Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Industry Conditions
Housing market conditions were very strong in 2020, despite a short pause in March and April due to COVID-19 uncertainties, as healthy underlying economic and housing market fundamentals drove demand with historically low interest rates, a limited supply of homes, and an increased desire for healthier, safer homes. Homebuilders with attractive, lower price-point product in desirable locations captured this demand that has been bolstered in part by millennials entering the market in a meaningful way, as well as the baby boomer generation downsizing. We believe the longer-term economic data supports a continuation of a solid homebuilding cycle, although individual market results will vary, responding to each respective market's economic factors.
At Meritage, we continue to focus on enhancing our entry-level and first move-up product through our commitment to simplification and remaining focused on our key financial initiatives of home closing gross margin improvement, selling, general and administrative cost control and long-term community count growth. As of December 31, 2020, 94% of our current communities are targeted to first-time or first move-up buyers and those buyer segments represented approximately 95% of our orders in 2020. We believe our strategy will allow us to achieve higher gross margins and better opportunities to leverage our overhead costs in the years to come.
Summary Company Results
Total home closing revenue increased 23.9% due to higher closing volume, to $4.5 billion for the year ended December 31, 2020 from $3.6 billion in 2019. Home closing gross margin for the year ended December 31, 2020 improved by 310 basis points to 22.0% while gross margin for the year ended December 31, 2019 was 18.9%. The improved margin in 2020 reflects increased pricing power, increased volume and efficiencies in our construction process and effective cost controls, despite increasing lumber prices. We recorded impairment charges of approximately $24.9 million during the year ended December 31, 2020, primarily resulting from the decision to sell land assets that no longer fit our strategy, compared to $7.3 million of similar charges in 2019. Interest expense decreased to $2.2 million for the year ended December 31, 2020 from $8.4 million in 2019, due to the the early redemption of senior notes in the fourth quarter of 2019, partially offset by interest charges from our Credit Facility which had $500.0 million outstanding for several months during the first half of 2020. Pre-tax net earnings of $533.6 million in 2020 increased 76.1% from $302.9 million in 2019. Our effective tax rate in 2020 was 20.6% as compared to a 17.6% effective tax rate in 2019. Net income for the year ended December 31, 2020 was $423.5 million compared to $249.7 million in 2019.
Our results for 2020 reflect strong growth in both closings and orders as buyers took advantage of the historically low interest-rate environment and capitalized on their desire to purchase their first home or move out of their existing home and transition to a larger, healthier home with indoor space to accommodate work and school from home needs and outdoor space to enjoy. We ended 2020 with 11,834 closings, a 27.7% increase over 9,267 closings in 2019. Orders improved by 42.7% in 2020 with 13,724 orders for the year compared to 9,616 in 2019. At December 31, 2020, our backlog of $1.8 billion on 4,672 units increased by 65.1% in value, compared to $1.1 billion on 2,782 units at December 31, 2019. Despite the instability of the market in the early stages of the COVID-19 pandemic, our full year cancellation rate on sales orders as a percentage of gross sales in 2020 decreased to 13.6% as compared to 14.2% for the year ended December 31, 2019.
Company Positioning
We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, and industry-leading innovation in energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growth in the highly competitive new home market.
Our focus includes the following strategic initiatives:
• Expanding our community count and market share;
• Continuously improving the overall customer experience, most recently through a simplification of the customer home purchase and option selection process for move-up buyers at Studio M, and a shortened construction timeline;
• Demonstrating our commitment to innovation by extending our digital offerings, including virtual tours in all of our communities for both prospective buyers and home closing walkthroughs, 3-D tours and dynamic floor plans, and
27
partial or fully virtual closings in states where such services are permitted. We also offer a fully-automated and secured digital loan pre-approval process available on our website;
• Enhancing our website and sales offices through investments in technology. All of our LiVE.NOW ® communities feature interactive technology tools offering homebuyers the ability to electronically search for available homes with their desired home features and based on their preferred availability or move-in dates;
• Simplifying our production process to allow us to more efficiently build our homes and reduce our construction costs, which in turn allows us to competitively price our homes; and
• Improving our home closing gross profit by growing closing volume while streamlining our operations, allowing us to better leverage our overhead;
In order to maintain focus on growing our business, we also remain committed to the following:
• Increasing orders and maintaining a healthy order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;
• Achieving or maintaining a position of at least 5% market share in all of our markets;
• Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand;
• Managing construction efficiencies and costs through national and regional vendor relationships with a focus on quality construction and warranty management;
• Carefully managing our liquidity and a strong balance sheet; we ended the year with a 30.3% debt-to-capital ratio and a 10.5% net debt-to-capital ratio;
• Maximizing returns to our shareholders, most recently through our improved financial performance and share repurchase program; and
• Promoting a positive environment for our employees through our commitment to drive diversity, equity, and inclusion and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts.
Critical Accounting Policies
We have established various accounting policies that govern the application of United States generally accepted accounting principles (“GAAP”) in the preparation and presentation of our consolidated financial statements. Our significant accounting policies are described in Note 1 of the accompanying consolidated financial statements included in this Form 10-K. Certain of these policies involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, and revenue and costs. We are subject to uncertainties such as the impact of future events, economic, environmental, political and regulatory factors and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are revised when circumstances warrant. Such changes in estimates and refinements in methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements. The judgments, assumptions and estimates we use and believe to be critical to our business are based on historical experience, knowledge of the accounts, industry practices, and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we have made, actual results may differ from these judgments and estimates and could have a material impact on the carrying values of assets and liabilities and the results of our operations.
The accounting policies that we deem most critical to us and involve the most difficult, subjective or complex judgments are as follows:
28
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, by applying the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (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:
• 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. Revenue is reported net of any discounts and incentives.
• 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 is generally upon the close of escrow.
Real Estate
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 ASC 360-10, Property, Plant and Equipment. Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes under construction when home construction begins. 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) 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. When a home closes, we may have incurred costs for goods and services that have not yet been paid. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to cost of sales.
We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. 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, 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 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 rates 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.
All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges are recorded to write down an asset to its estimated fair value if the undiscounted cash flows expected to be generated by the asset are lower than its carrying amount. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. Our analysis is conducted if indicators of a decline in value of our land and real estate assets exist. If an asset is deemed to be impaired, the impairment recognized is measured as the amount by which the assets’ carrying amount exceeds their fair value. The impairment of a community is allocated to each lot on a straight-line basis. We recorded impairment charges of approximately $24.9 million during the year ended December 31, 2020, primarily resulting from the decision to sell land assets that no longer fit our strategy, compared to $7.3 million of similar charges in 2019.
29
Warranty Reserves
We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects and cover any resultant damages, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, warranty reserves are recorded to cover our exposure to costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims subsequent to the delivery of a home to the homeowner. Reserves are reviewed on a regular basis and, with the assistance of an actuary for the structural warranty, we determine their sufficiency based on our and industry-wide historical data and trends. These reserves are subject to variability due to uncertainties regarding structural defect claims for the products we build, the markets in which we build, claim settlement history, insurance, legal interpretations and expected recoveries, among other factors.
At December 31, 2020, our warranty reserve was $23.7 million, reflecting an accrual of 0.1% to 0.6% of a home’s sale price depending on our loss history in the geographic area in which the home was built. A 10% increase in our warranty reserve rate would have increased our accrual and corresponding cost of sales by approximately $2.0 million in 2020. There were no adjustments to our reserve balance for the years ended December 31, 2020 and December 31, 2019. While we believe that the warranty reserve is sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Furthermore, there can be no assurances that future economic, financial or legislative developments might not lead to a significant change in the reserve.
Valuation of Deferred Tax Assets
We account for income taxes using the asset and liability method, which requires that deferred tax assets and liabilities be recognized based on future tax consequences of both temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.
On December 22, 2017, the President signed into law the Tax Act. In accordance with ASC 740-10-25-47, we recognized the effects of the new legislation in the period that included the date of enactment. The Tax Act's impact on 2017 was to reduce the value of our net deferred tax balances by $19.7 million at December 31, 2017, which was estimated due to the change in the federal tax rate and has been reflected in our financial statements. We have 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 in 2018. Accordingly, at December 31, 2018 we recorded a favorable adjustment of $2.7 million which has been reflected in our financial statements.
In accordance with ASC 740-10, Income Taxes , we evaluate our deferred tax assets by tax jurisdiction, including the benefit from net operating losses ("NOLs") by tax jurisdiction, to determine if a valuation allowance is required. Companies must assess, using significant judgments, whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, experience with operating losses and experience 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, 2020.
Home Closing Revenue, Home Orders and Order Backlog - Segment Analysis
The composition of our closings, home orders and backlog is constantly changing and is based on a dissimilar mix of communities between periods as new projects and product lines open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods.
For discussion of our fiscal 2019 results compared to our fiscal 2018 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our Annual Report on Form 10-K for the year ended December 31, 2019 .
The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):
30
Years Ended December 31, Year Over Year
2020 2019 Chg $ Chg %
Home Closing Revenue
Total
Dollars $ 4,464,389 $ 3,604,629 $ 859,760 23.9 %
Homes closed 11,834 9,267 2,567 27.7 %
Average sales price $ 377.3 $ 389.0 $ (11.7) (3.0) %
West Region
Arizona
Dollars $ 666,223 $ 556,432 $ 109,791 19.7 %
Homes closed 2,019 1,707 312 18.3 %
Average sales price $ 330.0 $ 326.0 $ 4.0 1.2 %
California
Dollars $ 774,349 $ 486,153 $ 288,196 59.3 %
Homes closed 1,231 749 482 64.4 %
Average sales price $ 629.0 $ 649.1 $ (20.1) (3.1) %
Colorado
Dollars $ 354,677 $ 367,468 $ (12,791) (3.5) %
Homes closed 738 711 27 3.8 %
Average sales price $ 480.6 $ 516.8 $ (36.2) (7.0) %
West Region Totals
Dollars $ 1,795,249 $ 1,410,053 $ 385,196 27.3 %
Homes closed 3,988 3,167 821 25.9 %
Average sales price $ 450.2 $ 445.2 $ 5.0 1.1 %
Central Region - Texas
Central Region Totals
Dollars $ 1,273,661 $ 1,033,755 $ 239,906 23.2 %
Homes closed 3,894 2,976 918 30.8 %
Average sales price $ 327.1 $ 347.4 $ (20.3) (5.8) %
East Region
Florida
Dollars $ 540,644 $ 468,591 $ 72,053 15.4 %
Homes closed 1,466 1,181 285 24.1 %
Average sales price $ 368.8 $ 396.8 $ (28.0) (7.1) %
Georgia
Dollars $ 229,577 $ 183,492 $ 46,085 25.1 %
Homes closed 642 527 115 21.8 %
Average sales price $ 357.6 $ 348.2 $ 9.4 2.7 %
North Carolina
Dollars $ 388,776 $ 303,635 $ 85,141 28.0 %
Homes closed 1,132 823 309 37.5 %
Average sales price $ 343.4 $ 368.9 $ (25.5) (6.9) %
South Carolina
Dollars $ 105,369 $ 88,371 $ 16,998 19.2 %
Homes closed 331 272 59 21.7 %
Average sales price $ 318.3 $ 324.9 $ (6.6) (2.0) %
Tennessee
Dollars $ 131,113 $ 116,732 $ 14,381 12.3 %
Homes closed 381 321 60 18.7 %
Average sales price $ 344.1 $ 363.7 $ (19.6) (5.4) %
East Region Totals
Dollars $ 1,395,479 $ 1,160,821 $ 234,658 20.2 %
Homes closed 3,952 3,124 828 26.5 %
Average sales price $ 353.1 $ 371.6 $ (18.5) (5.0) %
31
Years Ended December 31, Year Over Year
2020 2019 Chg $ Chg %
Home Orders (1)
Total
Dollars $ 5,174,938 $ 3,683,502 $ 1,491,436 40.5 %
Homes ordered 13,724 9,616 4,108 42.7 %
Average sales price $ 377.1 $ 383.1 $ (6.0) (1.6) %
West Region
Arizona
Dollars $ 823,339 $ 608,795 $ 214,544 35.2 %
Homes ordered 2,501 1,875 626 33.4 %
Average sales price $ 329.2 $ 324.7 $ 4.5 1.4 %
California
Dollars $ 956,681 $ 511,767 $ 444,914 86.9 %
Homes ordered 1,530 803 727 90.5 %
Average sales price $ 625.3 $ 637.3 $ (12.0) (1.9) %
Colorado
Dollars $ 361,619 $ 361,336 $ 283 0.1 %
Homes ordered 750 722 28 3.9 %
Average sales price $ 482.2 $ 500.5 $ (18.3) (3.7) %
West Region Totals
Dollars $ 2,141,639 $ 1,481,898 $ 659,741 44.5 %
Homes ordered 4,781 3,400 1,381 40.6 %
Average sales price $ 447.9 $ 435.9 $ 12.0 2.8 %
Central Region - Texas
Central Region Totals
Dollars $ 1,472,183 $ 1,031,937 $ 440,246 42.7 %
Homes ordered 4,476 3,043 1,433 47.1 %
Average sales price $ 328.9 $ 339.1 $ (10.2) (3.0) %
East Region
Florida
Dollars $ 590,966 $ 466,528 $ 124,438 26.7 %
Homes ordered 1,645 1,180 465 39.4 %
Average sales price $ 359.2 $ 395.4 $ (36.2) (9.2) %
Georgia
Dollars $ 237,576 $ 186,735 $ 50,841 27.2 %
Homes ordered 665 537 128 23.8 %
Average sales price $ 357.3 $ 347.7 $ 9.6 2.8 %
North Carolina
Dollars $ 472,483 $ 315,572 $ 156,911 49.7 %
Homes ordered 1,367 865 502 58.0 %
Average sales price $ 345.6 $ 364.8 $ (19.2) (5.3) %
South Carolina
Dollars $ 122,049 $ 80,325 $ 41,724 51.9 %
Homes ordered 380 254 126 49.6 %
Average sales price $ 321.2 $ 316.2 $ 5.0 1.6 %
Tennessee
Dollars $ 138,042 $ 120,507 $ 17,535 14.6 %
Homes ordered 410 337 73 21.7 %
Average sales price $ 336.7 $ 357.6 $ (20.9) (5.8) %
East Region Totals
Dollars $ 1,561,116 $ 1,169,667 $ 391,449 33.5 %
Homes ordered 4,467 3,173 1,294 40.8 %
Average sales price $ 349.5 $ 368.6 $ (19.1) (5.2) %
(1) Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home or a mortgage pre-approval as a sales contract until the contingency is removed.
32
Years Ended December 31,
2020 2019
Ending Average Ending Average
Active Communities
Total 195 219.7 244 258.0
West Region
Arizona 33 34.8 31 35.5
California 16 23.3 24 20.5
Colorado 11 12.0 18 19.0
West Region Totals 60 70.1 73 75.0
Central Region - Texas
Central Region Totals 63 66.9 77 86.0
East Region
Florida 31 33.8 33 32.0
Georgia 7 12.5 18 20.0
North Carolina 21 20.6 25 25.0
South Carolina 6 6.0 9 10.5
Tennessee 7 9.8 9 9.5
East Region Totals 72 82.7 94 97.0
Years Ended December 31,
2020 2019
Cancellation Rates (1)
Total 13.6 % 14.2 %
West Region
Arizona 12.2 % 12.4 %
California 15.7 % 15.5 %
Colorado 14.3 % 13.2 %
West Region Totals 13.6 % 13.3 %
Central Region - Texas
Central Region Totals 15.4 % 17.2 %
East Region
Florida 11.7 % 10.9 %
Georgia 12.4 % 16.0 %
North Carolina 9.6 % 9.6 %
South Carolina 13.0 % 19.1 %
Tennessee 16.3 % 10.6 %
East Region Totals 11.8 % 12.1 %
(1) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.
33
At December 31, Year Over Year
2020 2019 Chg $ Chg %
Order Backlog (1)
Total
Dollars $ 1,812,547 $ 1,098,158 $ 714,389 65.1 %
Homes in backlog 4,672 2,782 1,890 67.9 %
Average sales price $ 388.0 $ 394.7 $ (6.7) (1.7) %
West Region
Arizona
Dollars $ 343,917 $ 186,194 $ 157,723 84.7 %
Homes in backlog 993 511 482 94.3 %
Average sales price $ 346.3 $ 364.4 $ (18.1) (5.0) %
California
Dollars $ 274,680 $ 92,171 $ 182,509 198.0 %
Homes in backlog 444 145 299 206.2 %
Average sales price $ 618.6 $ 635.7 $ (17.1) (2.7) %
Colorado
Dollars $ 104,709 $ 97,508 $ 7,201 7.4 %
Homes in backlog 208 196 12 6.1 %
Average sales price $ 503.4 $ 497.5 $ 5.9 1.2 %
West Region Totals
Dollars $ 723,306 $ 375,873 $ 347,433 92.4 %
Homes in backlog 1,645 852 793 93.1 %
Average sales price $ 439.7 $ 441.2 $ (1.5) (0.3) %
Central Region - Texas
Central Region Totals
Dollars $ 572,242 $ 372,520 $ 199,722 53.6 %
Homes in backlog 1,630 1,048 582 55.5 %
Average sales price $ 351.1 $ 355.5 $ (4.4) (1.2) %
East Region
Florida
Dollars $ 214,790 $ 163,385 $ 51,405 31.5 %
Homes in backlog 550 371 179 48.2 %
Average sales price $ 390.5 $ 440.4 $ (49.9) (11.3) %
Georgia
Dollars $ 57,882 $ 49,742 $ 8,140 16.4 %
Homes in backlog 156 133 23 17.3 %
Average sales price $ 371.0 $ 374.0 $ (3.0) (0.8) %
North Carolina
Dollars $ 163,346 $ 79,446 $ 83,900 105.6 %
Homes in backlog 454 219 235 107.3 %
Average sales price $ 359.8 $ 362.8 $ (3.0) (0.8) %
South Carolina
Dollars $ 41,211 $ 24,427 $ 16,784 68.7 %
Homes in backlog 120 71 49 69.0 %
Average sales price $ 343.4 $ 344.0 $ (0.6) (0.2) %
Tennessee
Dollars $ 39,770 $ 32,765 $ 7,005 21.4 %
Homes in backlog 117 88 29 33.0 %
Average sales price $ 339.9 $ 372.3 $ (32.4) (8.7) %
East Region Totals
Dollars $ 516,999 $ 349,765 $ 167,234 47.8 %
Homes in backlog 1,397 882 515 58.4 %
Average sales price $ 370.1 $ 396.6 $ (26.5) (6.7) %
(1) Our backlog represents net sales that have not closed.
34
Fiscal 2020 Compared to Fiscal 2019
Companywide . In 2020, home closings improved 27.7% to 11,834 units valued at $4.5 billion compared to 9,267 units valued at $3.6 billion in 2019. The increase in closings year-over-year reflects a 42.7% increase in order volume to 13,724 units valued at $5.2 billion in 2020 as compared to 9,616 units valued at $3.7 billion in 2019, as well as increased backlog conversion due to selling and closing more speculative inventory homes in 2020 compared to the prior year. The higher volume of spec sales and a notably higher orders pace year-over-year are due to the heightened demand in today's market for available, new and healthier single-family homes at affordable price points due to the macroeconomic events discussed in "Industry Conditions". This customer demand is aligned with our focus on the first-time and first move-up buyers, as our entry-level communities offer only spec homes for sale, and in both our entry-level and first move-up communities we have achieved shorter construction cycle times, allowing quicker move-ins for our customers. The increase in home closing revenue was due entirely to 2,567 additional units closed as average sales prices ("ASP") decreased 3.0%, reflective of a higher percentage of lower-priced entry-level homes in our closing mix that was partially offset by sequential price increases throughout 2020 in all of our geographies. At December 31, 2020 we had 195 actively selling communities, 20.1% lower than prior year, as a 67.7% improvement in orders pace to 5.2 per month in 2020 compared to 3.1 in 2019 resulted in communities selling and closing out faster than we were able to open replacement communities. We ended the year with 4,672 homes in backlog valued at $1.8 billion, reflecting 67.9% and 65.1% increases in backlog units and value, respectively, compared to 2019. ASP of homes in backlog declined by 1.7% to $388,000 from $394,700 in 2019 primarily a result of our shift to entry-level homes offset by price increases, as noted previously.
West. The West Region generated $1.8 billion in home closing revenue for the year ended December 31, 2020, a 27.3% increase over revenue of $1.4 billion for the prior year, closing 3,988 homes, up 25.9% from the 3,167 homes closed in 2019. Order volume for the West Region was 4,781 homes during the year ended December 31, 2020, a 40.6% improvement from 3,400 home orders in 2019. Order value increased 44.5% to $2.1 billion in 2020 from $1.5 billion in 2019. The improvement in order volume was driven by a 50.6% higher year-over-year orders pace per community. This stronger orders pace more than offset the 6.5% decline in average active communities. All states in the Region saw significant increases in orders pace, most notably in California which experienced a 66.7% increase to lead the Region with 5.5 homes sold per month per community, as compared to 3.3 in the 2019 period. In the West Region, approximately 68% of our communities target the first-time buyers at December 31, 2020. We believe the high demand in this Region was directly attributable to the product offerings and desirable locations we have designed for these buyers. These results led to the strongest year-over-year improvement in backlog by Region, ending with $723.3 million on 1,645 units versus $375.9 million on 852 units in 2019, 92.4% and 93.1% increases over the prior year, respectively.
Central. The Central Region, made up of our Texas markets, generated the strongest year-over-year improvements in volume of closings and orders. The Region closed 3,894 units totaling $1.3 billion in home closing revenue for the year ended December 31, 2020. The 30.8% improvement in closing units was partially offset by a 5.8% decline in ASP, generating an increase in home closing revenues of $239.9 million, or 23.2%, from $1.0 billion in 2019 to $1.3 billion in 2020. The Region also reported improvement in orders year-over-year with 47.1% and 42.7% increases in orders and order value, respectively. The improvement in orders was achieved despite a 22.2% decline in average active communities, due to the 89.0% higher orders pace year-over-year. The Region ended the year with 4,476 orders valued at $1.5 billion in 2020 compared to 3,043 orders at $1.0 billion in the prior year. The Region ended 2020 with backlog of 1,630 units valued at $572.2 million compared to 1,048 units valued at $372.5 million at December 31, 2019, reflecting a $4,400 lower ASP from the shift to lower-priced homes mix compared to 2019.
East. The East Region experienced 26.5% and 20.2% increases in closing volume and revenue, respectively, delivering 3,952 closings and $1.4 billion of home closing revenue in 2020 compared to 3,124 closings and $1.2 billion of revenue in 2019. The increase in closing volume was partially offset by a $18,500 decrease in ASP resulting from our transition to offering more affordable product. Orders and order value in the East region improved by 40.8% and 33.5%, respectively, in 2020 with 4,467 units valued at $1.6 billion compared to 3,173 units valued at $1.2 billion in the prior year. The improvement in orders is due entirely to a 65.1% higher orders pace, as the Region experienced a 14.7% decline in average active communities open for sales in 2020 compared to 2019. The higher orders led to an improved backlog in the Region to end 2020 with 1,397 units in backlog valued at $517.0 million, 58.4% and 47.8% increases, respectively, compared to the prior year.
35
Land Closing Revenue and Gross Profit
From time to time, we may sell certain land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of $17.7 million and $45.9 million for the years ending December 31, 2020 and 2019, respectively. We recognized losses of $20.8 million and $1.0 million in 2020 and 2019, respectively. The losses recognized in both years were due to the upcoming dispositions of certain assets that no longer fit our strategic focus on entry-level and first move-up homes and includes associated impairment charges of $21.8 million and $4.1 million, in 2020 and 2019, respectively
Other Operating Information (dollars in thousands)
Years ended December 31,
2020 2019
Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue
Home Closing Gross Profit (1)
Total $ 980,408 22.0 % $ 680,660 18.9 %
West $ 380,675 21.2 % $ 264,173 18.7 %
Central $ 304,538 23.9 % $ 208,511 20.2 %
East $ 295,195 21.2 % $ 207,976 17.9 %
(1) Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings includes land and lot development costs, direct home construction costs, an allocation of common community costs (such as architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.
Fiscal 2020 Compared to Fiscal 2019
Companywide . Home closing gross margin improved to 22.0% for the year ended December 31, 2020 compared to 18.9% in the prior year. Home closing gross profit increased by $299.7 million to $980.4 million in 2020 versus $680.7 million in 2019, driven by the higher home closing revenue and 310 basis point increase in home closing gross margin. With robust homebuilding market dynamics, increased closing volume and pricing power were major drivers in our gross margin improvement. Despite a year-over-year ASP decline resulting from the mix of lower-priced entry-level homes, all of our geographies experienced sequential price increases corresponding with the strong demand as the year progressed, which more than offset the impact of rising lumber costs. With our simplified product, we have shortened our construction cycle times and achieved national purchasing savings on materials, while also gaining efficiency from production, all of which are contributing to higher gross margin.
West . Our West Region reported a 250 basis point improvement in year-over-year home closing gross margin of 21.2% in 2020 versus 18.7% in 2019. Pricing power, particularly in Arizona, contributed significantly to the improved margins year over year, as demand has been very strong in our communities. In addition, greater leverage of our overhead costs on higher revenue combined with construction efficiencies driven by our simplified product offerings and shorter construction cycle times have favorably impacted margins across the West Region.
Central. The Central Region produced the highest home closing gross margin in the Company and the most notable year-over-year increase for the year ended December 31, 2020 at 23.9%, up from 20.2% in the prior year. Construction efficiencies driven by our simplified product offerings and national purchasing savings combined with higher revenue have expanded our leverage of overhead costs to improve gross margin.
36
East . The East Region experienced a 330 basis point improvement in 2020 of 21.2% versus 17.9% for 2019. The margin improvement in the Region is the result of a change in our product line-up to more efficient plan designs with shorter construction cycle times combined with greater leverage of overhead costs on higher closing volume as compared to the prior year period.
Years Ended December 31,
($ in thousands)
2020 2019
Financial services profit $ 16,388 $ 20,579
Financial services profit. Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title and Meritage Insurance, as well as our portion of earnings from a mortgage joint venture. Meritage Insurance commenced operations in the fourth quarter of 2019 and provided only nominal results for the year ended December 31, 2019. The main driver of the $4.2 million lower financial services profit year-over-year is due to a change in the structure of customer incentives offered by our mortgage joint venture. In the fourth quarter of 2019, the profits associated with these incentives began to be captured as part of home closing revenue rather than through financial services earnings .
Years Ended December 31,
($ in thousands)
2020 2019
Commissions and Other Sales Costs
Dollars $ (287,901) $ (246,728)
Percent of home closing revenue 6.4 % 6.8 %
General and Administrative Expenses
Dollars $ (159,020) $ (146,093)
Percent of home closing revenue 3.6 % 4.1 %
Interest Expense
Dollars $ (2,177) $ (8,370)
Other Income, Net
Dollars $ 6,662 $ 9,577
Loss on Early Extinguishment of Debt
Dollars $ — $ (5,635)
Provision for Income Taxes
Dollars $ (110,091) $ (53,282)
Fiscal 2020 Compared to Fiscal 2019
Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs increased by $41.2 million in 2020 over 2019 as a result of higher closing volume, but decreased 40 basis points year over year. The increase in commissions and other sales costs in dollars compared to prior year reflects higher home closing revenue, partially offset by savings in advertising spend as we leveraged more digital platforms. The decline as a percentage of home closing revenue is due to the combination of leverage from higher closing volume and the efficiencies integrated into our sales and marketing structure.
General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the twelve months ended December 31, 2020, general and administrative expenses were $159.0 million or 3.6% of home closing revenue as compared to $146.1 million or 4.1% of home closing revenue for the 2019 period. The increased leveraging of costs against higher revenue and the pull-back on certain corporate expenditures due to COVID-19 aided in the improvement. We continually strive to optimize overhead
37
leverage through cost control efforts and expect some long-term improvements to result from the technological enhancements achieved during COVID-19.
Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes and our Credit Facility. Our non-capitalizable interest expense decreased to $2.2 million for the twelve months ended December 31, 2020 compared to $8.4 million for the 2019 period reflecting the early redemption of $300.0 million of senior notes which we redeemed in the fourth quarter of 2019, partially offset by interest charges from our Credit Facility which had $500.0 million outstanding for several months during the first half of 2020.
Other Income, Net. Other income, net primarily consists of (i) sub lease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements, and (iv) our portion of pre-tax income or loss from non-financial services joint ventures. Other income, net decreased by $2.9 million in 2020 compared to 2019, due to a decrease in interest earned on our cash and cash equivalents as a result of lower interest rates in 2020 as compared to 2019.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $5.6 million for the year ended December 31, 2019 is related to the early redemption of our $300.0 million 7.15% senior notes due 2020. There were no similar charges for the year ended December 31, 2020.
Income Taxes . The effective tax rate was 20.6% and 17.6% for 2020 and 2019, respectively. The effective rate in both years reflects the availability of the Internal Revenue Code §45L energy efficient homes credits (the "energy tax credit") from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the "2019 Act") that was signed into law on December 20, 2019 and extended the energy credit tax benefit from 2017 to 2020. The reduced rate in 2019 also reflects the 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. 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.
Liquidity and Capital Resources
Overview of Cash Management
Our principal uses of capital for 2020 were acquisition and development of new and previously controlled land and lot positions, home construction, operating expenses, the payment of routine liabilities and repurchasing our common stock. We remain focused on acquiring desirable land positions, generating increasing margins in our homebuilding operations and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.
Operating Cash Flow Activities
During the years ended December 31, 2020 and December 31, 2019, net cash provided by operations totaled $530.4 million and $346.8 million, respectively. Generally, our operating cash flows fluctuate primarily based on changes in our net earnings, real estate inventory and from timing of payments of accounts payable and accrued liabilities.
Operating cash flow results in 2020 primarily reflect $423.5 million in net earnings and an $88.9 million increase in accounts payable and accrued liabilities due to the timing of cash payments and an increase in income taxes payable, partially offset by a $40.1 million increase in real estate due to increased spending on homes under construction as well as acquisition of new land positions. Operating cash flow results in 2019 reflect the $249.7 million in net earnings and a $42.7 million increase in accounts payable and accrued liabilities due to the timing of cash payments for real estate and construction spending.
Investing Cash Flow Activities
During the year ended December 31, 2020, net cash used in investing activities totaled $18.2 million as compared to $13.5 million for the same period in 2019. Cash used in investing activities in both 2020 and 2019 is mainly attributable to the purchases of property, plant and equipment of $19.9 million and $24.4 million, respectively.
Financing Cash Flow Activities
During the year ended December 31, 2020, net cash used in financing activities totaled $86.0 million as compared to $325.3 million for the same period in 2019. The net cash used in financing activities in 2020 consists of $69.6 million in share repurchases and $16.4 million in repayments of loans payable and other borrowings. The net cash used in financing activities in 2019 is primarily from the early redemption of $300.0 million of our 7.15% senior notes.
Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other
38
amenities. Because these costs are a component of our inventory and are not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently acquiring and developing lots in our markets to grow our lot supply and active community count. We intend to increase our land and development spending in order to develop and prepare the land we currently control to achieve our community count targets and to replenish our land pipeline beyond 2022. We are also using our cash on hand to fund operations.
During 2020, we closed 11,834 homes, purchased approximately 20,200 lots for $737.3 million, spent $527.2 million on land development, and started construction on 13,123 homes. We currently primarily purchase undeveloped or partially-developed land requiring development dollars in order to bring them to a finished status ready for home construction. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended 2020 with $745.6 million of cash and cash equivalents, a $426.2 million increase from December 31, 2019 with no outstanding borrowings on our Credit Facility. We expect to generate cash from the sale of our inventory, but we intend to redeploy that cash primarily to acquire and develop strategic and well-positioned lots to grow our business.
On February 13, 2019, the Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. We acquired 1,100,000 and 308,840 shares of our common stock at an aggregate purchase price of $69.6 million and $16.0 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was approximately $114.4 million available under this program to repurchase shares.
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 December 2020, the Credit Facility was amended, extending the maturity date from July 2023 to December 2025 and providing 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.
Between our available cash and liquidity in our Credit Facility, we believe that we currently have sufficient liquidity. Nevertheless, we may seek additional capital to strengthen our liquidity position, enable us to opportunistically acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs. We may also, from time to time, opportunistically repurchase our senior notes and common stock. Reference is made to Notes 6 and 7 in the accompanying consolidated financial statements.
We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands):
39
At December 31, 2020 At December 31, 2019
Notes payable and other borrowings $ 1,020,085 $ 1,018,981
Stockholders’ equity 2,347,868 1,973,990
Total capital $ 3,367,953 $ 2,992,971
Debt-to-capital (1) 30.3 % 34.0 %
Notes payable and other borrowings $ 1,020,085 $ 1,018,981
Less: cash and cash equivalents (745,621) (319,466)
Net debt $ 274,464 $ 699,515
Stockholders’ equity 2,347,868 1,973,990
Total net capital $ 2,622,332 $ 2,673,505
Net debt-to-capital (2) 10.5 % 26.2 %
(1) Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net and loans payable and other borrowings and stockholders' equity.
(2) Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is total senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt to total capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing.
Senior Notes
7.15% Senior Notes
During the second quarter of 2010, we completed an offering of $200.0 million aggregate principal amount of 7.15% senior notes due 2020 ("2020 Notes"). During 2013, we completed a $100.0 million add-on offering to the 2020 Notes. In the fourth quarter of 2019, we redeemed all of the outstanding 2020 Notes, incurring a $5.6 million Loss on early extinguishment of debt charge included in our accompanying consolidated income statement for the year ended December 31, 2019.
7.00% Senior Notes
In April 2012, we completed an offering of $300.0 million aggregate principal amount of 7.00% Senior Notes due 2022 ("2022 Notes"). The 2022 Notes were issued at par and their associated proceeds were primarily used to pay down the remaining balance of our prior $285.0 million of 6.25% senior notes due 2015.
6.00% Senior Notes
In June 2015, we completed an offering of $200.0 million aggregate principal amount of 6.00% Senior Notes due 2025 ("2025 Notes"). The 2025 Notes were issued at par, and the proceeds were used for general corporate obligations and future land spend. In March 2018, the Company completed an offering of $200.0 million aggregate principal amount of additional 2025 Notes (the "Additional Notes"). The Additional Notes were issued as an add-on to the existing 2025 Notes that were issued in June 2015 which resulted in a combined $400.0 million aggregate principal amount of 6.00% Senior Notes due 2025 outstanding as of December 31, 2018. The Additional Notes were issued at a premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemption of the Company's $175.0 million of 4.50% Senior Notes that were due to mature on March 1, 2018.
5.125% Senior Notes
In June 2017, we completed an offering of $300.0 million aggregate principal amount of 5.125% Senior Notes due 2027 ("2027 Notes"). The 2027 notes were issued at par. Using the proceeds from the 2027 Notes offering, we retired all $126.5 million of our convertible senior notes aggregate principal amount.
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 of non-model home assets and mergers. We were in compliance with all such covenants as of December 31, 2020.
40
Loans Payable and Other Borrowings
The Company has a $780.0 million unsecured revolving Credit Facility with an accordion feature that permits 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. We had no outstanding borrowings under the Credit Facility as of December 31, 2020 or December 31, 2019. During the twelve months ended December 31, 2020 we had $500 million of gross borrowings and repayments. During the twelve months ended December 31, 2019 we had $90.0 million of gross borrowings and repayments. 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.
Credit Facility Covenants
Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.5 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of December 31, 2020. Our actual financial covenant calculations as of December 31, 2020 are reflected in the table below.
Financial Covenant (dollars in thousands): Covenant Requirement Actual
Minimum Tangible Net Worth > $1,589,483 $2,307,172
Leverage Ratio < 60% 8%
Interest Coverage Ratio (1) > 1.50 10.57
Minimum Liquidity (1) > $66,289 $1,330,799
Investments other than defined permitted investments < $692,152 $4,350
(1) We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.
Land under Control
We enter into various purchase and option contracts for land in the normal course of business. Generally, our lot options remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. The pre-established number is typically structured to approximate our expected rate of home construction starts, although if demand slows, in some instances starts may fall below the pre-established minimum number of lot purchases and lots would accumulate on our balance sheet. Additional information regarding our purchase agreements and related deposits is presented in Note 3 in the accompanying consolidated financial statements.
The total number of lots under control at December 31, 2020 was 55,502 as compared to 41,399 at December 31, 2019. At December 31, 2020 and 2019, respectively, 59.0% and 62.9% of our controlled lots were owned. We secured approximately 29,500 lots with an aggregate purchase price of $946.4 million in 2020 as compared to approximately 18,100 lots with an aggregate purchase price of $685.2 million in 2019. At December 31, 2020, our total option and purchase contracts had aggregated purchase prices of approximately $1.3 billion, on which we had made deposits of $59.5 million in cash, substantially all of which is non-refundable.
Off-Balance Sheet Arrangements
Reference is made to Notes 1, 3, 5, and 16 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K and are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated, if any.
41
Contractual Obligations
The following is a summary of our contractual obligations at December 31, 2020, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
Payments Due by Period
Total Less than
1 Year 1-3 Years 4-5 Years More Than
5 Years
Principal, senior notes $ 1,000,000 $ — $ 300,000 $ 400,000 $ 300,000
Interest, senior notes 231,112 60,375 84,000 64,751 21,986
Loans payable and other borrowings 23,094 13,847 9,247 — —
Interest, loans payable and other borrowings 624 531 93 — —
Other contractual obligations (1) 41,356 12,504 17,772 7,239 3,841
Total (2) $ 1,296,186 $ 87,257 $ 411,112 $ 471,990 $ 325,827
(1) Includes operating lease obligations that meet the criteria of ASC 842, equipment leases that do not meet the criteria for ASC 842, and other long-term obligations for items such as software and marketing licenses.
(2) See Notes 6, 7 and 16 to our consolidated financial statements included in this report for additional information regarding our contractual obligations.
We do not engage in commodity trading or other similar activities. We had no derivative financial instruments at December 31, 2020 or 2019.
Recent Accounting Standards
See Note 1 to our consolidated financial statements included in this report for discussion of recently-issued accounting standards.
42