PULTEGROUP INC/MI/ 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The overall US housing market remained strong in the first quarter and registered continued growth in new home demand and pricing, driven primarily by: an extremely limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, positive demographic trends, along with low unemployment levels and resulting wage growth. These improvements occurred despite a significant increase in mortgage interest rates during the period. The rising cost of housing, inflation in the broader economy, and increases in mortgage interest rates have placed additional pressure on overall housing affordability. However, while affordability has become more challenged, the cost of new housing continues to compete well with the cost of rental housing. In the current environment, we continued to experience strong demand for our products in the first quarter of 2022. While new orders were 19% lower than the prior year period, the decrease was driven primarily by a 7% reduction in community count in combination with Company actions to strategically manage the pace of sales to better align with current production levels. As a result, our order backlog increased 5% in units and 31% in dollars as of March 31, 2022 over the prior year period. Due to the increasing level of new homebuilding activity in the US, coupled with impacts on the US supply chain and construction and municipal workforces due to the COVID-19 pandemic, the availability of certain materials and construction labor, combined with delays in municipal approvals and inspections, have elongated the production cycle of the homes we are constructing. While we are working with our supply partners, have significantly 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. The time required to construct a home was approximately eight weeks longer in the three months ended March 31, 2022, as compared with the prior year period and approximately one week longer than the fourth quarter of 2021. Due to these supply chain and labor 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 as well as to protect gross margins in the face of inflationary cost pressures. Despite the production challenges in the current operating environment, we were able to achieve closing volume consistent with last year. We believe these conditions will continue to impact our industry for the remainder of 2022. The noted supply chain and labor issues are also leading to significant cost pressures in almost all areas of our business, but especially related to construction labor and materials. Specifically, the cost of lumber continues to be extremely volatile 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 expected 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. The unpredictability of current economic conditions will also continue to evolve due to disruptions occurring as a result of the military conflict in Ukraine and related sanctions or other actions against Russia imposed by the U.S. and other countries. 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 strength of current demand and extending municipal entitlement timelines, the number of our active communities decreased in 2021 as we sold out communities at a pace faster than we opened new ones. We have increased our investments in land acquisition and development and expect that the number of our active communities will begin to increase as we proceed through 2022. 22 Consolidated Operations The following is a summary of our operating results by line of business ($000's omitted, except per share data): Three Months Ended March 31, 2022 2021 Income before income taxes: Homebuilding $ 559,300 $ 327,704 Financial Services 40,593 66,348 Income before income taxes 599,893 394,052 Income tax expense (145,170) (89,945) Net income $ 454,723 $ 304,107 Per share data - assuming dilution: Net income $ 1.83 $ 1.13 • Homebuilding income before income taxes in the three months ended March 31, 2022 increased 71% compared with the same period in 2021, primarily as the result of a significantly higher average selling price and gross margin. Results for the three months ended March 31, 2021 also include a loss on debt retirement of $61.5 million (see Note 4 ). • Financial Services income before income taxes in the three months ended March 31, 2022 decreased 39% compared to the same period in 2021, primarily as the result of a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2022. • Our effective tax rate in the three months ended March 31, 2022 and 2021 was 24.2% and 22.8%, respectively. Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense, while the 2021 tax rate also included benefits associated with federal energy efficient home credits, which expired at December 31, 2021. 23 Homebuilding Operations The following presents selected financial information for our Homebuilding operations ($000’s omitted): Three Months Ended March 31, 2022 2022 vs. 2021 2021 Home sale revenues $ 3,070,313 18 % $ 2,596,510 Land sale and other revenues 33,159 22 % 27,159 Total Homebuilding revenues 3,103,472 18 % 2,623,669 Home sale cost of revenues (a) (2,181,074) 13 % (1,935,635) Land sale and other cost of revenues (32,002) 30 % (24,636) Selling, general, and administrative expenses ("SG&A") (329,022) 21 % (271,686) Loss on debt retirement — (b) (61,469) Other expense, net (2,074) (18) % (2,539) Income before income taxes $ 559,300 71 % $ 327,704 Supplemental data: Gross margin from home sales 29.0 % 350 bps 25.5 % SG&A as a percentage of home sale revenues 10.7 % 20 bps 10.5 % Closings (units) 6,039 — % 6,044 Average selling price $ 508 18 % $ 430 Net new orders (c) : Units 7,971 (19) % 9,852 Dollars $ 4,731,272 2 % $ 4,630,317 Cancellation rate 9 % 8 % Average active communities 777 (7) % 837 Backlog at March 31: Units 19,935 5 % 18,966 Dollars $ 11,519,770 31 % $ 8,826,989 (a) Includes the amortization of capitalized interest. (b) Percentage not meaningful. (c) Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders. Home sale revenues Home sale revenues in the three months ended March 31, 2022 were higher than the prior year period by $473.8 million. This 18% increase resulted from an 18% increase in average selling price, which reflects the impact of pricing actions taken in response to ongoing robust consumer demand, partially offset by a small increase in the mix of first-time buyer homes, which typically carry a lower sales price. The year-over-year increase in average selling price occurred in substantially all of our markets. Home sale gross margins Home sale gross margins were 29.0% in the three months ended March 31, 2022 compared to 25.5% in the three months ended March 31, 2021. Gross margins reflect the robust consumer demand combined with limited supplies of new and existing housing inventory. As a result, the pricing environment remained strong, and has allowed us to offset pressure in house and land costs through pricing actions. 24 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 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 $1.2 million for the three months ended March 31, 2022 compared to $2.5 million for the three months ended March 31, 2021. SG&A SG&A as a percentage of home sale revenues was 10.7% in the three months ended March 31, 2022 compared with 10.5% for the three months ended March 31, 2021. The gross dollar amount of our SG&A increased $57.3 million, or 21%, for the three months ended March 31, 2022 compared to March 31, 2021. The increase in gross dollars in 2022 resulted primarily from higher headcount to support the increased number of homes in production and future growth. Other expense, net Other expense, net includes the following ($000’s omitted): Three Months Ended March 31, 2022 2021 Write-offs of deposits and pre-acquisition costs $ (3,510) $ (1,368) Amortization of intangible assets (2,821) (4,992) Interest income 388 631 Interest expense (86) (135) Equity in earnings of unconsolidated entities 1,221 827 Miscellaneous, net 2,734 2,498 Total other expense, net $ (2,074) $ (2,539) Net new orders Net new orders in units decreased 19% while net new orders in dollars increased 2% for the three months ended March 31, 2022 as compared with the prior year period. The decrease in net new order volume in 2022 is due primarily to a 7% decrease in our average community count and Company actions to intentionally moderate sales pace, as more fully discussed above. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 9% for the three months ended March 31, 2022, and 8% for the same period in 2021. Ending backlog dollars, which represents orders for homes that have not yet closed, increased 31% at March 31, 2022 compared with March 31, 2021, as the result of higher average selling prices coupled with elongated production cycle times, as more fully discussed above. 25 Homes in production The following is a summary of our homes in production: March 31, 2022 March 31, 2021 Sold 16,088 12,930 Unsold Under construction 5,117 1,675 Completed 64 123 5,181 1,798 Models 1,276 1,248 Total 22,545 15,976 The number of homes in production at March 31, 2022 was 41% higher than at March 31, 2021. The increase in homes under production is the result of the strong demand environment combined with elongated cycle times, as more fully discussed above, due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities. The significantly higher level of unsold homes, or speculative homes, under construction reflects our strategic decision to increase housing starts of speculative units in response to the noted supply chain challenges and to meet demand. The lower unsold completed inventory for the first quarter of 2022 as compared to the prior year period reflected our ability to sell speculative units given the strong demand environment in the first quarter of 2022. Controlled lots The following is a summary of our lots under control at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Owned Optioned Controlled Owned Optioned Controlled Northeast 4,321 7,148 11,469 4,422 7,637 12,059 Southeast 15,937 31,691 47,628 15,604 28,887 44,491 Florida 28,360 31,774 60,134 27,654 32,240 59,894 Midwest 12,223 16,781 29,004 11,723 17,118 28,841 Texas 21,962 19,769 41,731 20,538 21,235 41,773 West 29,413 15,163 44,576 29,137 12,101 41,238 Total 112,216 122,326 234,542 109,078 119,218 228,296 48 % 52 % 100 % 48 % 52 % 100 % Developed (%) 38 % 16 % 27 % 38 % 13 % 25 % 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 to date. Additionally, we continue to seek to increase the percentage of our lots that are controlled via land option agreements. 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 $6.0 billion at March 31, 2022. 26 Homebuilding Segment Operations As of March 31, 2022, we conducted our operations in over 40 markets located throughout 24 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments: Northeast: Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia Southeast: Georgia, North Carolina, South Carolina, Tennessee Florida: Florida Midwest: Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio Texas: Texas West: Arizona, California, Colorado, Nevada, New Mexico, Washington The following tables present selected financial information for our reportable Homebuilding segments: Operating Data by Segment ($000's omitted) Three Months Ended March 31, 2022 2022 vs. 2021 2021 Home sale revenues: Northeast $ 164,329 (7) % $ 176,417 Southeast 527,811 21 % 436,267 Florida 738,950 23 % 600,942 Midwest 451,203 23 % 365,778 Texas 444,206 19 % 373,261 West 743,814 16 % 643,845 $ 3,070,313 18 % $ 2,596,510 Income (loss) before income taxes (a) : Northeast $ 27,399 6 % $ 25,894 Southeast 126,132 77 % 71,322 Florida 160,694 59 % 101,208 Midwest 64,701 22 % 52,864 Texas 83,716 28 % 65,648 West 133,311 35 % 98,832 Other homebuilding (b) (36,653) (58) % (88,064) $ 559,300 71 % $ 327,704 (a) Includes land-related charges as summarized in the table below. (b) Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments. Other homebuilding also includes a loss on debt retirement of $61.5 million in the three months ended March 31, 2021 (see Note 4 ). 27 Operating Data by Segment ($000's omitted) Three Months Ended March 31, 2022 2022 vs. 2021 2021 Closings (units): Northeast 262 (17) % 317 Southeast 1,026 (3) % 1,054 Florida 1,433 1 % 1,420 Midwest 944 13 % 839 Texas 1,210 (1) % 1,225 West 1,164 (2) % 1,189 6,039 — % 6,044 Average selling price: Northeast $ 627 13 % $ 557 Southeast 514 24 % 414 Florida 516 22 % 423 Midwest 478 10 % 436 Texas 367 20 % 305 West 639 18 % 542 $ 508 18 % $ 430 Net new orders - units: Northeast 425 (30) % 608 Southeast 1,331 (15) % 1,561 Florida 1,873 (22) % 2,404 Midwest 1,163 (25) % 1,561 Texas 1,514 (20) % 1,892 West 1,665 (9) % 1,826 7,971 (19) % 9,852 Net new orders - dollars: Northeast $ 295,372 (16) % $ 351,240 Southeast 763,720 8 % 708,295 Florida 1,215,250 7 % 1,134,296 Midwest 611,630 (13) % 706,430 Texas 643,209 2 % 630,291 West 1,202,091 9 % 1,099,765 $ 4,731,272 2 % $ 4,630,317 28 Operating Data by Segment ($000's omitted) Three Months Ended March 31, 2022 2022 vs. 2021 2021 Cancellation rates: Northeast 5 % 5 % Southeast 5 % 6 % Florida 9 % 9 % Midwest 8 % 5 % Texas 13 % 11 % West 11 % 10 % 9 % 8 % Unit backlog: Northeast 951 (24) % 1,244 Southeast 2,781 (2) % 2,847 Florida 5,870 27 % 4,638 Midwest 2,907 — % 2,921 Texas 3,403 (9) % 3,720 West 4,023 12 % 3,596 19,935 5 % 18,966 Backlog dollars: Northeast $ 642,274 (13) % $ 736,146 Southeast 1,598,772 23 % 1,302,937 Florida 3,534,132 64 % 2,161,220 Midwest 1,508,582 13 % 1,331,288 Texas 1,500,605 21 % 1,238,121 West 2,735,405 33 % 2,057,277 $ 11,519,770 31 % $ 8,826,989 29 Operating Data by Segment ($000’s omitted) Three Months Ended March 31, 2022 2021 Land-related charges (a) : Northeast $ 102 $ 116 Southeast 1,902 456 Florida 972 131 Midwest 158 54 Texas 239 527 West 137 84 Other homebuilding — — $ 3,510 $ 1,368 (a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges. Northeast For the first quarter of 2022, Northeast home sale revenues decreased by 7% when compared with the prior year period due to a 17% decrease in closings partially offset by a 13% increase in average selling price. The decrease in closings was primarily due to the timing of projects in our Mid-Atlantic operations, while the increase in average selling price occurred across all markets. Income before income taxes increased 6% primarily due to higher gross margins. Net new orders decreased across all markets. Southeast For the first quarter of 2022, Southeast home sale revenues increased 21% when compared with the prior year period due to a 24% increase in average selling price partially offset by a 3% decrease in closings. The decrease in closings was primarily due to the timing of projects in our South Carolina operations, while the increase in average selling price occurred across all markets. Income before income taxes increased 77% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across the majority of markets. Florida For the first quarter of 2022, Florida home sale revenues increased 23% when compared with the prior year period due to a 1% increase in closings combined with a 22% 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 59% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across all markets. Midwest For the first quarter of 2022, Midwest home sale revenues increased 23% when compared with the prior year period due to a 13% increase in closings combined with a 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 22% primarily due to higher revenues and gross margins. Net new orders decreased across the majority of markets. Texas For the first quarter of 2022, Texas home sale revenues increased 19% when compared with the prior year period due to a 20% increase in average selling price partially offset by a 1% decrease in closings. The higher average selling price occurred across all markets. Income before income taxes increased 28% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across all markets. 30 West For the first quarter of 2022, West home sale revenues increased 16% when compared with the prior year period due to an 18% increase in average selling price partially offset by a 2% decrease in closings. The increase in average selling price occurred across all markets. Income before income taxes increased 35% primarily due to increased revenues and gross margins across the majority of markets. Net new orders decreased across the majority of markets. Financial Services Operations 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 a credit agreement with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. 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 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. We believe that our mortgage 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 tables present selected financial information for our Financial Services operations ($000's omitted): Three Months Ended March 31, 2022 2022 vs. 2021 2021 Mortgage revenues $ 63,155 (29) % $ 89,040 Title services revenues 15,962 11 % 14,333 Insurance brokerage commissions 5,026 83 % 2,749 Total Financial Services revenues 84,143 (21) % 106,122 Expenses (43,486) 10 % (39,674) Other income (expense), net (64) (a) (100) Income before income taxes $ 40,593 (39) % $ 66,348 Total originations: Loans 4,057 (14) % 4,708 Principal $ 1,539,897 (2) % $ 1,564,668 (a) Percentage not meaningful 31 Three Months Ended March 31, 2022 2021 Supplemental data: Capture rate 81.0 % 88.3 % Average FICO score 750 751 Funded origination breakdown: Government (FHA, VA, USDA) 20 % 21 % Other agency 72 % 74 % Total agency 92 % 95 % Non-agency 8 % 5 % Total funded originations 100 % 100 % Revenues The demand for refinancing within the mortgage industry waned in 2021 and into 2022 as mortgage interest rates began to rise, which led to an increase in competition among lenders and lower margins per loan. As a result, total Financial Services revenues for the three months ended March 31, 2022 decreased 21% compared with the same period in 2021. The decrease occurred as the result of a decrease in the number of loans originated due to the lower capture rate combined with lower revenue per loan resulting from the competitive lending environment. These factors were partially offset by a higher average loan amount as the result of the higher average selling price within Homebuilding. Income before income taxes Income before income taxes for the three months ended March 31, 2022 decreased 39% compared to the same period in 2021, primarily as a result of the lower revenue per loan. Income Taxes Our effective income tax rate was 24.2% and 22.8% for March 31, 2022 and 2021, respectively. The 2022 effective tax rate is higher than the 2021 effective tax rate for the same period primarily due to the benefit of federal energy efficient home credits in 2021, which expired at December 31, 2021. Liquidity and Capital Resources We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing available financing sources, including revolving bank credit and securities offerings. At March 31, 2022, we had unrestricted cash and equivalents of $1.1 billion, restricted cash balances of $66.9 million, and $710.1 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. Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 21.5% at March 31, 2022, as compared with 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. The elongation of our production cycle has required a greater investment of cash in our homes under production. Additionally, we plan to continue our dividend payments and repurchases of common stock. Within the next twelve months, we need to repay or refinance Pulte Mortgage's master repurchase agreement. Beyond the next twelve months, we will need to repay or refinance our revolving credit facility, which matures in June 2023, and our unsecured senior notes, the next tranche of which becomes due in 2026. 32 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 We had $2.0 billion of unsecured senior notes outstanding at both March 31, 2022 and December 31, 2021 with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature. In the three months ended March 31, 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. In the three months ended March 31, 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 $40.9 million and $40.2 million at March 31, 2022 and December 31, 2021, respectively. These notes have maturities ranging up to three 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%. Revolving credit facility 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 March 31, 2022. 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. We had no borrowings outstanding at either March 31, 2022 or December 31, 2021, and $289.9 million and $298.8 million of letters of credit issued under the Revolving Credit Facility at March 31, 2022 and December 31, 2021, 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 March 31, 2022, 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 $710.1 million and $701.2 million at March 31, 2022 and December 31, 2021, respectively. Joint venture debt At March 31, 2022, aggregate outstanding debt of unconsolidated joint ventures was $64.7 million of which $41.0 million was related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding. Financial Services debt 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 $460.0 million at March 31, 2022 and increases to $550.0 million on June 27, 2022, which will then continue through maturity. 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 $396.1 million and $626.1 million outstanding under the Repurchase Agreement at March 31, 2022 and December 31, 2021, 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. 33 Dividends and share repurchase program In the three months ended March 31, 2022, we declared cash dividends totaling $36.5 million and repurchased 10.3 million shares under our repurchase authorization for $500.0 million. In the three months ended March 31, 2021, we declared cash dividends totaling $37.3 million and repurchased 3.3 million shares under our repurchase authorization for $153.7 million. On January 31, 2022, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At March 31, 2022, we had remaining authorization to repurchase $957.6 million of common shares. 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 March 31, 2022, 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 March 31, 2022, we had outstanding letters of credit totaling $289.9 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 $1.9 billion at March 31, 2022, 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 March 31, 2022, these agreements had an aggregate remaining purchase price of $6.0 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. At March 31, 2022, outstanding deposits totaled $265.4 million, of which $20.4 million is refundable. For further information regarding our primary obligations, refer to Note 4 and Note 8 to the Consolidated Financial Statements included elsewhere in this Quarterly Report on 10-Q for amounts outstanding as of March 31, 2022 related to debt and commitments and contingencies, respectively. Cash flows Operating activities Net cash provided by operating activities in the three months ended March 31, 2022 was $207.7 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 three months ended March 31, 2022 was primarily due to our net income of $454.7 million along with a seasonal $436.9 million decrease in residential mortgage loans available for sale, partially offset by a net increase in inventories of $814.8 million, which was primarily attributable to higher house inventory in production resulting from the higher order backlog combined with investment in land inventory to support future growth. Net cash provided by operating activities in the three months ended March 31, 2021 was $176.7 million. The positive cash flow from operations in three months ended March 31, 2021 was primarily due to our net income of $304.1 million, which included various non-cash items including a loss on debt retirement of $61.5 million,combined with a seasonal $69.9 million decrease in residential mortgage loans available-for-sale, partially offset by a net increase in inventories of $243.9 million, which was primarily attributable to higher house inventory in production resulting from the higher order backlog. Investing activities Net cash used in investing activities in the three months ended March 31, 2022 was $48.0 million. These cash outflows primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of Innovative Construction Group ("ICG"), 34 as well as capital expenditures of $30.7 million related to our ongoing investments in new communities, facilities, and certain information technology applications. Net cash used in investing activities in the three months ended March 31, 2021 was $27.6 million. These cash outflows in 2021 primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of ICG, as well as capital expenditures of $14.8 million related to our ongoing investments in new communities and information technology applications. Financing activities Net cash used in financing activities in the three months ended March 31, 2022 totaled $781.4 million. These cash outflows resulted primarily from the repurchase of 10.3 million common shares for $500.0 million under our share repurchase authorization, payments of $37.8 million in cash dividends, and net repayments of $230.0 million under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale. Net cash used in financing activities in the three months ended March 31, 2021 totaled $1.1 billion. These cash outflows in the three months ended March 31, 2021 resulted primarily from the repurchase of 3.3 million common shares for $153.7 million under our share repurchase authorization, repayments of debt totaling $794.4 million, payments of $37.6 million in cash dividends, and net repayments of $141.0 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale. Seasonality 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. We generally experience increases in revenues and cash flow from operations in the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. 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, supply chain challenges, and other macroeconomic factors, our quarterly results for 2022 and 2021 are not necessarily indicative of results that may be achieved in the future. Supplemental Guarantor Financial Information As of March 31, 2022, 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. All of our unsecured senior notes and the Revolving Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of PulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). 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"). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that such Guarantor: (a) incurred the guarantee with the intent of hindering, delaying or defrauding creditors; or (b) received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of any one of the following is also true at the time thereof: • such Guarantor was insolvent or rendered insolvent by reason of the issuance of the incurrence of the guarantee; • the incurrence of the guarantee left such Guarantor with an unreasonably small amount of capital or assets to carry on its business; • such Guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature; • such Guarantor was a defendant in an action for money damages, or had a judgment for money damages docketed against it, if the judgment is unsatisfied after final judgment. 35 The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. 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 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; or • it could not pay its debts as they became due. The guarantees of the senior notes contain a provision to limit each Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. However, under recent case law, this provision may not be effective to protect such guarantee from being voided under fraudulent transfer law or otherwise determined to be unenforceable. 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. 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. On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. The following tables present summarized financial information for PulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among PulteGroup, Inc. and the Guarantor Subsidiaries, as well as their investment in and equity in earnings from the Non-Guarantor Subsidiaries ($000’s omitted): PulteGroup, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data ASSETS March 31, 2022 December 31, 2021 Cash, cash equivalents, and restricted cash $1,115,527 $1,598,328 House and land inventory 9,677,985 8,859,163 Amount due from Non-Guarantor Subsidiaries — 278,531 Total assets 12,004,377 11,658,352 LIABILITIES Accounts payable, customer deposits, accrued and other liabilities $2,908,977 $2,788,465 Notes payable 2,030,108 2,029,044 Amount due to Non-Guarantor Subsidiaries 38,424 — Total liabilities 5,114,073 4,986,491 36 Three Months Ended March 31, Summarized Statement of Operations Data 2022 2021 Revenues $3,016,422 $2,536,892 Cost of revenues 2,145,499 1,889,395 Selling, general, and administrative expenses 319,439 264,252 Income before income taxes 543,227 315,600 Critical Accounting Estimates There have been no significant changes to our critical accounting estimates in the three months ended March 31, 2022 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, 2021.