What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-10-29 · 152 added, 313 removed, 251 unchanged (65% of the section changed)

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Overview and Outlook

The housing market remained solid during the third quarter of 2021 as it continues to benefit from still low interest rates, a limited supply of available homes, and ongoing demand, particularly with the millennial and baby boomer generations who are experiencing life events that align with a change in home ownership.

We believe that these underlying economic and demographic factors will continue in the near to mid-term, but will likely taper to a normalized pace over time.

Our operating model to provide buyers with affordable, healthy, and quick move-in ready homes has positioned us to take full advantage of the current market, resulting in the highest third quarter closing volume and the highest quarterly home closing gross margin in the Company's history.

In addition to our strong growth in closings and profitability during the third quarter of 2021, we continued to make progress on our goals for community count growth.

As of September 30, 2021, we had 236 active communities, up both sequentially and year-over-year from 226 at June 30, 2021, and 204 at September 30, 2020.

We were able to close 3,112 homes in the third quarter of 2021 despite supply chain constraints that impacted our production.

Through long-cultivated relationships with our national and local partners, we were able to navigate the current limitations and expect to continue to utilize our spec-heavy, limited SKU operating model to manage the continuing supply chain concerns that are expected to last into 2022.

We metered the number of homes available for sale to align with the current production constraints, causing our average absorption pace to decrease year-over-year during the third quarter, although it remains strong compared to historical trends.

Favorable demand in the housing market continued in the first quarter of 2022 due to the low supply of new and existing housing inventory and homebuying trends for entry-level and first move-up homes from millennials and baby boomers.

The supply chain constraints and labor shortages that presented themselves in 2021, caused by COVID-19 and other economic-related disruptions and exacerbated by the war in Ukraine, have impacted our production costs and cycle times and the homebuilding industry as a whole and have continued throughout the first quarter of 2022.

We have been successful, to date, in offsetting the higher costs with sales price increases thanks to the elevated buyer demand in this current environment.

We continue to carefully navigate this constrained operating environment by expanding our trade base and strengthening critical relationships.

While we believe that the demographics support a continuing increased need for housing, we also recognize the impact that increased home prices have had on both the buyer psychology and reality of tighter affordability.

To help alleviate concerns for our customers surrounding their purchase and future monthly payments, in March 2022, we purchased fixed interest rate locks on all eligible floating-rate loans for homes in our backlog scheduled to close in the second half of 2022.

In this rising price and interest rate environment, we believe that our strategy centered on affordable entry-level and first move-up homes and delivering homes that offer surprisingly more value to our homebuyers provides us with an opportunity to expand our customer base to include buyers that will become priced out of move-up communities.

Summary Company Results

Total home closing revenue was $1.3 billion on 3,112 homes closed for the three months ended September 30, 2021 compared to $1.1 billion on 3,004 homes closed for the third quarter of 2020, increases of 10.4% and 3.6%, respectively.

In addition to higher home closing revenue, we achieved our highest home closing gross margin in Company history of 29.7%, an 820 basis point increase year-over-year that contributed to a $128.1 million increase in home closing gross profit to $371.7 million compared to $243.6 million in the third quarter of 2020.

This improvement was due to pricing power from strong buyer demand and leveraging of our fixed costs on higher home closing volumes, more than offsetting higher lumber costs and other rising commodity costs.

General and administrative expenses were $47.2 million in the three months ended September 30, 2021, a $6.5 million increase from $40.7 million during the third quarter of 2020, driven by higher performance related compensation expenses and a higher employee headcount.

Earnings before income taxes improved by $126.2 million year-over-year to $261.7 million for the third quarter of 2021.

These improved year-over-year results combined with our higher effective income tax rate of 23.3% as compared to 19.5% in the prior year period led to net earnings of $200.8 million in the third quarter of 2021 versus $109.1 million in the third quarter of 2020.

The higher effective tax rate in the third quarter of 2021 reflects increased profit in states with higher tax rates and the reduced benefit of federal energy efficient home tax credits on higher net earnings before income taxes.

For the nine months ended September 30, 2021, home closing revenue was $3.6 billion on 9,275 homes closed, 17.7% and 14.6% increases over 2020, respectively.

Year-to-date results reflect an increase of $341.0 million in home closing gross profit versus the nine months ended September 30, 2020.

Interest expense decreased year-over-year by $1.9 million as we benefited from lower interest rates as a result of our debt refinancing in April 2021.

In connection with this refinancing transaction, we recognized an $18.2 million loss on early extinguishment of debt (see Note 6 in the accompanying unaudited financial statements for additional information).

Higher pre-tax income was reduced by an effective tax rate of 22.3%, leading to net income of $500.0 million for the nine months ended September 30, 2021 compared to $270.9 million for the 2020 period.

Order volume declined 10.6% in the three months ended September 30, 2021 compared to the same period in 2020, as a result of metering our orders to align with production and a slight return of traditional seasonality.

The third quarter of 2021 orders pace remained elevated at 5.0 per month, down from 5.8 in the third quarter of 2020, which represented the highest third quarter pace in Company history.

This was partially offset by a 4.8% increase in average active communities over the prior year comparable period.

Order value remained flat as a 12.0% increase in average sales price ("ASP") offset the volume decrease.

We were able to open 40 communities during the third quarter of 2021 despite delays in permitting, zoning and entitlement as well as land supply chain constraints.

Our order cancellation rate dropped to 10% for the third quarter of 2021 compared to 13% for the prior year period.

For the nine months ended September 30, 2021, home order volume decreased 1.0% while home order value increased 9.6% over the prior year, and our order cancellation rate dropped to 10% compared to 14% for the prior year period.

We ended the third quarter of 2021 with 5,838 homes in backlog valued at $2.6 billion, an 11.4% increase in units and a 27.5% increase in value over September 30, 2020.

Total home closing revenue was $1.2 billion on 2,858 homes closed for the three months ended March 31, 2022 compared to $1.1 billion on 2,890 homes closed for the first quarter of 2021.

