PULTEGROUP INC/MI/ 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. 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 at higher levels than the third quarter of 2022, evidenced by an increase in our net new orders of 43% for the three months ended September 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 closing cost incentives, especially mortgage interest rate buydowns, which have supported the increase in our net new orders. Additionally, the rate of customer order cancellation that spiked in late 2022 in response to inflation and interest rate increases has 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 two weeks shorter in the third quarter of 2023 compared with the third quarter of 2022 as we have experienced sequential improvement throughout 2023. Despite the recent improvements, 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, experienced heightened volatility in 2020 through 2022. 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. 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 the business slowed in the second half of 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 and nine months ended September 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 increased our housing starts throughout 2023. As interest rates continued to increase in the later part of the third quarter, buyer demand has slowed slightly, but we remain confident in our ability to navigate this environment and to position the Company to take advantage of opportunities as they arise. Consolidated Operations The following is a summary of our operating results by line of business ($000's omitted, except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Income before income taxes: Homebuilding $ 818,365 $ 783,763 $ 2,413,103 $ 2,167,562 Financial Services 28,949 27,514 89,346 108,181 Income before income taxes 847,314 811,277 2,502,449 2,275,743 Income tax expense (208,539) (183,349) (611,070) (540,657) Net income $ 638,775 $ 627,928 $ 1,891,379 $ 1,735,086 Per share data - assuming dilution: Net income $ 2.90 $ 2.69 $ 8.45 $ 7.22 24 Homebuilding Operations The following presents selected financial information for our Homebuilding operations ($000’s omitted): Three Months Ended Nine Months Ended September 30, September 30, 2023 2023 vs. 2022 2022 2023 2023 vs. 2022 2022 Home sale revenues (a) $ 3,886,908 3 % $ 3,791,695 $ 11,433,476 8 % $ 10,587,080 Land sale and other revenues 39,905 30 % 30,658 107,575 10 % 97,626 Total Homebuilding revenues 3,926,813 3 % 3,822,353 11,541,051 8 % 10,684,706 Home sale cost of revenues (a) (b) (2,739,596) 4 % (2,636,842) (8,068,287) 10 % (7,364,743) Land sale and other cost of revenues (35,007) 33 % (26,314) (92,467) 3 % (89,971) Selling, general, and administrative expenses ("SG&A") (e) (353,167) 1 % (350,112) (1,004,323) (3) % (1,030,391) Equity income from unconsolidated entities 891 (c) 319 3,293 (c) 1,112 Gain on debt retirement 362 (c) — 362 (c) — Other income (expense), net 18,069 (c) (25,641) 33,474 (c) (33,151) Income before income taxes $ 818,365 4 % $ 783,763 $ 2,413,103 11 % $ 2,167,562 Supplemental data: Gross margin from home sales (a) 29.5 % (100) bps 30.5 % 29.4 % (100) bps 30.4 % SG&A as a percentage of home sale revenues (e) 9.1 % (10) bps 9.2 % 8.8 % (90) bps 9.7 % Closings (units) 7,076 — % 7,047 20,988 4 % 20,263 Average selling price (a) $ 549 2 % $ 538 $ 545 4 % $ 522 Net new orders: Units 7,065 43 % 4,924 22,366 16 % 19,313 Dollars (d) $ 3,823,619 36 % $ 2,807,308 $ 11,884,620 4 % $ 11,442,579 Cancellation rate 15 % 24 % 15 % 15 % Average active communities 923 12 % 823 902 13 % 797 Backlog at September 30: Units 13,547 (21) % 17,053 Dollars $ 8,125,182 (23) % $ 10,581,026 (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. (c) Percentage not meaningful. (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 $66.2 million for the nine months ended September 30, 2023 (see Note 8 ). Home sale revenues Home sale revenues in the three and nine months ended September 30, 2023 were higher than the prior year period by $95.2 million and $846.4 million, respectively. In the three months ended September 30, 2023, the 3% increase resulted from a slight increase in closings combined with a 2% increase in average selling price. In the nine months ended September 30, 2023, the 8% increase resulted from a 4% increase in closings combined with a 4% increase in average selling price. The increases in closings were attributable to continued consumer demand, particularly 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 25 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 29.5% and 29.4% in the three and nine months