Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The 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. Despite the higher mortgage interest rates that continued through most of 2023, demand for new homes began to strengthen in early 2023, weakened in the fall with continued mortgage interest rate volatility, and then gained momentum to end the year as mortgage interest rates moderated. For the full year, we experienced an increase in our net new orders of 23% in 2023 from 2022. The overall demand for new homes strengthened as the result of a continuing limited supply 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 cancellations that spiked in 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 improved in 2022 and 2023, which has contributed to a shortening of our production cycle times. The time required to construct a home was approximately six weeks shorter at the end of 2023 compared to the end of 2022, and we experienced sequential improvement throughout 2023. However, production cycle times remain elevated versus our historical norms as the availability of certain materials and construction labor remain challenged along with ongoing, though lessened, delays in municipal approvals and inspections.
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 labor and materials costs related to the development of our land inventory and the construction of our homes. Lumber, in particular, has experienced heightened volatility in recent years. 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. During 2023 and 2022, through a combination of cost reduction initiatives, construction pacing and sales strategies which took advantage of periods of strong consumer demand, we were able 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 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 during 2023, buyer demand slowed slightly but strengthened again during the fourth quarter as a result of a recent decrease in mortgage interest rates.
We remain focused on taking a measured approach to our capital allocation strategy to effectively respond to future volatility in demand. Accordingly, we are focused on protecting liquidity and closely managing our cash flows while also continuing to focus on shareholder returns, including the following actions:
– Increasing our lot optionality within our land pipeline for increased flexibility;
– Producing sufficient levels of spec inventory (houses without customer orders) to service buyers seeking to close within 30 to 90 days;
– Maintaining a focus on shareholder return through share buybacks and dividends, including a 25% increase in our dividends from $0.16 to $0.20 per share effective with our January 2024 dividend payment;
– Taking an opportunistic approach to repurchasing debt; and
– Maintaining ample liquidity.
Although higher mortgage interest rates may persist for some time, the supply of both new and existing homes for sale remains limited, and demographics supporting housing demand remain favorable. We remain confident in our ability to navigate this environment and to position the Company to take advantage of opportunities as they arise and support future growth.
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The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years ended December 31, 2023 and 2022. For similar operating and financial data and discussion of our fiscal 2022 results compared to our fiscal 2021 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 6, 2023.
The following is a summary of our operating results by line of business ($000's omitted, except per share data):
Years Ended December 31,
2023 2022
Income before income taxes:
Homebuilding $ 3,316,075 $ 3,307,328
Financial Services 133,192 132,230
Income before income taxes 3,449,267 3,439,558
Income tax expense (846,895) (822,241)
Net income $ 2,602,372 $ 2,617,317
Per share data - assuming dilution:
Net income $ 11.72 $ 11.01
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Homebuilding Operations
The following is a summary of income before income taxes for our Homebuilding operations ($000’s omitted):
Years Ended December 31,
2023 FY 2023 vs. FY 2022 2022
Home sale revenues (a)
$ 15,598,707 — % $ 15,548,119
Land sale and other revenues 142,116 (1) % 143,144
Total Homebuilding revenues 15,740,823 — % 15,691,263
Home sale cost of revenues (a) (b)
(11,030,206) 1 % (10,867,879)
Land sale and other cost of revenues (124,607) 4 % (119,906)
Selling, general, and administrative expenses ("SG&A") (c)
(1,312,642) (5) % (1,381,222)
Equity income from unconsolidated entities (d)
3,506 (e) 49,403
Gain on debt retirement 663 (e) —
Other income (expense), net (f)
38,538 (e) (64,331)
Income before income taxes $ 3,316,075 — % $ 3,307,328
Supplemental data:
Gross margin from home sales (a) (b)
29.3 % (80) bps 30.1 %
SG&A % of home sale revenues (a) (c)
8.4 % (50) bps 8.9 %
Closings (units) 28,603 (2) % 29,111
Average selling price (a)
$ 545 2 % $ 534
Net new orders (g) :
Units 28,580 23 % 23,277
Dollars $ 15,244,353 12 % $ 13,589,392
Cancellation rate 16 % 19 %
Average active communities 906 12 % 810
Backlog at December 31:
Units 12,146 — % 12,169
Dollars $ 7,319,714 (5) % $ 7,674,068
(a) All periods reflect the reclassification of closing cost incentives from home sale cost of revenues to home sale revenues ( Note 1 ).
(b) Includes the amortization of capitalized interest.
(c) Includes insurance reserve reversals of $130.8 million and $65.0 million in 2023 and 2022, respectively.
(d) Equity income from unconsolidated entities includes a gain of $49.1 million in 2022 related to a property sale in an unconsolidated entity in Northern California.
(e) Percentage not meaningful.
(f) See "Other income (expense), net" for a table summarizing significant items ( Note 1 ).
(g) 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.
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Home sale revenues
Home sale revenues for 2023 were higher than 2022 by $50.6 million. The increase was attributable to a 2% increase in average selling price partially offset by a 2% decrease in closings. The increase 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 increase in average selling price occurred in the majority of our markets. The decrease in closings during 2023 was primarily attributable to 2022 benefiting from a larger beginning backlog due to heightened demand during 2021 combined with a sharp decrease in net new orders in the fourth quarter of 2022 in response to the aforementioned sharp increase in mortgage interest rates.
Home sale gross margins
Home sale gross margins were 29.3% in 2023, compared with 30.1% in 2022. Gross margins remained strong in both 2023 and 2022 relative to historical levels. Generally, we were able to maintain pricing to substantially offset increases in house and land costs as a result of continued consumer demand combined with the low supply of new and existing homes for sale.
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 $17.5 million and $23.2 million in 2023 and 2022, respectively.
SG&A
SG&A as a percentage of home sale revenues was 8.4% and 8.9% in 2023 and 2022, respectively. The gross dollar amount of our SG&A decreased $68.6 million, or 5%, in 2023 compared with 2022. This decrease is primarily attributable to lower insurance costs as a result of favorable claims experience partially offset by other overhead costs to support the higher number of active communities.
Other income (expense), net
Other income (expense), net includes the following ($000’s omitted):
2023 2022
Write-offs of deposits and pre-acquisition costs (Note 2)
$ (23,512) $ (63,559)
Amortization of intangible assets (Note 1)
(10,538) (11,118)
Interest income 61,533 1,971
Interest expense (469) (284)
Miscellaneous, net 11,524 8,659
Total other income (expense), net $ 38,538 $ (64,331)
The higher write-offs of deposits and pre-acquisition costs in 2022 occurred primarily in the second half of 2022 as we made decisions to terminate a number of land option agreements due to the aforementioned sharp decrease in demand that began in mid-2022 but then recovered in 2023. Interest income increased significantly in 2023 as the result of significantly higher returns on invested cash balances due to the elevated interest rate environment.
Net new orders
Net new orders in units increased 23% in 2023 compared with 2022, while net new orders in dollars increased by 12% compared with 2022. 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. The annual cancellation rate (canceled orders for the period divided by gross new orders for the period) decreased to 16% in 2023 compared to 19% in 2022. 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. Ending backlog dollars, which
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represents orders for homes that have not yet closed, decreased 5% in 2023 compared with 2022, as a result of improved production cycle times.
Homes in production
The following is a summary of our homes in production at December 31, 2023 and 2022:
2023 2022
Sold 9,508 10,247
Unsold
Under construction 6,118 6,874
Completed 1,263 982
7,381 7,856
Models 1,465 1,298
Total 18,354 19,401
The number of homes in production at December 31, 2023 was 5% lower compared to December 31, 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.
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Controlled lots
The following is a summary of our lots under control at December 31, 2023 and 2022:
December 31, 2023 December 31, 2022
Owned Optioned Controlled Owned Optioned Controlled
Northeast 4,204 8,718 12,922 4,295 7,502 11,797
Southeast 18,911 27,666 46,577 16,692 23,433 40,125
Florida 26,922 35,543 62,465 26,413 29,667 56,080
Midwest 12,290 14,461 26,751 12,923 13,128 26,051
Texas 16,487 17,378 33,865 20,197 14,438 34,635
West 25,701 14,349 40,050 28,328 14,096 42,424
Total 104,515 118,115 222,630 108,848 102,264 211,112
47 % 53 % 100 % 52 % 48 % 100 %
Developed (%) 45 % 18 % 31 % 43 % 16 % 30 %
While competition for well-positioned land is robust, we have 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 $6.4 billion at December 31, 2023.
Homebuilding Segment Operations
Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of homebuyers in our targeted markets. As of December 31, 2023, we conducted our operations in 46 markets located throughout 26 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, Oregon, Utah, Washington
We also have a reportable segment for our financial services operations, which consist principally of mortgage banking, title, and insurance agency operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.
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The following table presents selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000's omitted)
Years Ended December 31,
2023 FY 2023 vs. FY 2022 2022
Home sale revenues (a) :
Northeast $ 969,107 (9) % $ 1,062,764
Southeast 2,669,065 (3) % 2,761,629
Florida 4,652,617 22 % 3,816,917
Midwest 2,084,807 (9) % 2,289,216
Texas 2,040,164 (6) % 2,180,852
West 3,182,947 (7) % 3,436,741
$ 15,598,707 — % $ 15,548,119
Income before income taxes (b) :
Northeast $ 218,159 (11) % $ 244,233
Southeast 620,969 (10) % 692,279
Florida 1,212,675 29 % 939,034
Midwest 368,321 1 % 363,028
Texas 389,085 (16) % 465,461
West (c)
419,635 (39) % 687,403
Other homebuilding (d)
87,231 204 % (84,110)
$ 3,316,075 — % $ 3,307,328
Closings (units):
Northeast 1,417 (12) % 1,614
Southeast 5,201 2 % 5,105
Florida 7,742 12 % 6,928
Midwest 3,955 (14) % 4,579
Texas 5,295 (7) % 5,692
West 4,993 (4) % 5,193
28,603 (2) % $ 29,111
Average selling price (a) :
Northeast $ 684 4 % $ 658
Southeast 513 (5) % 541
Florida 601 9 % 551
Midwest 527 5 % 500
Texas 385 1 % 383
West 637 (4) % 662
$ 545 2 % $ 534
(a) All periods reflect the reclassification of closing cost incentives to home sale revenues from home sale cost of revenues ( Note 1 ).
(b) Includes land-related charges as summarized in the following land-related charges table ( Notes 2 and 3 ).
(c) West includes a gain of $49.1 million in 2022 related to a property sale in an unconsolidated entity in Northern California.
(d) Other homebuilding includes corporate interest income, the amortization of intangible assets, the amortization of capitalized interest, and other items not allocated to the operating segments. Also includes insurance reserve reversals of $130.8 million and $65.0 million in 2023 and 2022, respectively ( Note 11 ).
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The following table presents additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000's omitted)
Years Ended December 31,
2023 FY 2023 vs. FY 2022 2022
Net new orders - units:
Northeast 1,510 16% 1,300
Southeast 5,541 22% 4,535
Florida 6,893 12% 6,139
Midwest 4,297 33% 3,241
Texas 5,143 17% 4,382
West 5,196 41% 3,680
28,580 23% 23,277
Net new orders - dollars:
Northeast $ 1,034,819 14% $ 908,136
Southeast 2,758,983 8% 2,561,279
Florida 4,019,271 2% 3,941,197
Midwest 2,309,404 32% 1,753,351
Texas 1,916,753 8% 1,779,578
West 3,205,123 21% 2,645,851
$ 15,244,353 12% $ 13,589,392
Cancellation rates:
Northeast 8% 11%
Southeast 10% 12%
Florida 16% 15%
Midwest 11% 12%
Texas 19% 26%
West 22% 30%
16% 19%
Unit backlog:
Northeast 567 20% 474
Southeast 2,246 18% 1,906
Florida 3,792 (18)% 4,641
Midwest 1,692 25% 1,350
Texas 1,637 (8)% 1,789
West 2,212 10% 2,009
12,146 —% 12,169
Backlog dollars:
Northeast $ 408,371 19% $ 342,658
Southeast 1,221,736 8% 1,131,817
Florida 2,497,827 (20)% 3,131,174
Midwest 1,011,503 29% 786,905
Texas 730,389 (14)% 853,801
West 1,449,888 2% 1,427,713
$ 7,319,714 (5) % $ 7,674,068
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The following table presents additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000's omitted)
Years Ended December 31,
2023 2022
Land-related charges*:
Northeast $ 497 $ 4,597
Southeast 7,853 18,381
Florida 2,683 13,515
Midwest 7,786 6,517
Texas 3,661 6,745
West 19,343 16,406
Other homebuilding 1,292 495
$ 43,115 $ 66,656
* Land-related charges include land impairments, net realizable value adjustments for land held for sale, and write-offs of deposits and pre-acquisition costs. Other homebuilding consists primarily of write-offs of capitalized interest resulting from land-related charges. See Notes 2 and 3 to the Consolidated Financial Statements for additional discussion of these charges.
Northeast:
For 2023, Northeast home sale revenues decreased 9% compared with 2022 due to a 12% decrease in closings partially offset by a 4% 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 11%, primarily due to decreased closings and revenues in the Northeast Corridor. Net new orders increased across all markets.
Southeast:
For 2023, Southeast home sale revenues decreased 3% compared with 2022 due to a 5% decrease in average selling price partially offset by a 2% increase in closings. The decrease in average selling price and increase in closings occurred across the majority of markets. 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.
Florida:
For 2023, Florida home sale revenues increased 22% compared with 2022 due to a 12% increase in closings combined with a 9% 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 29%, primarily due to increased revenues and gross margins across all markets. Net new orders increased across the majority of markets.
Midwest:
For 2023, Midwest home sale revenues decreased 9% compared with 2022 due to a 14% 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 1%, primarily due to the increase in average selling price across all markets, partially offset by the closing volume decline across the majority of markets. Net new orders increased across all markets.
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Texas:
For 2023, Texas home sale revenues decreased 6% compared with 2022 due to a 7% decrease in closings partially offset by a 1% increase in average selling price. The decrease in closings occurred across all markets while the increase in average selling price occurred across the majority of markets. Income before income taxes decreased 16%, primarily due to decreased revenues and gross margins across all markets. Net new orders increased across the majority of markets.
West:
For 2023, West home sale revenues decreased 7% compared with 2022 primarily due to a 4% decrease in closings combined with a 4% decrease in average selling price. The decrease in closings and average selling price occurred across the majority of markets. Income before income taxes decreased 39%, primarily due to decreased revenues and gross margins across the majority of markets. Results for 2022 also included a gain of $49.1 million related to a property sale in an unconsolidated entity in Northern California. Net new orders increased across all markets.
Financial Services Operations
We conduct our Financial Services operations, which include mortgage banking, title, and insurance agency operations, through Pulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements 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 the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our 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):
Years Ended December 31,
2023 FY 2023 vs. FY 2022 2022
Mortgage revenues $ 202,614 (2) % $ 206,932
Title services revenues 85,462 7 % 80,198
Insurance agency commissions 32,679 33 % 24,586
Total Financial Services revenues 320,755 3 % 311,716
Expenses (187,280) 4 % (180,696)
Equity income from unconsolidated entities 1,055 (17) % 1,277
Other expense, net (1,338) (a) (67)
Income before income taxes $ 133,192 1 % $ 132,230
Total originations:
Loans 17,427 (4) % 18,186
Principal $ 6,924,910 (3) % $ 7,105,486
(a) Percentage not meaningful
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Years Ended December 31,
2023 2022
Supplemental data:
Capture rate 81.6 % 77.6 %
Average FICO score 748 748
Funded origination breakdown:
Government (FHA, VA, USDA) 23 % 19 %
Other agency 74 % 74 %
Total agency 97 % 93 %
Non-agency 3 % 7 %
Total funded originations 100 % 100 %
Revenues
Total Financial Services revenues during 2023 increased 3% compared with 2022 as the result of higher earned title premiums and insurance commissions.
Income before income taxes
The increase in income before income taxes for 2023 as compared with 2022 was primarily attributable to higher title and insurance revenues partially offset by higher overhead expenses.
Income Taxes
Our effective income tax rate was 24.6% and 23.9% for 2023 and 2022, respectively. 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 December 31, 2023, we had unrestricted cash and equivalents of $1.8 billion, restricted cash balances of $42.6 million, and $937.3 million available under our Revolving Credit Facility (as defined below). Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 15.9% at December 31, 2023 as 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. 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 12 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. Though we experienced significant improvement in 2023, the elongation of our production cycle in recent years 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
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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.
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
At December 31, 2023, we had $1.9 billion of unsecured senior notes outstanding with no repayments due until March 2026, when $455.4 million of notes are scheduled to mature.
At December 31, 2022, we had $2.0 billion of unsecured senior notes outstanding with no repayments due until March 2026, when $500.0 million of notes were scheduled to mature.
During the twelve months ended 2023, we completed open market repurchases of $44.6 million and $56.1 million of our unsecured senior notes scheduled to mature in 2026 and 2027, respectively.
Other notes payable
Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $71.0 million at December 31, 2023. These notes have maturities ranging up to six years, are secured by the applicable land positions to which they relate, and generally have no recourse to other assets. The stated interest rates on these notes range up to 6%.
Joint venture debt
At December 31, 2023, aggregate outstanding debt of unconsolidated joint ventures was $73.5 million, of which $33.2 million related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding.
Revolving credit facility
We maintain a revolving credit facility ("Revolving Credit Facility") maturing in June 2027 that has a maximum borrowing capacity of $1.3 billion and contains an uncommitted accordion feature that could increase the capacity to $1.8 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, up to the maximum borrowing capacity. The interest rate on borrowings under the Revolving Credit Facility may be based on either the Secured Overnight Financing Rate or a base rate plus an applicable margin, as defined therein. The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of December 31, 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 December 31, 2023, we had no borrowings outstanding, $312.7 million of letters of credit issued, and $937.3 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.
Financial Services debt
Pulte Mortgage provides mortgage financing for the majority of our home closings by utilizing its own funds and funds made available pursuant to credit agreements with third parties. Pulte Mortgage uses these resources to finance its lending activities until the loans are sold in the secondary market, which generally occurs within 30 days.
In August 2023, Pulte Mortgage entered into the Repurchase Agreement, which matures on August 14, 2024. The Repurchase Agreement replaced a substantially similar agreement that previously existed with different lenders. The maximum aggregate commitment was $850.0 million during the seasonally high borrowing period from December 27, 2023 through January 15,
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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. The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. 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 December 31, 2023, Pulte Mortgage had $499.6 million outstanding at a weighted average interest rate of 7.15%, and $350.4 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. Pulte Mortgage was in compliance with all of its covenants and requirements as of such dates.
Dividends and share repurchase program
We declared quarterly cash dividends totaling $149.8 million and $143.1 million in 2023 and 2022, respectively, and repurchased 13.8 million and 24.2 million shares in 2023 and 2022, respectively, for a total of $1.0 billion and $1.1 billion in 2023 and 2022, respectively. On April 24, 2023, the Board of Directors increased our share repurchase authorization by $1.0 billion. At December 31, 2023, we had remaining authorization to repurchase $382.9 million of common shares. On January 29, 2024, the Board of Directors increased our on January 29, 2024 share repurchase authorization by $1.5 billion.
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 December 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.
We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At December 31, 2023, we had outstanding letters of credit of $312.7 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 $2.4 billion at December 31, 2023, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to the applicable projects but has 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 December 31, 2023, these agreements had an aggregate remaining purchase price of $6.4 billion. Pursuant to these land option agreements, we 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 December 31, 2023, outstanding deposits totaled $405.4 million, of which $16.3 million is refundable.
For further information regarding our primary obligations, refer to Note 5 , "Debt" and Note 11 , "Commitments and Contingencies" to the Consolidated Financial Statements included elsewhere in this Annual Report on 10-K for amounts outstanding as of December 31, 2023, related to debt and commitments and contingencies, respectively.
Cash flows
Operating activities
Net cash provided by operating activities in 2023 was $2.2 billion, compared with net cash provided by operating activities of $668.5 million in 2022. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. Our positive cash flow from operations for 2023 was primarily due to our net income of $2.6 billion, which was partially offset by a $354.0 million net increase in inventories primarily attributable to investment in land inventory.
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Net cash provided by operating activities in 2022 was primarily due to our net income of $2.6 billion, which was partially offset by a $2.3 billion net increase in inventories primarily attributable to higher house inventory in production resulting from more unsold units and extended production cycle times combined with investment in land inventory. Cash flow from operations in 2022 was also favorably impacted by a $266.3 million decrease in residential mortgage loans available-for-sale.
Investing activities
Net cash used in investing activities totaled $129.1 million in 2023, compared with $171.7 million in 2022. The 2023 cash outflows primarily reflect $23.4 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of $92.2 million related to our ongoing investment in new communities, construction operations, and certain information technology applications.
Net cash used in investing activities in 2022 primarily reflected $64.7 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of $112.7 million related to our ongoing investment in new communities, construction operations, and certain information technology applications.
Financing activities
Net cash used in financing activities was $1.3 billion in 2023 compared with $1.2 billion during 2022. The net cash used in financing activities for 2023 resulted primarily from the repurchase of 13.8 million common shares for $1.0 billion under our repurchase authorization, cash dividends of $142.5 million, and repayments of debt of $123.3 million.
Net cash used in financing activities for 2022 resulted primarily from the repurchase of 24.2 million common shares for $1.1 billion under our repurchase authorization and cash dividends of $144.1 million.
Seasonality
Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we have historically experienced variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. 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, increase in mortgage interest rates, and other macroeconomic factors, our quarterly results in 2023 and 2022 are not necessarily indicative of results that may be achieved in the future.
Supplemental Guarantor Financial Information
As of December 31, 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 is also true at the time thereof:
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• 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 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 provide assurance, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
The following tables present summarized financial information for PulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among PulteGroup, Inc. and the Guarantor Subsidiaries, as well as their investment in and equity in earnings from the Non-Guarantor Subsidiaries ($000’s omitted):
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PulteGroup, Inc. and Guarantor Subsidiaries
Summarized Balance Sheet Data December 31,
ASSETS 2023 2022
Cash, cash equivalents, and restricted cash $ 1,471,293 $ 786,073
House and land inventory 11,474,861 10,925,830
Amount due from Non-Guarantor Subsidiaries 839,673 674,898
Total assets 14,451,614 13,074,398
LIABILITIES
Accounts payable, customer deposits,
accrued and other liabilities $ 2,810,832 $ 2,785,286
Notes payable 1,962,218 2,045,527
Total liabilities 5,078,696 5,049,079
Years Ended December 31,
Summarized Statement of Operations Data 2023 2022
Revenues $ 15,447,595 $ 15,416,191
Cost of revenues 10,895,197 10,764,667
Selling, general, and administrative expenses 1,312,645 1,330,994
Income before income taxes 3,334,858 3,245,925
Critical Accounting Estimates
The preparation of the Company's financial statements in conformity with U.S. generally accepted accounting principles and the discussion and analysis of its financial condition and operating results requires management to make estimates and assumptions, including estimates about the future resolution of existing uncertainties that affect the amounts reported. As a result, actual results could differ from these estimates. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. We believe the following critical accounting estimates reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For a discussion of all of our significant accounting policies, refer to Note 1 , "Summary of Significant Accounting Policies".
Inventory and cost of revenues
Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of 10 years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots.
We test inventory for impairment when events and circumstances indicate that the undiscounted cash flows estimated to be generated by the community may be less than its carrying amount. Such indicators include gross margins or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. Communities that demonstrate potential impairment indicators are tested for impairment by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the expected undiscounted cash
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flows, we determine the fair value of the community and impairment charges are recorded if the fair value of the community’s inventory is less than its carrying value.
We generally determine the fair value of each community using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.
Generally, a community must have projected gross margin percentages in the single digits or lower to potentially fail the undiscounted cash flow step and proceed to the fair value step. Our overall gross margin realized during 2023 and our average gross margin in backlog at December 31, 2023 both exceeded 28%, and we have only a small minority of communities with gross margins below 10%. However, in the event of an extended economic slowdown that leads to moderate or significant decreases in the price of new homes in certain geographic or buyer submarkets, we could have a larger number of communities that begin to approach these levels such that more detailed impairment analyses would be necessary, and the resulting impairments could be material. Additionally, we have $704.2 million of deposits and pre-acquisition costs at December 31, 2023 related to option agreements to acquire additional land. In the event of an extended economic slowdown, we could elect to cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.
Self-insured risks
At any point in time, we are managing numerous individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.
Our recorded reserves for all such claims totaled $563.1 million and $635.9 million at December 31, 2023 and 2022, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 77% and 74% of the total general liability reserves at December 31, 2023 and 2022, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs. Based on the actuarial analyses performed, we believe the range of reasonably possible losses related to these claims is $475 million to $650 million. While this range represents our best estimate of our ultimate liability related to these claims, due to a variety of factors, including those factors described above, there can be no assurance that the ultimate costs realized by us will fall within this range.
Volatility in both national and local housing market conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs.
Adjustments to reserves are recorded in the period in which the change in estimate occurs. During 2023 and 2022, we reduced general liability reserves by $130.8 million and $65.0 million, respectively, as a result of changes in estimates resulting from actual claim experience observed being less than anticipated in previous actuarial projections. The changes in actuarial estimates were driven by changes in actual claims experience that, in turn, impacted actuarial estimates for potential future
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claims. These changes in actuarial estimates did not involve any changes in actuarial methodology but did impact the development of estimates for future periods, which resulted in adjustments to the IBNR portion of our recorded liabilities. There were no material adjustments to individual claims. Rather, the adjustments reflect an overall lower level of losses related to construction defect claims in recent years as compared with our previous experience. We attribute this favorable experience to a variety of factors, including improved construction techniques, rising home values, and increased participation from our subcontractors in resolving claims.