This 15.3% increase in home closing revenue year-over-year was entirely driven by the 16.6% increase in average sales price ("ASP") on closings due to pricing power resulting from strong buyer demand, with flat volume of closings due to production delays.

In addition to higher home closing revenue, first quarter home closing gross margin improved 560 basis points, up $111.0 million year-over-year increase for home closing gross profit of $377.6 million compared to $266.7 million in the first quarter of 2021.

The margin improvement is primarily due to the benefit of rising ASPs which more than offset higher commodity costs and lower amortization of previously capitalized interest due to a lower interest cost achieved over the past several years through multiple debt refinancing transactions.

Land closing gross profit was $10.8 million in the three months ended March 31, 2022 compared to $0.5 million in the same prior year period, as we sold several parcels of land that did not fit our strategy.

Earnings before income taxes improved by $119.9 million, or 72.2%, year over year to $285.9 million for the first quarter of 2022.

These improved year-over-year results were partially offset with a higher effective income tax rate of 24.0% as compared to 20.6% in 2021, and led to net earnings of $217.3 million in the first quarter of 2022 versus $131.8 million in the first quarter of 2021.

In addition to growth in home closing revenue and improved profitability, we had another record breaking quarter in home orders, with the highest quarterly orders in Company history of 3,874 for the three months ended March 31, 2022, a 12.0% increase over 3,458 in the same period of 2021.

The growth in orders was attributable to a 32.4% increase in average active communities partially offset by slower orders pace as we metered orders to align starts with production capacity.

Home order value increased 31.0% year-over-year, to $1.8 billion during the three months ended March 31, 2022, versus $1.3 billion in the same period of 2021.

The increase in order value is due to the higher volume and a 17.0% increase in ASP on orders.

Order cancellation rates remained stable at 10% for the first quarter of 2022, compared to 11% for the prior year period.

We ended the first quarter of 2022 with 6,695 homes in backlog valued at $3.0 billion, a 27.8% increase in units and a 45.9% increase in value over March 31, 2021.

We remained steadfast in reaching our goals for community count growth, opening 32 new communities during the three months ended March 31, 2022 and ending the quarter with 268 active communities, up from 203 at March 31, 2021 and sequentially from 259 at December 31, 2021.

In addition, we purchased approximately 4,400 lots for $149.4 million, spent $222.1 million on land development and started construction on 4,020 homes during the three months ended March 31, 2022.

Company Positioning

We believe that our ongoing investments in 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, industry-leading innovation in our energy-efficient product offerings, automation, and transformative customer buying experience, create a differentiated strategy that has aided us in our success in the highly-competitive new home market and will continue to do so in the long-term.

We believe that 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 strategies:

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• Continuously improving the overall home buying experience through simplification and innovation;

Studio M streamlines the option selection process for move-up buyers, while 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;

• Leveraging and expanding on technological solutions through digital offerings.

During the third quarter of 2021, we launched our chat bot, Virtual Assistant Liaison ("VAL"), which provides customers and owners with around-the-clock information and support on our website.

We also offer virtual tours, partial or fully virtual closings in states where such services are permitted, and online scheduling for in-person model home tours and self-guided tours in select locations.

Our website provides a warranty portal for our homeowners to submit and track warranty-related matters and a comprehensive online suite of financial services such as mortgage pre-qualifications and on-demand homeowners’ insurance quotes;

• Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier homes with enhanced security features.

Every new home we construct meets or exceeds ENERGY STAR ® standards and comes standard with the MERV-13 air filter and a multispeed HVAC system, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs.

In addition, each of our newly constructed homes includes home automation features through our M.Connected Home™ Automation Suite which includes the Honeywell Pro Series Hub ("the Hub") that allows homeowners to monitor and control key components of their homes;

• 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 deliver them on a shorter timeline;

• Improving our home closing gross profit by growing closing volume, allowing us to better leverage our overhead;

In order to maintain focus on growing our business, we remain committed to the following long-term objectives:

• Maintaining a healthy orders pace through the use of our consumer and market research to 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 Home™ Automation Suite to create differentiation for the Meritage brand;

• Leveraging and expanding on technological solutions through digital offerings to our customers, such as our virtual home tours, interactive maps, digital financial services offerings and online warranty portal;

• Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier, safer homes that come equipped with standard features such as multi-speed HVAC systems to save energy and improve air quality and enhanced security features.

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

• Managing construction efficiencies and costs through national and regional vendor relationships with a focus on quality construction and warranty management;

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

• Promoting a positive environment for our employees through our commitment to foster 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

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

There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2021 compared to those disclosed in Item 7.

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

• Promoting a positive environment for our employees through our commitment to foster diversity, equity and inclusion ("DE&I") and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts;

• Maintaining a healthy orders 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, although currently our sales metering due to supply chain constraints is impacting our pace;

• Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand.

Critical Accounting Estimates

The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include valuation of real estate and cost of home closings, warranty reserves and valuation of deferred tax assets.

There have been no significant changes to our critical accounting estimates during the three months ended March 31, 2022 compared to those disclosed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Annual Report on Form 10-K.

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

Three Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

Home Closing Revenue

Dollars $ 1,251,435 $ 1,133,221 $ 118,214 10.4 %

Homes closed 3,112 3,004 108 3.6 %

Average sales price $ 402.1 $ 377.2 $ 24.9 6.6 %

Dollars $ 193,847 $ 143,630 $ 50,217 35.0 %

Homes closed 532 429 103 24.0 %

Average sales price $ 364.4 $ 334.8 $ 29.6 8.8 %

Dollars $ 177,623 $ 202,460 $ (24,837) (12.3) %

Homes closed 295 332 (37) (11.1) %

Average sales price $ 602.1 $ 609.8 $ (7.7) (1.3) %

Dollars $ 80,149 $ 88,199 $ (8,050) (9.1) %

Homes closed 144 183 (39) (21.3) %

Average sales price $ 556.6 $ 482.0 $ 74.6 15.5 %

West Region Totals

Dollars $ 451,619 $ 434,289 $ 17,330 4.0 %

Homes closed 971 944 27 2.9 %

Average sales price $ 465.1 $ 460.1 $ 5.0 1.1 %

Central Region - Texas

Central Region Totals

Dollars $ 383,206 $ 349,907 $ 33,299 9.5 %

Homes closed 1,012 1,059 (47) (4.4) %

Average sales price $ 378.7 $ 330.4 $ 48.3 14.6 %

Dollars $ 139,642 $ 124,836 $ 14,806 11.9 %

Homes closed 386 339 47 13.9 %

Average sales price $ 361.8 $ 368.2 $ (6.4) (1.7) %

Dollars $ 52,004 $ 62,921 $ (10,917) (17.4) %

Homes closed 139 178 (39) (21.9) %

Average sales price $ 374.1 $ 353.5 $ 20.6 5.8 %

North Carolina

Dollars $ 145,268 $ 98,322 $ 46,946 47.7 %

Homes closed 371 295 76 25.8 %

Average sales price $ 391.6 $ 333.3 $ 58.3 17.5 %

South Carolina

Dollars $ 31,686 $ 25,502 $ 6,184 24.2 %

Homes closed 92 78 14 17.9 %

Average sales price $ 344.4 $ 326.9 $ 17.5 5.4 %

Dollars $ 48,010 $ 37,444 $ 10,566 28.2 %

Homes closed 141 111 30 27.0 %

Average sales price $ 340.5 $ 337.3 $ 3.2 0.9 %

East Region Totals

Dollars $ 416,610 $ 349,025 $ 67,585 19.4 %

Homes closed 1,129 1,001 128 12.8 %

Average sales price $ 369.0 $ 348.7 $ 20.3 5.8 %

Nine Months Ended September 30, Quarter over Quarter

Three Months Ended March 31, Quarter over Quarter

2022 2021 Change $ Change %

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Average sales price $ 387.3 $ 345.7 $ 41.6 12.0 %

Three Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

Home Orders (1)

Dollars $ 1,488,951 $ 1,488,480 $ 471 — %

Homes ordered 3,441 3,851 (410) (10.6) %

Average sales price $ 432.7 $ 386.5 $ 46.2 12.0 %

Dollars $ 233,828 $ 240,151 $ (6,323) (2.6) %

Homes ordered 550 709 (159) (22.4) %

Average sales price $ 425.1 $ 338.7 $ 86.4 25.5 %

Dollars $ 213,859 $ 319,680 $ (105,821) (33.1) %

Homes ordered 319 510 (191) (37.5) %

Average sales price $ 670.4 $ 626.8 $ 43.6 7.0 %

Dollars $ 123,242 $ 88,972 $ 34,270 38.5 %

Homes ordered 207 188 19 10.1 %

Average sales price $ 595.4 $ 473.3 $ 122.1 25.8 %

West Region Totals

Dollars $ 570,929 $ 648,803 $ (77,874) (12.0) %

Homes ordered 1,076 1,407 (331) (23.5) %

Average sales price $ 530.6 $ 461.1 $ 69.5 15.1 %

Central Region - Texas

Central Region Totals

Dollars $ 427,689 $ 395,453 $ 32,236 8.2 %

Homes ordered 1,070 1,183 (113) (9.6) %

Average sales price $ 399.7 $ 334.3 $ 65.4 19.6 %

Dollars $ 192,479 $ 179,607 $ 12,872 7.2 %

Homes ordered 534 491 43 8.8 %

Average sales price $ 360.4 $ 365.8 $ (5.4) (1.5) %

Dollars $ 74,766 $ 62,541 $ 12,225 19.5 %

Homes ordered 176 172 4 2.3 %

Average sales price $ 424.8 $ 363.6 $ 61.2 16.8 %

North Carolina

Dollars $ 140,135 $ 132,988 $ 7,147 5.4 %

Homes ordered 347 386 (39) (10.1) %

Average sales price $ 403.8 $ 344.5 $ 59.3 17.2 %

South Carolina

Dollars $ 31,535 $ 28,140 $ 3,395 12.1 %

Homes ordered 100 90 10 11.1 %

Average sales price $ 315.4 $ 312.7 $ 2.7 0.9 %

Dollars $ 51,418 $ 40,948 $ 10,470 25.6 %

Homes ordered 138 122 16 13.1 %

Average sales price $ 372.6 $ 335.6 $ 37.0 11.0 %

East Region Totals

Dollars $ 490,333 $ 444,224 $ 46,109 10.4 %

Homes ordered 1,295 1,261 34 2.7 %

Average sales price $ 378.6 $ 352.3 $ 26.3 7.5 %

(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.

Nine Months Ended September 30, Quarter over Quarter

Three Months Ended March 31, Quarter over Quarter

2022 2021 Change $ Change %

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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.

Three Months Ended September 30,

Ending Average Ending Average

Active Communities

Total 236 231.0 204 220.5

Arizona 38 38.0 35 36.5

California 18 19.0 20 24.0

Colorado 16 16.5 11 12.0

West Region Totals 72 73.5 66 72.5

Central Region - Texas

Central Region Totals 68 66.0 58 63.0

Florida 38 36.0 34 35.0

Georgia 12 11.0 11 14.0

North Carolina 26 26.0 20 20.5

South Carolina 11 9.0 6 5.5

Tennessee 9 9.5 9 10.0

East Region Totals 96 91.5 80 85.0

Nine Months Ended September 30,

Three Months Ended March 31,

Ending Average Ending Average

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East Region Totals 112 110.0 80 76.0

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

2021 2020 2021 2020

Three Months Ended March 31,

Cancellation Rates (1)

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

At September 30, Quarter over Quarter

At March 31, Quarter over Quarter

2022 2021 Change $ Change %

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Companywide .

In the third quarter of 2021, we achieved our highest third quarter home closing volume and revenue in Company history, providing a 3.6% improvement in units over the third quarter of 2020, with 3,112 closings valued at $1.3 billion compared to 3,004 closings valued at $1.1 billion in the prior year.

This increase in closing volume was attributable to entering the quarter with a higher backlog as compared to prior year, despite a lower backlog conversion rate.

Home closing revenue increased by 10.4% over the third quarter of 2020 due to the higher closing volume combined with a 6.6% increase in ASP.

Home order volume declined by 10.6% to 3,441 homes as compared to 3,851 homes in the third quarter of 2020, due to a 14.9% decrease in orders pace that was partially offset by a 4.8% increase in average active communities.

We metered the number of homes available for sale during the third quarter of 2021 to align with our starts and the current production constraints.

Orders pace was still strong at 5.0 homes ordered per average active community per month during the third quarter of 2021, but down from the Company's all time third quarter high of 5.8 homes in 2020.

Home order value of $1.5 billion was flat compared to the third quarter of 2020, as the decrease in order volume was entirely offset by a 12.0% increase in ASP on orders.

This increase in ASP demonstrates the continuing market demand for homes, providing us pricing power.

Our focus on first-time and first move-up buyers, with our entry-level communities offering only spec homes for sale, allows for quicker move-ins for our customers, increasing the desirability of our products.

Community count increased 15.7% year-over-year, ending the third quarter with 236 actively selling communities at September 30, 2021, up from 204 at September 30, 2021.

Our order cancellation rate improved to 10% for both the three and nine month periods in 2021, as compared to 13% and 14% during the three and nine month periods in 2020, respectively, a further indication of strong demand in the market.

For the nine months ended September 30, 2021, home closing volume grew by 1,185 units, or 14.6%, and home closing revenue improved by $540.8 million on 9,275 closings valued at $3.6 billion.

Order volume for the nine months ended September 30, 2021 decreased 1.0% year-over-year, to 10,441 orders, while value increased 9.6%, to $4.3 billion for the nine months ended September 30, 2021.

Demand for our affordable entry-level homes has provided us with pricing power, resulting in a 10.7% increase in ASP on orders for the nine months ended September 30, 2021.

We ended the quarter with 5,838 homes in backlog valued at $2.6 billion, compared to 5,242 units valued at $2.0 billion at September 30, 2020.

Despite the decrease in order volume, backlog units and backlog value increased year-over-year from the impacts of rising ASP on orders and cycle time delays.

The West Region closed 971 homes and generated $451.6 million in home closing revenue in the third quarter of 2021, up from 944 homes and $434.3 million in home closing revenue in the comparable 2020 period.

Order volume decreased 23.5% to 1,076 homes in the third quarter of 2021 compared to 1,407 in 2020, most notably in California, due in part to a 20.8% decrease in average active communities.

Strong demand and pricing power resulted in a 15.1% increase in ASP on orders and helped to partially offset the decreased volumes, resulting in a net 12.0% decrease in order value in the third quarter of 2021 to $570.9 million, down from $648.8 million in the 2020 period.

Orders pace declined year-over-year to 4.9 homes per average community per month during the three months ended September 30, 2021 compared to 6.5 homes in the same period of 2020.

As discussed previously, the year-over-year decline in orders pace is due mainly to metering of homes available for sale in order to keep pace with production cycle times.

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

The number and value of homes closed versus prior year increased by 4.6% and 7.6%, respectively, and ASP improved 2.9%.

Order volumes for the Region declined 13.8% year-to-date, due to a 7.6% decline in the average number of actively selling communities and a 6.7% decline in orders pace.

Order value was 2.8% lower for the nine months ended September 30, 2021, due to the decreased volume partially offset by a 12.7% increase in ASP.

The West Region ended the third quarter of 2021 with 2,150 homes in backlog valued at $1.1 billion, up from 2,003 units valued at $865.0 million at September 30, 2020.

Despite the decrease in order volume, backlog increased year-over-year due to entering the period with a higher backlog and closing delays caused by supply chain constraints.

In the third quarter of 2021, the Central Region, made up of our Texas markets, closed 1,012 homes and generated $383.2 million in home closing revenue, up from the prior year comparable period results of 1,059 homes and $349.9 million of home closing revenue.

The 9.5% increase in revenue was due entirely to the 14.6% increase in ASP, as closing volume decreased 4.4% year-over-year.

Order volume declined 9.6% due to a 13.8% decrease in orders pace, partially offset by an increase in average active community count of 4.8%.

Despite the lower volume, order value increased 8.2% to $427.7 million in the third quarter of 2021, compared to $395.5 million in the prior year quarter, due to pricing power that drove ASP up by 19.6% in the Region.

The Central Region experienced improvements in home closings and home closing revenues for the nine months ended September 30, 2021, which were up 13.9% and 22.6%, respectively.

Order volume decreased 4.9% due to a lower average active community count, offset by increased orders pace.

Order value and ASP on orders improved 10.4% and 16.1%, respectively, year-over-year.

The Region ended the quarter with 1,787 units in backlog, up 1.6%, and backlog value of $715.2 million, up 18.7% compared to the prior year.

During the three months ended September 30, 2021, the East Region delivered 1,129 closings and $416.6 million in home closing revenue compared to 1,001 closings and $349.0 million in home closing revenue in the comparable prior year period, improvements of 12.8% and 19.4%, respectively.

The East Region was the only region in the Company to generate an increase in order volume in the third quarter of 2021, with an improvement in both volume and value of 2.7% and 10.4%, respectively, reporting 1,295 units valued at $490.3 million compared to 1,261 units valued at $444.2 million in the prior year period.

The higher orders reflect a 7.6% increase in average active communities, which offset the 4.1% decrease in orders pace, while the improvement in order value benefited from both the increase in volume as well as the 7.5% higher ASP.

The year-to-date results of the East Region were similar to those of the third quarter, with 25.3% and 25.7% improvements in home closing volume and revenue, respectively, compared to 2020, providing 3,369 closings and $1.2 billion in home closing revenue for the nine month period ending September 30, 2021.

The number and value of orders rose by 17.8% and 27.0%, respectively, due to a 24.2% increase in orders pace for the nine months ended September 30, 2021 compared to prior year, which more than offset the 5.1% decrease in average active communities.

The East Region ended the quarter with 1,901 homes in backlog valued at $766.1 million compared to 1,481 homes valued at $537.2 million at September 30, 2020, a 28.4% increase in units and 42.6% in order value from strong demand and pricing power.

Land Closing Revenue and Gross Profit/(Loss)

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing development or 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 $8.5 million and $4.9 million for the three months ending September 30, 2021 and 2020, respectively, and profit of $0.8 million and $0.5 for the third quarter of 2021 and 2020, respectively.

Year-to-date land sales resulted in a profit of $1.0 million for the nine months ended September 30, 2021 and a loss of $0.6 million loss in the prior year.

In the first quarter of 2022, home closing revenue improved 15.3% to $1.2 billion on 2,858 closings compared to $1.1 billion on 2,890 closings in the first quarter of 2021.

The increase in home closing revenue year-over-year was driven entirely by the 16.6% increase in ASP on closings, as closing volume declined marginally by 1.1% due to elongated construction cycle times.

We achieved our highest quarterly home orders of 3,874 homes valued at $1.8 billion in the first quarter of 2022 as compared to 3,458 homes valued at $1.3 billion in the first quarter of 2021.

The higher order volume is due to a 32.4% increase in average active communities, while orders pace declined 15.5% to 4.9 per month, down from 5.8 in the first quarter of 2021 which was one of the highest quarterly orders paces in Company history.

As a result of the increased construction cycle time caused by supply-chain and labor constraints, we continued to meter orders in the first quarter of 2022 to align our orders and starts with production capacity.

Home order value increased 31.0% year-over-year, the combined result of higher volumes and rising ASP as we experienced pricing power driven by buyer demand.

We ended the quarter with 268 actively selling communities, up from 203 at March 31, 2021.

We ended the first quarter of 2022 with 6,695 homes in backlog valued at $3.0 billion, up from 5,240 homes valued at $2.1 billion at March 31, 2021.

The year-over-year increases in backlog are the direct result of the favorable order volumes and pricing.

Order cancellations were relatively flat at 10% for the first three months of 2022, as compared to 11% during the three month period in 2021, a further indication of strong demand in the market.

The West Region closed 864 homes in the first quarter of 2022, relatively flat with the 862 homes closed in 2021.

Despite the flat volume, the Region improved home closing revenue 17.8% to $463.4 million resulting from an $80,000 increase in ASP due to sustained increases over the past few quarters from strong market demand.

Orders and order value in the first quarter of 2022 of 1,105 homes valued at $613.3 million were up from 1,057 homes valued at $485.6 million in the 2021 period.

The 4.5% higher order volume was due to a 28.2% increase in average community count, partially offset by an 19.3% decrease in orders pace year-over-year.

As a result of our intentional choice to meter orders as previously discussed, orders pace decreased to 4.6 per month in the first quarter of 2022, versus 5.7 in 2021.

The West Region had the Company's highest increase in ASP on orders of $95,700, or 20.8%, combined with the increase in volume resulted in a 26.3% increase in order value.

The West Region ended the first quarter of 2022 with 2,107 homes in backlog valued at $1.1 billion, up from 1,840 units valued at $815.7 million at March 31, 2021, increases of 14.5% and 36.6%, respectively.

In the first quarter of 2022, the Central Region closed 873 homes and generated $347.8 million in home closing revenue, as compared to 963 homes at $318.4 million in the first quarter of 2021.

The 9.3% decrease in closings was more than offset by 20.5% higher ASP to achieve a 9.2% increase in home closing revenue.

Both orders and order value improved year-over-year, with 1,296 homes ordered at $548.6 million in the first quarter of 2022, compared to 1,115 homes valued at $392.0 million in 2021.

Order volume grew 16.2% due to the Region's 21.3% increase in average active communities, partially offset by a 4.9% decrease in orders pace to 5.8 per month in the first quarter of 2022, down slightly from 6.1 in 2021.

With the Company's largest Regional increase in order volume of 16.2% and pricing power that drove ASP up by 20.4%, home order value improved 40.0% in the first quarter of 2022.

The Central Region ended the first quarter of 2022 with 2,301 homes in backlog valued at $973.8 million, up from 1,782 units valued at $646.0 million at March 31, 2021.

The East Region delivered 1,121 closings and $434.2 million in home closing revenue during the first quarter of 2022, compared to 1,065 closings and $368.2 million in home closing revenue in the comparable prior year period, improvements of 5.3% and 17.9%, respectively.

Orders and order value in the East Region grew by 14.5% and 28.5%, respectively, for the first quarter of 2022 with 1,473 units valued at $605.8 million compared to 1,286 units valued at $471.6 million in the prior year period.

The higher orders is due to a 44.7% increase in average active communities, the largest Regional increase in the Company, which more than offset a 19.6% year-over-year decrease in orders pace to 4.5 per month compared to the prior year order pace of 5.6.

The East Region ended the first quarter of 2022 with 2,287 homes in backlog valued at $951.3 million, up from 1,618 units valued at $620.6 million at March 31, 2021.

Land Closing Revenue and Gross Profit

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography, particularly with assets that no longer align with our strategy.

As a result of such sales, we recognized land closing revenue of $41.5 million and $3.8 million for the three months ending March 31, 2022 and 2021, respectively, and profits of $10.8 million and $0.5 million for the three months ended March 31, 2022 and 2021, respectively.

Other Operating Information (dollars in thousands)

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

2021 2020 2021 2020

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

Three Months Ended March 31,

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

Home Closing Gross Profit (1)

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East $ 129,485 29.8 % $ 84,225 22.9 %

(1) Home closing gross profit represents home closing revenue less cost of home closings, including impairments.

Cost of home closings includes land and associated development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.

(1) Home closing gross profit represents home closing revenue less cost of home closings, including impairments, if any.

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.

Companywide .

Home closing gross margin for the third quarter of 2021 improved 820 basis points to our highest quarterly home closing gross margin in Company history of 29.7%, compared to 21.5% in the third quarter of 2020.

The improved margin combined with higher revenue contributed to a $128.1 million improvement in home closing gross profit to end the quarter with $371.7 million compared to $243.6 million in 2020.

Gross margin was up 640 basis points to 27.4% versus 21.0% for the nine months ended September 30, 2021 and 2020, respectively.

The improved margins in 2021 in both the three and nine month periods are due to pricing power from strong buyer demand combined with leverage of fixed costs on greater home closing revenue, which have more than offset the higher lumber prices and increases in other commodity costs.

Home closing gross margin for the West Region improved by 790 basis points to 28.3% for the third quarter of 2021 versus 20.4% in the third quarter of 2020.

For the nine months ended September 30, 2021, home closing gross margin improved by 600 basis points to 26.4% versus 20.4% for the same period in the prior year.

The improvements in the West Region's gross margins are due to pricing power from strong market demand and leverage of fixed costs on higher home closing revenue.

The Central Region provided the highest home closing gross margin in the Company, which at 32.1% for the third quarter of 2021 was up 830 basis points from 23.8% in the prior year quarter.

The improvement in gross margin was due to pricing power that generated the highest ASP increase in the Company of 14.6% combined with leverage of fixed costs and overhead.

For the nine months ended September 30, 2021, gross margin was up 680 basis points to 29.6% as compared to 22.8% for the same 2020 period.

Home closing gross margin in the East Region was up 850 basis points year-over-year, our most notable improvement, at 29.0% in the third quarter of 2021 versus 20.5% for the comparable 2020 period.

For the nine months ended September 30, 2021, gross margin was up 610 basis points to 26.3% versus 20.2% for the same period in the prior year.

Pricing power and leverage of fixed costs on higher closing revenues contributed to improvements in gross margin for both the three and nine months ended September 30, 2021 compared to the respective 2020 periods.

Home closing gross margin for the first quarter of 2022 improved 560 basis points to 30.3% compared to 24.7% in the first quarter of 2021.

The improvement in home closing gross margin is largely attributable to pricing power fueled by the sustained strong buyer demand and low supply of available homes, allowing ASPs on home closings to accelerate at a greater pace than both direct costs and lot costs.

In addition, cost of home closings in the first three months of 2022 benefited from lower interest cost, the result of the lower interest rates from our debt refinancing transactions in recent years.

Higher home closing revenue combined with the margin improvement led to a $111.0 million increase in home closing gross profit of $377.6 million for the three months ended March 31, 2022, compared to $266.7 million for the three months ended March 31, 2021.

The West Region had the highest home closing gross margin in the Company of 31.0% for the first quarter of 2022, a 630 basis point improvement over 24.7% in the first quarter of 2021.

The improvement in home closing margin is mainly due to the favorable pricing environment where ASP increases have outpaced rising commodity and labor costs.

Home closing gross margin in the Central Region improved 320 basis points to 30.0% for the first quarter of 2022 from 26.8% in the prior year quarter.

The year-over-year improvement is due to pricing power leverage on both direct costs and lot costs.

The East Region saw the greatest improvement in home closing gross margin at 690 basis points year-over-year to 29.8% in the first quarter of 2022 versus 22.9% for the comparable 2021 period.

High demand in the East Region has created opportunity to lift selling prices which have more than offset the steadily increasing commodity costs.

Financial Services Profit (in thousands)

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

2021 2020 2021 2020

Three Months Ended March 31,

Financial services profit $ 3,334 $ 3,760

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 Agency and Meritage Homes Insurance Agency, as well as our portion of earnings from our mortgage joint venture.

Financial services profit was $4.2 million and $4.3 million for the three months ended September 30, 2021 and 2020, respectively, and $12.6 million and $10.9 million for the nine months ended September 30, 2021 and 2020, respectively.

The nominal decrease in year-over-year third quarter 2021 financial services profit despite an increase in closing volume is largely due to costs attributable to increased employee headcount.

The $1.7 million year-over-year increase in year-to-date financial services profit is commensurate with the year-over-year 14.6% higher closing volumes.

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.

Financial services profit decreased $0.4 million in the first quarter of 2022 to $3.3 million versus $3.8 million in 2021 due to a change in mix of financial services closing volume in markets where we provide financial services, as Carefree Title does not provide title and escrow services in all of the markets in which we have homebuilding operations.

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Commissions and other sales costs $ (65,540) $ (67,744)

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Interest expense $ (41) $ (90)

Other income, net $ 1,268 $ 1,188 $ 3,443 $ 3,313

Loss on early extinguishment of debt $ — $ — $ (18,188) $ —

Other (expense)/income, net $ (317) $ 798

Provision for income taxes $ (68,629) $ (34,134)

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

At $69.0 million for the three months ended September 30, 2021, these costs decreased $4.3 million compared to the prior year comparable period, and decreased 100 basis points as a percentage of home closing revenue, down to 5.5% versus 6.5%.

For the nine months ended September 30, 2021, commissions and other sales costs decreased 80 basis points and were $5.7 million higher than the corresponding prior year period.

For both the three and nine month comparative periods, the decline as a percentage of home closing revenue is due to greater leverage of fixed expenses on higher closing revenue and cost savings from technology innovations that particularly benefited our sales and marketing efforts and lower external broker commissions.

In addition, the third quarter of 2020 was negatively impacted by increased commission incentives that were temporarily offered during the earlier stages of COVID-19.

These costs were $65.5 million, or 5.3% of home closing revenue, for the three months ended March 31, 2022, $2.2 million, or 100 basis points, lower than the prior year comparable period, resulting from a decrease in commissions paid to third party brokers that bring prospective buyers to our communities.

General and Administrative Expenses.

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

For the three months ended September 30, 2021, general and administrative expenses were $47.2 million, compared to $40.7 million for the 2020 period, a $6.5 million increase, due primarily to increased payroll and performance based bonus compensation expenses on higher employee headcount.

For the nine months ended September 30, 2021 and 2020, general and administrative expenses were $128.3 million and $111.1 million, respectively.

As a percentage of home closing revenue, expenses were flat at 3.6% for both periods, as we realized the efforts of our cost control objectives.

