What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-26 compared with 2022-04-28 · 185 added, 128 removed, 313 unchanged (50% of the section changed)

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.

The following discussion and analysis of our financial condition and results of operations is provided as a supplement to and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Our home sales revenues increased 18% for both the three and six months ended June 30, 2022 over the comparable prior year periods while our gross margins increased 430 bps and 400 bps, respectively, over the same periods.

These results were driven by increases in selling prices in response to robust consumer demand in 2021 and early 2022 when the majority of the homes closed in the three and six months ended June 30, 2022 were placed under contract with the customers.

The strength in new home demand and pricing during that period resulted from an extremely limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and positive demographic trends, along with low unemployment levels and resulting wage growth.

While many of these economic conditions continue, a historic increase in mortgage interest rates during the first half of 2022 has tempered demand for new homes.

The rising cost of housing due to increases in average sales prices in recent years and the recent increases in mortgage interest rates, coupled with general inflation in the U.S.

economy, have placed additional pressure on overall housing affordability and have caused many potential home buyers to pause and reconsider their housing choices.

As a result, new orders were 23% and 21% lower for the three and six months ended June 30, 2022, respectively, compared with the comparable prior year periods.

Due to the increased 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.

The time required to construct a home was approximately eight weeks longer in the second quarter of 2022 as compared with the prior year period and approximately two weeks longer than the first quarter of 2022.

Due to these supply chain and labor challenges, we moderated lot releases and the pace of new orders in the majority of our communities in 2021 and early 2022 in order to balance sales volume and production capacity to reduce backlog durations.

Given the affordability challenges described above and the resulting impact on demand, we have reduced the number of communities where we are moderating lot releases and have increased sales incentives moderately in certain communities.

We believe these conditions will continue to impact our industry for the remainder of 2022.

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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.

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

To date, we have been able to increase pricing to offset the majority of such cost increases, but there can be no assurances that we will continue to be able to do so in the future.

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.

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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.

Due to the strength of consumer demand and extended 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 increase as we proceed through 2022.

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

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Income before income taxes:

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Net income $ 2.73 $ 1.90 $ 4.54 $ 3.03

• 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.

• Homebuilding income before income taxes in the three and six months ended June 30, 2022 increased 40% and 51% compared with the same periods in 2021, respectively.

The results are primarily the result of a significantly higher average selling price and gross margin.

The results include insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8 ).

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

• Financial Services income before income taxes in the three and six months ended June 30, 2022 decreased 22% and 32% compared to the same periods in 2021, respectively, 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 and six months ended June 30, 2022 was 24.5% and 24.4%, respectively, compared to 21.3% and 21.9%, respectively, for the same periods in 2021.

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, and a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

Homebuilding Operations

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2022 vs.

2021 2021 2022 2022 vs.

Home sale revenues $ 3,809,601 18 % $ 3,235,379 $ 6,879,914 18 % $ 5,831,889

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Selling, general, and administrative

expenses ("SG&A") (329,022) 21 % (271,686)

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

expenses ("SG&A") (b)

(351,256) 29 % (272,286) (680,279) 25 % (543,973)

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

Other expense, net (4,645) 218 % (1,460) (6,719) 68 % (3,998)

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Supplemental data:

Gross margin from home sales 29.0 % 350 bps 25.5 %

Gross margin from home sales 30.9 % 430 bps 26.6 % 30.1 % 400 bps 26.1 %

SG&A as a percentage of home

sale revenues 10.7 % 20 bps 10.5 %

sale revenues 9.2 % 80 bps 8.4 % 9.9 % 60 bps 9.3 %

Closings (units) 7,177 (1) % 7,232 13,216 — % 13,276

Average selling price $ 531 19 % $ 447 $ 521 19 % $ 439

Net new orders (c) :

Net new orders (d) :

Units 6,418 (23) % 8,322 14,389 (21) % 18,174

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Average active communities 791 (2) % 808 784 (5) % 822

Backlog at March 31:

Backlog at June 30:

Units 19,176 (4) % 20,056

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(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.

(b) Includes insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8 ).

(d) 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 revenues in the three and six months ended June 30, 2022 were higher than the prior year periods by $574.2 million and $1.0 billion, respectively.

In the three months ended June 30, 2022, the 18% increase resulted from a 19% increase in average selling price partially offset by a 1% decrease in closings.

In the six months ended June 30, 2022, the 18% increase resulted from a 19% increase in average selling price.

The increases in average selling price reflected the impact of pricing actions taken in response to robust consumer demand in 2021 and early 2022 when the majority of the homes that closed were placed under contract with the customers, partially offset by an increase in the mix of first-time buyer homes, which typically carry a lower sales price.

The year-over-year increases 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.

Home sale gross margins were 30.9% and 30.1% in the three and six months ended June 30, 2022, respectively, compared to 26.6% and 26.1% in the three and six months ended June 30, 2021, respectively.

Gross margins reflect the robust consumer demand that existed in 2021 and early 2022 when the majority of the homes were placed under contract with the customers combined with limited supplies of new and existing housing inventory.

This resulted in a strong pricing environment, which allowed us to offset pressure in house and land costs through pricing actions.

Land sale and other revenues

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

Land sales and other revenues contributed income of $1.2 million for the three months ended March 31, 2022 compared to $2.5 million for the three months ended March 31, 2021.

SG&A 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.

Land sales and other revenues contributed income of $2.2 million and $3.3 million for the three and six months ended June 30, 2022, respectively, compared to $1.9 million and $4.4 million for the three and six months ended June 30, 2021, respectively.

SG&A as a percentage of home sale revenues was 9.2% and 9.9% in the three and six months ended June 30, 2022, respectively, compared with 8.4% and 9.3% for the three and six months ended June 30, 2021, respectively.

The gross dollar amount of our SG&A increased $79.0 million, or 29%, for the three months ended June 30, 2022 compared to the prior year period, and increased $136.3 million, or 25%, for the six months ended June 30, 2022 compared to the prior year period.

The increases in gross dollars in 2022 resulted primarily from higher headcount and other overhead costs to support growth expectations and the increased number of homes in production, combined with insurance reserve reversals of $49.1 million and $55.2 million recorded in the three and six months ended June 30, 2021, respectively (see Note 8 ).

Other expense, net

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Write-offs of deposits and pre-acquisition costs $ (4,503) $ (1,866) $ (8,013) $ (3,235)

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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.

Net new orders in units decreased 23% while net new orders in dollars decreased 8% in the three months ended June 30, 2022 compared to the prior year period.

Net new orders in units decreased 21% while net new orders in dollars decreased 3% for the six months ended June 30, 2022 as compared with the prior year period.

The decreases in net new order volume in 2022 are due primarily to reduced buyer demand in the second quarter of 2022, particularly for homes that are estimated to close further out in time, as the market responded to increased affordability challenges resulting from an historic increase in mortgage interest rates, increases in the price of homes, and the impact of inflationary pressures in the broader economy.

Contributing factors also include our lower average community count and Company actions to intentionally moderate sales pace earlier in 2022 in order to manage our large backlog of orders and supply chain challenges.

The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 15% and 12% for the three and six months ended June 30, 2022, respectively, and 7% and 8% for the comparable periods in 2021, respectively.

The increase in cancellation rates occurred primarily in the second quarter of 2022 due to a decrease in consumer confidence coupled with the increase in mortgage interest rates.

Ending backlog dollars, which represents orders for homes that have not yet closed, increased 18% at June 30, 2022 compared with June 30, 2021, as the result of higher average selling prices coupled with elongated production cycle times.

Homes in production

The following is a summary of our homes in production:

2022 March 31,

2022 June 30,

Sold 16,560 15,111

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Total 24,635 18,542

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 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.

The number of homes in production at June 30, 2022 was 33% higher than at June 30, 2021.

The increase in sold homes under production reflects the size of our backlog 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 have product available that can close quickly for customers that are concerned about potentially higher mortgage interest rates.

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

The following is a summary of our lots under control at June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

Owned Optioned Controlled Owned Optioned Controlled

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Developed (%) 40 % 15 % 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.

The remaining purchase price under our land option agreements totaled $6.5 billion at June 30, 2022.

Homebuilding Segment Operations

As of March 31, 2022, we conducted our operations in over 40 markets located throughout 24 states.

As of June 30, 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:

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Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2022 vs.

2021 2021 2022 2022 vs.

Home sale revenues:

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Other homebuilding (b)

(36,653) (58) % (88,064)

(42,409) (c) 7,180 (79,062) 2 % (80,884)

$ 824,498 40 % $ 588,019 $ 1,383,798 51 % $ 915,723

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(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 ).

Other homebuilding also includes insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8 ) and a loss on debt retirement of $61.5 million in the six months ended June 30, 2021 (see Note 4 ).

Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2022 vs.

2021 2021 2022 2022 vs.

Closings (units):

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Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2022 vs.

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West 23 % 10 % 16 % 10 %

15 % 7 % 12 % 8 %

Unit backlog:

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($000’s omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2021 2022 2021

Land-related charges (a) :

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Texas 294 263 534 791

West 591 (19) 728 65

Other homebuilding — — — —

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

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.

For the second quarter of 2022, Northeast home sale revenues decreased by 13% when compared with the prior year period due to a 22% decrease in closings partially offset by a 12% 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.

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Net new orders decreased across all markets.

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.

For the six months ended June 30, 2022, Northeast home sale revenues decreased by 11% when compared with the prior year period due to a 20% decrease in closings partially offset by a 12% 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 10% primarily due to higher gross margins.

Net new orders decreased across all markets.

For the second quarter of 2022, Southeast home sale revenues increased 14% when compared with the prior year period due to a 23% increase in average selling price partially offset by a 8% decrease in closings.

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

Income before income taxes increased 63% primarily due to increased revenues, as well as improved gross margins across all markets.

The decrease in net new orders was mixed among markets.

For the six months ended June 30, 2022, Southeast home sale revenues increased 17% when compared with the prior year period due to a 24% increase in average selling price partially offset by a 5% decrease in closings.

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

Income before income taxes increased 69% primarily due to increased revenues, as well as improved gross margins across all markets.

The decrease in net new orders was mixed among markets.

For the second quarter of 2022, Florida home sale revenues increased 27% when compared with the prior year period due to a 5% increase in closings combined with a 21% increase in average selling price.

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

Income before income taxes increased 67% primarily due to increased revenues, as well as improved gross margins across all markets.

Net new orders decreased across the majority of markets.

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.

For the six months ended June 30, 2022, Florida home sale revenues increased 25% when compared with the prior year period due to a 3% increase in closings combined with a 21% increase in the average selling price.

The increase in closings occurred across the majority of markets.

The increase in average selling price occurred across all markets.

Income before income taxes increased 64% primarily due to increased revenues, as well as improved gross margins across all markets.

Net new orders decreased across all markets.

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.

Net new orders decreased across the majority of markets.

For the second quarter of 2022, Midwest home sale revenues increased 20% when compared with the prior year period due to a 9% increase in closings combined with a 10% increase in average selling price.

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

Income before income taxes increased 22% primarily due to higher revenues and gross margins.

Net new orders decreased across the majority of markets.

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.

For the six months ended June 30, 2022, Midwest home sale revenues increased 21% when compared with the prior year period due to a 10% increase in closings combined with a 10% increase in average selling price.

The increase in closings and the increase in 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.

For the second quarter of 2022, Texas 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 2% decrease in closings.

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

Income before income taxes increased 59% primarily due to higher revenues and gross margins across the majority of markets.

Net new orders decreased across all markets.

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.

Net new orders decreased across the majority of markets.

For the six months ended June 30, 2022, Texas home sale revenues increased 20% when compared with the prior year period due to a 23% increase in average selling price partially offset by a 2% decrease in closings.

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

Income before income taxes increased 45% primarily due to higher revenues and gross margins across the majority of markets.

Net new orders decreased across the majority of markets.

For the second quarter of 2022, West home sale revenues increased 20% when compared with the prior year period due to a 19% increase in average selling price.

The increase in average selling price occurred across all markets.

Income before income taxes increased 42% primarily due to increased revenues and gross margins across the majority of markets.

Net new orders decreased across the majority of markets.

Net new orders decreased across all markets.

For the six months ended June 30, 2022, West home sale revenues increased 18% when compared with the prior year period due to a 19% 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 occurred across the majority of markets.

Income before income taxes increased 39% primarily due to increased revenues and gross margins across the majority of markets.

Net new orders decreased across all markets.

Financial Services Operations

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2022 2022 vs.

2021 2021 2022 2022 vs.

Mortgage revenues $ 58,082 (17) % $ 70,227 $ 121,237 (24) % $ 159,267

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Expenses (43,847) 9 % (40,411) (87,333) 9 % (80,086)

Other income (expense), net (64) (a) (100)

Other income (expense), net 1,147 (a) 836 1,083 (a) 739

Income before income taxes $ 40,075 (22) % $ 51,454 $ 80,668 (32) % $ 117,803

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(a) Percentage not meaningful.

Three Months Ended

Six Months Ended

Supplemental data:

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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.

As a result, total Financial Services revenues for the three and six months ended June 30, 2022 decreased 9% and 15%, respectively, compared with the same

periods in 2021.

The decreases 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.

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.

Income before income taxes in the three and six months ended June 30, 2022 decreased 22% and 32% compared to the same periods in 2021, respectively, 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 income tax rate for the three and six months ended June 30, 2022 was 24.5% and 24.4%, respectively, compared to 21.3% and 21.9%, respectively, for the same periods in 2021.

The 2022 effective tax rates are higher than the 2021 effective tax rates for the same periods primarily due to the benefit of federal energy efficient home credits in 2021, which expired at December 31, 2021, and a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

Liquidity and Capital Resources

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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.

At June 30, 2022, we had unrestricted cash and equivalents of $662.8 million, restricted cash balances of $69.3 million, and $903.0 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.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 20.8% at June 30, 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.

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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.

Within the next twelve months, we need to repay or refinance Pulte Mortgage's master repurchase agreement with third-party lenders (the "Repurchase Agreement").

While we intend to refinance the Repurchase Agreement prior to its maturity, there can be no assurances that the Repurchase Agreement can be renewed or replaced on commercially reasonable terms upon its expiration.

However, we believe we have adequate liquidity to meet Pulte Mortgage's anticipated financing needs.

Beyond the next twelve months, we will need to repay or refinance our Revolving Credit Facility, which matures in June 2027, and our unsecured senior notes, the next tranche of which becomes due in 2026.

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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.

We had $2.0 billion of unsecured senior notes outstanding at both June 30, 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 six months ended June 30, 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 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.

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $40.5 million and $40.2 million at June 30, 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.

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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.

In June 2022, we entered into the Third Amended and Restated Credit Agreement ("Revolving Credit Facility"), which replaced our previous credit agreement.

The Revolving Credit Facility contains substantially similar terms to the previous credit agreement, increased our borrowing capacity, and extended the maturity date from June 2023 to June 2027.

The Revolving Credit Facility has a maximum borrowing capacity of $1.3 billion and contains an uncommitted accordion feature that could increase the capacity to $1.8 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, up to the maximum borrowing capacity.

The interest rate on borrowings under the Revolving Credit Facility may be based on either the Secured Overnight Financing Rate ("SOFR") or a base rate plus an applicable margin, as defined therein.

We had no borrowings outstanding at either June 30, 2022 or December 31, 2021, and $347.0 million and $298.8 million of letters of credit issued under the Revolving Credit Facility at June 30, 2022 and December 31, 2021, respectively.

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

As of June 30, 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 $903.0 million and $701.2 million at June 30, 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.

At June 30, 2022, aggregate outstanding debt of unconsolidated joint ventures was $70.7 million of which $42.4 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.

The Repurchase Agreement matures on July 28, 2022.

The maximum aggregate commitment was $550.0 million at June 30, 2022, which continues 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.

Pulte Mortgage had $442.8 million and $626.1 million outstanding under the Repurchase Agreement at June 30, 2022 and December 31, 2021, respectively, and was in compliance with all of its covenants and requirements as of such dates.

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.

In the six months ended June 30, 2022, we declared cash dividends totaling $72.0 million and repurchased 17.4 million shares under our repurchase authorization for $794.2 million.

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

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.

At June 30, 2022, we had remaining authorization to repurchase $663.3 million of common shares.

Contractual Obligations

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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.

Certain contractual obligations are reflected on the Consolidated Balance Sheet as of June 30, 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.

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

At March 31, 2022, we had outstanding letters of credit totaling $289.9 million.

At June 30, 2022, we had outstanding letters of credit totaling $347.0 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.

These bonds, which approximated $2.1 billion at June 30, 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.

At June 30, 2022, these agreements had an aggregate remaining purchase price of $6.5 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.

At June 30, 2022, outstanding deposits totaled $291.9 million, of which $22.7 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 June 30, 2022 related to debt and commitments and contingencies, respectively.

Operating activities

Net cash provided by operating activities in the three months ended March 31, 2022 was $207.7 million.

Net cash provided by operating activities in the six months ended June 30, 2022 was $102.3 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.

The positive cash flow from operations for the six months ended June 30, 2022 was primarily due to net income of $1.1 billion along with a seasonal $393.4 million decrease in residential mortgage loans available for sale, offset by a net increase in inventories of $1.7 billion, which was primarily attributable to higher house inventory in production combined with investment in land inventory to support future growth.

Reflecting the higher house inventory levels, we also experienced an increase in accounts payable.

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

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

Reflecting the higher house inventory levels, we also experienced an increase in accounts payable.

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"),

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.

Net cash used in investing activities in the six months ended June 30, 2022 was $123.1 million.

These cash outflows primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of Innovative Construction Group ("ICG"), $50.5 million of investments in unconsolidated entities as well as capital expenditures of $62.6 million related to our ongoing investments in new communities, facilities, and certain information technology applications.

Net cash used in investing activities in the six months ended June 30, 2021 was $47.4 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 $31.5 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.

Net cash used in financing activities in the six months ended June 30, 2022 totaled $1.1 billion.

These cash outflows resulted primarily from the repurchase of 17.4 million common shares for $794.2 million under our share repurchase authorization, payments of $74.2 million in cash dividends, and net repayments of $183.3 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.

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

These cash outflows in 2021 resulted primarily from the repurchase of 6.9 million common shares for $353.7 million under our share repurchase authorization, repayments of debt totaling $797.4 million, payments of $74.9 million in cash dividends, and net repayments of

$59.2 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.

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, 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.

Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, supply chain challenges, increase in mortgage interest rates, 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.

As of June 30, 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.

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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.

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.

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Summarized Balance Sheet Data

ASSETS March 31, 2022 December 31, 2021

ASSETS June 30, 2022 December 31, 2021

Cash, cash equivalents, and restricted cash $608,113 $1,598,328

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Total liabilities 5,251,531 4,986,491

Three Months Ended

Six Months Ended

Summarized Statement of Operations Data 2022 2021

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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.

There have been no significant changes to our critical accounting estimates in the six months ended June 30, 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis