What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-07 compared with 2021-02-02 · 175 added, 280 removed, 347 unchanged (57% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We experienced significant volatility in market conditions during 2020.

We ended 2019 and began 2020 in an environment exhibiting strong demand conditions.

However, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, and the various containment and mitigation measures adopted by governments and institutions globally and in the U.S.

began to have a severe economic impact, including causing the U.S.

to enter into an economic recession that continues through the date of this report.

In response to the COVID-19 pandemic and various state and local orders, we instituted the following actions in March:

• Placed restrictions on business travel for our employees;

• Closed our sales centers, model homes, and design centers to the general public and shifted to appointment-only interactions with our customers where permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer;

• Enhanced our virtual sales tools to give customers the ability to shop for a new home online;

• Closed the public gathering spaces of our amenity centers as well as community pools and athletic facilities;

• Modified our corporate and division office functions in order to allow all of our employees to work remotely except for essential minimum basic operations which could only be done in an office setting;

• Eliminated non-emergency warranty work in our customers’ homes;

• Modified much of our customer interactions around the mortgage origination and closing process to be virtual and minimize in-person interactions;

• Modified our construction operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening.

The severity of these restrictions and the date we resumed more normal operations have varied by market based on the reduction in restrictions under "shelter in place" orders and improvement in public health conditions.

While all of the above-referenced steps were, and some remain, necessary and appropriate in light of the COVID-19 pandemic, they impacted our ability to operate our business in its ordinary and traditional course.

However, residential construction and financial services have been designated as essential services in almost all of our markets, which has allowed us to continue operations.

As the result of the COVID-19 pandemic, our net new orders declined significantly in late March through April.

As the pandemic spread and government and business responses expanded, we focused on protecting our liquidity and closely managing our cash flows, including through the following actions:

• Delaying the acquisition of certain land parcels and slowing land development where practical;

• Limiting our investment in house construction, including strictly limiting production of new unsold "speculative" homes, and contacting backlog customers to reconfirm status before beginning construction of sold homes;

• As a precautionary measure, proactively drawing $700.0 million under the Revolving Credit Facility in March;

• Suspending the repurchase of shares under our share repurchase program;

• Reducing headcount and other overhead expenses.

However, demand began to stabilize in May and then rebounded sharply in June and has remained strong through the date of this report.

This resulted in a 17% increase in net new orders for the full year 2020 over 2019, including a 24% increase in net new orders in the fourth quarter of 2020 over the fourth quarter of 2019.

We believe the recovery in demand reflects a number of factors, including historically low mortgage interest rates, 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.

In addition to the improved demand, all of our operations are now functioning at effectively full capacity subject to health and safety protocols necessitated by the ongoing pandemic.

However, we have experienced periodic disruptions in our supply chain, including the availability of skilled labor as industry demand increases, which have elongated the production cycles in certain markets.

We are also facing cost pressures related to labor and materials, especially lumber, although we believe that we will be able to increase pricing to offset the majority of such cost increases.

Despite the volatility in 2020, the resurgence of demand resulted in the second highest annual pre-tax income and the highest year-end backlog (as measured in dollars) in our history.

These financial results, combined with the favorable outlook, have allowed us to:

• Fully repay the $700.0 million drawn on the Revolving Credit Facility;

• Reinstate our share repurchase program, including the repurchase of $75.0 million of shares in the fourth quarter of 2020;

• Increase our quarterly dividend by 17% to $0.14 per share in the fourth quarter of 2020;

• Announce a tender offer expected to be completed in March 2021 for $300 million of our senior notes scheduled to mature in 2026 and 2027;

• Increase our investments in new communities via land acquisition and development expenditures;

• Improve our available liquidity to $3.4 billion, consisting of $2.6 billion of cash and cash equivalents and $750.3 million available under our Revolving Credit Facility as of December 31, 2020.

We experienced strong demand for our products throughout 2021 as new orders increased 8% in units and 28% in dollars over the prior year.

New order growth was uneven through the year as 2021 volume reflected our traditional seasonal patterns of higher orders in the first half of the year as part of the spring selling season while 2020 experienced significant volatility resulting from the onset of the COVID-19 pandemic, which severely impacted sales in the first half of 2020 but then contributed to a sharp increase in demand in the second half of 2020.

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.

Home closings increased 17% in 2021 compared with the prior year.

The higher closing volume occurred in the face of 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 substantially all 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 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 declined significantly since peaking in May 2021, it increased again in late 2021 and remains elevated compared to historical norms.

Additionally, 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 average active communities declined 9% in 2021 compared to 2020 as we closed-out communities at a pace faster than we were opening new ones.

In response, we have increased our investments in land acquisition and development, and we expect the number of our active communities to increase meaningfully in 2022.

Also, while mortgage interest rates have recently increased, they remain low relative to historical levels, and supplies of new and existing home inventory remain low.

Combined with an improving macroeconomic environment, overall demand for new housing remained robust at the end of 2021 as evidenced by our significantly higher order backlog, which increased 19% in units and 45% in dollars as of December 31, 2021 over the prior year.

