What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-06 compared with 2022-02-07 · 133 added, 144 removed, 378 unchanged (42% of the section changed)

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

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

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

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

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

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

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

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

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

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

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

While the cost of lumber declined significantly since peaking in May 2021, it increased again in late 2021 and remains elevated compared to historical norms.

Additionally, the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged.

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

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

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

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

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

Due to the higher demand and long municipal entitlement timelines, the number of our average active communities declined 9% in 2021 compared to 2020 as we closed-out communities at a pace faster than we were opening new ones.

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

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

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

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

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

Our home sales revenues increased 18% in 2022 compared to 2021, while our gross margins increased 330 bps.

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 2022 were placed under contract with customers.

However, the strength of new home demand rapidly declined starting in the second quarter of 2022 as the Federal Reserve increased benchmark interest rates in response to inflation, which, in turn, drove national mortgage and other interest rates higher, impacting home affordability and consumer sentiment.

These increases in interest rates, along with ongoing high inflation, waning consumer confidence, and other macroeconomic factors, have tempered new home demand in all of our markets.

As a result, net new orders declined 27% for the year ended 2022 compared to 2021.

This decline was concentrated in the back half of the year, with net new orders declining 28% and 41% in the third and fourth quarters, respectively, compared with the same periods in 2021.

As a result, our order backlog in units decreased 32% from December 31, 2021 to December 31, 2022.

In addition to lower new orders, our order cancellation rate also increased significantly in the second half of 2022, ending the year with a fourth quarter cancellation rate of 32% compared with 11% in the fourth quarter of 2021.

Supply chain constraints that began after the onset of the COVID-19 pandemic have continued to limit the availability of certain materials and construction labor, which, combined with delays in municipal approvals and inspections, continue to pressure production cycle times of the homes we are constructing.

The time required to construct a home was approximately two months longer in 2022 compared with 2021.

The noted supply chain and labor issues have led to significant cost pressures in almost all areas of our business, but especially related to construction labor and materials.

For example, lumber experienced heightened volatility during 2022, evidenced by a nearly 75% decrease from its early 2022 peak to its price on December 31, 2022.

Despite these challenges, pricing remained elevated in 2022 overall as average selling prices increased 17% compared to 2021.

In 2021 and the first half of 2022, we were able to increase pricing to offset the majority of such cost increases, but pricing may be significantly more challenged in the near term given the lower demand for new homes.

In response to the significant shift in market conditions in 2022, we have slowed the pace of our housing starts, have increased sales incentives, and are taking additional pricing actions in the majority of our communities.

We are updating the underwriting for each of our land option contracts prior to buying additional land and have made decisions in recent months to terminate a number of land option agreements, which resulted in write-offs of deposits and pre-acquisition costs totaling $63.6 million in 2022.

We plan to work with our trade partners to update the costs for materials, labor, and services to reflect current market conditions and will adjust our overhead cost structure as necessary to align with demand.

Despite these challenges, we remain focused on taking a measured approach to our capital allocation strategy in response to the current operating environment.

Accordingly, we are focused on protecting liquidity and closely managing our cash flows, including the following planned actions:

– Limiting our investment in land acquisition and development spend in 2023;

– Updating the underwriting on each of our land option contracts prior to buying additional land;

– Continuing our focus on increasing our lot optionality within our land pipeline for increased flexibility;

– Maintaining a sufficient level of spec inventory in response to buyer preference to close in 30 to 90 days;

– Taking a more opportunistic approach to share buybacks;

– Maintaining ample liquidity.

We expect that the more challenging environment for new residential housing will continue through at least 2023 and will result in lower revenues and profitability during those periods.

Despite these conditions, there remains a housing shortage across the United States, and we are confident in our ability to navigate this environment and to position the Company to take advantage of opportunities as they arise.

The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years ended December 31, 2022 and 2021.

10 unchanged sentences

Net income $ 11.01 $ 7.43

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

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

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

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

• Homebuilding income before income taxes increased 45% in 2022, primarily as the result of a 17% higher average selling price combined with a 330 bps increase in gross margin due to the robust consumer demand environment in 2021 and early 2022 when the majority of the homes closed in 2022 were placed under contract with the customers.

• Financial Services income before income taxes decreased 40% in 2022 compared with 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 income tax rate was 23.9% and 22.5% for 2022 and 2021, respectively.

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

The higher effective tax rate in 2022 was primarily due to changes in valuation allowances relating to projected utilization of certain state net operating loss carryforwards (see Note 8 ).

Homebuilding Operations

8 unchanged sentences

Land sale and other cost of revenues (119,906) (11) % (134,013)

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

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

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

Goodwill impairment — (c) (20,190)

Other expense, net (d)

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

Selling, general, and administrative expenses ("SG&A") (1,381,222) 14 % (1,208,698)

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

Other expense, net (c)

(14,928) (b) (3,081)

Income before income taxes $ 3,307,328 45 % $ 2,288,128

1 unchanged sentence

Gross margin from home sales (a)

26.4 % 24.3 %

SG&A % of home sale revenues (b)

29.7 % 330 bps 26.4 %

SG&A % of home sale revenues 8.8 % (20) bps 9.0 %

Closings (units) 29,111 1 % 28,894

9 unchanged sentences

(a) Includes the amortization of capitalized interest.

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

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

(b) Percentage not meaningful.

Home sale revenues

Home sale revenues for 2022 were higher than 2021 by $2.4 billion, or 18%.

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

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

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

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

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

The increase was attributable to a 17% increase in average selling price combined with a 1% increase in closings.

The increase in average selling price reflects 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 in 2022 were placed under contract with 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 increase in average selling price occurred in substantially all of our markets.

Home sale gross margins

Home sale gross margins were 29.7% in 2022, compared with 26.4% in 2021.

Gross margins remained strong in both 2021 and 2020 relative to historical levels and reflect a combination of factors, including:

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

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

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

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

Gross margins remained strong in both 2022 and 2021 relative to historical levels.

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

This resulted in a strong pricing environment, which allowed us to offset increases in house and land costs through pricing actions in 2022.

Land sale and other revenues

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SG&A as a percentage of home sale revenues was 8.8% and 9.0% in 2022 and 2021, respectively.

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

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

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

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

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

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

Goodwill impairment

As a result of the significant decline in equity market valuations that occurred during the period between our acquisition of Innovative Construction Group ("ICG") in January 2020 and March 31, 2020, we determined that an event-driven goodwill impairment test was appropriate for the ICG goodwill, which resulted in an impairment totaling $20.2 million in the first quarter of 2020.

This impairment was not the result of any unique factors specific to ICG's operations but, rather, reflected the broad-based declines in the market capitalizations of publicly-traded construction companies in the short period of time between the acquisition and the March 31, 2020 valuation date.

The gross dollar amount of our SG&A increased $172.5 million, or 14%, in 2022 compared with 2021.

This increase resulted primarily from higher sales commissions expense due to the higher revenues, increased headcount, and other overhead costs to support the increased number of homes in production.

These results also reflect insurance reserve reversals of $65.0 million and $81.1 million in 2022 and 2021, respectively, based on favorable claims experience in recent years relative to historical expectations.

Other expense, net

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Equity in earnings of unconsolidated entities ( Note 4 )

50,680 17,200

Miscellaneous, net 7,382 7,053

Total other expense, net $ (14,928) $ (3,081)

The higher write-offs of deposits and pre-acquisition costs in 2022 occurred primarily in the second half of 2022 as we made decisions to terminate a number of land option agreements due to the aforementioned lower consumer demand in recent months.

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

The 2022 results included a gain of $49.1 million related to a property sale in an unconsolidated entity in Northern California.

Net new orders

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

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

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

Ending backlog dollars, which represents orders for homes that have not yet closed, increased 45% in 2021 compared with 2020 as the result of the higher new orders coupled with elongated cycle times due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities.

Net new orders in units decreased 27% in 2022 compared with 2021, while net new orders in dollars decreased by 17% compared with 2021.

The lower new order volume began in mid-2022 as the market responded to increased affordability

challenges resulting from a historic increase in mortgage interest rates, increases in the price of homes, and the impact of inflationary pressures in the broader economy.

Likewise, the annual cancellation rate (canceled orders for the period divided by gross new orders for the period) increased significantly to 19% in 2022 compared to 9% in 2021, including a fourth quarter cancellation rate of 32% compared with 11% in the fourth quarter of 2021.

Ending backlog dollars, which represents orders for homes that have not yet closed, decreased 22% in 2022 compared with 2021 as the result of the lower net new orders.

Homes in production

5 unchanged sentences

Total 19,401 19,698

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

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

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

The lower unsold completed inventory is near historical lows for our company and reflects our ability to sell these speculative units given the strong demand environment.

The number of homes in production at December 31, 2022 was 2% lower compared to December 31, 2021.

This decrease is primarily attributable to the lower number of sold homes as a result of decreased new orders and higher cancellations.

This decrease was partially offset by a higher level of unsold homes, or speculative homes, under construction, which 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.

The higher cancellation rate in 2022 also contributed to the increase in unsold inventory.

Controlled lots

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Developed (%) 43 % 16 % 30 % 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.

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

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

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

We also continue to seek to maintain a high percentage of our lots that are controlled via land option agreements as 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.

However, the percentage of lots controlled via land option agreements decreased in 2022 as the result of our decision to terminate a number of pending transactions.

The remaining purchase price under our land option agreements totaled $5.4 billion at December 31, 2022.

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Southeast 692,279 66 % 417,880

585,680 62 % 362,276

Florida 939,034 60 % 585,680

Midwest 363,028 26 % 287,956

Texas 465,461 44 % 322,979

West 594,976 40 % 424,803

687,403 16 % 592,845

Other homebuilding (c)

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

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

(b) West includes a gain of $49.1 million related to a property sale in an unconsolidated entity in Northern California.

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

Also includes:

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

insurance reserve reversals of $65.0 million and $81.1 million in 2022 and 2021, respectively (see Note 11 ), and a loss on debt retirement of $61.5 million in 2021 (see Note 5 ).

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

24 unchanged sentences

Texas 26% 13%

West 11 % 18 %

Unit backlog:

29 unchanged sentences

See Notes 2 and 3 to the Consolidated Financial Statements for additional discussion of these charges.

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

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

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

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

For 2022, Northeast home sale revenues decreased 4% compared with 2021 due to an 18% decrease in closings partially offset by a 16% increase in average selling price.

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

Income before income taxes increased 13% primarily due to improved gross margins across the majority of markets.

Net new orders decreased across all markets.

For 2022, Southeast home sale revenues increased 25% compared with 2021 due to a 3% increase in closings combined with a 22% increase in average selling price.

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

Income before income taxes increased 61% primarily due to increased revenues, as well as improved gross margins which occurred across all markets, and improved overhead management which occurred across the majority of markets.

Net new orders increased across the majority of markets.

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

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

Income before income taxes increased 62% due to increased revenues, as well as improved gross margins which occurred across all markets, and improved overhead management which occurred across the majority of markets.

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

Net new orders increased across all markets.

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 66% primarily due to increased revenues, as well as improved gross margins across all markets.

Net new orders decreased across all markets.

For 2022, Florida home sale revenues increased 27% compared with 2021 due to a 4% increase in closings combined with a 22% 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 60% due to increased revenues, as well as improved gross margins across all markets.

Net new orders decreased across the majority of markets.

For 2022, Midwest home sale revenues increased 17% compared with 2021 due to a 4% increase in closings combined with a 13% increase in average selling price.

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

Income before income taxes increased 34% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across all markets.

Net new orders increased across all markets.

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

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

Income before income taxes increased 33% primarily due to increased revenues, as well as improved gross margins which occurred across all markets, and improved overhead management which occurred across the majority of markets.

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

Income before income taxes increased 26% primarily due to increased revenues, as well as improved gross margins across substantially all markets.

Net new orders decreased across all markets.

For 2022, Texas home sale revenues increased 24% compared with 2021 due to a 1% increase in closings combined with a 22% increase in the average selling price.

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

Income before income taxes increased 44% primarily due to increased revenues, as well as improved gross margins across substantially all markets.

Net new orders decreased across the majority of markets.

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

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

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

In addition, 2021 results include a gain of $12.9 million related to a land sale transaction in California that had been in the entitlement process for a number of years.

The increase in net new orders was mixed among markets.

For 2022, West home sale revenues increased 9% compared with 2021 primarily due to a 12% increase in the average selling price partially offset by a 2% decrease in closings.

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

Income before income taxes increased 16% primarily due to increased revenues, as well as improved gross margins, which were mixed among markets.

Results for 2022 included a gain of $49.1 million related to a property sale in an unconsolidated entity in Northern California, while the 2021 results included a gain of $12.9 million related to a land sale transaction in California that had been in the entitlement process for a number of years.

Net new orders decreased across all markets.

Financial Services Operations

31 unchanged sentences

Total funded originations 100 % 100 %

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

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

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

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

The demand for refinancing within the mortgage industry waned in 2021 and throughout 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 during 2022 decreased 20% compared with 2021.

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

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

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

The decrease in income before income taxes for 2022 as compared with 2021 was primarily due to a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2022.

Our effective income tax rate was 23.9% and 22.5% for 2022 and 2021, respectively.

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

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

The higher effective tax rate in 2022 was primarily due to changes in valuation allowances relating to projected utilization of certain state net operating loss carryforwards in 2022 (see Note 8 ).

Liquidity and Capital Resources

1 unchanged sentence

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 December 31, 2021, we had unrestricted cash and equivalents of $1.8 billion, restricted cash balances of $54.5 million, and $701.2 million available under our Revolving Credit Facility.

At December 31, 2022, we had unrestricted cash and equivalents of $1.1 billion, restricted cash balances of $41.4 million, and $946.6 million available under our Revolving Credit Facility (as defined below).

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 21.3% at December 31, 2021.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 18.7% at December 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.

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

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 comes due in 2026.

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

To the extent the sources

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

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

1 unchanged sentence

During 2021, we retired $426.0 million of senior notes at their scheduled maturity date and also accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer.

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

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

Other notes payable

Certain of our local homebuilding operations are party to non-recourse and limited recourse collateralized notes payable with third parties that totaled $40.2 million at December 31, 2021.

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

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $55.2 million at December 31, 2022.

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

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

Joint venture debt

At December 31, 2022, aggregate outstanding debt of unconsolidated joint ventures was $77.3 million, of which $42.0 million 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.

Revolving credit facility

We maintain a 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 December 31, 2021.

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

In the event that LIBOR is no longer widely available, the agreement contemplates transitioning to an alternative widely available market rate agreeable between the parties.

As a precautionary measure during the initial phase of the COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility.

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

We had no borrowings outstanding and $298.8 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at December 31, 2021 and 2020, respectively.

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

We maintain a revolving credit facility ("Revolving Credit Facility") maturing in June 2027 that 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 or a base rate plus an applicable margin, as defined therein.

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 December 31, 2022, we were in compliance with all covenants.

Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $701.2 million and $750.3 million as of December 31, 2021 and 2020, respectively.

At December 31, 2022, we had no borrowings outstanding, $303.4 million of letters of credit issued, and $946.6 million of remaining capacity under the Revolving Credit Facility.

At December 31, 2021, we had no borrowings outstanding, $298.8 million of letters of credit issued, and $701.2 million of remaining capacity under the Revolving Credit Facility.

Financial Services debt

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

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

Pulte Mortgage maintains the Repurchase Agreement, which matures on July 27, 2023.

The maximum aggregate commitment was $800.0 million during the seasonally high borrowing period from December 27, 2022 through January 12, 2023.

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

Pulte Mortgage had $586.7 million and $626.1 million

outstanding under the Repurchase Agreement at December 31, 2022 and 2021, respectively, and was in compliance with its covenants and requirements as of such dates.

Dividends and share repurchase program

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

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

We declared quarterly cash dividends totaling $143.1 million and $148.1 million in 2022 and 2021, respectively, and repurchased 24.2 million and 17.7 million shares in 2022 and 2021, respectively, for a total of $1.1 billion and $897.3 million in 2022 and 2021, respectively.

On January 31, 2022, the Board of Directors increased our share repurchase authorization by $1.0 billion.

At December 31, 2022, we had remaining authorization to repurchase $382.9 million of common shares.

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

Contractual Obligations

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Operating activities

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

Net cash provided by operating activities in 2022 was $668.5 million, compared with net cash provided by operating activities of $1.0 billion in 2021.

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

Our positive cash flow from operations for 2021 was primarily due to our net income of $1.9 billion, which was partially offset by a $1.3 billion increase in inventories which was primarily attributable to higher house inventory in production resulting from higher sales activity and extended production cycle times combined with higher investment in land inventory to support future growth.

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

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

Our positive cash flow from operations for 2022 was primarily due to our net income of $2.6 billion, which was partially offset by a $2.3 billion net increase in inventories primarily attributable to higher house inventory in production resulting from more unsold units and extended production cycle times combined with investment in land inventory.

Cash flow from operations was also favorably impacted by a $266.3 million decrease in residential mortgage loans available-for-sale.

Net cash provided by operating activities in 2021 was primarily due to our net income of $1.9 billion, which was partially offset by a $1.3 billion increase in inventories which was primarily attributable to higher house inventory in production, resulting from higher sales activity and extended production cycle times combined with higher investment in land inventory to support future growth.

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

Investing activities

Net cash used in investing activities totaled $171.7 million in 2022, compared with $124.1 million in 2021.

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

information technology applications.

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

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

The 2022 cash outflows primarily reflect $64.7 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of $112.7 million related to our ongoing investment in new communities, construction operations, and certain information technology applications.

Net cash used in investing activities in 2021 primarily reflected $101.6 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of $72.8 million related to our ongoing investment in new communities, construction operations, and certain information technology applications.

Financing activities

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

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

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

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.

Net cash used in financing activities was $1.2 billion in 2022 compared with $1.7 billion during 2021.

The net cash used in financing activities for 2022 resulted primarily from the repurchase of 24.2 million common shares for $1.1 billion under our repurchase authorization and cash dividends of $144.1 million.

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

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we have historically experienced 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 during the fourth quarter based on the timing of home closings.

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

Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our quarterly results in 2021 and 2020 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 in 2022 and 2021 are not necessarily indicative of results that may be achieved in the future.

Supplemental Guarantor Financial Information

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Notes payable 2,045,527 2,029,044

Amount due to Non-Guarantor Subsidiaries — 12,208

Total liabilities 5,049,079 4,986,491

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Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.

Generally, a community must have projected gross margin percentages in the mid-single digits or lower to potentially fail the undiscounted cash flow step and proceed to the fair value step.

Generally, a community must have projected gross margin percentages in the single digits or lower to potentially fail the undiscounted cash flow step and proceed to the fair value step.

Our overall gross margin realized during 2022 and our average gross margin in backlog at December 31, 2022 both exceeded 25%, and we have only a small minority of communities with gross margins below 10%.

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Self-insured risks

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

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis