What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-27 · 174 added, 169 removed, 328 unchanged (51% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

We continue to experience very strong demand for our products as new orders increased 28% and 30% in the three and six months ended June 30, 2021, respectively, compared with the prior year periods.

These increases reflected significant increases across each of our first-time, move-up, and active adult buyer groups and in substantially all of our geographical markets.

The higher demand for new housing has been driven by mortgage interest rates near historical lows, a limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers or to relocate from higher cost geographical regions.

While home closings increased 22% and 17% in the three and six months ended June 30, 2021, respectively, compared with the prior year periods, the increase continues to lag the growth in new orders in recent periods.

This has combined to result in a 52% year-over-year increase in our order backlog.

In part, this is the result of the normal timeline between receiving an order and delivering a home.

However, we have also experienced periodic disruptions in our supply chain, including the availability of certain materials and construction labor combined with delays in municipal approvals and inspections, which has elongated the production cycle in many of our markets.

We have increased our housing starts and hired additional construction and customer service employees in response to the higher demand.

Nevertheless, our production cycle times have extended by roughly two weeks in the majority of our markets due to the challenges referenced above.

We continue to experience strong demand for our products as new orders increased 12% over the prior year for the nine months ended September 30, 2021.

While new orders were 17% lower than the prior year for the three months ended September 30, 2021, the decrease was driven primarily by a 14% reduction in community count in combination with Company actions to strategically manage the pace of sales to better align with current production levels.

The favorable demand for new housing has been driven by mortgage interest rates near historical lows, a limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers or to relocate from higher cost geographical regions.

As a result, our order backlog increased 33% in units and 56% in dollars as of September 30, 2021 over the prior year.

Home closings increased 9% and 14% in the three and nine months ended September 30, 2021, respectively, compared with the prior year periods.

The higher closing volume is despite significant disruption in the homebuilding supply chain, including the availability of certain materials and construction labor combined with delays in municipal approvals and inspections, which has elongated the production cycle of the homes we are constructing.

While we are working with our supply partners, have increased our speculative housing starts, and have hired additional construction and customer service employees, our production cycle times have extended in the majority of our markets due to the challenges referenced above.

Due to these supply chain challenges, we are moderating lot releases and the pace of new orders in the majority of our communities in order to balance sales volume and production capacity to reduce backlog durations.

We are also facing cost pressures related to labor and materials, although we have been and believe we will continue to be able to increase pricing to offset the majority of such cost increases due to the high consumer demand.

We believe these conditions will continue to impact our industry for at least the next few quarters.

We are also facing cost pressures related to labor and materials, due in large part to a shortage of workers and supply chain challenges resulting from ongoing effects of the COVID-19 pandemic and other macroeconomic factors.

Specifically, the cost of lumber more than quadrupled from mid-2020 to mid-2021.

While the cost of lumber has declined significantly in recent weeks, it remains elevated compared to historical norms, and the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged.

We also continue to experience significant challenges with the availability and cost of windows, siding, and appliances.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic will last.

Therefore, the unpredictability of the current economic and public health conditions will continue to evolve.

However, all of our operations are now functioning at effectively full capacity subject to health and safety protocols, and, with expectations for a material acceleration in economic growth as the pandemic continues to recede, we remain optimistic about future housing demand and our ability to continue expanding our business.

While the cost of lumber has declined significantly since peaking in May 2021, it remains elevated compared to historical norms, and the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged.

We also continue to experience significant challenges with the cost and availability of windows, siding, and appliances, among other supply categories.

To date, we have been, and believe we will continue to be, able to increase pricing to offset the majority of such cost increases due to ongoing high consumer demand.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, or its related impacts on overall economic conditions or the global supply chain, will last.

As a result, the unpredictability of the current economic and public health conditions will continue to evolve.

However, all of our operations continue to function at effectively full capacity subject to health and safety protocols, and we remain optimistic about future housing demand and our ability to continue expanding our business.

Due to the higher demand and long municipal entitlement timelines, the number of our active communities continues to decrease as we close communities at a pace faster than we are opening new ones.

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The following is a summary of our operating results by line of business ($000's omitted, except per share data):

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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Net income $ 1.82 $ 1.54 $ 4.85 $ 3.56

• Homebuilding income before income taxes for the three and six months ended June 30, 2021 increased 48% and 43% compared with the same periods in 2020, respectively.

• Homebuilding income before income taxes for the three and nine months ended September 30, 2021 increased 36% and 40%, respectively, compared with the same periods in 2020, respectively.

The results are primarily the result of increased closings, higher gross margins, and improved overhead leverage in 2021.

The results also include insurance adjustments of $46.2 million for the three months ended June 30, 2021, compared to $60.7 million for the three months ended June 30, 2020 (see Note 8 ).

This benefit in 2020 was partially offset by severance expense of $10.3 million for the

three months ended June 30, 2020, and a goodwill impairment charge totaling $20.2 million ( see N ote 1 ) in the six months ended June 30, 2020.

Results for the six months ended June 30, 2021 also include a loss on debt retirement of $61.5 million (see Note 4 ).

• Financial Services income before income taxes for the three months ended June 30, 2021 decreased 15% compared to the same period in 2020, primarily as a result of increased competition in 2021 resulting in lower revenue per loan.

For the six months ended June 30, 2021, income before income taxes increased 47% compared with the same period in 2020 as a result of higher volumes, which largely resulted from increased homebuilding volumes.

• Our effective tax rate for the three and six months ended June 30, 2021 was 21.3% and 21.9%, respectively, compared to 23.7% and 23.4%, respectively, for the same periods in 2020.

Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense, partially offset by benefits associated with federal energy efficient home credits.

The effective tax rate for 2021 also reflects a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

The results also include

insurance adjustments of $53.7 million for the nine months ended September 30, 2021, compared to $59.4 million for the nine months ended September 30, 2020 (see Note 8 ).

This benefit in 2020 was partially offset by severance expense of $10.4 million for the nine months ended September 30, 2020, and a goodwill impairment charge totaling $20.2 million ( see Note 1 ) in the nine months ended September 30, 2020.

Results for the nine months ended September 30, 2021 also include a loss on debt retirement of $61.5 million (see Note 4 ).

• Financial Services income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of increased competition in 2021 resulting in lower revenue per loan.

For the nine months ended September 30, 2021, Financial Services income before income taxes increased 16% compared with the same period in 2020 as a result of higher volumes, which largely resulted from increased homebuilding volumes, partially offset by the lower revenue per loan.

• Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020.

Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense and benefits associated with federal energy efficient home credits.

Income tax expense in the three and nine months ended September 30, 2020 includes benefits of $53.2 million and $58.0 million, respectively, associated with the extension of federal energy efficient homes tax credits, including to homes closed in prior open tax years.

The effective tax rate for the nine months ended September 30, 2021 also reflects a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

Homebuilding Operations

The following presents selected financial information for our Homebuilding operations ($000’s omitted):

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2021 vs.

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SG&A as a percentage of home

sale revenues 8.4 % 40 bps 8.0 % 9.3 % (50) bps 9.8 %

sale revenues 9.6 % — 9.6 % 9.4 % (30) bps 9.7 %

Closings (units) 7,007 9 % 6,454 20,283 14 % 17,764

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Average active communities 768 (14) % 892 804 (9) % 884

Backlog at June 30:

Backlog at September:

Units 19,845 33 % 14,962

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(a) Includes the amortization of capitalized interest.

(b) Includes insurance adjustments of $46.2 million and $52.3 million for the three and six months ended June 30, 2021, respectively, and $60.7 million and $59.4 million for the three and six months ended June 30, 2020 (see Note 8 ), respectively, and severance expense of $10.3 million for the three months ended June 30, 2020.

(b) Includes insurance adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8 ), and severance expense of $10.4 million in the nine months ended September 30, 2020.

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Home sale revenues

Home sale revenues for the three and six months ended June 30, 2021 were higher than the prior year periods by $763.4 million and $1.1 billion, respectively.

For the three months ended June 30, 2021, the 31% increase was attributable to a 22% increase in closings combined with a 7% increase in average selling price.

For the six months ended June 30, 2021, the 24% increase was attributable to a 17% increase in closings combined with a 6% increase in average selling price.

The increase in closings was primarily the result of favorable demand conditions.

Home sale revenues for the three and nine months ended September 30, 2021 were higher than the prior year periods by $500.6 million and $1.6 billion, respectively.

For the three months ended September 30, 2021, the 18% increase was attributable to a 9% increase in closings combined with an 8% increase in average selling price.

For the nine months ended September 30, 2021, the 22% increase was attributable to a 14% increase in closings combined with a 7% increase in average selling price.

The increase in closings was primarily the result of favorable demand conditions, including a large backlog of orders.

Beginning in March 2020, the COVID-19 pandemic began to unfavorably impact the demand environment.

However, demand improved significantly beginning in June 2020 and has remained favorable through mid-2021.

The higher average selling price reflects the impact of pricing actions taken in response to the higher

demand as well as increased input costs, partially offset by an increase in the mix of first-time buyer homes, which typically carry a lower sales price.

However, demand improved significantly beginning in June 2020 and has remained favorable.

The higher average selling price reflects the impact

of pricing actions taken in response to the higher demand as well as increased input costs, partially offset by a small increase in the mix of first-time buyer homes, which typically carry a lower sales price.

Home sale gross margins

Home sale gross margins were 26.6% and 26.1% for the three and six months ended June 30, 2021, respectively, compared to 23.9% and 23.8% for the three and six months ended June 30, 2020, respectively.

Gross margins for the three and six months ended June 30, 2021 remained higher than recent levels and reflect a combination of factors, including:

Home sale gross margins were 26.5% and 26.2% for the three and nine months ended September 30, 2021, respectively, compared to 24.5% and 24.1% for the three and nine months ended September 30, 2020, respectively.

Gross margins for the three and nine months ended September 30, 2021 remained higher than prior year levels and reflect a combination of factors, including:

strong consumer demand, the low mortgage interest rate environment, and limited supplies of new and existing housing inventory.

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While costs remain elevated, we have been able to more than offset these cost increases through price increases.

Additionally, while speculative home sales (homes started prior to receipt of a customer order) remain the minority of our operations, the current environment is providing opportunities for additional pricing and margin gains related to such homes.

Land sale and other revenues

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Land sale and other revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions.

Land sales and other revenues contributed income of $1.9 million and $4.4 million for the three and six months ended June 30, 2021, respectively, compared to $6.9 million and $10.8 million for the three and six months ended June 30, 2020, respectively.

SG&A as a percentage of home sale revenues was 8.4% and 9.3% for the three and six months ended June 30, 2021, respectively, compared with 8.0% and 9.8% for the three and six months ended June 30, 2020, respectively.

The gross dollar amount of our SG&A increased $75.4 million, or 38%, for the three months ended June 30, 2021 compared to June 30, 2020, and increased $83.4 million, or 18%, for the six months ended June 30, 2021 compared to June 30, 2020.

The change in gross dollars in 2021 resulted from the higher production volume.

Land sales and other revenues contributed income of $15.6 million and $20.0 million for the three and nine months ended September 30, 2021, respectively, compared to $3.7 million and $14.5 million for the three and nine months ended September 30, 2020, respectively.

Income in the three and nine months ended September 30, 2021 included a gain of $12.9 million related to a land sale transaction in California that had been in the entitlement process for a number of years.

SG&A as a percentage of home sale revenues was 9.6% and 9.4% for the three and nine months ended September 30, 2021, respectively, compared with 9.6% and 9.7% for the three and nine months ended September 30, 2020, respectively.

The gross dollar amount of our SG&A increased $49.2 million, or 18%, for the three months ended September 30, 2021 compared to September 30, 2020, and increased $132.7 million, or 18%, for the nine months ended September 30, 2021 compared to September 30, 2020.

The change in gross dollars in 2021 resulted from the higher production volume primarily as the result of higher sales commissions expense.

The improvement in year-to-date SG&A as a percentage of home sale revenues is primarily attributable to leverage gained from the higher revenues.

This overhead leverage was partially offset by the lower insurance benefit in three months ended June 30, 2021 ($46.2 million compared with $60.7 million in the prior year period) and higher incentive compensation accruals due to the Company's strong operating performance.

The three months ended June 30, 2020 also included severance expense of $10.3 million as we took actions in the second quarter of 2020 to reduce overhead expenses due to the disruption caused by the early stages of the COVID-19 pandemic.

This overhead leverage was partially offset in 2021 by higher headcount to support the increased production volume as well as higher incentive compensation accruals due to the Company's strong operating performance.

The nine months ended September 30, 2020 also included severance expense of $10.3 million as we took actions in the second quarter of 2020 to reduce overhead expenses due to the disruption caused by the early stages of the COVID-19 pandemic.

Other expense, net

Other expense, net includes the following ($000’s omitted):

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

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Net new orders

Net new orders in units increased 28% while net new orders in dollars increased 59% for the three months ended June 30, 2021 as compared with the prior year period.

Net new orders in units increased 30% while net new orders in dollars increased 49% for the six months ended June 30, 2021 as compared with the prior year period.

The higher net new order volume in 2021 reflects favorable demand conditions as discussed above.

The cancellation rate (canceled orders for the period divided by gross

new orders for the period) was 7% and 8% for the three and six months ended June 30, 2021, respectively, and 19% and 16% for the same periods in 2020.

Ending backlog, which represents orders for homes that have not yet closed, increased 70% at June 30, 2021 compared with June 30, 2020.

Net new orders in units decreased 17% while net new orders in dollars increased 4% for the three months ended September 30, 2021 as compared with the prior year period.

Net new orders in units increased 12% while net new orders in dollars increased 32% for the nine months ended September 30, 2021 as compared with the prior year period.

The net new order volume in 2021 reflects favorable demand conditions partially offset by a lower community count, as more fully discussed above.

The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 10% and 8% for the three and nine months ended September 30, 2021, respectively, and 12% and 15% for the same periods in 2020.

Ending backlog dollars, which represents orders for homes that have not yet closed, increased 56% at September 30, 2021 compared with September 30, 2020.

Homes in production

The following is a summary of our homes in production:

2021 June 30,

September 30,

2021 September 30,

Sold 15,676 9,696

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Total 20,014 12,728

The number of homes in production at June 30, 2021 was 52% higher than at June 30, 2020.

The increase in homes under

production is the result of the significant increase in demand, coupled with elongated cycle times due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities.

Lower unsold completed inventory reflects the strong demand environment.

The number of homes in production at September 30, 2021 was 57% higher than at September 30, 2020.

The increase in homes under production is the result of the significant increase in demand, coupled with elongated cycle times due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities.

The higher level of unsold homes, or speculative homes, under construction reflects a conscious decision to increase our housing starts of speculative units in response to the noted supply chain challenges and to meet demand.

The lower unsold completed inventory reflects our ability to sell these speculative units given the strong demand environment.

Controlled lots

The following is a summary of our lots under control at June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

The following is a summary of our lots under control at September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

Owned Optioned Controlled Owned Optioned Controlled

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Developed (%) 38 % 14 % 25 % 43 % 16 % 30 %

While competition for well-positioned land is robust, we continue to pursue land investments that we believe can achieve appropriate risk-adjusted returns on invested capital.

While competition for well-positioned land is robust, we continue to pursue land investments that we believe can achieve appropriate risk-adjusted returns on invested capital and have increased our controlled lot count as the result of the strong demand environment.

Additionally, we continue to seek to increase the percentage of our lots that are controlled via land option agreement.

Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings.

The remaining purchase price under our land option agreements totaled $4.8 billion at June 30, 2021.

The remaining purchase price under our land option agreements totaled $5.3 billion at September 30, 2021.

These land option agreements generally may be canceled at our discretion and in certain cases extend over several years.

Our maximum exposure related to these land option agreements is generally limited to our deposits and pre-acquisition costs, which totaled $326.9 million, of which $16.5 million is refundable at June 30, 2021.

Our maximum exposure related to these land option agreements is generally limited to our deposits and pre-acquisition costs, which totaled $354.3 million, of which $19.4 million is refundable, at September 30, 2021.

Homebuilding Segment Operations

As of June 30, 2021, we conducted our operations in 40 markets located throughout 23 states.

As of September 30, 2021, we conducted our operations in 40 markets located throughout 23 states.

For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

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Operating Data by Segment ($000's omitted)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2021 vs.

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(a) Includes land-related charges as summarized in the table below.

(b) Includes goodwill impairment charge totaling $20.2 million in the six months ended June 30, 2020.

(b) Includes goodwill impairment charge totaling $20.2 million in the nine months ended September 30, 2020.

(c) Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments.

Other homebuilding also includes insurance adjustments of $46.2 million and $52.3 million for the three and six months ended June 30, 2021, respectively, and $60.7 million and $59.4 million for the three and six months ended June 30, 2020 (see Note 8 ).

Other homebuilding also includes a loss on debt retirement of $61.5 million in the six months ended June 30, 2021 (see Note 4 ).

Other homebuilding also includes insurance adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8 ).

Other homebuilding also includes a loss on debt retirement of $61.5 million in the nine months ended September 30, 2021 (see Note 4 ).

Operating Data by Segment ($000's omitted)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2021 vs.

33 unchanged sentences

Operating Data by Segment ($000's omitted)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2021 vs.

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($000’s omitted)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

10 unchanged sentences

Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.

For the second quarter of 2021, Northeast home sale revenues increased by 102% when compared with the prior year period due to a 91% increase in closings combined with a 6% increase in average selling price.

For the third quarter of 2021, Northeast home sale revenues increased by 13% when compared with the prior year period due to a 10% increase in closings combined with a 2% increase in average selling price.

The increase in closings occurred across all markets, while the increase in average selling price was mixed among markets.

Income before income taxes increased 35% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across the majority of markets.

Net new orders increased across the majority of markets.

For the six months ended June 30, 2021, Northeast home sale revenues increased by 52% when compared with the prior year period due to a 43% increase in closings combined with a 7% increase in average selling price.

The increase in closings occurred across the majority of markets while the increase in average selling price was primarily attributable to Mid-Atlantic.

Income before income taxes increased 111% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across the majority of markets.

Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Northeast home sale revenues increased by 35% when compared with the prior year period due to a 29% increase in closings combined with a 4% increase in average selling price.

The increase in closings and average selling price occurred across the majority of markets.

Income before income taxes increased 72% primarily due to increased revenues, as well as improved gross margins which occurred across all markets and improved overhead management which occurred across the majority of markets.

Net new orders increased across the majority of markets.

For the second quarter of 2021, Southeast home sale revenues increased 13% compared with the prior year period as the result of a 6% increase in closings combined with a 6% increase in average selling price.

For the third quarter of 2021, Southeast home sale revenues increased 36% compared with the prior year period as the result of a 21% increase in closings combined with a 12% increase in average selling price.

The increase in closings occurred across the majority of markets, while the increase in average selling price occurred across all markets.

Income before income taxes increased 58% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

Net new orders increased across all markets except Tennessee.

For the six months ended June 30, 2021, Southeast home sale revenues increased 14% compared with the prior year period as the result of a 10% increase in closings combined with a 4% increase in average selling price.

The increase in closings and average selling price occurred across the majority of markets.

Income before income taxes increased 29% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

Net new orders increased across the majority of markets.

For the second quarter of 2021, Florida home sale revenues increased 37% compared with the prior year period due to a 23% increase in closings combined with an 11% increase in the average selling price.

Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Southeast home sale revenues increased 21% compared with the prior year period as the result of a 14% increase in closings combined with a 7% increase in average selling price.

The increase in closings and average selling price occurred across all markets.

Income before income taxes increased 52% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

Net new orders increased across all markets.

For the six months ended June 30, 2021, Florida home sale revenues increased 30% compared with the prior year period due to a 20% increase in closings combined with an 8% increase in the average selling price.

The increased closings and average selling price occurred across all markets.

Income before income taxes increased 63% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets, combined with the impact of a goodwill impairment charge of $20.2 million in the six months ended June 30, 2020 (see Note 1 ).

Income before income taxes increased 39% primarily due to increased revenues, as well as improved gross margins which occurred across the majority of markets.

Net new orders increased across all markets.

For the second quarter of 2021, Midwest home sale revenues increased 37% compared with the prior year period due to a 29% increase in closings combined with a 6% increase in average selling price.

For the third quarter of 2021, Florida home sale revenues increased 17% compared with the prior year period due to a 5% increase in closings combined with an 11% increase in the average selling price.

The increase in closings occurred across the majority of markets, while the increase in average selling price occurred across all markets.

Income before income taxes increased 26% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

Net new orders decreased across all markets except North Florida.

For the nine months ended September 30, 2021, Florida home sale revenues increased 25% compared with the prior year period due to a 15% increase in closings combined with an 9% increase in the average selling price.

The increase in closings and average selling price occurred across all markets.

Income before income taxes increased 48% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets, combined with the impact of a goodwill impairment charge of $20.2 million in the nine months ended September 30, 2020 (see Note 1 ).

Net new orders increased across all markets.

For the six months ended June 30, 2021, Midwest home sale revenues increased 32% compared with the prior year period due to a 24% increase in closings combined with a 6% increase in average selling price.

The increase in closings and average selling price occurred across the majority of markets.

Income before income taxes increased 65% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets.

For the third quarter of 2021, Midwest home sale revenues increased 23% compared with the prior year period due to a 18% increase in closings combined with a 4% increase in average selling price.

The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets.

Income before income taxes increased 16% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Midwest home sale revenues increased 28% compared with the prior year period due to a 22% increase in closings combined with a 5% increase in average selling price.

The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets.

Income before income taxes increased 42% primarily due to increased revenues as well as improved gross margins which occurred the majority of markets.

Net new orders increased across all markets.

For the second quarter of 2021, Texas home sale revenues increased 29% compared with the prior year period due to a 27% increase in closings combined with a 1% increase in average selling price.

For the third quarter of 2021, Texas home sale revenues increased 15% compared with the prior year period due to a 10% increase in closings combined with a 5% increase in average selling price.

The increase in closings and average selling price occurred across the majority of markets.

Income before income taxes increased 10% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets.

The increase in net new orders was mixed across markets.

For the six months ended June 30, 2021, Texas home sale revenues increased 19% compared with the prior year period due to an 18% increase in closings combined with a slight increase in the average selling price.

The increase in closings and average selling price occurred in all markets except Austin.

Income before income taxes increased 32% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets except Austin.

Net new orders increased across all markets.

For the second quarter of 2021, West home sale revenues increased 21% compared with the prior year period due to a 10% increase in closings combined with a 10% increase in average selling price.

The increase in closings occurred across the majority of markets while the increase in average selling price occurred across all markets except Northern California.

Income before income taxes increased 45% primarily due to increased revenues, as well as improved overhead management and gross margins across the majority of markets.

Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Texas home sale revenues increased 18% compared with the prior year period due to a 15% increase in closings combined with a 2% increase in the average selling price.

The increase in closings occurred across the majority of markets, while the increase in average selling price occurred in all markets.

Income before income taxes increased 24% primarily due to increased revenues, as well as improved gross margins and improved overhead management, which occurred across the majority of markets.

Net new orders decreased across all markets except Dallas and Austin.

For the third quarter of 2021, West home sale revenues increased 8% compared with the prior year period due to a 14% increase in average selling price partially offset by a 5% decrease in closings.

The decrease in closings occurred across the majority of markets, while the increase in average selling price occurred across the majority of markets.

Income before income taxes increased 42% primarily due to increased revenues, improved overhead management and gross margins across the majority of markets, and gains of $12.9 million related to a land sale transaction in California .

Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, West home sale revenues increased 15% compared with the prior year period due to a 4% increase in closings combined with an 10% increase in average selling price.

The increase in closings and average selling price occurred across the majority of markets.

Income before income taxes increased 44% primarily due to increased revenues, improved overhead management and gross margins across all markets, and gains of $12.9 million related to a land sale transaction in California.

Net new orders increased across the majority of markets.

For the six months ended June 30, 2021, West home sale revenues increased 19% compared with the prior year period due to a 9% increase in closings combined with an 8% increase in average selling price.

The increase in closings occurred across all markets except Las Vegas while the increase in average selling price occurred across all markets except Northern California.

Income before income taxes increased 46% primarily due to increased revenues, as well as improved overhead management and gross margins across all markets.

Net new orders increased across all markets except Pacific Northwest.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage and other subsidiaries.

We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage LLC ("Pulte Mortgage") and other subsidiaries.

In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties.

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We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans.

This strategy results in owning the loans and related servicing rights for only a short period of time.

This strategy results in owning loans and related servicing rights for only a short period of time.

Operating as a captive business model primarily targeted to support our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding as Homebuilding customers continue to account for substantially all of its business.

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The following tables present selected financial information for our Financial Services operations ($000's omitted):

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2021 vs.

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(a) Percentage not meaningful

Six Months Ended

Nine Months Ended

September 30,

Supplemental data:

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Total funded originations 100 % 100 %

Mortgage interest rates have been at or near historically low levels through 2020 and the first half of 2021.

In the three months ended June 30, 2021, loan margins are lower than the prior year period due to competition driven by a reduction in refinance volume within the mortgage industry, which has lowered gains from the sale of mortgages in the secondary market.

Total Financial Services revenues for the three months ended June 30, 2021 decreased 4% compared with the same period in 2020 primarily as a result of lower revenue per loan due to this increased competition, partially offset by higher loan origination volume resulting from Homebuilder volume growth.

Financial Services revenues for the six months ended June 30, 2021 increased 32% compared with the same period in 2020 primarily as a result of higher loan origination volume due to Homebuilder volume growth, partially offset by lower revenue per loan.

Mortgage interest rates have been at or near historically low levels through 2020 and the first nine months of 2021.

In the three and nine months ended September 30, 2021, loan margins are lower than the prior year periods due to competition driven by a reduction in refinance volume within the mortgage industry, which has lowered gains from the sale of mortgages in the secondary market.

Total Financial Services revenues for the three months ended September 30, 2021 decreased 14% compared with the same period in 2020 primarily as a result of lower revenue per loan due to this increased competition, partially offset by higher loan origination volume resulting from Homebuilder volume growth.

Financial Services revenues for the nine months ended September 30, 2021 increased 13% compared with the same period in 2020 primarily as a result of higher loan origination volume due to Homebuilder volume growth, partially offset by lower revenue per loan.

Income before income taxes

Income before income taxes for the three months ended June 30, 2021 decreased 15% compared to the same period in 2020, primarily as a result of lower revenue per loan.

For the six months ended June 30, 2021, income before income taxes increased 47% compared with the same period in 2020 as the result of higher volume, partially offset by lower revenue per loan.

Our effective tax rate for the three and six months ended June 30, 2021 was 21.3% and 21.9%, respectively, compared to 23.7% and 23.4%, respectively, for the same periods in 2020.

The 2021 effective tax rates are lower than the 2020 effective tax rates for the same periods primarily due to the benefit from federal energy efficient home credits and reductions in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

Income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of lower revenue per loan, partially offset by higher volume.

For the nine months ended September 30, 2021, income before income taxes increased 16% compared with the same period in 2020 as the result of higher volume, partially offset by lower revenue per loan.

Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020.

The 2020 effective tax rates are lower than the 2021 effective tax rates for the same periods primarily due to federal energy efficient home credits.

Liquidity and Capital Resources

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We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing other available financing sources, including revolving bank credit and securities offerings.

At June 30, 2021, we had unrestricted cash and equivalents of $1.7 billion, restricted cash balances of $57.9 million, and $739.1 million available under our Revolving Credit Facility.

At September 30, 2021, we had unrestricted cash and equivalents of $1.6 billion, restricted cash balances of $56.3 million, and $717.7 million available under our Revolving Credit Facility.

We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments.

Given the financial resources available to us, we believe that we have adequate liquidity to continue funding our operations for the foreseeable future.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 22.7% at June 30, 2021, as compared with 29.5% at December 31, 2020.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 22.4% at September 30, 2021, as compared with 29.5% at December 31, 2020.

Unsecured senior notes

We had $2.0 billion and $2.7 billion of unsecured senior notes outstanding at June 30, 2021 and December 31, 2020, respectively, with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.

In the six months ended June 30, 2021, we accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer.

We had $2.0 billion and $2.7 billion of unsecured senior notes outstanding at September 30, 2021 and December 31, 2020, respectively, with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.

In the nine months ended September 30, 2021, we accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer.

The retirement resulted in a loss of $61.5 million, which includes the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees.

We also retired $426.0 million of senior notes scheduled to mature in March 2021.

We also retired $426.0 million of senior notes at their scheduled maturity date.

Other notes payable

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $58.2 million and $40.1 million at June 30, 2021 and December 31, 2020, respectively.

These notes have maturities ranging up to four years, are secured by the applicable land positions to which they relate, and have no recourse to any other assets.

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $71.4 million and $40.1 million at September 30, 2021 and December 31, 2020, respectively.

These notes have maturities ranging up to four years, are secured by the applicable land positions to which they relate, and generally have no recourse to other assets.

The stated interest rates on these notes range up to 6%.

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We maintain a revolving credit facility (the "Revolving Credit Facility") maturing in June 2023 that has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 billion, subject to certain conditions and availability of additional bank commitments.

The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, with a sublimit of $500.0 million at June 30, 2021.

The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein.

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In June 2020, we repaid the full outstanding balance of $700.0 million.

As a result, we had no borrowings outstanding at both June 30, 2021 and December 31, 2020, and $260.9 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at June 30, 2021 and December 31, 2020, respectively.

We had no borrowings outstanding at either September 30, 2021 or December 31, 2020, and $282.3 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at September 30, 2021 and December 31, 2020, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility).

As of June 30, 2021, we were in compliance with all covenants.

Our available and unused borrowings

under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $739.1 million and $750.3 million at June 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, we were in compliance with all covenants.

Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $717.7 million and $750.3 million at September 30, 2021 and December 31, 2020, respectively.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement with third party lenders (the "Repurchase Agreement") that matures on July 29, 2021.

The maximum aggregate commitment was $375.0 million at June 30, 2021, which continues through maturity.

Pulte Mortgage maintains a master repurchase agreement with third party lenders (as amended, the "Repurchase Agreement") that matures on July 28, 2022.

The maximum aggregate commitment was $580.0 million at September 30, 2021, which will increase to $650.0 million during the seasonally high borrowing period from December 27, 2021 through January 13, 2022.

At all other times, the maximum aggregate commitment ranges from $460.0 million to $550.0 million.

Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale.

The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity.

Pulte Mortgage had $352.6 million and $411.8 million outstanding under the Repurchase Agreement at June 30, 2021 and December 31, 2020, respectively, and was in compliance with all of its covenants and requirements as of such dates.

While there can be no assurances that the Repurchase Agreement can be renewed or replaced on commercially reasonable terms upon its expiration, we believe we have adequate liquidity to meet Pulte Mortgage's anticipated financing needs.

Pulte Mortgage had $476.5 million and $411.8 million outstanding under the Repurchase Agreement at September 30, 2021 and December 31, 2020, respectively, and was in compliance with all of its covenants and requirements as of such dates.

Dividends and share repurchase program

In the six months ended June 30, 2021, we declared cash dividends totaling $74.1 million and repurchased 6.9 million shares under our repurchase authorization for $353.7 million.

In the nine months ended September 30, 2021, we declared cash dividends totaling $110.3 million and repurchased 12.0 million shares under our repurchase authorization for $614.3 million.

On April 26, 2021, the Board of Directors approved an additional share repurchase authorization of $1.0 billion.

At June 30, 2021, we had remaining authorization to repurchase $1.0 billion of common shares.

At September 30, 2021, we had remaining authorization to repurchase $740.6 million of common shares.

Operating activities

Net cash provided by operating activities for the six months ended June 30, 2021 was $432.1 million.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $548.2 million.

Generally, the primary drivers of our cash flow from operations are profitability and changes in the levels of inventory and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations.

The positive cash flow from operations for the six months ended June 30, 2021 was primarily due to our net income of $807.5 million, which included various non-cash items including a loss on debt retirement of $61.5 million, partially offset by a net increase in inventories of $632.6 million, which was primarily attributable to higher house inventory in production resulting from the higher sales activity.

Net cash provided by operating activities for the six months ended June 30, 2020 was $807.9 million.

The positive cash flow from operations for the six months ended June 30, 2020 was primarily due to our net income of $552.3 million, which included various non-cash items, a seasonal $114.1 million decrease in residential mortgage loans available-for-sale, and a net decrease in inventories of $101.8 million.

The decrease in inventories resulted from our deliberate efforts to reduce inventory spend, especially land acquisition and development spend, starting in March 2020 in response to the COVID-19 pandemic.

While a seasonal increase in house inventory partially offset the reduced land expenditures, the size of the seasonal increase was lower as we tightly managed production levels given the volatility in demand during March through June 2020.

The positive cash flow from operations for the nine months ended September 30, 2021 was primarily due to our net income of $1.3 billion, which included various non-cash items including a loss on debt retirement of $61.5 million, partially offset by a net increase in inventories of $1.1 billion, which was primarily attributable to higher house inventory in production resulting from higher sales activity and extended production cycle times combined with higher investment in land inventory to support future growth.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $1.3 billion.

The positive cash flow from operations for the nine months ended September 30, 2020 was primarily due to our net income of $968.7 million, which included various non-cash items, a seasonal $108.2 million decrease in residential mortgage loans available-for-sale, and a net decrease in inventories of $84.3 million.

The decrease in inventories resulted from our deliberate efforts to reduce inventory spend, especially land acquisition and development spend, during the second quarter of 2020 in response to the COVID-19 pandemic.

Investing activities

Net cash used in investing activities for the six months ended June 30, 2021 was $47.4 million.

These cash outflows primarily reflected a $10.4 million deferred payment related to the acquisition of ICG, as well as capital expenditures of $31.5 million related to our ongoing investments in new communities and certain information technology applications.

Net cash used in investing activities for the six months ended June 30, 2020 was $105.5 million.

Net cash used in investing activities for the nine months ended September 30, 2021 was $86.5 million.

These cash outflows primarily reflected a $10.4 million deferred payment related to the acquisition of Innovative Construction Group ("ICG"), $35.8 million of investments in unconsolidated entities, as well as capital expenditures of $52.1 million related to our ongoing investments in new communities and certain information technology applications.

These outflows were partially offset by distributions from unconsolidated entities of $11.5 million.

Net cash used in investing activities for the nine months ended September 30, 2020 was $107.2 million.

These cash outflows primarily reflected our acquisition of ICG in January 2020 for $83.3 million, as well as capital expenditures of $46.9 million related to our ongoing investments in new communities and certain information technology applications.

These outflows were partially offset by distributions from unconsolidated entities of $19.9 million.

Financing activities

Net cash used in financing activities for the six months ended June 30, 2021 totaled $1.3 billion.

These cash outflows resulted primarily from the repurchase of 6.9 million common shares for $353.7 million under our share repurchase authorization, repayments of debt totaling $797.4 million, payments of $74.9 million in cash dividends, and net repayments of $59.2 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.

Net cash used in financing activities for the six months ended June 30, 2020 totaled $256.1 million.

These cash outflows resulted primarily from the repurchase of 2.8 million common shares for $95.7 million under our repurchase authorization, repayments of debt totaling $10.1 million, payments of $65.3 million in cash dividends, and net repayments of $70.2 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.

Net cash used in financing activities for the nine months ended September 30, 2021 totaled $1.5 billion.

These cash outflows resulted primarily from the repurchase of 12.0 million common shares for $614.3 million under our share repurchase authorization, repayments of debt totaling $797.4 million, and payments of $111.7 million in cash dividends.

These outflows were partially offset by net borrowings of $64.7 million under the Repurchase Agreement to support higher loan originations resulting from growth in home closing volume.

Net cash used in financing activities for the nine months ended September 30, 2020 totaled $296.7 million.

These cash outflows resulted primarily from the repurchase of 2.8 million common shares for $95.7 million under our share repurchase authorization, repayments of debt totaling $11.0 million, payments of $97.8 million in cash dividends, and net repayments of $77.5 million for borrowings under the Repurchase Agreement.

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs.

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As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year.

Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our quarterly results for 2021 are not necessarily indicative of results that may be achieved in the future.

Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our quarterly results for 2021 and 2020 are not necessarily indicative of results that may be achieved in the future.

Contractual Obligations and Commercial Commitments

retirement of $426 million, $200 million, and $100 million of unsecured senior notes previously scheduled to mature in March 2021, March 2026, and January 2027, respectively.

There have been no material changes to our contractual obligations from those disclosed in our "Contractual Obligations and Commercial Commitments" contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation s, included in our Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of the retirement of $426 million, $200 million, and $100 million of unsecured senior notes previously scheduled to mature in March 2021, March 2026, and January 2027, respectively.

Supplemental Guarantor Financial Information

As of June 30, 2021, PulteGroup, Inc.

As of September 30, 2021, PulteGroup, Inc.

had outstanding $2.0 billion principal amount of unsecured senior notes due at dates from March 2026 through February 2035 and no amounts outstanding on its Revolving Credit Facility.

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However, in general, a court would deem a company insolvent if:

• the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;

• the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature;

• the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair salable value of all of its assets;

• the present fair salable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature;

• it could not pay its debts as they became due.

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Summarized Balance Sheet Data

ASSETS June 30, 2021

ASSETS September 30, 2021 December 31, 2020

Cash, cash equivalents, and restricted cash $1,539,275 $2,429,639

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Total liabilities 4,713,444 4,948,275

Six Months Ended

Summarized Statement of Operations Data June 30, 2021

Nine Months Ended

September 30,

Summarized Statement of Operations Data 2021 2020

Revenues $9,035,505 $7,424,736

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If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis.

At June 30, 2021, we had outstanding letters of credit totaling $260.9 million.

At September 30, 2021, we had outstanding letters of credit totaling $282.3 million.

Our surety bonds generally do not have stated expiration dates;

rather, we are released from the bonds as the contractual performance is completed.

These bonds, which approximated $1.7 billion at June 30, 2021, are typically outstanding over a period of approximately three to five years.

These bonds, which approximated $1.8 billion at September 30, 2021, are typically outstanding over a period of approximately three to five years.

Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future.

At June 30, 2021, these agreements had an aggregate remaining purchase price of $4.8 billion.

At September 30, 2021, these agreements had an aggregate remaining purchase price of $5.3 billion.

Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates in the six months ended June 30, 2021 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

There have been no significant changes to our critical accounting policies and estimates in the nine months ended September 30, 2021 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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