We have also continued our restrictions on certain corporate expenditures, particularly as they relate to precautions taken to address ongoing COVID-19 concerns.

As COVID-19 restrictions ease, we expect these costs to gradually return as more employees return to the office and resume travel.

For the three months ended March 31, 2022, general and administrative expenses increased $2.0 million to $40.0 million, up from $37.9 million for the 2021 period.

As a percentage of home closing revenue, these expenses decreased by 30 basis points to 3.2%.

The increase in general administrative expenses year-over-year is due primarily to a higher employee headcount.

Interest Expense.

Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our Credit Facility.

Interest expense for the three and nine months ended September 30, 2021 totaled $0.1 million and $0.2 million, respectively, compared to $0.1 million and $2.2 million in the three and nine months ended September 30, 2020, respectively.

The decrease in year-to-date interest expense is due to interest charges incurred in the first half of 2020 on our Credit Facility which had $500.0 million outstanding for several weeks during that period.

Other Income, Net.

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

For the three months ended September 30, 2021, Other income, net was $1.3 million, compared to $1.2 million in the 2020 comparable period.

For the nine months ended September 30, 2021, Other income, net was $3.4 million compared to $3.3 million in the 2020 period.

Loss on Early Extinguishment of Debt.

Loss on early extinguishment of debt of $18.2 million for the nine months ended September 30, 2021 is related to the early redemption of our $300.0 million 7.00% Senior Notes due 2022 during the second quarter of 2021.

There were no similar charges during the nine months ended September 30, 2020.

See Note 6 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our Senior Notes due 2022.

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

Interest expense totaled $41,000 and $90,000 for the three months ended March 31, 2022 and 2021, respectively.

Other (Expense)/Income, Net.

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

For the three months ended March 31, 2022, Other (expense)/income, net was expense of $0.3 million, compared to income of $0.8 million in the 2021 comparable period.

Income Taxes.

Our effective tax rate was 23.3% and 19.5% for the three months ended September 30, 2021 and 2020, respectively, and 22.3% and 19.9% for the nine months ended September 30, 2021 and 2020, respectively.

The higher tax rates for the three and nine months ended September 30, 2021, reflect increased profit in states with higher tax rates and a reduced benefit of the federal energy efficient home credits earned under Internal Revenue Code §45L applied to greater earnings before income taxes.

The tax rates for the three and nine months ended September 30, 2020, reflect credits earned under Internal Revenue Code §45L new energy efficient homes.

Our effective tax rate was 24.0% and 20.6% for the three months ended March 31, 2022 and 2021, respectively.

The higher tax rate for the three months ended March 31, 2022 is due to the expiration of the Internal Revenue Code §45L new energy efficient homes credits on December 31, 2021.

Liquidity and Capital Resources

Our principal uses of capital in the first nine months of 2021 were acquisition and development of new lot positions, home construction, operating expenses, the payment of routine liabilities, the repayment of senior notes and repurchases of our common stock.

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

In addition, in the second quarter of 2021, we received proceeds from issuing new 3.875% senior notes due 2029, which were used in part to pay off existing 7.00% senior notes due 2022.

See Note 6 in the accompanying unaudited consolidated financial statements for more information.

We remain focused long-term on acquiring desirable land positions and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.

Operating Cash Flow Activities

During the nine months ended September 30, 2021, net cash used in operating activities totaled $248.7 million versus cash provided by operating activities of $373.1 million during the nine months ended September 30, 2020.

Operating cash flows in 2021 and 2020 benefited from cash generated by net earnings of $500.0 million and $270.9 million, respectively.

For the nine months ended September 30, 2021, operating cash flows generated by net earnings were offset by an $810.7 million increase in real estate assets due to our increased home construction, land acquisition and development activities.

For the nine months ended September 30, 2020, operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $60.0 million due to timing of payments for routine transactions.

Investing Cash Flow Activities

During the nine months ended September 30, 2021, net cash used in investing activities totaled $17.5 million as compared to $13.2 million for the same period in 2020.

Cash used in investing activities in the first nine months of 2021 and 2020 is mainly attributable to the purchases of property and equipment of $17.9 million and $14.8 million for the 2021 and 2020 periods, respectively.

Financing Cash Flow Activities

During the nine months ended September 30, 2021, net cash provided by financing activities totaled $82.9 million as compared to net cash used of $69.3 million for the same period in 2020.

The net cash provided by financing activities in 2021 primarily reflects the net proceeds of $450.0 million from the issuance of our 3.875% Senior Notes due 2029, offset by the early redemption of our 7.00% Senior Notes due 2022 of $300.0 million principal and associated early tender fees of $17.7 million, along with share repurchases of $37.0 million.

An additional $0.5 million of non-cash charges associated with the early redemption of our 7.00% Senior Notes due 2022 were recognized as Loss on early extinguishment of debt in the accompanying unaudited consolidated income statements.

The activity in 2020 was primarily due to $60.8 million of share repurchases.

Overview of Cash Management

We have historically generated cash and funded our operations primarily from cash flows from operating activities.

Additional sources of funds may include additional debt or equity financing and borrowing capacity under our Credit Facility.

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.

Our principal uses of cash include acquisition and development of new and previously controlled land and lot positions, home construction, operating expenses, and the payment of interest and routine liabilities.

From time to time, we opportunistically repurchase our common stock and 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 amenities.

Because these costs are a component of our inventory and not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings.

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 over the next several years, consistent with our growth initiatives.

We are using our cash on hand to fund operations.

During the nine months ended September 30, 2021, we closed 9,275 homes, purchased approximately 24,800 lots for $824.6 million, spent $623.0 million on land development and started construction on 10,554 homes.

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

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

We ended the third quarter of 2021 with $562.3 million of cash and cash equivalents, a decrease of $183.3 million from December 31, 2020, 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.

Between our available cash and liquidity in our Credit Facility, we believe that we currently have sufficient liquidity to manage through our strategic growth goals.

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

Such additional capital may be in the form of equity or debt financing and may be from a variety of sources.

Short-term Liquidity and Capital Resources

Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest payments and opportunistic common stock repurchases.

We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and our net cash flows provided by operations.

Between our cash and cash equivalents on hand combined with the availability of funds 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 acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to grow our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature and common stock repurchases.

We expect our existing and generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities.

To the extent the sources of capital described above are insufficient to meet our long-term cash needs, we may also conduct additional public offerings of our securities, refinance or secure new debt or dispose of certain assets to fund our operating activities.

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

We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase or redeem our outstanding senior notes.

In April 2021, we completed an offering of $450.0 million aggregate principal amount of 3.875% Senior Notes due 2029.

The proceeds were used to redeem all $300.0 million aggregate principal amount outstanding of our 7.00% Senior Notes due 2022.

See Note 6 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our 7.00% Senior Notes due 2022.

On February 13, 2019, our 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.

On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program.

There is no stated expiration for this program.

The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise.

The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements.

The share repurchase program may be modified, suspended or discontinued at any time.

The Company intends to retire any shares repurchased.

In the nine months ended September 30, 2021, we purchased and retired 395,461 shares of our

common stock at an aggregate purchase price of $37.0 million and as of September 30, 2021, $177.4 million remained available under this program.

Material Cash Requirements

We are a party to many contractual obligations involving commitments to make payments to third parties.

These obligations impact both short-term and long-term liquidity and capital resource needs.

Certain contractual obligations are reflected on our unaudited consolidated balance sheets as of March 31, 2022, while others are considered future commitments for materials or services not yet provided.

Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Agreement, letters of credit and surety bonds and operating leases.

We have no debt maturities until 2025.

We also have certain short-term lease commitments, commitments to fund our existing unconsolidated joint ventures and other purchase obligations in the normal course of business.

Other material cash requirements include land acquisition and development costs, home construction costs and operating expenses, including our selling, general and administrative expenses.

We plan to fund these commitments primarily with cash flows generated by operations, but may also utilize additional debt or equity financing and borrowing capacity under our Credit Facility.

Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized pre-acquisition costs.

For information about our loans payable and other borrowings, including our Credit Facility, and senior notes, reference is made to Notes 5 and 6 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and are incorporated by reference herein.

For information about our lease obligations, reference is made to Note 4 in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 and are incorporated by reference herein.

Reference is made to Notes 1, 3, 4, and 15 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q 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.

We do not engage in commodity trading or other similar activities.

We had no derivative financial instruments at March 31, 2022 or December 31, 2021.

Operating Cash Flow Activities

During the three months ended March 31, 2022, net cash provided by operating activities totaled $12.2 million versus net cash used in operating activities of $13.9 million during the three months ended March 31, 2021.

Operating cash flows in the first quarter of 2022 benefited from cash generated by net earnings of $217.3 million and an increase in accounts payable and accrued liabilities of $115.9 million due to timing of payments for routine transactions, offset by a $283.9 million increase in real estate assets and a $52.1 million increase in other receivables, prepaids and other assets.

The increase in other receivables, prepaids and other assets was largely due to the purchase of fixed rate interest locks for eligible buyers in our backlog.

During the first quarter of 2021, operating cash flows benefited from cash generated by net earnings of $131.8 million and a $38.7 million increase in accounts payable and accrued liabilities, offset by an increase in real estate assets of $193.4 million.

Investing Cash Flow Activities

During the three months ended March 31, 2022 and 2021, net cash used in investing activities totaled $6.2 million and $4.9 million, respectively.

Cash used in investing activities for both periods is mainly attributable to the purchases of property and equipment of $6.4 million and $5.0 million, respectively.

Financing Cash Flow Activities

During the three months ended March 31, 2022 and 2021, net cash used in financing activities totaled $103.9 million and $10.3 million, respectively.

The net cash used in financing activities in 2022 and 2021 primarily reflect $99.3 million and $8.4 million in share repurchases, respectively.

Our Board of Directors has authorized the expenditure of up to $300.0 million to repurchase shares of our common stock under our current stock repurchase program, of which $54.1 million remained available as of March 31, 2022.

There is no stated expiration for this program and repurchases may be made in the open market, privately negotiated transactions, or otherwise.

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):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Senior notes, net, loans payable and other borrowings $ 1,165,323 $ 1,160,038

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Currently, we plan to utilize our cash to manage our liquidity and to grow community count.

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

Future cash dividends, if any, will depend upon economic and financial conditions, results of operations, capital requirements, statutory requirements, restrictions imposed by our Credit Facility, as well as other factors considered relevant by our Board of Directors.

Credit Facility Covenants

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The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.9 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 in the credit facility) of at least 1.50 to 1.00 or (ii) liquidity (as defined in the credit facility) of an amount not less than our consolidated interest incurred during the trailing 12 months.

We were in compliance with all Credit Facility covenants as of September 30, 2021.

Our actual financial covenant calculations as of September 30, 2021 are reflected in the table below.

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

We were in compliance with all Credit Facility covenants as of March 31, 2022.

Our actual financial covenant calculations as of March 31, 2022 are reflected in the table below.

Financial Covenant (dollars in thousands):

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(1) We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.

Off-Balance Sheet Arrangements

Reference is made to Notes 1, 3, and 4 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which are incorporated by reference herein.

Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements.

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We typically benefit from the cash generated from home closings more in the third and fourth quarters than in the first and second quarters.

In 2020, historical cycles were impacted by COVID-19 and its impact on consumer behavior, particularly as it relates to the homebuilding market.

This impact has continued throughout 2021;

however, we saw some return of seasonality in the third quarter of 2021 and expect our historical seasonal pattern to continue over the long term, although it may continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.

During 2020, historical cycles were impacted by COVID-19 and since then have been further impacted by sustained increased demand.

We have continued to experience these impacts in the first quarter of 2022;

however, we expect our historical seasonal pattern to continue over the long term, although it will continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.

Recent Issued Accounting Pronouncements

See Note 1 in the accompanying notes to the unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.

See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis