed as more information became available.

At December 31, 2018, we had completed our accounting for the

income tax effects of the Tax Act on our deferred tax assets.

In accordance with SEC Staff Accounting Bulletin No.

118 and ASC 740, we revised the valuation of our 2017 deferred tax assets for the impact of the Tax Act based on completion of our 2017 income tax returns.

Accordingly, in 2018 we recorded a favorable revaluation adjustment of $ 2.7 million which was also reflected in our effective tax rate reconciliation.

On February 9, 2018, the bipartisan Budget Act of 2018 was enacted and extended the availability for the IRC §45L new energy efficient homes credit to the end of 2017.

118 and ASC 740, we revised the valuation of our 2017 deferred tax assets for the impact of the Tax Act based on completion of our 2017 income tax returns in 2018.

Accordingly, in 2018 we recorded a favorable revaluation adjustment of $ 2.7 million which was reflected in our effective tax rate reconciliation for 2018.

On February 9, 2018, the Bipartisan Budget Act of 2018 was enacted and extended the availability for the IRC §45L new energy efficient homes credit retroactively to the end of 2017.

In accordance with ASC 740, we recognized a tax benefit of $ 8.1 million in 2018 for qualifying new homes closed in 2017.

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In December of 2019, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 as a part of the Further Consolidated Appropriations Act, 2020 (the "2020 Act") which the President signed into law on December 20, 2019.

The 2020 Act further extended the availability of the IRC §45L new energy efficient homes credit through the end of 2020.

The 2020 Act further extended the availability of the IRC §45L new energy efficient homes credit (the "energy tax credit") through the end of 2020.

Under ASC 740, the effects of the new legislation are recognized in the period that includes the date of enactment, regardless of the retroactive benefit.

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The estimated tax effected benefit is reflected in our effective tax rate reconciliation as the benefit from federal tax credits.

Our future NOL and deferred tax asset realization depends on sufficient taxable income in the carryforward periods under existing tax laws.

In December of 2020, the energy tax credit was extended through the end of 2021 and we expect to recognize a benefit from this extension.

Our future deferred tax asset realization depends on sufficient taxable income in the carryforward periods under existing tax laws.

Federal NOL carryforwards may be used to offset future taxable income for 20 years.

State NOL carryforwards may be used to offset future taxable income for a period of time ranging from 5 to 20 years, depending on the state jurisdiction.

At December 31, 2019, we had no remaining un-utilized federal NOL carryforward or federal tax credits.

At December 31, 2019, we had tax benefits for state NOL carryforwards of $ 0.8 million that begin to expire in 2028.

At December 31, 2019, we have a current tax receivable of $ 14.4 million, which primarily consists of current federal and state tax accruals, net of estimated tax payments and energy tax credits.

At December 31, 2020, we had no remaining un-utilized federal NOL carryforward, federal tax credits, or state NOL carryforwards.

At December 31, 2020, we have a current tax payable of $ 25.3 million, which consists of current federal and state income tax accruals net of current energy tax credits and estimated tax payments.

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

At December 31, 2020, we have a current tax receivable of $ 0.7 million from amending prior year returns to claim additional energy tax credits.

This amount is recorded in Other Receivables in the accompanying balance sheet at December 31, 2020.

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federal, state, or local income tax examinations by taxing authorities for years prior to 2016.

We have one state income tax examination covering various years pending resolution at this time.

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 Internal Revenue Code (“IRC”) §382.

We have no federal or state income tax examinations being conducted at this time.

The future tax benefits from any 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 December 31, 2020, we do not believe that we have experienced an ownership change.

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Non-cash operating activities:

Real estate not owned increase $ — $ — $ 38,864

Real estate acquired through notes payable $ 16,597 $ 11,721 $ 13,174

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We believe that the terms and fees negotiated for all transactions listed below are no less favorable than those that could be negotiated in arm’s length transactions.

We charter aircraft services from companies that use the private plane of Steven Hilton, our Chairman and CEO, although Mr.

We charter aircraft services from companies that use the private plane of Steven Hilton, our Executive Chairman and former CEO, although Mr.

Hilton does not have an ownership interest in the charter companies.

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As defined in ASC 280-10, Segment Reporting , we have nine homebuilding operating segments.

The homebuilding segments are engaged in the business of

acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services.

The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services.

We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity.

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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, prepaid expenses and other assets, and property and equipment.

(4) Balance consists primarily of cash.

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

(3) Balance consists primarily of cash, goodwill, prepaids and other assets, and property and equipment.

(4) Balance consists primarily of cash, deferred tax assets and prepaids and other assets.

At December 31, 2019

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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 cash.

(3) Balance consists primarily of goodwill, cash and property and equipment.

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

(3) Balance consists primarily of goodwill, prepaids and other assets, and property and equipment.

(4) Balance consists primarily of cash.

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

We believe there are not any pending legal or warranty matters 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”, we have case specific reserves within our $ 22.0 million of total warranty reserves related to alleged stucco defects in homes in certain Florida communities we developed prior to 2016.

We are involved in legal proceedings relating to such stucco defects.

Our review of these stucco related matters is ongoing and our estimate of and reserve for future costs of repairs is based on our judgment, various assumptions and internal data.

We believe there are

not any pending legal or warranty matters 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”, we have case specific reserves within our $ 23.7 million of total warranty 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 judgment and various assumptions and estimates.

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

We also are currently in the process of completing final repairs from a foundation design and performance matter affecting a single community in Texas.

In addition to the repairs required to be made to homes within that community, we have been named as a defendant in a lawsuit filed by homeowners in that community.

As of December 31, 2019, the claim we made for this matter under our general liability insurance policies has initially been denied, which we disagree with and have disputed

with our insurance carrier.

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

Nearly all of the identified repairs have been made, however, our estimate of costs to resolve this matter are updated regularly as progress is made or as new information becomes available.

As of December 31, 2019, after considering potential recoveries from the contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover both the above mentioned stucco related repairs and claims and the claims related to the Texas community.

As of December 31, 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.

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However, during economic downturns or times of certain government incentives, our results may not follow our historical trends.

NOTE 18 — SUBSEQUENT EVENTS

Pursuant to the share repurchase program authorized in 2019, in January 2020, we repurchased 100,000 shares of our common stock at an average purchase price of $ 61.35 .

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data