However, future economic conditions and the demand for homes are subject to continued uncertainty due to many factors, including the recent increase in mortgage interest rates, higher inflation, ongoing disruptions from supply chain challenges and labor shortages, the ongoing impact of the COVID-19 pandemic and government directives, and other factors.

While we believe the demand for new housing will remain strong through 2022, our past performance may not be indicative of future results.

The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years ended December 31, 2021 and 2020.

For similar operating and financial data and discussion of our fiscal 2019 results compared to our fiscal 2018 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on January 30, 2020.

For similar operating and financial data and 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 fiscal year ended December 31, 2020, which was filed with the SEC on February 2, 2021.

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

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Net income $ 7.43 $ 5.18

• Homebuilding income before income taxes increased 25% in 2020, primarily as the result of higher revenues, improved gross margins, and strong overhead management.

Homebuilding results also included a goodwill impairment charge of $20.2 million in 2020 (see Note 1 ) and net favorable insurance-related adjustments totaling $75.7 million and $26.8 million in 2020 and 2019, respectively (see Note 11 ).

• The increase in Financial Services income in 2020 compared with 2019 was primarily the result of the Homebuilding volume growth, an improved capture rate of homebuyers from our Homebuilding operations, and a low mortgage interest rate environment.

Mortgage interest rates continued at or near historically low levels during 2020, which resulted in higher gains from the sale of mortgages in the secondary market.

These improvements were partially offset by $26.4 million of mortgage repurchase reserve charges (see Note 11 ).

• Our effective tax rate was 18.6% and 24.1% for 2020 and 2019, respectively.

The lower effective tax rate in 2020 resulted primarily from the extension of federal energy efficient home credits (see Note 8 ).

• Homebuilding income before income taxes increased 48% in 2021, primarily as the result of higher revenues and gross margins and improved overhead management.

Homebuilding results also included insurance reserve reversals of $81.1 million and $93.4 million in 2021 and 2020, respectively, partially offset by reserves against insurance receivables of $17.8 million in 2020 (see Note 11 ) and a goodwill impairment charge of $20.2 million in 2020 (see Note 1 ).

• Financial Services income before income taxes increased in 2021 compared with 2020 resulting from higher volumes, partially offset by lower revenue per loan.

The prior year also included $26.4 million of mortgage repurchase reserve charges (see Note 11 ).

• Our effective income tax rate was 22.5% and 18.6% for 2021 and 2020, respectively.

The lower effective tax rate in 2020 resulted primarily from a benefit for federal energy efficient homes credits related to homes closed in prior years (see Note 8 ).

Homebuilding Operations

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(9,841,961) 23 % (8,004,823)

Land sale and other cost of revenues (b)

(77,626) 38 % (56,098)

Selling, general, and administrative expenses ("SG&A") (c)

Land sale and other cost of revenues (134,013) 73 % (77,626)

Selling, general, and administrative expenses ("SG&A") (b)

(1,208,698) 20 % (1,011,442)

Goodwill impairment (20,190) (d) —

Other expense, net (e)

Loss on debt retirement (61,469) (c) —

Goodwill impairment — (c) (20,190)

Other expense, net (d)

(3,081) (83) % (17,775)

2 unchanged sentences

Gross margin from home sales (a)

24.3 % 120 bps 23.1 %

SG&A % of home sale revenues (c)

9.6 % (90) bps 10.5 %

26.4 % 24.3 %

SG&A % of home sale revenues (b)

Closings (units) 28,894 17 % 24,624

9 unchanged sentences

(a) Includes the amortization of capitalized interest.

land inventory impairments of $7.0 million and $8.6 million in 2020 and 2019 , respectively (see Note 2 ), and warranty charges of $14.8 million related to a closed-out community in 2019 (see Note 11 ).

(b) Includes net realizable value adjustments on sold or land held for sale of $5.4 million in 2019 (see Note 2 ).

(c) Includes insurance reserve reversals of $93.4 million and $49.4 million in 2020 and 2019, respectively, partially offset by reserves against insurance receivables of $17.8 million and $22.6 million 2020 and 2019, respectively (see Note 11 ).

(d) Percentage not meaningful.

(e) See "Other expense, net" for a table summarizing significant items (see Note 1 ).

(b) Includes insurance reserve reversals of $81.1 million and $93.4 million in 2021 and 2020, respectively, partially offset by reserves against insurance receivables of $17.8 million in 2020 (see Note 11 ).

(d) See "Other expense, net" for a table summarizing significant items (see Note 1 ).

Home sale revenues

Home sale revenues for 2020 were higher than 2019 by $664.2 million, or 7%.

The increase was attributable to a 6% increase in closings combined with a 1% increase in average selling price.

The increase in closings was primarily the result of favorable demand conditions that began in 2019 and continued into the first quarter of 2020, especially among first-time buyers, which provided a large backlog of orders such that production could continue through 2020 despite the disruptions caused by the COVID-19 pandemic.

The increased average selling price is reflective of favorable pricing actions related to all customer groups taken starting in the third quarter in response to the significant improvement in demand, partially offset by the increase in the mix of first-time buyer homes, which typically carry a lower sales price.

Home sale revenues for 2021 were higher than 2020 by $2.8 billion, or 26%.

The increase was attributable to a 17% increase in closings combined with an 8% increase in average selling price.

The increase in closings was primarily the result of favorable demand conditions and occurred in substantially all of our geographic markets.

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.

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 26.4% in 2021, compared with 24.3% in 2020.

Our results in 2020 and 2019 include the effect of the aforementioned land inventory impairments totaling $7.0 million and $8.6 million, respectively.

Excluding such impairments, gross margins remained strong in both 2020 and 2019 relative to historical levels and reflect a combination of factors, including shifts in community mix and the aforementioned warranty charge of $14.8 million in 2019 related to a closed-out community in the Southeast.

The low mortgage interest rate environment combined with limited supply of new and existing housing inventory has contributed to our ability to maintain or increase pricing in the majority of our markets, which has allowed us to effectively manage pressure in house and land costs as well as expand margins.

Amortized interest costs in 2020 remained roughly equal in dollar terms with 2019 but declined slightly as a percentage of revenue to 1.7% in 2020 compared with 1.8% in 2019.

Gross margins remained strong in both 2021 and 2020 relative to historical 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.

As a result, the pricing environment remains strong, which has allowed us to effectively manage pressure in house and land costs through pricing actions.

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 relative margin gains related to such homes.

Land sale and other revenues

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Land sales and other revenues contributed income of $26.5 million and $16.4 million in 2021 and 2020, respectively.

Income in 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 9.0% and 9.6% in 2021 and 2020, respectively.

The gross dollar amount of our SG&A decreased $32.9 million, or 3%, in 2020 compared with 2019 and reflects net favorable insurance-related adjustments totaling $75.7 million (0.7% of revenues) and $26.8 million (0.3% of revenues) in 2020 and 2019, respectively.

These adjustments resulted from favorable insurance reserve adjustments partially offset by reserves against insurance receivables.

The lower gross SG&A dollars were partially offset by severance expense of $10.3 million recorded in the second quarter of 2020 related to various overhead actions taken as a result of the COVID-19 pandemic as well as higher incentive compensation expense.

The dollar amount of our SG&A increased $197.3 million, or 20%, in 2021 compared with 2020.

This increase resulted primarily from higher sales commissions expense and other variable costs due to the higher production volume.

The improvement in 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 in 2021 by higher headcount to support the increased production volume as well as higher performance-based compensation accruals due to the Company's strong operating results.

These results also reflect insurance reserve reversals of $81.1 million and $93.4 million in 2021 and 2020, respectively, partially offset by reserves against insurance receivables of $17.8 million in 2020.

The 2020 SG&A expense also reflects severance costs of $10.3 million recorded in the second quarter of 2020 as we took actions to reduce overhead expenses due to the disruption caused by the early stages of the COVID-19 pandemic.

Goodwill impairment

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$ (12,283) $ (12,390)

Loss on debt retirement ( Note 5 )

Amortization of intangible assets (Note 1)

2 unchanged sentences

Interest expense (502) (4,248)

Equity in earnings (loss) of unconsolidated entities ( Note 4 )

Equity in earnings of unconsolidated entities ( Note 4 )

Miscellaneous, net 7,054 9,831

Total other expense, net $ (3,081) $ (17,775)

The higher intangible assets amortization in 2020 reflects the ICG acquisition in January 2020.

The lower interest income in 2020 resulted from the lower interest rate environment while the higher interest expense reflects the aforementioned short-term borrowing under the Revolving Credit Facility.

Equity in earnings of unconsolidated entities reflects our share of earnings from joint ventures and other investments with independent third parties and varies between periods based on the performance of the underlying investments.

Net new orders

Net new orders in units increased 8% in 2021 compared with 2020 while net new orders in dollars increased by 28% compared with 2020.

The increased new orders resulted from the strong demand for new housing during the year, not withstanding the impact on demand in the second quarter of the COVID-19 pandemic, which we attribute to a variety of factors, including historically low mortgage interest rates, a restricted 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.

While the annual cancellation rate (canceled orders for the period divided by gross new orders for the period) was flat in 2020 with 2019 at 14%, the cancellation rate spiked in the period of mid-March through May as the result of the falloff in demand triggered by the onset of the COVID-19 pandemic before stabilizing and then declining, ending the year with a cancellation rate of 12% in the fourth quarter.

Due to supply chain challenges resulting from both disruptions caused by the COVID-19 pandemic as well as the surge in demand, we have consciously moderated the pace of sales in certain communities in order to better balance pricing, sales pace, lot availability, and production capacity.

This has allowed us to increase pricing in the majority of our communities.

Despite this moderation, ending backlog units, which represent orders for homes that have not yet closed, increased 44% as measured in units and 50% as measured in dollars at December 31, 2020 compared with December 31, 2019.

This represented the highest year-end backlog (as measured in dollars) in our history.

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

The annual cancellation rate (canceled orders for the period divided by gross new orders for the period) was a historically-low 9% in 2021 compared to 14% in 2020.

Ending backlog dollars, which represents orders for homes that have not yet closed, increased 45% in 2021 compared with 2020 as the result of the higher new orders 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.

Homes in production

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The number of homes in production at December 31, 2021 was 44% higher compared to December 31, 2020.

The increase in homes under production resulted primarily from the higher backlog.

Since demand accelerated in June 2020, the new housing supply chain has experienced delays in regard to certain materials and labor as well as with obtaining necessary approvals, permits, and inspections from local municipalities.

As a result, our production cycle times have elongated somewhat, which has

also contributed to the higher number of homes in production.

The number of unsold, or "speculative", homes has decreased significantly as we have focused our production on completing sold homes consistent with the moderation of sales pace in certain communities discussed above.

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 strategic 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 is near historical lows for our company and reflects our ability to sell these speculative units given the strong demand environment.

Controlled lots

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Total 109,078 119,218 228,296 91,363 88,989 180,352

48 % 52 % 100 % 51 % 49 % 100 %

Developed (%) 38 % 13 % 25 % 43 % 16 % 30 %

Of our controlled lots, 91,363 and 93,359 were owned and 88,989 and 64,903 were under land option agreements at December 31, 2020 and 2019, respectively.

While competition for well-positioned land is robust, we continue to pursue strategic 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 $5.5 billion at December 31, 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 $291.9 million, of which $16.2 million is refundable, at December 31, 2020.

Homebuilding Segment Operations

6 unchanged sentences

Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio

Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our financial services operations, which consist principally of mortgage banking and title operations.

Arizona, California, Colorado, Nevada, New Mexico, Washington

We also have a reportable segment for our financial services operations, which consist principally of mortgage banking, title, and insurance brokerage operations.

The Financial Services segment operates generally in the same markets as the Homebuilding segments.

13 unchanged sentences

Northeast $ 215,193 57 % $ 136,985

Southeast (b)

Southeast 417,880 61 % 258,794

585,680 62 % 362,276

Florida 362,276 17 % 309,596

Midwest 285,825 34 % 213,017

20 unchanged sentences

$ 463 8 % $ 430

(a) Includes land-related charges as summarized in the following land-related charges table (see Note 2 ).

(b) Southeast includes a warranty charge of $14.8 million in 2019 related to a closed-out community (see Note 11 ).

(a) Includes land-related charges as summarized in the following land-related charges table (see Notes 2 and 3 ).

(b) Includes goodwill impairment charge of $20.2 million in 2020 (see Note 1 ).

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

Also includes:

reserves against insurance receivables of $17.8 million and $22.6 million associated with the resolution of certain insurance matters in 2020 and 2019, respectively;

and insurance reserve reversals of $93.4 million and $49.4 million in 2020 and 2019, respectively (see Note 11 ).

The following table present additional selected financial information for our reportable Homebuilding segments:

insurance reserve reversals of $81.1 million and $93.4 million in 2021 and 2020, respectively, partially offset by reserves against insurance receivables of $17.8 million in 2020 (see Note 11 ) and a loss on debt retirement of $61.5 million in 2021 (see Note 5 ).

The following table presents additional selected financial information for our reportable Homebuilding segments:

Operating Data by Segment ($000's omitted)

56 unchanged sentences

For 2021, Northeast home sale revenues increased 33% compared with 2020 due to a 29% increase in closings combined with a 3% increase in average selling price.

The increase in closings was primarily attributable to Mid-Atlantic while the increase in average selling price was primarily attributable to Northeast Corridor.

The increased income before income taxes resulted primarily due to the higher revenues across all markets.

Net new orders increased 21%, which is attributable primarily to Mid-Atlantic.

For 2020, Southeast home sale revenues increased 1% compared with 2019 due to a 3% increase in closings partially offset by a 2% decrease in average selling price.

The increase in closings occurred in all markets except Georgia and Tennessee while the decrease in average selling price occurred across the majority of markets.

Income before income taxes increased 47% primarily due to higher revenues, improved gross margins, and improved overhead management, which occurred across the majority of markets, and charges related to estimated costs to complete repairs in a closed-out community during 2019.

Net new orders increased 8%, which is attributable to a majority of our markets.

For 2020, Florida home sale revenues increased 10% compared with 2019 due to a 9% increase in closings combined with a 1% increase in average selling price.

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

The increased income before income taxes for 2020 resulted primarily from higher revenues and improved gross margin across the majority of markets.

Net new orders increased 25%, which is attributable to all of our markets.

For 2020, Midwest home sale revenues increased 1% compared with the prior year period due to a 2% increase in average selling price partially offset by a 1% decrease in closings.

The increase in average selling price occurred across all markets while the decrease in closings primarily occurred in Michigan.

Income before income taxes increased 15% primarily due to improved overhead management and gross margins.

Net new orders increased 13%,which is attributable to the majority of markets.

For 2020, Texas home sale revenues increased 5% compared with the prior year period due to an 5% increase in closings partially offset by a slight decrease in the average selling price.

The increase in closings occurred in all markets except Dallas while the decrease in average selling price occurred across all markets except Austin.

Income before income taxes increased primarily due to increased revenues, improved overhead management and gross margins.

Net new orders increased 22%, which is attributable to all of our markets.

For 2020, West home sale revenues increased 11% compared with the prior year period due to a 12% increase in closings partially offset by a slight decrease in the average selling price.

Closings were higher in most markets with Las Vegas benefiting from the American West acquisition that occurred in 2019.

However, Northern California experienced significantly lower revenues, primarily due to the prior period completion, or near completion, of several high performing communities and an overall moderation of demand in that market.

The decrease in average selling prices was mixed among markets.

Income before income taxes increased 10% primarily as the result of higher revenues and improved gross margins across the majority of markets.

Net new orders increased by 14%, which is attributable to all markets except Arizona.

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 57% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across all markets.

Net new orders decreased, which was primarily attributable to Mid-Atlantic.

For 2021, Southeast home sale revenues increased 32% compared with 2020 due to a 21% increase in closings combined with a 9% increase in average selling price.

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

Income before income taxes increased 61% 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 2021, Florida home sale revenues increased 34% compared with 2020 due to a 21% increase in closings combined with an 11% increase in average selling price.

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

Income before income taxes increased 62% 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.

Florida's income before income taxes also includes a goodwill impairment charge of $20.2 million in 2020 (see Note 1 ).

Net new orders increased across all markets.

For 2021, Midwest home sale revenues increased 31% compared with 2020 due to a 24% increase in closings combined with a 6% 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 34% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across all markets.

Net new orders increased across all markets.

For 2021, Texas home sale revenues increased 24% compared with 2020 due to an 18% increase in closings combined with a 5% increase in the average selling price.

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

Income before income taxes increased 33% 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 decreased across the majority of markets.

For 2021, West home sale revenues increased 14% compared with 2020 period due to a 2% increase in closings combined with an 11% increase in the average selling price.

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

Income before income taxes increased 40% primarily due to increased revenues, as well as improved gross margins and overhead management, which occurred across the majority of markets.

In addition, 2021 results include 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.

The increase in net new orders was mixed among markets.

Financial Services Operations

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We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model.

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

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

Years Ended December 31,

5 unchanged sentences

Expenses (168,486) (4) % (175,481)

Other income, net (51) (85) % (346)

Other income (expense), net 671 (a) (51)

Income before income taxes $ 221,717 19 % $ 186,637

2 unchanged sentences

Principal $ 7,454,108 23 % $ 6,075,132

(a) Percentage not meaningful

Years Ended December 31,

9 unchanged sentences

Total Financial Services revenues during 2021 increased 8% compared with 2020.

The increase occurred primarily as the result of the Homebuilding volume growth combined with the low mortgage interest rate environment.

Mortgage interest rates continued at or near historically low levels during 2020, which resulted in higher gains from the sale of mortgages in the secondary market and also contributed to an improved capture rate.

The increase occurred as the result of increased homebuilding volumes, partially offset by lower capture rates and margins per loan.

Mortgage interest rates were at or near historically low levels during 2020, which resulted in a refinancing boom that created a very favorable competitive environment for new originations.

However, the demand for refinancing within the mortgage industry waned in 2021 as mortgage interest rates began to rise, which led to an increase in competition among lenders and lower margins per loan.

Income before income taxes

The increase in income before income taxes for 2020 as compared with 2019 was due primarily to higher volume, higher revenue per loan, and improved expense leverage.

These improvements were partially offset by $26.4 million of mortgage repurchase reserve charges (see Note 11 ).

Our effective tax rate was 18.6% and 24.1% for 2020 and 2019, respectively.

The lower effective tax rate in 2020 resulted primarily from the extension of federal energy efficient home credits (see Note 8 ).

The increase in income before income taxes for 2021 as compared with 2020 was due primarily to higher volume, partially offset by lower margins per loan.

Additionally, we incurred $26.4 million of mortgage repurchase reserve charges in 2020 (see Note 11 ).

Our effective income tax rate was 22.5% and 18.6% for 2021 and 2020, respectively.

The lower effective income tax rate in 2020 resulted primarily from the extension of federal energy efficient home credits related to homes closed in prior years.

Both 2021 and 2020 also included benefits related to the reversals of valuation allowances against state net operating loss carryforwards.

Liquidity and Capital Resources

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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.

We retired outstanding debt totaling $65.3 million and $310.0 million during 2020 and 2019, respectively.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 29.5% at December 31, 2020, which is slightly below our targeted long-term range of 30.0% to 40.0%.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 21.3% at December 31, 2021.

For the next twelve months, we expect our principal demand for funds will be for the acquisition and development of land inventory, construction of house inventory, and operating expenses, including our general and administrative expenses.

Additionally, we plan to continue our dividend payments and repurchases of common stock.

Beyond the next twelve months, we will need to repay or refinance our long-term debt, the next tranche of which becomes due in 2026.

We believe that our current cash position and other available financing resources, coupled with our ongoing operating activities, will provide sufficient liquidity to fund our business needs over the next twelve months and beyond.

To the extent the sources

of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt, dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities.

Unsecured senior notes

During 2019, we completed a tender offer to retire $310.0 million of our unsecured senior notes maturing in 2021.

At December 31, 2021, we had $2.0 billion of unsecured senior notes outstanding with no repayments due until March 2026 when $500.0 million of notes are scheduled to mature.

In January 2021, the Company announced a tender offer expected to be completed in February 2021 for up to $300 million of our senior notes scheduled to mature in 2026 and 2027.

During 2021, we retired $426.0 million of senior notes at their scheduled maturity date and also 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 tender offer resulted in a loss of $61.5 million, which includes the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees.

Other notes payable

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Pulte Mortgage uses these resources to finance its lending activities until the loans are sold in the secondary market, which generally occurs within 30 days.

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

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

The maximum aggregate commitment was $650.0 million during the seasonally high borrowing period from December 27, 2021 through January 13, 2022.

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Pulte Mortgage had $626.1 million and $411.8 million outstanding under the Repurchase Agreement at December 31, 2021 and 2020, respectively, and was in compliance with its covenants and requirements as of such dates.

Share repurchase program

We repurchased 4.5 million and 8.4 million shares in 2020 and 2019, respectively, for a total of $170.7 million and $274.3 million in 2020 and 2019, respectively, under this program.

In 2018, our Board of Directors authorized a $500.0 million share repurchase program and approved an increase of $500.0 million in May 2019.

The repurchase of shares was suspended in March 2020 as a response to the COVID-19 pandemic and was reinstated in October 2020.

Dividends and share repurchase program

We declared quarterly cash dividends totaling $148.1 million and $135.1 million in 2021 and 2020, respectively, and repurchased 17.7 million and 4.5 million shares in 2021 and 2020, respectively, for a total of $897.3 million and $170.7 million in 2021 and 2020, respectively.

On April 26, 2021, our board of directors approved an additional share repurchase authorization of $1.0 billion.

At December 31, 2021, we had remaining authorization to repurchase $457.6 million of common shares.

Our declared quarterly cash dividends totaled $135.1 million and $124.4 million in 2020 and 2019, respectively.

This repurchase authorization was increased by $1.0 billion on January 31, 2022.

Contractual Obligations

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

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

Certain contractual obligations are reflected on the Consolidated Balance Sheet as of December 31, 2021, while others are considered future commitments.

Our contractual obligations primarily consist of long-term debt and related interest payments, purchase obligations related to expected acquisitions and development of land, operating leases, and obligations under our various compensation and benefit plans.

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects.

The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects.

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 December 31, 2021, we had outstanding letters of credit of $298.8 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 $1.8 billion at December 31, 2021, are typically outstanding over a period of approximately three to five years.

Because significant construction and development work has been performed related to the applicable projects but has 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 December 31, 2021, these agreements had an aggregate remaining purchase price of $5.5 billion.

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

At December 31, 2021, outstanding deposits totaled $254.4 million, of which $20.0 million is refundable.

For further information regarding our primary obligations, refer to Note 5 , "Debt" and Note 11 , "Commitments and Contingencies" to the Consolidated Financial Statements included elsewhere in this Annual Report on 10-K for amounts outstanding as of December 31, 2021, related to debt and commitments and contingencies, respectively.

Operating activities

Our net cash provided by operating activities in 2020 was $1.8 billion, compared with net cash provided by operating activities of $1.1 billion in 2019.

Net cash provided by operating activities in 2021 was $1.0 billion, compared with net cash provided by operating activities of $1.8 billion in 2020.

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

Our positive cash flow from operations for 2020 was primarily due to our net income of $1.4 billion, which included various non-cash items, including land-related charges of $20.3 million and $137.6 million of deferred income tax expense.

These factors were partially offset by a $56.7 million increase in residential mortgage loans available-for-sale.

Our positive cash flow from operations for 2019 was primarily due to our net income of $1.0 billion, which included non-cash land-related charges of $27.1 million and $105.4 million of deferred income tax expense.

These factors were partially offset by a net increase in inventories of $237.7 million and a $48.3 million increase in residential mortgage loans available-for-sale.

Our positive cash flow from operations for 2021 was primarily due to our net income of $1.9 billion, which was partially offset by a $1.3 billion increase in inventories 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.

Cash flow from operations was also favorably impacted by $395.3 million more in customer deposits resulting from the higher order backlog but unfavorably impacted by an increase of $382.8 million in residential mortgage loans available-for-sale resulting from higher loan originations to support revenue growth.

Net cash provided by operating activities in 2020 was primarily due to our net income of $1.4 billion.

Investing activities

Net cash used in investing activities totaled $124.1 million in 2021, compared with $107.9 million in 2020.

The 2020 cash outflows primarily reflect our acquisition of ICG in January 2020 for $83.3 million, as well as capital expenditures of $58.4 million related to our ongoing investment in new communities and certain information technology applications.

The use of cash in investing activities in 2019 was primarily due to our acquisition of American West in April 2019 for $163.7 million as well as $58.1 million of capital expenditures.

The 2021 cash outflows primarily reflect $101.6 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of $72.8 million related to our ongoing investment in new communities and certain

information technology applications.

The outflows were partially offset by distributions from unconsolidated entities of $53.9 million.

Net cash used in investing activities in 2020 primarily reflected our acquisition of ICG in January 2020 for $83.3 million as well as capital expenditures of $58.4 million.

Financing activities

Net cash used in financing activities was $295.6 million in 2020 compared with $733.6 million during 2019.

The net cash used in financing activities for 2020 resulted primarily from the repurchase of 4.5 million common shares for $170.7 million under our repurchase authorization, repayments of debt of $65.3 million, and cash dividends of $130.2 million.

Net cash used in financing activities was $1.7 billion in 2021 compared with $295.6 million during 2020.

The net cash used in financing activities for 2021 resulted primarily from the repurchase of 17.7 million common shares for $897.3 million under our repurchase authorization, repayments of debt of $836.9 million, and cash dividends of $147.8 million, partially offset by net Financial Services borrowings of $214.3 million.

Net cash used in financing activities for 2020 resulted primarily from the repurchase of 4.5 million common shares for $170.7 million under our repurchase authorization, repayments of debt of $65.3 million, and cash dividends of $130.2 million.

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

Inflation may also increase our financing costs.

In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers.

While we attempt to pass on to our customers increases in our costs through increased sales prices, market forces may limit our ability to do so.

If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry.

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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 in 2020 are not necessarily indicative

of results that may be achieved in the future.

Contractual Obligations and Commercial Commitments

The following table summarizes our payments under contractual obligations as of December 31, 2020:

Payments Due by Period

($000’s omitted)

2021 2022-2023 2024-2025 After 2025 Total

Contractual obligations:

Notes payable (a)

$ 596,928 $ 285,766 $ 271,250 $ 2,881,229 $ 4,035,173

Operating lease obligations 21,154 42,746 23,335 19,432 106,667

Total contractual obligations (b)

$ 618,082 $ 328,512 $ 294,585 $ 2,900,661 $ 4,141,840

(a) Represents principal and interest payments related to our senior notes and limited recourse collateralized financing arrangements.

(b) We do not have any payments due in connection with capital lease or long-term purchase obligations.

We are currently under examination by various taxing jurisdictions and anticipate finalizing the examinations with certain jurisdictions within the next twelve months.

The final outcome of these examinations is not yet determinable.

The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2016 to 2020.

At December 31, 2020, we had $30.9 million of gross unrecognized tax benefits and $2.8 million of related accrued interest and penalties, which are excluded from the above table.

We are subject to certain obligations associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business.

Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings.

At December 31, 2020, we had $291.9 million of deposits and pre-acquisition costs, of which $16.2 million is refundable, relating to option agreements to acquire 88,989 lots with a remaining purchase price of $3.8 billion.

We expect to acquire the majority of such land within the next three years.

The following table summarizes our other commercial commitments as of December 31, 2020:

Amount of Commitment Expiration by Period

($000’s omitted)

2021 2022-2023 2024-2025 After 2025 Total

Other commercial commitments:

Revolving Credit Facility (a)

$ — $ 1,000,000 $ — $ — $ 1,000,000

Repurchase Agreement (b)

420,000 — — — 420,000

Total commercial commitments (c)

$ 420,000 $ 1,000,000 $ — $ — $ 1,420,000

(a) The $1.0 billion in 2022-2023 represents the capacity of our Revolving Credit Facility, under which no borrowings were outstanding, and $249.7 million of letters of credit were issued at December 31, 2020.

(b) Represents the capacity of the Repurchase Agreement, of which $411.8 million was outstanding at December 31, 2020.

The capacity of $420.0 million was effective through January 15, 2021 after which it ranges from $230.0 million to $375.0 million until its expiration in July 2021.

(c) The above table excludes an aggregate $1.5 billion of surety bonds, which typically do not have stated expiration dates.

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

Supplemental Guarantor Financial Information

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("Guarantors" or "Guarantor Subsidiaries").

Each of the Guarantor

Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc.

Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc.

Our subsidiaries associated with our financial services operations and certain other subsidiaries do not guarantee the unsecured senior notes or the Revolving Credit Facility (collectively, "Non-Guarantor Subsidiaries").

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If a court were to find that the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under that guarantee, could subordinate that guarantee to presently existing and future indebtedness of the Guarantor or could require the holders of the senior notes to repay any amounts received with respect to that guarantee.

In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the senior notes.

In the event of a finding that a fraudulent transfer or conveyance occurred, holders may not receive any repayment on the senior notes.

Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the guarantees to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of senior notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of senior notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

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and Guarantor Subsidiaries

Summarized Balance Sheet Data

ASSETS December 31, 2020

Summarized Balance Sheet Data December 31,

ASSETS 2021 2020

Cash, cash equivalents, and restricted cash $1,598,328 $2,429,639

House and land inventory 8,859,163 7,600,542

Amount due from Non-Guarantor Subsidiaries 278,531 —

Total assets 11,658,352 11,028,911

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Total liabilities 4,986,491 4,948,275

For the year ended

Summarized Statement of Operations Data December 31, 2020

Years Ended December 31,

Summarized Statement of Operations Data 2021 2020

Revenues $13,173,753 $10,368,616

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Income before income taxes 2,213,419 1,510,185

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects.

The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects.

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 December 31, 2020, we had outstanding letters of credit of $249.7 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 $1.5 billion at December 31, 2020, are typically outstanding over a period of approximately three to five years.

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 December 31, 2020, these agreements had an aggregate remaining purchase price of $3.8 billion.

Pursuant to these land option agreements, we 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

The accompanying consolidated financial statements were prepared in conformity with U.S.

generally accepted accounting principles.

When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 to our Consolidated Financial Statements).

Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties;

Critical Accounting Estimates

The preparation of the Company's financial statements in conformity with U.S.

generally accepted accounting principles and the discussion and analysis of its financial condition and operating results requires management to make estimates and assumptions, including estimates about the future resolution of existing uncertainties that affect the amounts reported.

As a result, actual results could differ from these estimates.

In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality.

Revenue recognition

Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date.

Little to no estimation is involved in recognizing such revenues.

Land sale and other revenues - We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development.

Land sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied.

Revenues related to our construction services operations are generally recognized as materials are delivered and installation services are provided.

Financial services revenues - Loan origination fees, commitment fees, and direct loan origination costs are recognized as incurred.

Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment.

The determination of fair value for certain of these financial instruments requires the use of estimates and management judgment.

Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur.

Interest income is accrued from the date a mortgage loan is originated until the loan is sold.

Mortgage servicing fees represent fees earned for servicing loans for various investors.

Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed.

Insurance brokerage commissions relate to commissions on home and other insurance policies placed with third party carriers through various agency channels.

Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy, and related contract assets for estimated future renewal commissions are included in other assets and totaled $38.5 million at December 31, 2020.

Due to uncertainties in the estimation process and the long duration of renewal policies, which can extend years into the future, actual results could differ from such estimates.

Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances.

We believe the following critical accounting estimates reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

For a discussion of all of our significant accounting policies, refer to Note 1 , "Summary of Significant Account Policies".

Inventory and cost of revenues

Inventory is stated at cost unless the carrying value is determined to not be recoverable, in which case the affected inventory is written down to fair value.

Cost includes land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction.

For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred.

Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community.

The specific identification method is used to accumulate home construction costs.

We capitalize interest cost into homebuilding inventories.

Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development.

Interest expense is allocated over the period based on the timing of home closings.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and closing costs applicable to the home.

Sales commissions are classified within selling, general, and administrative expenses.

The construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs.

This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed.

Total community land acquisition and development

costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete.

Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete.

The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities.

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Additionally, we have $404.9 million of deposits and pre-acquisition costs at December 31, 2021 related to option agreements to acquire additional land.

In the event of an extended economic slowdown, we could elect to cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.

Residential mortgage loans available-for-sale

In accordance with Accounting Standards Codification ("ASC") 825, “Financial Instruments” (“ASC 825”), we use the fair value option for our residential mortgage loans available-for-sale.

Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions.

Changes in the fair value of these loans are reflected in revenues as they occur.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to (and in limited instances exceeding) 10 years.

We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time revenue is recognized.

Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and the projected cost of claims.

We periodically assess the adequacy of our recorded warranty liability for each geographic market in which we operate and adjust the amounts as necessary.

Actual warranty costs in the future could differ from our estimates.

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized.

The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods.

We conduct our evaluation by considering all available positive and negative evidence.

This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S.

industry and broader economy.

The accounting for deferred taxes is based upon estimates of future results.

Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position.

Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes.

We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

Significant judgment is required to evaluate uncertain tax positions.

Our evaluations of tax positions consider a variety of factors, including relevant facts and circumstances, applicable tax law, correspondence with taxing authorities, and effective settlements of audit issues.

Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made.

Interest and penalties related to income taxes and unrecognized tax benefits are recognized as a component of income tax expense (benefit).

In the event of an extended economic slowdown, we could elect to

cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.

Self-insured risks

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage.

At any point in time, we are managing approximately 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage.

We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims.

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The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses.

Liabilities related to IBNR and related claim expenses represented approximately 68% of the total general liability reserves at both December 31, 2020 and 2019.

Liabilities related to IBNR and related claim expenses represented approximately 70% and 68% of the total general liability reserves at December 31, 2021 and 2020, respectively.

The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data.

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We attribute this favorable experience to a variety of factors, including improved construction techniques, rising home values, and increased participation from our subcontractors in resolving claims.

In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties.

Estimates of such amounts are recorded when recovery is considered probable.

Our receivables from insurance carriers totaled $69.5 million and $118.4 million at December 31, 2020 and 2019, respectively.

The insurance receivables relate to costs incurred or to be incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of both known and anticipated future construction defect claims that we believe to be insured related to previously closed homes.

We believe collection of these insurance receivables is probable based on various factors, including the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the credit quality of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies.

While the outcome of these matters cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis