MERITAGE HOMES CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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Industry Terms

The housing market was exceptionally strong in 2021 as the high demand that we
experienced in 2020 continued, driven by favorable market factors including low
mortgage interest rates, record low supply of existing homes and persistent
demand, particularly from the millennial and baby boomer generations who are
experiencing increased levels of household savings alongside life events that
align with home ownership. We believe that the elevated demand created by these
underlying economic and demographic factors will continue in the near to
mid-term but will taper to a normalized pace over time. We believe our strategy
for providing affordable new homes in desirable locations with inventory
available for quick move-in is well positioned to address these buyer concerns.

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, balance sheet management and long-term
community count growth. As of December 31, 2021, 98% of our ending number of
actively selling communities are targeted to first-time or first move-up buyers
and those buyer segments represented approximately 98% of our orders in 2021. In
2021, supply chain constraints and labor shortages caused by COVID-19 and other
economic-related disruptions impacted our production and the homebuilding
industry as a whole. Through long cultivated relationships with our national and
local partners, we were able to navigate the limitations and expect to continue
to utilize our spec-heavy, limited SKU operating model to manage the supply
chain concerns that are expected to continue for at least the next several
quarters.

Summary of business results

Total home closing revenue increased 14.1% due to higher home closing volume and
higher ASPs, growing to our highest annual home closing revenue in Company
history of $5.1 billion for the year ended December 31, 2021 from $4.5 billion
in 2020. Home closing gross margin for the year ended December 31, 2021 improved
by 580 basis points to 27.8% while gross margin for the year ended December 31,
2020 was 22.0%. The higher margin in 2021 reflects increased pricing power,
higher closings and effective cost controls, despite rising prices for lumber
and other commodities. We recorded impairment charges of approximately $2.1
million during the year ended December 31, 2021, primarily resulting from the
decision to sell land assets that no longer fit our strategy, compared to $24.9
million of similar charges in 2020. General and administrative expenses as a
percentage of home closing revenue held steady at 3.6% in both 2021 and 2020,
but did increase $22.4 million over the prior year to $181.4 million, primarily
driven by higher performance related compensation expenses and a higher employee
headcount. Interest expense decreased to $0.3 million for the year ended
December 31, 2021 from $2.2 million in 2020, as we benefited from lower interest
rates as a result of our debt refinancing in April 2021 and more capitalization
of interest on a higher balance of qualified assets. In connection with the debt
refinancing transaction, we recognized an $18.2 million loss on early
extinguishment of debt (see Note 7 in the accompanying financial statements for
additional information). Pre-tax net earnings of $954.8 million in 2021
increased 79.0% from $533.6 million in 2020. Our effective tax rate in 2021 was
22.8% as compared to a 20.6% effective tax rate in 2020. Net income for the year
ended December 31, 2021 was $737.4 million compared to $423.5 million in 2020.

Our results for 2021 reflect strong growth in both closings and orders as buyers
took advantage of the persistent 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 2021 with 12,801
closings, our highest closing volume in Company history and represented an 8.2%
increase over 11,834 closings in 2020. Orders were relatively flat
year-over-year, at 13,808 orders for the year compared to 13,724 in 2020 due to
our metering of orders to align with production constraints. At December 31,
2021, our backlog of $2.5 billion on 5,679 units increased by 38.8% in value,
compared to $1.8 billion on 4,672 units at December 31, 2020. Supported by
strong market demand, our full year cancellation rate on sales orders as a
percentage of gross sales units in 2021 decreased to 10.2% as compared to 13.6%
for the year ended December 31, 2020.

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.

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Our goal includes the following strategic initiatives:

•Increase the number of our communities and our market share;

•Continually improve the overall home buying experience through simplification and innovation;

• Leverage and extend technology 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;

• Simplify our production process to enable us to build our homes more efficiently and reduce our construction costs, which allows us to price our homes competitively and deliver them in shorter lead times; and

•Improve our home closing gross margin by increasing closing volume, allowing us to better leverage our overhead;

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

• Maintaining a good pace of orders through our consumer and market research to ensure that we are building homes that offer our buyers the desired features and amenities;

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

• Continue to innovate and promote our energy efficiency program and our M.Connected® automation suite to create differentiation for the Merit Brand;

• Manage construction efficiency and costs through relationships with national and regional vendors with a focus on construction quality and warranty management;

•Prudent management of our liquid assets and a solid balance sheet; we ended the year with a debt ratio of 27.6% and a net debt ratio of 15.1%;

•Maximize returns for our shareholders, most recently through our improved financial performance and share buyback program; and

•Promoting a positive environment for our employees through our commitment to
foster DE&I and providing market-competitive benefits in order to develop and
motivate our employees and to minimize turnover and to maximize recruitment
efforts.

Critical accounting estimates

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 critical accounting estimates, which are significant judgments,
assumptions and estimates by management in accordance with GAAP that involve a
significant level of estimation uncertainty and have had or are reasonably
likely to 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 critical accounting estimates that we believe involve the most difficult, subjective or complex judgments are as follows:

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Real Estate Appraisal and Cost of Home Closings

Real estate inventory 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 when home construction begins. Home construction costs are
accumulated on a per-home basis, while selling and marketing costs are expensed
as incurred. Cost of home closings includes the specific construction costs of
the home and all related allocated land acquisition, land development and other
common costs (both incurred and estimated to be incurred) that are allocated
based upon the total number of homes expected to be closed in each community or
phase. Any changes to the estimated total development costs of a community or
phase are allocated to the remaining homes in that community or phase. When a
home closes, we may have incurred costs for goods and services that have not yet
been paid. We accrue a liability to capture such obligations in connection with
the home closing which is charged directly to cost of sales.

We capitalize qualifying interest to inventory during the development and
construction periods. Capitalized interest is included in cost of closings when
the related inventory is closed. Included within our real estate inventory is
land held for development and land held for sale. Land held for development
primarily represents land and land development costs related to land where
development activity is not currently underway but is expected to begin in the
future. For these parcels, we have chosen not to currently develop certain land
holdings as they typically represent a portion or phases of a larger land parcel
that we plan to build out over several years. We do not capitalize interest for
these inactive assets, and all ongoing costs of land ownership (i.e. property
taxes, homeowner association dues, etc.) are expensed as incurred.

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 development costs.

Typically, a community's life cycle ranges from three to five years, commencing
with the acquisition of the land, continuing through the land development phase,
if applicable, and concluding with the sale, construction and closing of the
homes. Actual community lives will vary based on the size of the community, the
orders 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.
If the undiscounted cash flows expected to be generated by an asset are lower
than its carrying amount, impairment charges are recorded to write down the
asset to its estimated fair value. 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. We conduct an analysis if indicators of a decline in value of
our land and real estate assets exists. 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 and is recognized in Cost of
closings in the period in which the impairment is determined. We recorded
impairment charges of approximately $2.1 million during the year ended December
31, 2021, primarily resulting from the decision to sell land assets that no
longer fit our strategy, compared to $24.9 million of similar charges in 2020.

We have made no material changes to our methodology or material assumptions used to record and value our real estate and home cost closings over the past three years.

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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 or
available insurance 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
material or construction defect claims, the markets in which we build, claim
settlement history, insurance, legal interpretations and expected recoveries,
among other factors.

At December 31, 2021, our warranty reserve was $26.3 million, reflecting an
accrual of 0.1% to 0.5% 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 $1.8 million in 2021. There were no adjustments to our reserve
balance for the years ended December 31, 2021 and December 31, 2020. 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.

We have made no material changes to our methodology or the material assumptions used to record and measure our collateral reserves over the past three years.

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 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.

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, 2021.

We have not made any material changes to our methodology or the material assumptions used to value our deferred tax assets over the past three years.

Home Closing Revenue, Home Orders and Backlog – Analysis by Segment

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 2020 results compared to our fiscal 2019 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, 2020  .

The tables on the following pages present the operational and financial data that we consider most critical for the management of our operations (in thousands of dollars):

                                Years Ended December 31,               Year Over Year
                                 2021              2020              Chg $            Chg %
Home Closing Revenue
Total
Dollars                     $   5,094,873      $ 4,464,389      $      630,484        14.1  %
Homes closed                       12,801           11,834                 967         8.2  %
Average sales price         $       398.0      $     377.3      $         20.7         5.5  %
West Region
Arizona
Dollars                     $     802,401      $   666,223      $      136,178        20.4  %
Homes closed                        2,183            2,019                 164         8.1  %
Average sales price         $       367.6      $     330.0      $         37.6        11.4  %
California
Dollars                     $     776,528      $   774,349      $        2,179         0.3  %
Homes closed                        1,242            1,231                  11         0.9  %
Average sales price         $       625.2      $     629.0      $         (3.8)       (0.6) %
Colorado
Dollars                     $     335,490      $   354,677      $      (19,187)       (5.4) %
Homes closed                          630              738                (108)      (14.6) %
Average sales price         $       532.5      $     480.6      $         51.9        10.8  %
West Region Totals
Dollars                     $   1,914,419      $ 1,795,249      $      119,170         6.6  %
Homes closed                        4,055            3,988                  67         1.7  %
Average sales price         $       472.1      $     450.2      $         21.9         4.9  %
Central Region - Texas
Central Region Totals
Dollars                     $   1,500,682      $ 1,273,661      $      227,021        17.8  %
Homes closed                        4,165            3,894                 271         7.0  %
Average sales price         $       360.3      $     327.1      $         33.2        10.1  %
East Region
Florida
Dollars                     $     600,554      $   540,644      $       59,910        11.1  %
Homes closed                        1,663            1,466                 197        13.4  %
Average sales price         $       361.1      $     368.8      $         (7.7)       (2.1) %
Georgia
Dollars                     $     249,882      $   229,577      $       20,305         8.8  %
Homes closed                          647              642                   5         0.8  %
Average sales price         $       386.2      $     357.6      $         28.6         8.0  %
North Carolina
Dollars                     $     528,840      $   388,776      $      140,064        36.0  %
Homes closed                        1,390            1,132                 258        22.8  %
Average sales price         $       380.5      $     343.4      $         37.1        10.8  %
South Carolina
Dollars                     $     129,367      $   105,369      $       23,998        22.8  %
Homes closed                          377              331                  46        13.9  %
Average sales price         $       343.1      $     318.3      $         24.8         7.8  %
Tennessee
Dollars                     $     171,129      $   131,113      $       40,016        30.5  %
Homes closed                          504              381                 123        32.3  %
Average sales price         $       339.5      $     344.1      $         (4.6)       (1.3) %
East Region Totals
Dollars                     $   1,679,772      $ 1,395,479      $      284,293        20.4  %
Homes closed                        4,581            3,952                 629        15.9  %
Average sales price         $       366.7      $     353.1      $         13.6         3.9  %




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                                Years Ended December 31,               Year Over Year
                                 2021              2020              Chg $            Chg %
Home Orders (1)
Total
Dollars                     $   5,796,813      $ 5,174,938      $      621,875        12.0  %
Homes ordered                      13,808           13,724                  84         0.6  %
Average sales price         $       419.8      $     377.1      $         42.7        11.3  %
West Region
Arizona
Dollars                     $     951,730      $   823,339      $      128,391        15.6  %
Homes ordered                       2,335            2,501                (166)       (6.6) %
Average sales price         $       407.6      $     329.2      $         78.4        23.8  %
California
Dollars                     $     773,166      $   956,681      $     (183,515)      (19.2) %
Homes ordered                       1,191            1,530                (339)      (22.2) %
Average sales price         $       649.2      $     625.3      $         23.9         3.8  %
Colorado
Dollars                     $     429,499      $   361,619      $       67,880        18.8  %
Homes ordered                         750              750                   -           -  %
Average sales price         $       572.7      $     482.2      $         90.5        18.8  %
West Region Totals
Dollars                     $   2,154,395      $ 2,141,639      $       12,756         0.6  %
Homes ordered                       4,276            4,781                (505)      (10.6) %
Average sales price         $       503.8      $     447.9      $         55.9        12.5  %
Central Region - Texas
Central Region Totals
Dollars                     $   1,700,744      $ 1,472,183      $      228,561        15.5  %
Homes ordered                       4,413            4,476                 (63)       (1.4) %
Average sales price         $       385.4      $     328.9      $         56.5        17.2  %
East Region
Florida
Dollars                     $     738,132      $   590,966      $      147,166        24.9  %
Homes ordered                       1,981            1,645                 336        20.4  %
Average sales price         $       372.6      $     359.2      $         13.4         3.7  %
Georgia
Dollars                     $     283,649      $   237,576      $       46,073        19.4  %
Homes ordered                         694              665                  29         4.4  %
Average sales price         $       408.7      $     357.3      $         51.4        14.4  %
North Carolina
Dollars                     $     591,193      $   472,483      $      118,710        25.1  %
Homes ordered                       1,501            1,367                 134         9.8  %
Average sales price         $       393.9      $     345.6      $         48.3        14.0  %
South Carolina
Dollars                     $     132,779      $   122,049      $       10,730         8.8  %
Homes ordered                         390              380                  10         2.6  %
Average sales price         $       340.5      $     321.2      $         19.3         6.0  %
Tennessee
Dollars                     $     195,921      $   138,042      $       57,879        41.9  %
Homes ordered                         553              410                 143        34.9  %
Average sales price         $       354.3      $     336.7      $         17.6         5.2  %
East Region Totals
Dollars                     $   1,941,674      $ 1,561,116      $      380,558        24.4  %
Homes ordered                       5,119            4,467                 652        14.6  %
Average sales price         $       379.3      $     349.5      $         29.8         8.5  %


(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.



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                                            Years Ended December 31,
                                     2021                                2020
                          Ending            Average             Ending        Average
Active Communities
Total                     259               223.8               195          219.7
West Region
Arizona                    39                36.2                33           34.8
California                 22                19.0                16           23.3
Colorado                   17                14.6                11           12.0
West Region Totals         78                69.8                60           70.1
Central Region - Texas
Central Region Totals      73                65.4                63           66.9
East Region
Florida                    41                34.8                31           33.8
Georgia                    15                11.2                 7           12.5
North Carolina             26                24.6                21           20.6
South Carolina             14                 8.8                 6            6.0
Tennessee                  12                 9.2                 7            9.8
East Region Totals        108                88.6                72           82.7



                                  Years Ended December 31,
                                      2021                 2020
Cancellation Rates (1)
Total                                         10.2  %     13.6  %
West Region
Arizona                                       10.8  %     12.2  %
California                                    10.0  %     15.7  %
Colorado                                      10.4  %     14.3  %
West Region Totals                            10.5  %     13.6  %
Central Region - Texas
Central Region Totals                         11.9  %     15.4  %
East Region
Florida                                        7.0  %     11.7  %
Georgia                                       10.3  %     12.4  %
North Carolina                                 7.0  %      9.6  %
South Carolina                                15.9  %     13.0  %
Tennessee                                      9.5  %     16.3  %
East Region Totals                             8.5  %     11.8  %

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

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                                          At December 31,                   Year Over Year
                                       2021             2020              Chg $            Chg %
       Order Backlog (1)
       Total
       Dollars                     $ 2,516,164      $ 1,812,547      $      703,617        38.8  %
       Homes in backlog                  5,679            4,672               1,007        21.6  %
       Average sales price         $     443.1      $     388.0      $         55.1        14.2  %
       West Region
       Arizona
       Dollars                     $   493,575      $   343,917      $      149,658        43.5  %
       Homes in backlog                  1,145              993                 152        15.3  %
       Average sales price         $     431.1      $     346.3      $         84.8        24.5  %
       California
       Dollars                     $   271,383      $   274,680      $       (3,297)       (1.2) %
       Homes in backlog                    393              444                 (51)      (11.5) %
       Average sales price         $     690.5      $     618.6      $         71.9        11.6  %
       Colorado
       Dollars                     $   198,832      $   104,709      $       94,123        89.9  %
       Homes in backlog                    328              208                 120        57.7  %
       Average sales price         $     606.2      $     503.4      $        102.8        20.4  %
       West Region Totals
       Dollars                     $   963,790      $   723,306      $      240,484        33.2  %
       Homes in backlog                  1,866            1,645                 221        13.4  %
       Average sales price         $     516.5      $     439.7      $         76.8        17.5  %
       Central Region - Texas
       Central Region Totals
       Dollars                     $   772,871      $   572,242      $      200,629        35.1  %
       Homes in backlog                  1,878            1,630                 248        15.2  %
       Average sales price         $     411.5      $     351.1      $         60.4        17.2  %
       East Region
       Florida
       Dollars                     $   352,584      $   214,790      $      137,794        64.2  %
       Homes in backlog                    868              550                 318        57.8  %
       Average sales price         $     406.2      $     390.5      $         15.7         4.0  %
       Georgia
       Dollars                     $    91,781      $    57,882      $       33,899        58.6  %
       Homes in backlog                    203              156                  47        30.1  %
       Average sales price         $     452.1      $     371.0      $         81.1        21.9  %
       North Carolina
       Dollars                     $   225,854      $   163,346      $       62,508        38.3  %
       Homes in backlog                    565              454                 111        24.4  %
       Average sales price         $     399.7      $     359.8      $         39.9        11.1  %
       South Carolina
       Dollars                     $    44,673      $    41,211      $        3,462         8.4  %
       Homes in backlog                    133              120                  13        10.8  %
       Average sales price         $     335.9      $     343.4      $         (7.5)       (2.2) %
       Tennessee
       Dollars                     $    64,611      $    39,770      $       24,841        62.5  %
       Homes in backlog                    166              117                  49        41.9  %
       Average sales price         $     389.2      $     339.9      $         49.3        14.5  %
       East Region Totals
       Dollars                     $   779,503      $   516,999      $      262,504        50.8  %
       Homes in backlog                  1,935            1,397                 538        38.5  %
       Average sales price         $     402.8      $     370.1      $         32.7         8.8  %

(1)Our backlog represents net sales not yet closed.

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Fiscal 2021 vs. Fiscal 2020

Companywide. In 2021, home closing revenue grew by 14.1% to $5.1 billion on
12,801 units compared to $4.5 billion on 11,834 units in 2020. The improved
revenue reflects an 8.2% increase in volume and a 5.5% increase in ASP on
closings resulting from pricing power on continued elevated demand in the
homebuilding market due to the macroeconomic events discussed in "Industry
Conditions." Order value increased 12.0% to $5.8 billion from $5.2 billion, due
almost entirely to pricing power, as ASP on orders increased 11.3%
year-over-year, while both order volume and orders pace were comparable with
prior year as we metered orders in 2021 to align with our current production
capacity. Order volume was 13,808 and 13,724 for the years ended December 31,
2021 and 2020, respectively, as a 1.9% higher number of average active
communities was offset by a 1.3% decline in orders pace of 5.1 per month in 2021
compared to 5.2 in 2020. We ended the year with 5,679 homes in backlog valued at
$2.5 billion, 21.6% and 38.8% higher backlog units and value, respectively,
compared to 2020. ASP on homes in backlog grew by 14.2% to $443,100 at December
31 2021, compared to $388,000 in 2020, reflective of the persistent pricing
power experienced throughout the year.

West. The West Region generated $1.9 billion in home closing revenue for the
year ended December 31, 2021, a 6.6% increase over the $1.8 billion in the prior
year, closing 4,055 homes in 2021, up 1.7% from the 3,988 homes closed in 2020.
Order value for the West Region held steady at $2.2 billion in 2021 as compared
to $2.1 billion in 2020, as a 12.5% increase in ASP on orders offset the 10.6%
decrease in order volume of 4,276 homes during the year ended December 31, 2021
from 4,781 home orders in 2020. The decrease in order volume is primarily the
result of a 10.1% decline in year-over-year orders pace per community to 5.1 per
month in 2021 compared to 5.7 in 2020, due to the metering of orders as
previously discussed, and a relatively consistent average active community count
year-over-year. In the West Region, approximately 80% of our communities target
first-time buyers at December 31, 2021. The West Region ended 2021 with backlog
of 1,866 homes valued at $963.8 million versus 1,645 homes at $723.3 million in
2020, 13.4% and 33.2% increases over the prior year, respectively.

Central. The Central Region, made up of our Texas markets, closed 4,165 homes
for the year ended December 31, 2021 compared to 3,894 in 2020. The 7.0%
improvement in closing units combined with 10.1% higher ASP generated a 17.8%
increase in home closing revenue to $1.5 billion, up from $1.3 billion in 2020.
The Central Region also reported a 15.5% improvement in order value
year-over-year due to a 17.2% increase in ASP on orders that was partially
offset by 1.4% lower order volume. The decline in order volume was driven
entirely by a 2.2% decline in average active communities. The Central Region
ended 2021 with 4,413 orders valued at $1.7 billion compared to 4,476 orders at
$1.5 billion in the prior year. The Region ended 2021 with backlog of 1,878
units valued at $772.9 million compared to 1,630 units valued at $572.2 million
at December 31, 2020, reflecting a 17.2% improvement in ASP.

East. The East Region generated the strongest year-over-year improvements in
both volume and value of closings and orders. The East Region posted increases
of 20.4% and 15.9% in home closing revenue and volume, respectively, to $1.7
billion on 4,581 homes in 2021 from $1.4 billion on 3,952 homes in 2021. Home
closing revenue benefited from the increase in volume and a 3.9% higher ASP on
closings. The East Region was the only region to see improvement in order
volume, with order volume and value improving by 14.6% and 24.4%, respectively,
in 2021 to 5,119 units valued at $1.9 billion compared to 4,467 units valued at
$1.6 billion in the prior year. The year-over-year improvement in orders is due
to both a 7.0% higher orders pace and a 7.1% increase in average active
communities, with the East as our only region to have an increase in average
active communities. The East Region also delivered the greatest improvement in
backlog units and value, ending 2021 with 1,935 units in backlog valued at
$779.5 million, 38.5% and 50.8% increases, respectively, compared to the prior
year.

Land closing receipts 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 $25.2 million and $17.7 million for
the years ending December 31, 2021 and 2020, respectively. We recognized losses
of $1.1 million and $20.8 million in 2021 and 2020, 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 $2.0 million and $21.8 million, in
2021 and 2020, respectively.


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Other operating information (in thousands of dollars)

Years completed the 31st of December,

                                                                         2021                                      2020
                                                                                  Percent of                              Percent of
                                                                                 Home Closing                            Home Closing
                                                             Dollars               Revenue             Dollars             Revenue
Home Closing Gross Profit (1)
Total                                                    $   1,418,377                 27.8  %       $ 980,408                 22.0  %

West                                                     $     519,372                 27.1  %       $ 380,675                 21.2  %

Central                                                  $     448,284                 29.9  %       $ 304,538                 23.9  %

East                                                     $     450,721                 26.8  %       $ 295,195                 21.2  %



(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.

Fiscal 2021 vs. Fiscal 2020

Companywide. Home closing gross margin improved to 27.8% for the year ended
December 31, 2021 compared to 22.0% in the prior year. Home closing gross profit
increased by $438.0 million to $1.4 billion in 2021 versus $980.4 million in
2020, driven by the higher home closing revenue and 580 basis point increase in
home closing gross margin. The improvement in home closing gross margin is
primarily due to pricing power from robust buyer demand combined with leverage
of fixed costs on greater home closing revenue, which have more than offset the
rising lumber prices and increases in other commodity costs.

West. Our West Region home closing gross margin improved 590 basis points to
27.1% in 2021 versus 21.2% in 2020. Pricing power and leverage of fixed costs on
greater revenues led to improved margins year-over-year.

Central. The Central Region produced the highest home closing gross margin and
the greatest improvement of 600 basis points for the year ended December 31,
2021 at 29.9%, up from 23.9% in the prior year. The improvement in gross margin
was due to pricing power resulting in the highest ASP increase in the Company of
10.1% combined with leverage of fixed costs.

East. The East Region experienced a 560 basis point improvement in 2021 of 26.8%
versus 21.2% for 2020. The margin improvement in the Region is the result of
greater leverage of fixed costs on 20.4% higher closing revenue year-over-year
as well as a 3.9% increase in ASP.








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                                                Years Ended December 31,
                                                    ($ in thousands)
                                                   2021                 2020
            Financial services profit     $      18,034              $ 16,388


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. The
increase of $1.6 million, or 10.0%, is in line with the increase in home closing
volume year-over-year.
                                              Years Ended December 31,
                                                  ($ in thousands)
                                               2021              2020

Commissions and other selling expenses $(285,403) ($287,901)
Percentage of home closing income

                    5.6  %           6.4  %

General and administrative expenses ($181,449) ($159,020)
Percentage of home closing income

                    3.6  %           3.6  %
Interest Expense                          $       (318)      $   (2,177)
Other Income, Net                         $      4,864       $    6,662

Loss on early extinguishment of debt ($18,188) $ – Provision for income taxes

                $   (217,390)      $ (110,091)



Fiscal 2021 vs. Fiscal 2020

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 decreased $2.5
million and decreased as a percentage of home closing revenue by 80 basis points
in 2021 over 2020. The decrease as a percentage of home closing revenue is due
to lower broker commissions in 2021 and our utilization of digital sales
solutions. Additionally, the latter half of 2020 was negatively impacted by
increased commission incentives that were temporarily offered during the early
stages of the pandemic. The decrease in commissions and other sales costs in
dollars was primarily the result of savings in marketing and advertising spend
as we leveraged more digital platforms and 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 year ended December
31, 2021, general and administrative expenses were $181.4 million or 3.6% of
home closing revenue as compared to $159.0 million or 3.6% of home closing
revenue for the 2020 period. The $22.4 million increase is due primarily to
increased payroll and performance based bonus compensation expenses on higher
employee headcount and one-time items totaling approximately $5.0 million
included retirement payments to our former General Counsel who retired in
December 2021 and a change in the Company's retirement vesting eligibility for
equity awards. As a percentage of home closing revenue, general and
administrative expenses were consistent 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.

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 $0.3 million in 2021 compared to $2.2 million for
the 2020 period due to lower interest incurred in 2021 resulting from the early
redemption of the $300.0 million 7.00% Senior Notes due 2022 ("2022 Notes")
during the second quarter of 2021 and no outstanding borrowings on our Credit
Facility during 2021. In 2020 we incurred 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 $1.8
million in 2021 compared to 2020 due to a one-time benefit payment in 2020 of
approximately $1.5 million for company-owned life insurance proceeds.
                                       37
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Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of
$18.2 million for the year ended December 31, 2021 is related to the early
redemption of our 2022 Notes. There were no similar charges for the year ended
December 31, 2020. See Note 7 in the accompanying consolidated financial
statements for more information related to the early redemption.

Income Taxes. The effective tax rate was 22.8% and 20.6% for 2021 and 2020,
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
has been extended through 2021. The higher rate in 2021 reflects increased
profit in states with higher tax rates and a reduced benefit of the energy tax
credit applied to greater earnings before income taxes.

Cash and capital resources

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 unsecured
revolving credit facility ("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 senior notes and common stock.

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 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.

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 on current and future debt
financings 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 the principal
amounts 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.

Material cash needs

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 consolidated balance sheets as of December 31, 2021, while
others are considered future commitments. 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
                                       38
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ventures and other purchase obligations in the normal course of business. Future
commitments include land acquisition spend under purchase and option agreements.
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 lease obligations, loans payable and other borrowings
and senior notes, reference is made to Notes 4, 6, and 7 in the accompanying
Notes to the consolidated financial statements included in this Annual Report on
Form 10-K and are incorporated by reference herein.

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.

We do not engage in commodity trading or other similar activities. We had no derivative financial instruments at December 31, 2021 or 2020.

Operating cash activities

During the year ended December 31, 2021, net cash used in operations totaled
$152.1 million versus net cash provided by operations of $530.4 million during
the year ended December 31, 2020. Generally, our operating cash flows fluctuate
primarily based on changes in our net earnings, real estate inventory and, to a
lesser extent, timing of payments of accounts payable and accrued liabilities.

Operating cash flow results in 2021 primarily reflect $737.4 million in net
earnings, which were offset by a $948.1 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 2020 reflect the $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.

Investing Cash Flow Activities

During the year ended December 31, 2021, net cash used in investing activities
totaled $26.8 million as compared to $18.2 million for the same period in 2020.
Cash used in investing activities in both 2021 and 2020 is mainly attributable
to the purchases of property, plant and equipment of $25.7 million and $19.9
million, respectively.

Financing of treasury activities

During the year ended December 31, 2021, net cash provided by financing
activities totaled $51.6 million as compared to net cash used in financing
activities of $86.0 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 $61.0 million. 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.

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. 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. We acquired 639,346
and 1,100,000 shares of our common stock at an aggregate purchase price of $61.0
million and $69.6 million for the years ended December 31, 2021 and 2020,
respectively. As of December 31, 2021, there was approximately $153.4 million
available under this program to repurchase shares.

The Company entered into the unsecured revolving Credit Facility in 2014 that
has been amended from time to time. In December 2021, the Credit Facility was
amended, extending the maturity date from December 2025 to December 2026 and
replacing LIBOR as the benchmark interest rate with the Secured Overnight
Financing Rate ("SOFR"). 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.
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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):
                                                                     At 

the 31st of DecemberAT the 31st of December,

                                                                          2021                  2020
Senior notes, net, loans payable and other borrowings                $  1,160,038          $  1,020,085
Stockholders' equity                                                    3,044,389             2,347,868
Total capital                                                        $  4,204,427          $  3,367,953
Debt-to-capital (1)                                                          27.6  %               30.3  %
Senior notes, net, loans payable and other borrowings                $  1,160,038          $  1,020,085
Less: cash and cash equivalents                                          (618,335)             (745,621)
Net debt                                                             $    541,703          $    274,464
Stockholders' equity                                                    3,044,389             2,347,868
Total net capital                                                    $  3,586,092          $  2,622,332
Net debt-to-capital (2)                                                      15.1  %               10.5  %



(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.

Covenants relating to credit facilities

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 $1.9 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 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, 2021. Our
actual financial covenant calculations as of December 31, 2021 are reflected in
the table below.

Financial Covenant (dollars in thousands):                     Covenant Requirement                 Actual
Minimum Tangible Net Worth                                         > $2,068,292                   $3,003,878
Leverage Ratio                                                         < 60%                         13.1%
Interest Coverage Ratio (1)                                           > 1.50                         17.30
Minimum Liquidity (1)                                                > $62,836                    $1,335,939
Investments other than defined permitted investments                < $901,163                      $5,764


(1)We are required to meet either the interest coverage ratio or the minimum liquidity, but not both.

Recent accounting standards

See note 1 of our consolidated financial statements included in this report for a discussion of recently issued accounting standards.

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