ended September 30, 2023, respectively, compared with 30.5% and 30.4% in the three and nine months ended September 30, 2022, respectively. Despite higher sales incentives, we were generally able to maintain net pricing to substantially offset net increases in house and land costs. Land sale and other revenues We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale and other revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales and other revenues contributed income of $4.9 million and $15.1 million for the three and nine months ended September 30, 2023, respectively, compared with $4.3 million and $7.7 million for the three and nine months ended September 30, 2022, respectively. SG&A SG&A as a percentage of home sale revenues was 9.1% and 8.8% in the three and nine months ended September 30, 2023, respectively, compared with 9.2% and 9.7% for the three and nine months ended September 30, 2022, respectively. The gross dollar amount of our SG&A increased $3.1 million, or 1%, for the three months ended September 30, 2023 compared with the prior year period, and decreased $26.1 million, or 3%, for the nine months ended September 30, 2023 compared with the prior year period. The decrease in gross dollars for the nine months ended September 30, 2023 resulted primarily from insurance reserve reversals of $66.2 million recorded in the nine months ended September 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 Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Write-offs of deposits and pre-acquisition costs $ (2,456) $ (24,462) $ (9,629) $ (32,475) Amortization of intangible assets (2,623) (2,766) (7,915) (8,353) Interest income 19,303 370 41,701 1,048 Interest expense (120) (65) (347) (216) Miscellaneous, net 3,965 1,282 9,664 6,845 Total other income (expense), net $ 18,069 $ (25,641) $ 33,474 $ (33,151) Write-offs of deposits and pre-acquisition costs were lower in the three and nine months ended September 30, 2023, due to the improved demand environment in 2023 as compared with the sharp decrease in demand that began in mid-2022. Interest income increased significantly in the three and nine months ended September 30, 2023, due to higher returns on invested cash balances as a result of the elevated interest rate environment. Net new orders Net new orders in units increased 43% while net new orders in dollars increased 36% in the three months ended September 30, 2023, as compared with the prior year period. Net new orders in units increased 16% while net new orders in dollars increased 4% for the nine months ended September 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 15% for both the three and nine months ended September 30, 2023 and 24% and 15% for the comparable prior year periods. Cancellation rates began to 26 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 23% at September 30, 2023 compared with September 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. Homes in production The following is a summary of our homes in production: September 30, 2023 September 30, 2022 Sold 10,657 14,854 Unsold Under construction 5,752 7,656 Completed 967 500 6,719 8,156 Models 1,465 1,272 Total 18,841 24,282 The number of homes in production at September 30, 2023 was 22% lower than at September 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 September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Owned Optioned Controlled Owned Optioned Controlled Northeast 4,468 8,172 12,640 4,295 7,502 11,797 Southeast 17,944 28,854 46,798 16,692 23,433 40,125 Florida 24,784 35,806 60,590 26,413 29,667 56,080 Midwest 13,054 11,966 25,020 12,923 13,128 26,051 Texas 17,198 20,692 37,890 20,197 14,438 34,635 West 26,306 13,849 40,155 28,328 14,096 42,424 Total 103,754 119,339 223,093 108,848 102,264 211,112 47 % 53 % 100 % 52 % 48 % 100 % Developed (%) 46 % 15 % 30 % 43 % 16 % 30 % 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 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 $6.3 billion at September 30, 2023. 27 Homebuilding Segment Operations As of September 30, 2023, we conducted our operations in 45 markets located throughout 24 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments: Northeast: Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia Southeast: Georgia, North Carolina, South Carolina, Tennessee Florida: Florida Midwest: Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio Texas: Texas West: Arizona, California, Colorado, Nevada, New Mexico, Washington The following tables present selected financial information for our reportable Homebuilding segments: Operating Data by Segment ($000's omitted) Three Months Ended Nine Months Ended September 30, September 30, 2023 2023 vs. 2022 2022 2023 2023 vs. 2022 2022 Home sale revenues (a) : Northeast $ 234,284 (6) % $ 249,983 $ 684,085 4 % $ 657,420 Southeast 646,182 (9) % 711,610 2,005,382 10 % 1,816,573 Florida 1,196,780 30 % 920,059 3,458,194 33 % 2,606,682 Midwest 540,678 (3) % 557,151 1,407,833 (9) % 1,550,847 Texas 481,046 (16) % 574,088 1,567,574 — % 1,570,981 West 787,938 1 % 778,804 2,310,408 (3) % 2,384,577 $ 3,886,908 3 % $ 3,791,695 $ 11,433,476 8 % $ 10,587,080 Income (loss) before income taxes (b) : Northeast $ 52,265 (1) % $ 52,682 $ 150,227 7 % $ 140,052 Southeast 144,643 (20) % 181,667 469,653 2 % 460,056 Florida 316,113 43 % 220,850 904,916 44 % 628,979 Midwest 105,267 28 % 82,279 242,552 3 % 235,345 Texas 99,433 (25) % 133,404 305,552 (13) % 351,253 West 107,537 (26) % 145,890 307,537 (34) % 463,947 Other homebuilding (c) (6,893) 79 % (33,009) 32,666 129 % (112,070) $ 818,365 4 % $ 783,763 $ 2,413,103 11 % $ 2,167,562 (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 $66.2 million in the nine months ended September 30, 2023. 28 Operating Data by Segment ($000's omitted) Three Months Ended Nine Months Ended September 30, September 30, 2023 2023 vs. 2022 2022 2023 2023 vs. 2022 2022 Closings (units): Northeast 344 (9) % 378 996 (3) % 1,026 Southeast 1,291 — % 1,295 3,864 13 % 3,406 Florida 1,983 22 % 1,628 5,802 20 % 4,840 Midwest 1,018 (8) % 1,104 2,693 (15) % 3,179 Texas 1,211 (15) % 1,431 4,030 (2) % 4,124 West 1,229 1 % 1,211 3,603 (2) % 3,688 7,076 — % 7,047 20,988 4 % 20,263 Average selling price (a) : Northeast $ 681 3 % $ 661 $ 687 7 % $ 641 Southeast 501 (9) % 550 519 (3) % 533 Florida 604 7 % 565 596 11 % 539 Midwest 531 5 % 505 523 7 % 488 Texas 397 (1) % 401 389 2 % 381 West 641 — % 643 641 (1) % 647 $ 549 2 % $ 538 $ 545 4 % $ 522 Net new orders - units: Northeast 376 59 % 237 1,161 11 % 1,046 Southeast 1,374 27 % 1,081 4,277 15 % 3,716 Florida 1,598 9 % 1,471 5,386 10 % 4,898 Midwest 1,090 66 % 655 3,426 29 % 2,660 Texas 1,258 28 % 979 4,070 9 % 3,718 West 1,369 173 % 501 4,046 24 % 3,275 7,065 43 % 4,924 22,366 16 % 19,313 Net new orders - dollars: Northeast $ 254,346 54 % $ 165,018 $ 792,080 8 % $ 736,434 Southeast 698,219 16 % 599,621 2,143,322 1 % 2,130,969 Florida 939,975 3 % 911,099 3,122,522 (2) % 3,188,807 Midwest 602,356 65 % 364,849 1,829,729 27 % 1,442,207 Texas 493,094 28 % 385,634 1,518,821 (2) % 1,551,534 West 835,629 119 % 381,087 2,478,146 4 % 2,392,628 $ 3,823,619 36 % $ 2,807,308 $ 11,884,620 4 % $ 11,442,579 (a) All periods reflect the reclassification of closing cost incentives to home sale revenues from home sale cost of revenues (see Note 1 ). 29 Operating Data by Segment ($000's omitted) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2023 vs. 2022 2022 Cancellation rates: Northeast 7 % 13 % 8 % 9 % Southeast 9 % 15 % 9 % 9 % Florida 17 % 18 % 16 % 13 % Midwest 11 % 14 % 10 % 11 % Texas 18 % 33 % 19 % 22 % West 20 % 48 % 21 % 23 % 15 % 24 % 15 % 15 % Unit backlog: Northeast 639 (21) % 808 Southeast 2,319 (17) % 2,786 Florida 4,225 (23) % 5,488 Midwest 2,083 (4) % 2,169 Texas 1,829 (32) % 2,693 West 2,452 (21) % 3,109 13,547 (21) % 17,053 Backlog dollars: Northeast $ 450,623 (23) % $ 582,178 Southeast 1,269,758 (24) % 1,660,331 Florida 2,795,502 (23) % 3,608,719 Midwest 1,208,801 (1) % 1,223,984 Texas 805,047 (36) % 1,254,262 West 1,595,451 (29) % 2,251,552 $ 8,125,182 (23) % $ 10,581,026 30 Operating Data by Segment ($000’s omitted) Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 Land-related charges (a) : Northeast $ 197 $ 3,759 $ 266 $ 3,961 Southeast 2,616 5,889 5,643 9,724 Florida 338 4,881 2,430 6,493 Midwest 282 1,677 886 2,780 Texas 59 2,794 388 3,328 West 2,889 5,462 6,689 6,189 Other homebuilding 487 — 676 — $ 6,868 $ 24,462 $ 16,978 $ 32,475 (a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges. Northeast For the third quarter of 2023, Northeast home sale revenues decreased by 6% when compared with the prior year period due to a 9% decrease in closings partially offset by a 3% 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 1%, primarily due to lower revenues and gross margins across the majority of markets. Net new orders increased across all markets. For the nine months ended September 30, 2023, Northeast home sale revenues increased by 4% when compared with the prior year period due to a 7% increase in average selling price partially offset by a 3% decrease in closings. The increase in average selling price occurred across all markets, while the decrease in closings was attributable to the Northeast Corridor. Income before income taxes increased 7%, primarily due to the higher revenues. Net new orders increased across all markets. Southeast For the third quarter of 2023, Southeast home sale revenues decreased 9% when compared with the prior year period due to a 9% decrease in average selling price. The decrease in average selling price occurred across all markets. Income before income taxes decreased 20%, primarily due to lower revenues and gross margins across the majority of markets. Net new orders increased across the majority of markets. For the nine months ended September 30, 2023, Southeast home sale revenues increased 10% when compared with the prior year period due to a 13% increase in closings partially offset by a 3% decrease in average selling price. The increase in closings occurred across all markets. Income before income taxes increased 2%, primarily due to the increased revenues. Net new orders increased across the majority of markets. Florida For the third quarter of 2023, Florida home sale revenues increased 30% when compared with the prior year period due to a 22% increase in closings combined with a 7% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 43%, primarily due to the increased revenues. Net new orders increased across the majority of markets. For the nine months ended September 30, 2023, Florida home sale revenues increased 33% when compared with the prior year period due to a 20% increase in closings combined with an 11% 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 the increased revenues. Net new orders increased across the majority of markets. 31 Midwest For the third quarter of 2023, Midwest home sale revenues decreased 3% 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 all markets. Income before income taxes increased 28%, primarily due to higher gross margins across the majority of markets. Net new orders increased across all markets. For the nine months ended September 30, 2023, Midwest home sale revenues decreased 9% when compared with the prior year period due to a 15% decrease in closings partially offset by a 7% 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 increased 3%, primarily due to improved overhead leverage across the majority of markets. Net new orders increased across all markets. Texas For the third quarter of 2023, Texas home sale revenues decreased 16% when compared with the prior year period due to a 15% decrease in closings partially offset by a 1% decrease in average selling price. The decrease in closings occurred across all markets while the decrease in average selling price was mixed among markets. Income before income taxes decreased 25%, primarily due to lower revenues and gross margins across the majority of markets. Net new orders increased across the majority of markets. For the nine months ended September 30, 2023, Texas home sale revenues were flat when compared with the prior year period due to a 2% decrease in closings partially offset by a 2% increase in average selling price. The decrease in closings was mixed among markets while the increase in average selling price occurred across the majority of markets. Income before income taxes decreased 13%, primarily due to lower gross margins across all markets. The increase in net new orders was mixed among markets. West For the third quarter of 2023, West home sale revenues increased 1% when compared with the prior year period due to a 1% increase in closings. Income before income taxes decreased 26%, primarily due to lower gross margins across the majority of markets as we have had to adjust pricing downward in certain of our western geographies. Net new orders increased across all markets. For the nine months ended September 30, 2023, West home sale revenues decreased 3% when compared with the prior year period due to a 2% decrease in closings combined with a 1% decrease in average selling price. The decrease in closings and average selling price occurred across the majority of markets. Income before income taxes decreased 34%, primarily due to lower revenues and gross margins across the majority of markets. Net new orders increased across all markets. Financial Services Operations We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage LLC ("Pulte Mortgage") and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to a credit agreement with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to support our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding, as Homebuilding customers continue to account for substantially all of its business. We believe that our mortgage capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000's omitted): 32 Three Months Ended Nine Months Ended September 30, September 30, 2023 2023 vs. 2022 2022 2023 2023 vs. 2022 2022 Mortgage revenues $ 46,664 (2) % $ 47,773 $ 140,044 (17) % $ 169,009 Title services revenues 21,714 9 % 19,893 62,804 13 % 55,617 Insurance brokerage commissions 8,342 65 % 5,043 24,027 60 % 15,001 Total Financial Services revenues 76,720 6 % 72,709 226,875 (5) % 239,627 Expenses (46,431) 2 % (45,323) (137,244) 3 % (132,655) Equity income from unconsolidated entities — (100) % 128 1,055 (17) % 1,277 Other income (expense), net (1,340) (a) — (1,340) (a) (68) Income before income taxes $ 28,949 5 % $ 27,514 $ 89,346 (17) % $ 108,181 Total originations: Loans 4,362 — % 4,369 12,770 (2) % 12,994 Principal $ 1,745,952 2 % $ 1,715,344 $ 5,053,379 1 % $ 5,009,957 (a) Percentage not meaningful. Nine Months Ended September 30, 2023 2022 Supplemental data: Capture rate 80.5 % 78.7 % Average FICO score 747 748 Funded origination breakdown: Government (FHA, VA, USDA) 22 % 19 % Other agency 75 % 74 % Total agency 97 % 93 % Non-agency 3 % 7 % Total funded originations 100 % 100 % Revenues Total Financial Services revenues for the three and nine months ended September 30, 2023 increased 6% and decreased 5%, respectively, compared with the same periods in 2022. The increase during the three months ended September 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 nine months ended September 30, 2023 when compared with the prior year period was 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. Income before income taxes Income before income taxes in the three and nine months ended September 30, 2023 increased 5% and decreased 17%, respectively, compared with the same periods in 2022. The increase during the three months ended September 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 nine months ended September 30, 2023 when compared with the prior year period was 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. 33 Income Taxes Our effective income tax rate for the three and nine months ended September 30, 2023 was 24.6% and 24.4%, respectively, compared with 22.6% and 23.8%, 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. Liquidity and Capital Resources We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing available financing sources, including revolving bank credit and securities offerings. At September 30, 2023, we had unrestricted cash and equivalents of $1.8 billion, restricted cash balances of $51.1 million, and $945.4 million available under our Revolving Credit Facility. Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 16.5% at September 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. 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. In August 2024, 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. We may from time to time repurchase our unsecured senior notes through open market purchases, privately negotiated transactions, or otherwise. During the three months ended September 30, 2023, we repurchased $22.0 million and $43.0 million of our unsecured senior notes scheduled to mature in 2026 and 2027, respectively. We believe that our current cash position and other available financing resources, coupled with our ongoing operating activities, will provide sufficient liquidity to fund our business needs over the next twelve months and beyond. To the extent the sources of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt, dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities. Unsecured senior notes We had $1.9 billion of unsecured senior notes outstanding at September 30, 2023 and $2.0 billion of unsecured senior notes outstanding at December 31, 2022 with no repayments due until March 2026, when $478.0 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 $54.8 million and $55.2 million at September 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. The stated interest rates on these notes range up to 6%. Revolving credit facility We maintain a revolving credit facility (the "Revolving Credit Facility") maturing in June 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 34 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 September 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 September 30, 2023, we had no borrowings outstanding, $304.6 million of letters of credit issued, and $945.4 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 September 30, 2023, aggregate outstanding debt of unconsolidated joint ventures was $79.5 million of which $40.3 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 entered into a master repurchase agreement (the "Repurchase Agreement") in August 2023 that matures on August 14, 2024. The Repurchase Agreement replaced a substantially similar agreement that previously existed with different lenders. The maximum aggregate commitment under the Repurchase Agreement was $560.0 million at September 30, 2023, and will increase to $850.0 million during the seasonally high borrowing period from December 27, 2023 to January 15, 2024. Thereafter, the maximum aggregate commitment ranges from $600.0 million to $700.0 million. The Repurchase Agreement also contains an accordion feature that could increase the commitment by $50.0 million above its active commitment level. 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 September 30, 2023, Pulte Mortgage had $425.5 million outstanding at a weighted average interest rate of 7.01% and $134.5 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 prior agreement replaced by the Repurchase Agreement. Pulte Mortgage was in compliance with all of its covenants and requirements as of such dates. Dividends and share repurchase program In the nine months ended September 30, 2023, we declared cash dividends totaling $106.8 million and repurchased 10.2 million shares under our repurchase authorization for $700.0 million. In the nine months ended September 30, 2022, we declared cash dividends totaling $106.7 million and repurchased 21.8 million shares under our repurchase authorization for $974.7 million. On April 24, 2023, the Board of Directors increased our share repurchase authorization by $1.0 billion. At September 30, 2023, we had remaining authorization to repurchase $682.9 million of common shares. Contractual Obligations We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as of September 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. 35 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 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 September 30, 2023, we had outstanding letters of credit totaling $304.6 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 $2.3 billion at September 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 September 30, 2023, these agreements had an aggregate remaining purchase price of $6.3 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 September 30, 2023, outstanding deposits totaled $611.5 million, of which $26.5 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 September 30, 2023 related to debt and commitments and contingencies, respectively. Cash flows Operating activities Net cash provided by operating activities in the nine months ended September 30, 2023 was $1.9 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 nine months ended September 30, 2023 were primarily due to net income of $1.9 billion along with a seasonal $262.6 million decrease in residential mortgage loans available for sale, partially offset by a net increase in inventories of $173.4 million. Net cash used in operating activities in the nine months ended September 30, 2022 was $303.9 million. The cash outflows from operations in nine months ended September 30, 2022 were primarily due to our net income of $1.7 billion along with a seasonal $507.9 million decrease in residential mortgage loans available for sale, offset by a net increase in inventories of $2.7 billion, which was primarily attributable to higher house inventory in production resulting from a large order backlog, more unsold units, and extended production cycle times combined with investment in land inventory. Investing activities Net cash used in investing activities in the nine months ended September 30, 2023 was $95.0 million. These cash outflows primarily resulted from capital expenditures of $67.6 million related to our ongoing investments in new communities, facilities, and information technology applications along with $18.1 million of investments in unconsolidated entities. Net cash used in investing activities in the nine months ended September 30, 2022 was $154.7 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"), $58.2 million of investments in unconsolidated entities as well as capital expenditures of $88.6 million related to our ongoing investments in new communities and information technology applications. Financing activities Net cash used in financing activities in the nine months ended September 30, 2023 totaled $1.0 billion. These cash outflows resulted primarily from the repurchase of 10.2 million common shares for $700.0 million under our share repurchase authorization, payments of $107.7 million in cash dividends, $86.8 million of repayments of notes payable, and net repayments of $161.3 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 nine months ended September 30, 2022 totaled $1.1 billion. These cash outflows resulted primarily from the repurchase of 21.8 million common shares for $974.7 million under our share repurchase authorization, payments of $109.6 million in cash dividends, and net repayments of of $287.9 million under the Repurchase 36 Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.These cash outflows were partially offset by net borrowings of $319.0 million under the Revolving Credit Facility. Seasonality Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations in the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, supply chain challenges, changes in mortgage interest rates, and other macroeconomic factors, our quarterly results for 2023 and 2022 are not necessarily indicative of results that may be achieved in the future. Supplemental Guarantor Financial Information As of September 30, 2023, PulteGroup, Inc. had outstanding $1.9 billion principal amount of unsecured senior notes due at dates from March 2026 through February 2035 and no amounts outstanding on its Revolving Credit Facility. All of our unsecured senior notes and the Revolving Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of PulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc. Our subsidiaries associated with our financial services operations and certain other subsidiaries do not guarantee the unsecured senior notes or the Revolving Credit Facility (collectively, "Non-Guarantor Subsidiaries"). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that such Guarantor: (a) incurred the guarantee with the intent of hindering, delaying or defrauding creditors; or (b) received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of any one of the following being true at the time thereof: • such Guarantor was insolvent or rendered insolvent by reason of the issuance of the incurrence of the guarantee; • the incurrence of the guarantee left such Guarantor with an unreasonably small amount of capital or assets to carry on its business; • such Guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature; • such Guarantor was a defendant in an action for money damages, or had a judgment for money damages docketed against it, if the judgment is unsatisfied after final judgment. The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. However, in general, a court would deem a company insolvent if: • the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets; • the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or • it could not pay its debts as they became due. The guarantees of the senior notes contain a provision to limit each Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. However, under recent case law, this provision may not be effective to protect such guarantee from being voided under fraudulent transfer law or otherwise determined to be unenforceable. If a court were to find that the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under that guarantee, could subordinate that guarantee to presently 37 existing and future indebtedness of the Guarantor or could require the holders of the senior notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, holders may not receive any repayment on the senior notes. Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the guarantees to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of senior notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of senior notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code. On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. The following tables present summarized financial information for PulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among PulteGroup, Inc. and the Guarantor Subsidiaries, as well as their investment in and equity in earnings from the Non-Guarantor Subsidiaries ($000’s omitted): PulteGroup, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data ASSETS September 30, 2023 December 31, 2022 Cash, cash equivalents, and restricted cash $1,668,197 $786,073 House and land inventory 11,255,575 10,925,830 Amount due from Non-Guarantor Subsidiaries 560,237 674,898 Total assets 14,339,400 13,074,398 LIABILITIES Accounts payable, customer deposits, accrued and other liabilities $2,781,021 $2,785,286 Notes payable 1,981,315 2,045,527 Total liabilities 5,096,522 5,049,079 Nine Months Ended September 30, Summarized Statement of Operations Data 2023 2022 Revenues $11,317,362 $10,470,677 Cost of revenues 7,961,586 7,283,050 Selling, general, and administrative expenses 979,196 971,786 Income before income taxes 2,366,792 2,143,273 Critical Accounting Estimates There have been no significant changes to our critical accounting estimates in the nine months ended September 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.