What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-25 compared with 2023-04-25 · 190 added, 130 removed, 305 unchanged (51% of the section changed)

1 unchanged sentence

The following discussion and analysis of our financial condition and results of operations are 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, 2022.

The strength of new home demand declined beginning in mid-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.

As a result, net signups during the first quarter of 2023 decreased by 8% as compared to the comparable prior year period, as such prior year period benefited from a historically low interest rate environment and the tailwinds of pent-up demand from the COVID-19 pandemic.

Demand strengthened in the first quarter of 2023, evidenced by a monthly increase in net signups beginning in December 2022 and increasing sequentially through March 2023.

This sequential increase in orders in recent months was partially supported by an increase in sales incentives, including mortgage interest rate buydowns and a decrease in mortgage rates.

Reflective of these trends, our order backlog in units decreased 34% at March 31, 2023 compared with March 31, 2022 but increased 8% compared with December 31, 2022.

Additionally, our home sale revenues increased 15% for the three months ended March 31, 2023 over the comparable prior year period, while our gross margins remained very strong relative to historical levels at 29.1%.

Demand for new homes declined beginning in mid-2022 as the Federal Reserve repeatedly increased benchmark interest rates in response to inflation, which, in turn, drove national mortgage and other interest rates higher and negatively impacted home affordability and consumer sentiment.

However, new home sales began to strengthen in early 2023, evidenced by an increase in our net new orders and closings of 24% and 5%, respectively, for the three months ended June 30, 2023 over the comparable prior year period.

The demand for new homes has strengthened as the result of limited supplies of existing home inventories in combination with the market adjusting to the higher interest rate environment.

While affordability challenges for housing remain due to the higher interest rates, cost increases, and general inflation in recent years, we have responded by adjusting sales prices where necessary and focusing sales incentives on mortgage interest rate buydowns, which have supported the increase in our net new orders.

Additionally, the rate of customer cancellation of orders that spiked in late 2022 in response to inflation and interest rate increases have now normalized to historical levels.

Supply chain constraints that began after the onset of the COVID-19 pandemic have improved but continue 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 five weeks longer in the first quarter of 2023 compared with the first quarter of 2022, but we have begun to see signs of a normalization in cycle times since the fourth quarter of 2022.

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.

Lumber, in particular, has experienced heightened volatility in recent years, including significant cost increases in 2021 followed by significant cost decreases in 2022.

The time required to construct a home was approximately three weeks longer in the second quarter of 2023 compared with the second quarter of 2022.

However, we have begun to see improvement in cycle times since late 2022 and into 2023, with sequential improvement since the first quarter of 2023.

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

Lumber, in particular, experienced heightened volatility in 2020 through 2022 and has recently experienced an increase in price primarily due to wildfires in Canada, which may pressure costs for the remainder of the year.

Due to the length of our construction cycle times, there is a lag between when such cost changes occur and when they impact our operating results.

Sales pricing of our homes has remained elevated in 2023, which has allowed us to offset the majority of such cost increases.

However, average selling prices decreased sequentially since the fourth quarter of 2022, primarily as a result of increased sales incentives.

To date in 2023, the strong demand environment has allowed us to largely offset the majority of such cost increases through the sales prices of our homes.

As interest rates increased in 2022, we adjusted business practices to support a consistent cadence of house starts and an appropriate inventory of quick move-in homes as we focused on turning our assets and delivering high returns on investment.

By achieving an effective balance of price and pace, we realized strong revenues and earnings in the three months ended March 31, 2023.

By achieving an effective balance of price and pace, we realized strong revenues and earnings in the three and six months ended June 30, 2023.

Within an evolving macroeconomic environment, consumers across all buyer segments and price points continued to demonstrate a strong desire for homeownership.

As a result, we have increased our housing starts in recent months and are also increasing our planned investments in future land acquisition and development.

We are confident in our ability to navigate this environment and to position the Company to take advantage of opportunities as they arise.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Income before income taxes:

6 unchanged sentences

Net income $ 3.21 $ 2.73 $ 5.55 $ 4.54

• Homebuilding income before income taxes in the three months ended March 31, 2023 increased 23% compared with the same period in 2022.

The results are primarily the result of higher closings and average selling prices combined with improved overhead leverage.

• Financial Services income before income taxes in the three months ended March 31, 2023 decreased 66% compared to the same period in 2022, primarily as the result of a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2023, including an industry-wide increase in mortgage incentives.

• Our effective tax rate was 24.2% for both the three months ended March 31, 2023 and 2022.

Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense.

• Homebuilding income before income taxes in the three and six months ended June 30, 2023 increased 10% and 15%, respectively, compared with the same periods in 2022.

The increases are primarily the result of higher closings and average selling prices combined with improved overhead leverage.

Results for the three months ended June 30, 2023 include insurance reserve reversals of $64.9 million.

• Financial Services income before income taxes in the three and six months ended June 30, 2023 increased 16% and decreased 25%, respectively, compared with the same periods in 2022.

The increase during the three months ended June 30, 2023 when compared with the prior year period was primarily due to higher revenues per loan resulting from the higher average selling price within Homebuilding.

The decrease during the six months ended June 30, 2023 when compared with the prior year period is primarily attributable to relative weakness during the first quarter of 2023 as a result of a lower capture rate and revenue per loan due to competitiveness in the mortgage industry.

• Our effective tax rate in the three and six months ended June 30, 2023 was 24.4% and 24.3%, respectively, compared with 24.5% and 24.4%, respectively, for the same periods in 2022.

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,

2023 2023 vs.

2022 2022 2023 2023 vs.

Home sale revenues (a)

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Selling, general, and administrative

expenses ("SG&A") (336,518) 2 % (329,022)

Equity income from unconsolidated entities 2,513 (c) 1,221

Other expense, net 1,818 (c) (3,295)

expenses ("SG&A") (e)

(314,637) (10) % (351,256) (651,156) (4) % (680,279)

Equity income from unconsolidated entities (110) (c) (427) 2,402 (c) 794

Other income (expense), net 13,586 (c) (4,218) 15,405 (c) (7,513)

Income before income taxes $ 906,518 10 % $ 824,498 $ 1,594,738 15 % $ 1,383,798

1 unchanged sentence

Gross margin from home sales (a)

29.1 % (20) bps 29.3 %

29.6 % (170) bps 31.3 % 29.4 % (100) bps 30.4 %

SG&A as a percentage of home

sale revenues (a)

9.6 % (130) bps 10.9 %

sale revenues (e)

7.8 % (250) bps 9.3 % 8.6 % (140) bps 10.0 %

Closings (units) 7,518 5 % 7,177 13,912 5 % 13,216

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$ 540 3 % $ 524 $ 542 5 % $ 514

Net new orders (d) :

Net new orders:

Units 7,947 24 % 6,418 15,301 6 % 14,389

Dollars $ 3,789,993 (20) % $ 4,731,272

$ 4,271,008 9 % $ 3,903,999 $ 8,061,001 (7) % $ 8,635,271

Cancellation rate 13 % 15 % 15 % 12 %

Average active communities 903 14 % 791 891 14 % 784

Backlog at March 31:

Backlog at June 30:

Units 13,558 (29) % 19,176

Dollars $ 8,188,502 (29) % $ 11,614,167

(a) All periods reflect the reclassification of closing cost incentives from home sale cost of revenues to homes sale revenues ( Note 1 ).

(a) All periods reflect the reclassification of closing cost incentives from home sale cost of revenues to home sale revenues (see Note 1 ).

(b) Includes the amortization of capitalized interest.

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(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.

(e) Includes insurance reserve reversals of $64.9 million for the three months ended June 30, 2023 (see Note 8 ).

Home sale revenues

Home sale revenues in the three months ended March 31, 2023 were higher than the prior year period by $455.4 million.

In the three months ended March 31, 2023, the 15% increase resulted from a 6% increase in closings combined with a 9% increase in average selling price.

The increase in closings was attributable an increased number of quick move-in or speculative homes to satisfy consumer demand to quickly close on homes due to the volatile interest rate environment and ongoing supply chain challenges.

The increased average selling price reflected the impact of continued consumer demand and persistent inflation, partially offset by an increase in the mix of first-time buyer homes, which typically carry a lower sales price, and higher sales incentives in substantially all of our markets.

The year-over-year increases in average selling price occurred in substantially all of our markets.

Home sale revenues in the three and six months ended June 30, 2023 were higher than the prior year period by $295.8 million and $751.2 million, respectively.

In the three months ended June 30, 2023, the 8% increase resulted from a 5% increase in closings combined with a 3% increase in average selling price.

In the six months ended June 30, 2023, the 11% increase resulted from a 5% increase in closings combined with a 5% increase in average selling price.

The increases in closings were attributable to an increased number of quick move-in speculative homes to satisfy consumer demand to quickly close on homes due to the volatile interest rate environment and supply chain challenges.

The increases in average selling price reflected the impact of continued consumer demand and persistent inflation, partially offset by an increase in the mix of first-time buyer homes, which typically carry a lower sales price, and higher sales incentives in substantially all of our markets.

The year-over-year increases in average selling price occurred in the majority of our markets.

Home sale gross margins

Home sale gross margins were 29.1% in the three months ended March 31, 2023, compared to 29.3% in the three months ended March 31, 2022.

Home sale gross margins were 29.6% and 29.4% in the three and six months ended June 30, 2023, respectively, compared with 31.3% and 30.4% in the three and six months ended June 30, 2022, respectively.

Generally, we were able to maintain pricing to substantially offset increases in house and land costs.

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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 $5.1 million for the three months ended March 31, 2023 compared to $1.2 million for the three months ended March 31, 2022.

SG&A as a percentage of home sale revenues was 9.6% in the three months ended March 31, 2023 compared with 10.9% for the three months ended March 31, 2022.

The gross dollar amount of our SG&A increased $7.5 million, or 2%, for the three months ended March 31, 2023 compared to March 31, 2022.

Land sales and other revenues contributed income of $5.1 million and $10.2 million for the three and six months ended June 30, 2023, respectively, compared with $2.2 million and $3.3 million for the three and six months ended June 30, 2022, respectively.

SG&A as a percentage of home sale revenues was 7.8% and 8.6% in the three and six months ended June 30, 2023, respectively, compared with 9.3% and 10.0% for the three and six months ended June 30, 2022, respectively.

The gross dollar amount of our SG&A decreased $36.6 million, or 10%, for the three months ended June 30, 2023 compared with the prior year period, and decreased $29.1 million, or 4%, for the six months ended June 30, 2023 compared with the prior year period.

The decreases in gross dollars in 2023 resulted primarily from insurance reserve reversals of $64.9 million recorded in the three months ended June 30, 2023, partially offset by other overhead costs to support growth expectations.

Other income (expense), net

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Write-offs of deposits and pre-acquisition costs $ (1,490) $ (4,503) $ (7,173) $ (8,013)

5 unchanged sentences

Net new orders

Net new orders in units decreased 8% while net new orders in dollars decreased 20% in the three months ended March 31, 2023, as compared to the prior year period.

The decreased net new order volume in 2023 was primarily due to higher cancellation rates (canceled orders for the period divided by gross new orders for the period), which was 17% for the three months ended March 31, 2023 and 9% for the comparable prior year period.

Cancellation rates began to increase during the second quarter of 2022 as the market responded to increased home 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.

Ending backlog dollars, which represents orders for homes that have not yet closed, decreased 31% at March 31, 2023 compared with March 31, 2022, as a result of the aforementioned lower net new orders and higher cancellation rates.

Net new orders in units increased 24% while net new orders in dollars increased 9% in the three months ended June 30, 2023, as compared with the prior year period.

Net new orders in units increased 6% while net new orders in dollars decreased 7% for the six months ended June 30, 2023 as compared with the prior year period.

The increased net new order volume in 2023 was primarily due to improved demand combined with better availability of quick move-in speculative homes.

Net new orders in dollars increased a smaller amount than the increase in units as the result of both an increase in the mix of first-time buyer homes, which typically carry a lower sales price, and higher sales incentives in substantially all of our markets.

Cancellation rates (canceled orders for the period divided by gross new orders for the period) were 13% and 15% for the three and six months ended June 30, 2023, respectively, and 15% and 12% for the comparable prior year periods.

Cancellation rates began to increase in mid-2022 as the market responded to increased home 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.

However, cancellation rates have normalized thus far in 2023 back to historical levels.

Ending backlog dollars, which represents orders for homes that have not yet closed, decreased 29% at June 30, 2023 compared with June 30, 2022, as a result of the aforementioned decline in net new orders beginning in mid-2022 combined with a large number of deliveries of previously ordered homes in the second half of 2022.

Backlog has increased sequentially since December 31, 2022 due to the aforementioned increase in net new orders in 2023.

Homes in production

The following is a summary of our homes in production:

2023 March 31,

2023 June 30,

Sold 10,725 16,560

3 unchanged sentences

Total 18,122 24,635

The number of homes in production at March 31, 2023 was 19% lower than at March 31, 2022.

This decrease was primarily attributable to the lower number of sold homes as a result of decreased new orders and higher cancellations, partially offset by an increased number of unsold homes, which reflected our strategic decision to increase starts of speculative units in response to buyer demand for quick move-in homes.

The number of homes in production at June 30, 2023 was 26% lower than at June 30, 2022.

This decrease resulted from the lower order backlog caused by the lower number of sold homes and higher cancellations in the second half of 2022 following the significant increase in mortgage interest rates.

This decrease was partially offset by an increased number of completed unsold homes, which reflected our strategic decision to increase starts of speculative units in response to buyer demand for quick move-in homes.

Controlled lots

The following is a summary of our lots under control at March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

The following is a summary of our lots under control at June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

Owned Optioned Controlled Owned Optioned Controlled

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

We have also continued to seek to maintain a high percentage of our lots that are controlled via land option agreements as such contracts enabled us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings.

The remaining purchase price under our land option agreements totaled $5.5 billion at March 31, 2023.

We have also continued 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.

The remaining purchase price under our land option agreements totaled $6.1 billion at June 30, 2023.

Homebuilding Segment Operations

As of March 31, 2023, we conducted our operations in 42 markets located throughout 24 states.

As of June 30, 2023, we conducted our operations in 44 markets located throughout 24 states.

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

5 unchanged sentences

Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2023 vs.

2022 2022 2023 2023 vs.

Home sale revenues (a) :

16 unchanged sentences

$ 906,518 10 % $ 824,498 $ 1,594,738 15 % $ 1,383,798

(a) All periods reflect the reclassification of closing cost incentives to homes sale revenues from home sale cost of revenues ( Note 1 ).

(a) All periods reflect the reclassification of closing cost incentives to home sale revenues from home sale cost of revenues (see Note 1 ).

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

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

Other homebuilding also includes insurance reserve reversals of $64.9 million in the three months ended June 30, 2023.

Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2023 vs.

2022 2022 2023 2023 vs.

Closings (units):

30 unchanged sentences

$ 4,271,008 9 % $ 3,903,999 $ 8,061,001 (7) % $ 8,635,271

(a) All periods reflect the reclassification of closing cost incentives to homes sale revenues from home sale cost of revenues ( Note 1 ).

(a) All periods reflect the reclassification of closing cost incentives to home sale revenues from home sale cost of revenues (see Note 1 ).

Operating Data by Segment ($000's omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2023 vs.

6 unchanged sentences

West 19 % 23 % 22 % 16 %

13 % 15 % 15 % 12 %

Unit backlog:

16 unchanged sentences

($000’s omitted)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Land-related charges (a) :

4 unchanged sentences

Texas 214 294 329 534

West 3,059 591 3,800 728

Other homebuilding 189 — 189 —

$ 4,427 $ 4,503 $ 10,110 $ 8,013

For the first quarter of 2023, Northeast home sale revenues increased by 36% when compared with the prior year period due to a 29% increase in closings combined with a 6% 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 71%, primarily due to increased revenues.

(a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue.Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.

For the second quarter of 2023, Northeast home sale revenues decreased by 6% when compared with the prior year period due to an 18% decrease in closings partially offset by a 15% increase in average selling price.

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 decreased 15%, primarily due to lower revenues and gross margins across the majority of markets.

Net new orders increased across the majority of markets.

For the six months ended June 30, 2023, Northeast home sale revenues increased by 10% when compared with the prior year period due to a 1% 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 12%, primarily due to higher revenues in Mid-Atlantic.

Net new orders decreased across all markets.

For the first quarter of 2023, Southeast home sale revenues increased 20% when compared with the prior year period due to a 14% increase in closings combined with a 6% increase in average selling price.

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

Income before income taxes increased 15%, primarily due to the higher revenues.

For the second quarter of 2023, Southeast home sale revenues increased 25% when compared with the prior year period due to a 29% increase in closings partially offset by a 3% decrease in average selling price.

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

Income before income taxes increased 18%, primarily due to increased revenues across the majority of markets.

Net new orders increased across the majority of markets.

For the first quarter of 2023, Florida home sale revenues increased 44% when compared with the prior year period due to a 22% increase in closings combined with an 18% increase in average selling price.

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

For the six months ended June 30, 2023, Southeast home sale revenues increased 23% when compared with the prior year period due to a 22% increase in closings combined with a 1% 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 17%, primarily due to increased revenues across the majority of markets.

Net new orders increased across the majority of markets.

For the second quarter of 2023, Florida home sale revenues increased 26% when compared with the prior year period due to a 16% increase in closings combined with an 9% increase in average selling price.

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

Income before income taxes increased 29%, primarily due to increased revenues across all markets.

The increase in net new orders was concentrated in Orlando as the result of new community openings.

For the first quarter of 2023, Midwest home sale revenues decreased 12% when compared with the prior year period due to a 20% decrease in closings partially offset by a 10% increase in average selling price.

The increase in net new orders occurred across the majority of markets.

For the six months ended June 30, 2023, Florida home sale revenues increased 34% when compared with the prior year period due to a 19% increase in closings combined with a 13% increase in the 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 44%, primarily due to increased revenues and gross margins across all markets.

Net new orders increased across the majority of markets.

For the second quarter of 2023, Midwest home sale revenues decreased 13% when compared with the prior year period due to a 19% decrease in closings partially offset by a 7% increase in average selling price.

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

Income before income taxes decreased 11%, primarily due to decreased revenues and gross margins across the majority of markets.

Net new orders increased across all markets.

For the six months ended June 30, 2023, Midwest home sale revenues decreased 13% when compared with the prior year period due to a 19% decrease in closings partially offset by an 8% increase in average selling price.

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 decreased 9%, primarily due to the lower revenues.

Net new orders decreased as the result of challenged demand conditions.

For the first quarter of 2023, Texas home sale revenues increased 11% when compared with the prior year period due to an 8% increase in closings combined with a 3% increase in average selling price.

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

Income before income taxes decreased 4%, primarily due to decreased gross margins across all markets.

Net new orders decreased across the majority of markets.

For the first quarter of 2023, West home sale revenues decreased 4% when compared with the prior year period due to an 8% decrease in closings partially offset by a 5% increase in average selling price.

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

Income before income taxes decreased 25%, primarily due to decreased revenues and gross margins.

Income before income taxes decreased 10%, primarily due to decreased revenues and gross margins across the majority of markets.

Net new orders increased across the majority of markets.

For the second quarter of 2023, Texas home sale revenues increased 7% when compared with the prior year period due to a 2% increase in closings combined with a 5% increase in average selling price.

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

Income before income taxes decreased 6%, primarily due to decreased gross margins across the majority of markets, partially offset by increased revenues across the majority of markets.

Net new orders increased across all markets.

For the six months ended June 30, 2023, Texas home sale revenues increased 9% when compared with the prior year period due to a 5% increase in closings combined with a 4% increase in average selling price.

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

Income before income taxes decreased 5%, primarily due to decreased gross margins across the majority of markets, partially offset by increased revenues across the majority of markets.

Net new orders increased which was mixed among markets.

For the second quarter of 2023, West home sale revenues decreased 6% when compared with the prior year period due to a 1% decrease in closings combined with a 6% decrease in average selling price.

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

Income before income taxes decreased 46%, primarily due to decreased revenues and gross margins across the majority of markets.

Net new orders increased across all markets.

For the six months ended June 30, 2023, West home sale revenues decreased 5% when compared with the prior year period due to a 4% decrease in closings combined with a 1% decrease in average selling price.

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

Income before income taxes decreased 37%, primarily due to decreased revenues and gross margins across the majority of markets.

Net new orders decreased across the majority of markets.

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

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

We believe that our mortgage capture rate, which represents loan originations from our Homebuilding operations as a

percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2023 vs.

2022 2022 2023 2023 vs.

Mortgage revenues $ 61,616 6 % $ 58,082 $ 93,381 (23) % $ 121,237

3 unchanged sentences

Expenses (46,778) 7 % (43,847) (90,813) 4 % (87,333)

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

Equity income from unconsolidated entities 1,054 (8) % 1,150 1,054 (8) % 1,150

Other income (expense), net — (a) (3) — (a) (67)

Income before income taxes $ 46,495 16 % $ 40,075 $ 60,397 (25) % $ 80,668

3 unchanged sentences

(a) Percentage not meaningful.

Three Months Ended

Six Months Ended

Supplemental data:

7 unchanged sentences

Total funded originations 100 % 100 %

The demand for refinancing within the mortgage industry waned in 2022 and has remained low in 2023 as mortgage interest rates began to sharply rise and remained high, 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, 2023 decreased 31% compared with the same period in 2022.

Total Financial Services revenues for the three and six months ended June 30, 2023 increased 11% and decreased 10%, respectively, compared with the same periods in 2022.

The demand for refinancing within the mortgage industry waned in 2022 and has remained low in 2023 as mortgage interest rates began to sharply rise and have remained high, which led to an increase in competition among lenders and lower margins per loan.

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 in the three months ended March 31, 2023 decreased 66% compared to the same period in 2022, primarily due to a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2023, including an industry-wide increase in mortgage incentives.

Our effective income tax rate was 24.2% for both the three months ended March 31, 2023 and 2022.

Income before income taxes in the three and six months ended June 30, 2023 increased 16% and decreased 25%, respectively, compared with the same periods in 2022.

The increase during the three months ended June 30, 2023 when compared with the prior year period was primarily due to higher revenues per loan due to a higher average selling price within Homebuilding.

The decrease during the six months ended June 30, 2023 when compared with the prior year period is primarily attributable to

relative weakness during the first quarter of 2023 as a result of a lower capture rate and revenue per loan due to competitiveness in the mortgage industry.

Our effective income tax rate for the three and six months ended June 30, 2023 was 24.4% and 24.3%, respectively, compared with 24.5% and 24.4%, respectively, for the same periods in 2022.

Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense.

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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, 2023, we had unrestricted cash and equivalents of $1.3 billion, restricted cash balances of $48.8 million, and $961.2 million available under our Revolving Credit Facility.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 18.1% at March 31, 2023, compared with 18.7% at December 31, 2022.

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, which helps mitigate banking concentration risk.

At June 30, 2023, we had unrestricted cash and equivalents of $1.7 billion, restricted cash balances of $49.1 million, and $965.0 million available under our Revolving Credit Facility.

Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 17.3% at June 30, 2023, compared with 18.7% at December 31, 2022.

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

In response to recent volatility in the banking system, we have shifted a larger percentage of our cash and equivalents to money market funds to reduce the balances held in bank accounts.

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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 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.

In July 2023, we need to repay or refinance Pulte Mortgage's master repurchase agreement with third-party lenders (as amended, the "Repurchase Agreement").

While we intend to refinance the Repurchase Agreement, 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, 2023 and December 31, 2022 with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.

We had $2.0 billion of unsecured senior notes outstanding at both June 30, 2023 and December 31, 2022 with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.

Other notes payable

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $51.0 million and $55.2 million at March 31, 2023 and December 31, 2022, respectively.

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $42.2 million and $55.2 million at June 30, 2023 and December 31, 2022, respectively.

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

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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 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 March 31, 2023, we were in compliance with all covenants.

As of June 30, 2023, we were in compliance with all covenants.

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

At March 31, 2023, we had no borrowings outstanding, $288.8 million of letters of credit issued, and $961.2 million of remaining capacity under the Revolving Credit Facility.

At June 30, 2023, we had no borrowings outstanding, $285.0 million of letters of credit issued, and $965.0 million of remaining capacity under the Revolving Credit Facility.

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.

Joint venture debt

At March 31, 2023, aggregate outstanding debt of unconsolidated joint ventures was $80.6 million of which $42.0 million was related to one joint venture in which we have a 50% interest.

At June 30, 2023, aggregate outstanding debt of unconsolidated joint ventures was $81.0 million of which $39.4 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 the Repurchase Agreement with third-party lenders that matures on July 27, 2023.

The maximum aggregate commitment was $360.0 million at March 31, 2023 and will increase to $500.0 million on June 26, 2023 through maturity.

Pulte Mortgage maintains a master repurchase agreement with third-party lenders (as amended, the "Repurchase Agreement") that matures on July 27, 2023.

The maximum aggregate commitment was $500.0 million at June 30, 2023, 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.

At March 31, 2023, Pulte Mortgage had $324.4 million outstanding at a weighted average interest rate of 6.18% and $35.6 million of remaining capacity under the Repurchase Agreement.

At June 30, 2023, Pulte Mortgage had $315.6 million outstanding at a weighted average interest rate of 6.68% and $184.4 million of remaining capacity under the Repurchase Agreement.

At December 31, 2022, Pulte Mortgage had $586.7 million outstanding at a weighted average interest rate of 5.39% and $213.3 million of remaining capacity under the Repurchase Agreement.

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Dividends and share repurchase program

In the three months ended March 31, 2023, we declared cash dividends totaling $36.1 million and repurchased 2.8 million shares under our repurchase authorization for $150.0 million.

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.

On January 31, 2022, the Board of Directors approved an additional share repurchase authorization of $1.0 billion.

At March 31, 2023, we had remaining authorization to repurchase $232.9 million of common shares.

This repurchase authorization was increased by $1.0 billion on April 24, 2023.

In the six months ended June 30, 2023, we declared cash dividends totaling $71.8 million and repurchased 6.4 million shares under our repurchase authorization for $400.0 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.

On April 24, 2023, the Board of Directors increased our share repurchase authorization by $1.0 billion.

At June 30, 2023, we had remaining authorization to repurchase $982.9 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, 2023, 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.

Certain contractual obligations are reflected on the Consolidated Balance Sheet as of June 30, 2023, 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, house construction costs, operating leases, and obligations under our various compensation and benefit plans.

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

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

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

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, 2023, we had outstanding letters of credit totaling $288.8 million.

At June 30, 2023, we had outstanding letters of credit totaling $285.0 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 $2.1 billion at March 31, 2023, are typically outstanding over a period of approximately three to five years.

These bonds, which approximated $2.2 billion at June 30, 2023, 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, 2023, these agreements had an aggregate remaining purchase price of $5.5 billion.

At June 30, 2023, these agreements had an aggregate remaining purchase price of $6.1 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, 2023, outstanding deposits totaled $485.7 million, of which $14.4 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, 2023 related to debt and commitments and contingencies, respectively.

At June 30, 2023, outstanding deposits totaled $283.7 million, of which $18.2 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, 2023 related to debt and commitments and contingencies, respectively.

Operating activities

Net cash provided by operating activities in the three months ended March 31, 2023 was $711.4 million.

Net cash provided by operating activities in the six months ended June 30, 2023 was $1.5 billion.

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 cash inflows from operations for the three months ended March 31, 2023 were primarily due to net income of $532.3 million along with a seasonal $256.4 million decrease in residential mortgage loans available for sale, offset by a net increase in inventories of $85.4 million, which was primarily attributable to extended house production cycle times combined with investment in land inventory.

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

The positive cash flow from operations in 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.

The cash inflows from operations for the six months ended June 30, 2023 were primarily due to net income of $1.3 billion along with a seasonal $244.5 million decrease in residential mortgage loans available for sale.

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

The positive cash flow from operations in six months ended June 30, 2022 was primarily due to our 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 resulting from the higher order backlog combined with investment in land inventory to support future growth.

Investing activities

Net cash used in investing activities in the three months ended March 31, 2023 was $24.2 million.

These cash outflows primarily related to capital expenditures of $23.7 million related to our ongoing investments in new communities, facilities, and information technology applications.

Net cash used in investing activities in the three months ended March 31, 2022 was $48.0 million.

These cash outflows in 2022 primarily related to a $10.4 million deferred payment related to the 2020 acquisition of Innovative Construction Group as well as capital expenditures of $30.7 million related to our ongoing investments in new communities and information technology applications.

Net cash used in investing activities in the six months ended June 30, 2023 was $54.0 million.

These cash outflows primarily resulted from capital expenditures of $45.1 million related to our ongoing investments in new communities, facilities, and information technology applications.

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

These cash outflows in 2022 primarily resulted from 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 and information technology applications.

Financing activities

Net cash used in financing activities in the three months ended March 31, 2023 totaled $454.9 million.

These cash outflows resulted primarily from the repurchase of 2.8 million common shares for $150.0 million under our share repurchase authorization, payments of $36.4 million in cash dividends, and net repayments of $262.3 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, 2022 totaled $781.4 million.

Net cash used in financing activities in the six months ended June 30, 2023 totaled $713.4 million.

These cash outflows resulted primarily from the repurchase of 6.4 million common shares for $400.0 million under our share repurchase authorization, payments of $72.3 million in cash dividends, and net repayments of $271.1 million under the Repurchase Agreement related to a seasonal decrease in residential mortgage loans available-for-sale.

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 of $183.3 million under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.

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Supplemental Guarantor Financial Information

As of March 31, 2023, PulteGroup, Inc.

As of June 30, 2023, 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.

with respect to that guarantee.

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

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Summarized Balance Sheet Data

ASSETS March 31, 2023 December 31, 2022

ASSETS June 30, 2023 December 31, 2022

Cash, cash equivalents, and restricted cash $1,597,204 $786,073

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Total liabilities 5,029,870 5,049,079

Three Months Ended

Six Months Ended

Summarized Statement of Operations Data 2023 2022

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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, 2023 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, 2022.

There have been no significant changes to our critical accounting estimates in the six months ended June 30, 2023 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, 2022.

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