PULTEGROUP INC/MI/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PULTEGROUP, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 and 2022 ($000’s omitted, except per share data) 2023 2022 ASSETS Cash and equivalents $ 1,806,583 $ 1,053,104 Restricted cash 42,594 41,449 Total cash, cash equivalents, and restricted cash 1,849,177 1,094,553 House and land inventory 11,795,370 11,326,017 Land held for sale 23,831 42,254 Residential mortgage loans available-for-sale 516,064 677,207 Investments in unconsolidated entities 166,913 146,759 Other assets 1,545,667 1,291,572 Goodwill 68,930 68,930 Intangible assets 56,338 66,875 Deferred tax assets 64,760 82,348 $ 16,087,050 $ 14,796,515 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Accounts payable, including book overdrafts of $ 117,212 and $ 87,578 at December 31, 2023 and 2022, respectively $ 619,012 $ 565,975 Customer deposits 675,091 783,556 Deferred tax liabilities 302,155 215,446 Accrued and other liabilities 1,645,690 1,685,202 Financial Services debt 499,627 586,711 Notes payable 1,962,218 2,045,527 Total liabilities 5,703,793 5,882,417 Shareholders’ equity: Preferred shares, $ 0.01 par value; 25,000,000 shares authorized, none issued $ — $ — Common shares, $ 0.01 par value; 500,000,000 shares authorized, 212,557,522 and 225,840,443 shares issued and outstanding at December 31, 2023 and 2022, respectively 2,126 2,258 Additional paid-in capital 3,368,407 3,330,138 Retained earnings 7,012,724 5,581,702 Total shareholders’ equity 10,383,257 8,914,098 $ 16,087,050 $ 14,796,515 See Notes to Consolidated Financial Statements. 40 PULTEGROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2023, 2022, and 2021 (000’s omitted, except per share data) 2023 2022 2021 Revenues: Homebuilding Home sale revenues $ 15,598,707 $ 15,548,119 $ 13,186,925 Land sale and other revenues 142,116 143,144 160,538 15,740,823 15,691,263 13,347,463 Financial Services 320,755 311,716 389,532 Total revenues 16,061,578 16,002,979 13,736,995 Homebuilding Cost of Revenues: Home sale cost of revenues ( 11,030,206 ) ( 10,867,879 ) ( 9,652,074 ) Land sale and other cost of revenues ( 124,607 ) ( 119,906 ) ( 134,013 ) ( 11,154,813 ) ( 10,987,785 ) ( 9,786,087 ) Financial Services expenses ( 187,280 ) ( 180,696 ) ( 168,486 ) Selling, general, and administrative expenses ( 1,312,642 ) ( 1,381,222 ) ( 1,208,698 ) Equity income from unconsolidated entities, net 4,561 50,680 17,200 Gain (loss) on debt retirement 663 — ( 61,469 ) Other income (expense), net 37,200 ( 64,398 ) ( 19,610 ) Income before income taxes 3,449,267 3,439,558 2,509,845 Income tax expense ( 846,895 ) ( 822,241 ) ( 563,525 ) Net income $ 2,602,372 $ 2,617,317 $ 1,946,320 Net income per share: Basic $ 11.79 $ 11.07 $ 7.44 Diluted $ 11.72 $ 11.01 $ 7.43 Cash dividends declared $ 0.68 $ 0.61 $ 0.57 Number of shares used in calculation: Basic 219,958 235,010 259,285 Effect of dilutive securities 1,205 1,156 643 Diluted 221,163 236,166 259,928 See Notes to Consolidated Financial Statements. 41 PULTEGROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2023, 2022, and 2021 ($000’s omitted) 2023 2022 2021 Net income $ 2,602,372 $ 2,617,317 $ 1,946,320 Other comprehensive income, net of tax: Change in value of derivatives — 45 100 Other comprehensive income — 45 100 Comprehensive income $ 2,602,372 $ 2,617,362 $ 1,946,420 See Notes to Consolidated Financial Statements. 42 PULTEGROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended December 31, 2023, 2022, and 2021 (000’s omitted) Common Shares Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shares $ Shareholders' equity, December 31, 2020 266,464 $ 2,665 $ 3,261,412 $ ( 145 ) $ 3,306,057 $ 6,569,989 Stock option exercises 1 — 11 — — 11 Share issuances 525 5 4,176 — — 4,181 Dividends declared — — — — ( 148,133 ) ( 148,133 ) Share repurchases ( 17,664 ) ( 177 ) — — ( 897,126 ) ( 897,303 ) Cash paid for shares withheld for taxes — — — — ( 10,842 ) ( 10,842 ) Share-based compensation — — 25,192 — — 25,192 Net income — — — — 1,946,320 1,946,320 Other comprehensive income — — — 100 — 100 Shareholders' equity, December 31, 2021 249,326 $ 2,493 $ 3,290,791 $ ( 45 ) $ 4,196,276 $ 7,489,515 Share issuances 676 7 6,024 — — 6,031 Dividends declared — — — — ( 143,134 ) ( 143,134 ) Share repurchases ( 24,162 ) ( 242 ) — — ( 1,074,431 ) ( 1,074,673 ) Cash paid for shares withheld for taxes — — — — ( 14,326 ) ( 14,326 ) Share-based compensation — — 33,323 — — 33,323 Net income — — — — 2,617,317 2,617,317 Other comprehensive income — — — 45 — 45 Shareholders' equity, December 31, 2022 225,840 $ 2,258 $ 3,330,138 $ — $ 5,581,702 $ 8,914,098 Share issuances 511 6 4,835 — — 4,841 Dividends declared — — — — ( 149,806 ) ( 149,806 ) Share repurchases ( 13,793 ) ( 138 ) — — ( 999,862 ) ( 1,000,000 ) Excise tax on share repurchases — — — — ( 9,691 ) ( 9,691 ) Cash paid for shares withheld for taxes — — — — ( 11,991 ) ( 11,991 ) Share-based compensation — — 33,434 — — 33,434 Net income — — — — 2,602,372 2,602,372 Shareholders' equity, December 31, 2023 212,558 $ 2,126 $ 3,368,407 $ — $ 7,012,724 $ 10,383,257 See Notes to Consolidated Financial Statements. 43 PULTEGROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2023, 2022, and 2021 ($000’s omitted) 2023 2022 2021 Cash flows from operating activities: Net income $ 2,602,372 $ 2,617,317 $ 1,946,320 Adjustments to reconcile net income to net cash from operating activities: Deferred income tax expense 104,266 106,584 59,168 Land-related charges 43,115 66,656 12,302 (Gain) loss on debt retirement ( 663 ) — 61,469 Depreciation and amortization 80,824 70,918 69,953 Equity income from unconsolidated entities ( 4,561 ) ( 50,680 ) ( 17,200 ) Distributions of earnings from unconsolidated entities 4,564 49,151 2,110 Share-based compensation expense 48,200 42,989 36,745 Other, net ( 758 ) 1,431 1,586 Increase (decrease) in cash due to: Inventories ( 354,016 ) ( 2,256,690 ) ( 1,266,398 ) Residential mortgage loans available-for-sale 160,934 266,310 ( 382,813 ) Other assets ( 290,631 ) ( 140,761 ) ( 159,906 ) Accounts payable, accrued and other liabilities ( 196,884 ) ( 104,759 ) 640,685 Net cash provided by operating activities 2,196,762 668,466 1,004,021 Cash flows from investing activities: Capital expenditures ( 92,201 ) ( 112,661 ) ( 72,781 ) Investments in unconsolidated entities ( 23,403 ) ( 64,701 ) ( 101,591 ) Distributions of capital from unconsolidated entities 3,265 21,704 53,927 Business acquisition — ( 10,400 ) ( 10,400 ) Other investing activities, net ( 16,756 ) ( 5,685 ) 6,713 Net cash used in investing activities ( 129,095 ) ( 171,743 ) ( 124,132 ) Cash flows from financing activities: Repayments of notes payable ( 123,290 ) ( 4,856 ) ( 836,893 ) Borrowings under revolving credit facility — 2,869,000 — Repayments under revolving credit facility — ( 2,869,000 ) — Financial Services borrowings (repayments), net ( 87,084 ) ( 39,412 ) 214,302 Debt issuance costs ( 1,572 ) ( 11,167 ) — Proceeds from liabilities related to consolidated inventory not owned 129,656 58,729 — Payments related to consolidated inventory not owned ( 76,303 ) ( 5,915 ) — Stock option exercises — — 11 Share repurchases ( 1,000,000 ) ( 1,074,673 ) ( 897,303 ) Cash paid for shares withheld for taxes ( 11,991 ) ( 14,326 ) ( 10,842 ) Dividends paid ( 142,459 ) ( 144,115 ) ( 147,834 ) Net cash used in financing activities ( 1,313,043 ) ( 1,235,735 ) ( 1,678,559 ) Net increase (decrease) 754,624 ( 739,012 ) ( 798,670 ) Cash, cash equivalents, and restricted cash at beginning of period 1,094,553 1,833,565 2,632,235 Cash, cash equivalents, and restricted cash at end of period $ 1,849,177 $ 1,094,553 $ 1,833,565 Supplemental Cash Flow Information: Interest paid (capitalized), net $ 10,786 $ 1,797 $ 10,856 Income taxes paid, net $ 784,453 $ 641,948 $ 457,406 See Notes to Consolidated Financial Statements. 44 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies Basis of presentation PulteGroup, Inc. is one of the largest homebuilders in the U.S., and our common shares trade on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title and insurance agency operations. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of PulteGroup, Inc. and all of its direct and indirect subsidiaries and variable interest entities in which PulteGroup, Inc. is deemed to be the primary beneficiary. All significant intercompany accounts, transactions, and balances have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Effective with our first quarter 2023 reporting, we reclassified our closing cost incentives provided to customers, including seller-paid financing costs, from home sale cost of revenues to home sale revenues. All prior period amounts have been reclassified to conform to the current presentation. As a result, all sales incentives provided to customers are classified as a reduction of home sale revenues. This reclassification had the effect of reducing both home sale revenues and home sale cost of revenues by the amount of such closing cost incentives, which totaled $ 226.0 million and $ 189.9 million for the years ended December 31, 2022 and 2021, respectively. Subsequent events We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission ("SEC"). Cash and equivalents Cash and equivalents include institutional money market investments and time deposits with an original maturity of three months or less. Cash and equivalents at December 31, 2023 and 2022 also included $ 43.2 million and $ 42.9 million, respectively, of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit. Restricted cash We maintain certain cash balances that are restricted as to their use, including customer deposits on home sales that are temporarily restricted by regulatory requirements in certain states until title transfers to the homebuyer. Investments in unconsolidated entities We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of these entities. Certain of these entities sell land to us. We defer the recognition of profits from such activities until the time we ultimately sell the related land. 45 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC 323, “Investments – Equity Method and Joint Ventures”. If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income (expense), net. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. See Note 4 . Intangible assets Goodwill, which represents the cost of acquired businesses in excess of the fair value of the net assets of such businesses at the acquisition date, totaled $ 68.9 million at both December 31, 2023 and 2022. We assess goodwill for impairment annually in the fourth quarter and if events or changes in circumstances indicate the carrying amount may not be recoverable. Intangible assets consist of primarily of tradenames acquired in connection with acquisitions and totaled $ 56.3 million, net of accumulated amortization of $ 98.2 million, at December 31, 2023, and $ 66.9 million, net of accumulated amortization of $ 87.7 million, at December 31, 2022. Such tradenames are generally being amortized over 20-year lives. Amortization expense totaled $ 10.5 million, $ 11.1 million, and $ 16.5 million in 2023, 2022 and 2021, respectively, and is expected to be $ 10.0 million in 2024, $ 9.3 million in 2025, $ 8.9 million in 2026, $ 6.5 million in 2027, and $ 6.3 million in 2028. The ultimate realization of these assets is dependent upon the future cash flows and benefits that we expect to generate from their use. We assess intangibles for impairment if events or changes in circumstances indicate the carrying amount may not be recoverable. Property and equipment Property and equipment are recorded at cost. Maintenance and repair costs are expensed as incurred. Depreciation is computed by the straight-line method based upon estimated useful lives as follows: office furniture and equipment - 3 to 10 years; leasehold improvements - life of the lease; software and hardware - 3 to 5 years; model park improvements and furnishings - 1 to 5 years. Property and equipment are included in other assets and totaled $ 221.5 million net of accumulated depreciation of $ 264.4 million at December 31, 2023 and $ 200.3 million net of accumulated depreciation of $ 242.3 million at December 31, 2022. Depreciation expense totaled $ 70.3 million, $ 59.8 million, and $ 53.5 million in 2023, 2022, and 2021, respectively. Advertising costs Advertising costs are expensed to selling, general, and administrative expense as incurred and totaled $ 57.5 million, $ 61.6 million, and $ 47.2 million, in 2023, 2022, and 2021, respectively. 46 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Employee benefits We maintain a defined contribution retirement plan that covers substantially all of our employees. Company contributions to the plan totaled $ 27.8 million, $ 27.6 million, and $ 23.4 million in 2023, 2022, and 2021, respectively. Other income (expense), net Other income (expense), net consists of the following ($000’s omitted): 2023 2022 2021 Write-offs of deposits and pre-acquisition costs (Note 2) $ ( 23,512 ) $ ( 63,559 ) $ ( 12,283 ) Amortization of intangible assets (Note 1) ( 10,538 ) ( 11,118 ) ( 16,502 ) Interest income 61,533 1,971 1,953 Interest expense ( 469 ) ( 284 ) ( 502 ) Miscellaneous, net 10,186 8,592 7,724 Total other income (expense), net $ 37,200 $ ( 64,398 ) $ ( 19,610 ) Earnings per share Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares, adjusted for unvested shares, (the “Denominator”), for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of unvested restricted share units and other potentially dilutive instruments. Anti-dilutive shares were immaterial in 2023, 2022, and 2021. In accordance with ASC 260 "Earnings Per Share", the two-class method determines earnings per share for each class of common share and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. Our outstanding restricted share units and deferred shares are considered participating securities . The following table presents a reconciliation of the Numerator used in our earnings per common share calculation ($000's omitted): December 31, 2023 December 31, 2022 December 31, 2021 Numerator: Net income $ 2,602,372 $ 2,617,317 $ 1,946,320 Less: earnings distributed to participating securities ( 511 ) ( 846 ) ( 1,218 ) Less: undistributed earnings allocated to participating securities ( 8,990 ) ( 15,330 ) ( 15,117 ) Numerator for basic earnings per share $ 2,592,871 $ 2,601,141 $ 1,929,985 Add: undistributed earnings allocated to participating securities 8,990 15,330 15,117 Less: undistributed earnings reallocated to participating securities ( 8,923 ) ( 15,229 ) ( 15,080 ) Numerator for diluted earnings per share $ 2,592,938 $ 2,601,242 $ 1,930,022 47 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Share-based compensation We measure compensation cost for share-based compensation on the grant date. Fair value for restricted share units is determined based on the quoted price of our common shares on the grant date. We recognize compensation expense for restricted share units, the majority of which cliff vest at the end of three years , ratably over the vesting period. For share-based awards containing performance conditions, we recognize compensation expense ratably over the vesting period when it is probable that the stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change. Compensation expense related to our share-based awards is included in selling, general, and administrative expense, except for a small portion recognized in Financial Services expenses. Forfeitures of share-based awards are recognized as a reduction of expense as incurred. See Note 7 . Income taxes The provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment is required. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results including the valuation and realization of deferred tax assets and liabilities over time. Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We follow the provisions of ASC 740, "Income Taxes", which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including relevant facts and circumstances, applicable tax law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made. Interest and penalties related to income taxes and unrecognized tax benefits are recognized as a component of income tax expense (benefit). See Note 8 . Revenue recognition Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied at the home closing date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit and classified as cash. Contract liabilities include customer deposit liabilities related to sold but undelivered homes, which totaled $ 675.1 million and $ 783.6 million at December 31, 2023 and 2022, respectively. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. See Note 11 for information on warranties and related obligations. 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 sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied. Other revenues related to our construction services operations are generally recognized as materials are delivered and installation services are provided. Financial services revenues - Loan origination fees, commitment fees, and discount points are recognized upon loan origination. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of interest rate lock commitments ("IRLCs") that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of IRLCs and residential mortgage available for sale are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans until the loans are sold. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received. 48 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance agency commissions relate to commissions on home and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy. The related contract assets for estimated future renewal commissions are included in other assets and totaled $ 74.0 million and $ 57.3 million at December 31, 2023 and 2022, respectively. Sales incentives Sales incentives primarily relate to discounts on the selling price of the home, payment of closing costs, or free products or services offered to the customer. Sales incentives are recorded as a reduction of home sale revenues. Inventory and cost of revenues Inventory is stated at cost unless the carrying value is determined to not be recoverable, in which case the affected inventory is written down to fair value. Cost includes land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. 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. The specific identification method is used to accumulate home construction costs. We capitalize interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the timing of home closings. Cost of revenues includes the construction cost, average lot cost, and estimated warranty costs applicable to the home. Sales commissions are classified within selling, general, and administrative expenses. 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. 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 ten 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 or strategy 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 flows, we estimate 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. See Note 2 . Land held for sale 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 held for sale is recorded at the lower of cost or fair value less costs to sell. In determining the fair value of land held for sale, we consider recent offers received, prices for land in recent comparable sales transactions, and other factors. We record net realizable value adjustments for land held for sale within Homebuilding land sale cost of revenues. See Note 2 . Warranty liabilities Home buyers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home's construction and operating systems for periods of up to (and in 49 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) limited instances exceeding) 10 years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time revenue is recognized (see Note 11 ). Self-insured risks We maintain, and require the majority of our subcontractors to maintain, general liability insurance coverage, including coverage for certain construction defects. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. However, we retain a significant portion of the overall risk for such claims. We reserve for these costs on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims, which include estimates of claims incurred but not yet reported. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from our subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. See Note 11 . Residential mortgage loans available-for-sale Substantially all of the loans originated by us and their related servicing rights are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. In accordance with ASC 825, “Financial Instruments”, we use the fair value option to record residential mortgage loans available-for-sale. Election of the fair value option for these loans allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging". See Note 11 for discussion of the risks retained related to mortgage loan originations. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of IRLCs that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. At December 31, 2023 and 2022, residential mortgage loans available-for-sale had an aggregate fair value of $ 516.1 million and $ 677.2 million, respectively, and an aggregate outstanding principal balance of $ 508.5 million and $ 680.5 million, respectively. These changes in fair value were substantially offset by changes in fair value of the corresponding derivative instruments. Net gains from the sale of mortgages during 2023, 2022, and 2021 were $ 149.8 million, $ 157.3 million, and $ 251.3 million, respectively, and have been included in Financial Services revenues . Mortgage servicing rights We 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 servicing rights for only a short period of time. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, generally within 90 to 120 days after sale. We establish reserves for this exposure at the time the sale is recorded. Such reserves were immaterial at December 31, 2023 and 2022. Interest income on mortgage loans Interest income on mortgage loans is recorded in Financial Services revenues, accrued from the date a mortgage loan is originated until the loan is sold, and totaled $ 20.4 million, $ 14.2 million, and $ 10.0 million in 2023, 2022, and 2021, respectively. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan. Mortgage discounts are not amortized as interest income due to the short period the loans are held until sale to third party investors . Derivative instruments and hedging activities We are party to IRLCs with customers resulting from our mortgage origination operations. At December 31, 2023 and 2022, we had aggregate IRLCs of $ 404.7 million and $ 653.2 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the 50 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies. We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan investor commitments, which are obligations of an investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. At December 31, 2023 and 2022, we had unexpired forward contracts of $ 745.0 million and $ 1.0 billion, respectively, and whole loan investor commitments of $ 207.9 million and $ 285.9 million, respectively. Changes in the fair value of IRLCs and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable. There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 90 days. The fair values of derivative instruments and their location in the Consolidated Balance Sheets are summarized below ($000’s omitted): December 31, 2023 December 31, 2022 Other Assets Other Liabilities Other Assets Other Liabilities IRLCs $ 3,926 $ 1,506 $ 10,830 $ 1,572 Forward contracts 110 26,104 4,144 20,853 Whole loan commitments 24 47 806 165 $ 4,060 $ 27,657 $ 15,780 $ 22,590 Credit losses We are exposed to credit losses primarily through our vendors and insurance carriers. We assess and monitor each counterparty’s ability to pay amounts owed by considering contractual terms and conditions, the counterparty’s financial condition, macroeconomic factors, and business strategy. Our assets exposed to credit losses consist primarily of insurance receivables, contract assets related to insurance agency commissions, accounts receivable, and vendor rebate receivables. Counterparties associated with these assets are generally highly rated. Allowances on the aforementioned assets were not material as of December 31, 2023. New accounting pronouncements In 2023, we adopted ASU 2020-04, "Reference Rate Reform (Topic 848)", as amended by ASU 2021-01 in January 2021, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the cessation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. Our adoption of ASU 2020-04 did not have a material impact on the Company's condensed consolidated financial statements. In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which requires expanded disclosure of significant segment expenses and other segment items on an annual and interim basis. ASU 2023-07 is effective for us for annual periods beginning after January 1, 2024 and interim periods beginning after January 1, 2025. We are currently evaluating the impact ASU 2023-07 will have on our financial statement disclosures. In December 2023, FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires expanded disclosure of our income rate reconciliation and income taxes paid. ASU 2023-09 is effective for us for annual periods beginning after January 1, 2025. We are currently evaluating the impact ASU 2023-09 will have on our financial statement disclosures. 51 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Inventory and land held for sale Major components of inventory at December 31, 2023 and 2022 were ($000’s omitted): 2023 2022 Homes under construction $ 5,262,850 $ 5,440,186 Land under development 5,805,993 5,134,432 Raw land 606,005 679,341 Consolidated inventory not owned (a) 120,522 72,058 $ 11,795,370 $ 11,326,017 (a) Consolidated inventory not owned includes land sold to third parties for which the Company retains a repurchase option. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels . Activity related to interest capitalized into inventory is as follows ($000’s omitted): Years Ended December 31, 2023 2022 2021 Interest in inventory, beginning of period $ 137,262 $ 160,756 $ 193,409 Interest capitalized 126,040 130,051 129,380 Interest expensed ( 124,224 ) ( 153,545 ) ( 162,033 ) Interest in inventory, end of period $ 139,078 $ 137,262 $ 160,756 Land option agreements We enter into land option agreements in order to procure land for the construction of homes in the future. 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. 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 may serve to reduce our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other income (expense), net. See Note 1 . If an entity holding the land under option is a variable interest entity (“VIE”), our deposit represents a variable interest in that entity. No VIEs required consolidation at either December 31, 2023 or 2022 because we determined that we were not the primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. The following provides a summary of our interests in land option agreements ($000’s omitted): 52 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 53 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 2023 December 31, 2022 Deposits and Pre-acquisition Costs Remaining Purchase Price Deposits and Pre-acquisition Costs Remaining Purchase Price Land options with VIEs $ 238,070 $ 1,916,558 $ 213,895 $ 2,130,398 Other land options 466,139 4,531,566 264,860 3,269,843 $ 704,209 $ 6,448,124 $ 478,755 $ 5,400,241 Land-related charges We recorded the following land-related charges ($000's omitted): Statement of Operations Classification 2023 2022 2021 Net realizable value adjustments ("NRV") - land held for sale Land sale and other cost of revenues $ — $ 107 $ 19 Land impairments Home sale cost of revenues 19,603 2,990 — Write-offs of deposits and pre-acquisition costs Other income (expense), net 23,512 63,559 12,283 Total land-related charges $ 43,115 $ 66,656 $ 12,302 Our evaluations for land-related charges are based on our best estimates of the future cash flows for our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of certain of our communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates. 3. Segment information Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. Home sale revenues for detached and attached homes were $ 13.1 billion and $ 2.5 billion in 2023, $ 13.2 billion and $ 2.3 billion in 2022, and $ 11.1 billion and $ 2.1 billion in 2021, respectively. 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. Evaluation of segment performance is generally based on income before income taxes. Each reportable segment generally follows the same accounting policies described in Note 1 . 54 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Operating Data by Segment ($000’s omitted) Years Ended December 31, 2023 2022 2021 Revenues (a) : Northeast $ 969,628 $ 1,063,568 $ 1,112,778 Southeast 2,675,213 2,764,945 2,208,345 Florida 4,740,387 3,930,828 3,108,017 Midwest 2,089,257 2,292,871 1,959,752 Texas 2,069,467 2,193,295 1,768,895 West 3,196,871 3,445,756 3,189,676 15,740,823 15,691,263 13,347,463 Financial Services 320,755 311,716 389,532 Consolidated revenues $ 16,061,578 $ 16,002,979 $ 13,736,995 Income before income taxes (a)(b) : Northeast $ 218,159 $ 244,233 $ 215,193 Southeast 620,969 692,279 417,880 Florida 1,212,675 939,034 585,680 Midwest 368,321 363,028 287,956 Texas 389,085 465,461 322,979 West (c) 419,635 687,403 592,845 Other homebuilding (d) 87,231 ( 84,110 ) ( 134,405 ) 3,316,075 3,307,328 2,288,128 Financial Services 133,192 132,230 221,717 Consolidated income before income taxes $ 3,449,267 $ 3,439,558 $ 2,509,845 (a) All periods reflect the reclassification of closing cost incentives to home sale revenues from home sale cost of revenues ( Note 1 ). (b) Includes certain land-related charges (see the following table and Note 2 ). (c) West includes a gain of $ 49.1 million related to a property sale in an unconsolidated entity in 2022. (d) Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Also included are insurance reserve reversals of $ 130.8 million, $ 65.0 million, and $ 81.1 million in 2023, 2022 and 2021, respectively, partially offset by a loss on debt retirement of $ 61.5 million in 2021 ( Note 5 ). 55 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Operating Data by Segment ($000's omitted) Years Ended December 31, 2023 2022 2021 Land-related charges*: Northeast $ 497 $ 4,597 $ 1,433 Southeast 7,853 18,381 5,365 Florida 2,683 13,515 1,088 Midwest 7,786 6,517 2,150 Texas 3,661 6,745 1,357 West 19,343 16,406 909 Other homebuilding 1,292 495 — $ 43,115 $ 66,656 $ 12,302 * Land-related charges include land impairments, NRV adjustments for land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. See Note 2 for additional discussion of these charges. Operating Data by Segment ($000's omitted) Years Ended December 31, 2023 2022 2021 Depreciation and amortization: Northeast $ 3,365 $ 2,956 $ 2,631 Southeast 6,056 5,151 4,765 Florida 13,471 11,720 8,823 Midwest 8,207 7,035 6,332 Texas 6,214 5,591 4,989 West 12,438 11,840 11,898 Other homebuilding 22,992 19,929 24,811 72,743 64,222 64,249 Financial Services 8,081 6,696 5,704 $ 80,824 $ 70,918 $ 69,953 56 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Operating Data by Segment ($000's omitted) December 31, 2023 Homes Under Construction Land Under Development Raw Land Consolidated Inventory Not Owned Total Inventory Total Assets Northeast $ 312,903 $ 337,130 $ 4,091 $ — $ 654,124 $ 775,316 Southeast 786,698 826,240 80,451 27,963 1,721,352 1,994,492 Florida (a) 1,405,934 1,211,087 205,843 48,139 2,871,003 3,420,924 Midwest 621,144 685,139 14,265 3,472 1,324,020 1,476,166 Texas 634,574 721,032 101,394 40,948 1,497,948 1,686,609 West 1,473,617 1,688,498 190,082 — 3,352,197 3,752,089 Other homebuilding (b) 27,980 336,867 9,879 — 374,726 2,140,954 5,262,850 5,805,993 606,005 120,522 11,795,370 15,246,550 Financial Services — — — — — 840,500 $ 5,262,850 $ 5,805,993 $ 606,005 $ 120,522 $ 11,795,370 $ 16,087,050 December 31, 2022 Homes Under Construction Land Under Development Raw Land Consolidated Inventory Not Owned Total Inventory Total Assets Northeast $ 321,687 $ 241,897 $ 45,455 $ — $ 609,039 $ 700,413 Southeast 793,539 544,867 102,336 20,169 1,460,911 1,668,053 Florida (a) 1,417,657 1,081,836 125,253 51,889 2,676,635 3,195,091 Midwest 523,194 689,541 22,467 — 1,235,202 1,382,227 Texas 690,622 726,342 133,300 — 1,550,264 1,735,683 West 1,662,251 1,528,863 238,758 — 3,429,872 3,771,808 Other homebuilding (b) 31,236 321,086 11,772 — 364,094 1,470,919 5,440,186 5,134,432 679,341 72,058 11,326,017 13,924,194 Financial Services — — — — — 872,321 $ 5,440,186 $ 5,134,432 $ 679,341 $ 72,058 $ 11,326,017 $ 14,796,515 (a) Florida includes goodwill of $ 28.6 million, net of cumulative impairment charges of $ 20.2 million. (b) Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments. Other homebuilding also includes goodwill of $ 40.4 million. 4. Investments in unconsolidated entities We participate in a number of joint ventures and other investments with independent third parties. These entities generally purchase, develop, and sell land, including selling land to us for use in our homebuilding operations. Our investments in such entities totaled $ 166.9 million and $ 146.8 million at December 31, 2023 and 2022, respectively. In 2023, 2022, and 2021, we recognized earnings from unconsolidated joint ventures of $ 4.6 million , $ 50.7 million , and $ 17.2 million, respectively. We received distributions of capital from our unconsolidated joint ventures of $ 3.3 million, $ 21.7 million, and $ 53.9 million in 2023, 2022, and 2021, respectively. We made capital contributions to our unconsolidated joint ventures of $ 23.4 million, $ 64.7 million, and $ 101.6 million in 2023, 2022, and 2021, respectively. 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 57 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding. The timing of cash flows related to a joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved by the joint venture, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals. 5. Debt Our notes payable are summarized as follows ($000’s omitted): December 31, 2023 2022 5.500 % unsecured senior notes due March 2026 (a) $ 455,424 $ 500,000 5.000 % unsecured senior notes due January 2027 (a) 443,875 500,000 7.875 % unsecured senior notes due June 2032 (a) 300,000 300,000 6.375 % unsecured senior notes due May 2033 (a) 400,000 400,000 6.000 % unsecured senior notes due February 2035 (a) 300,000 300,000 Net premiums, discounts, and issuance costs (b) ( 8,047 ) ( 9,701 ) Total senior notes $ 1,891,252 $ 1,990,299 Other notes payable 70,966 55,228 Notes payable $ 1,962,218 $ 2,045,527 Estimated fair value $ 2,080,187 $ 2,079,218 (a) Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries. (b) The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes . The indentures governing the senior notes impose certain restrictions on the incurrence of additional debt along with other limitations. At December 31, 2023, we were in compliance with all of the covenants and requirements under the senior notes. We retired outstanding debt totaling $ 123.3 million, $ 4.9 million, and $ 836.9 million during 2023, 2022, and 2021, respectively. The retirements in 2023 included open market repurchases of $ 44.6 million and $ 56.1 million of our unsecured senior notes scheduled to mature in 2026 and 2027, respectively. The retirements in 2021 included a tender offer to retire $ 200.0 million and $ 100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively. The retirement in 2021 resulted in a loss of $ 61.5 million that included the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees related to the repurchased debt and which is reflected in other income (expense), net. Other notes payable Other notes payable include non-recourse and limited recourse collateralized notes with third parties that totaled $ 71.0 million and $ 55.2 million at December 31, 2023 and 2022, respectively. 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 any other assets. The stated interest rates on these notes range up to 6 %. We recorded inventory through seller financing of $ 46.7 million, $ 39.1 million, and $ 50.9 million in 2023, 2022, and 2021, respectively. 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 58 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 In August 2023, Pulte Mortgage entered into a master repurchase agreement (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, 2024. At all other times, 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 its covenants and requirements as of such dates. 6. Shareholders’ equity We declared quarterly cash dividends totaling $ 149.8 million, $ 143.1 million, and $ 148.1 million in 2023, 2022, and 2021, respectively. Under a share repurchase program authorized by our Board of Directors, we repurchased 13.8 million, 24.2 million, and 17.7 million shares in 2023, 2022, and 2021, respectively, for a total of $ 1.0 billion, $ 1.1 billion, and $ 897.3 million in 2023, 2022, and 2021, 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 share repurchase authorization by $ 1.5 billion. Under our stock compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of restricted shares and share units, generally related to the payment of tax obligations. During 2023, 2022, and 2021, employees surrendered shares valued at $ 12.0 million, $ 14.3 million, and $ 10.8 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization. 7. Stock compensation plans We maintain a stock award plan for both employees and non-employee directors. The plan provides for the grant of a variety of equity awards, including time-based and performance-based restricted share units ("RSUs") to key employees for periods not to exceed ten years . Non-employee directors are awarded an annual distribution of common shares. RSUs represent the right to receive an equal number of common shares and are converted into common shares upon distribution. Time-based RSUs generally cliff vest after three years , and RSU holders earn cash or accrued dividends during the vesting period. Performance-based RSUs vest upon attainment of the stated performance targets and minimum service requirements and are converted into common shares upon distribution. As of December 31, 2023, there were 10.6 million shares that remained available for grant under the plan. Our stock compensation expense is presented below ($000's omitted): 2023 2022 2021 RSUs $ 28,112 $ 33,323 $ 25,192 Other long-term incentive plans 20,088 9,666 11,553 $ 48,200 $ 42,989 $ 36,745 59 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) RSUs A summary of RSUs is presented below (000’s omitted, except per share data): 2023 2022 2021 Shares Weighted- Average Per Share Grant Date Fair Value Shares Weighted- Average Per Share Grant Date Fair Value Shares Weighted- Average Per Share Grant Date Fair Value Outstanding, beginning of year 1,628 $ 48 1,995 $ 39 2,001 $ 33 Granted 714 59 550 54 720 47 Distributed ( 550 ) 44 ( 813 ) 28 ( 642 ) 30 Forfeited ( 133 ) 52 ( 104 ) 48 ( 84 ) 38 Outstanding, end of year 1,659 $ 54 1,628 $ 48 1,995 $ 39 During 2023, 2022, and 2021, the total fair value of shares vested during the year was $ 33.8 million, $ 40.5 million, and $ 30.5 million, respectively. Unamortized compensation cost related to share awards was $ 29.5 million at December 31, 2023. These costs will be expensed over a weighted-average period of approximately two years . Additionally, there were 0.2 million deferred shares at December 31, 2023, that had vested but had not yet been paid out because the payout date had been deferred by the holders. Other long-term incentive plans We maintain long-term incentive plans for senior management and other employees that provide awards based on the achievement of stated performance targets over three-year periods. Awards are denominated in either restricted stock units or dollars that are settled in common shares based on the stock price at the end of the performance period. We recognize the expense associated with the awards based on the probability of achieving the stated performance targets at each reporting period. 8. Income taxes Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted): 2023 2022 2021 Current expense Federal $ 622,205 $ 615,434 $ 430,686 State and other 120,424 100,223 73,671 $ 742,629 $ 715,657 $ 504,357 Deferred expense Federal $ 72,854 $ 55,653 $ 57,743 State and other 31,412 50,931 1,425 $ 104,266 $ 106,584 $ 59,168 Income tax expense $ 846,895 $ 822,241 $ 563,525 60 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table reconciles the statutory federal income tax rate to the effective income tax rate: 2023 2022 2021 Income taxes at federal statutory rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax 3.5 3.4 3.3 Federal tax credits ( 0.2 ) ( 0.9 ) ( 1.2 ) Deferred tax asset valuation allowance — 0.4 ( 0.8 ) Other 0.3 — 0.2 Effective rate 24.6 % 23.9 % 22.5 % The effective tax rates differ from the federal statutory rate primarily due to state income tax expense, benefits associated with federal energy efficient home credits, and changes in valuation allowances relating to projected utilization of certain state net operating loss ("NOL") carryforwards. Deferred tax assets and liabilities reflect temporary differences arising from the different treatment of items for tax and accounting purposes. Components of our net deferred tax liability are as follows ($000’s omitted): At December 31, 2023 2022 Deferred tax assets: Accrued insurance $ 140,126 $ 138,289 Inventory valuation reserves 58,819 58,339 Capitalized inventory expenses 39,037 32,620 State NOL carryforwards 83,601 105,609 Other 65,432 66,500 387,015 401,357 Deferred tax liabilities: Deferred income ( 537,855 ) ( 439,863 ) Fixed assets and intangibles ( 27,890 ) ( 31,921 ) Other ( 33,909 ) ( 31,802 ) ( 599,654 ) ( 503,586 ) Valuation allowance ( 24,756 ) ( 30,869 ) Net deferred tax liability $ ( 237,395 ) $ ( 133,098 ) We have state NOLs in various jurisdictions that may generally be carried forward up to 20 years, depending on the jurisdiction. Our state NOL carryforward deferred tax assets will expire if unused at various dates as follows: $ 10.7 million from 2024 to 2028 and $ 72.9 million from 2029 and thereafter. We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence, including, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We had $ 58.2 million and $ 23.6 million of gross unrecognized tax benefits at December 31, 2023 and 2022, respectively. If recognized, $ 46.0 million and $ 18.7 million, respectively, of these 61 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) amounts would impact our effective tax rate. Additionally, we had accrued interest and penalties of $ 6.3 million and $ 4.1 million at December 31, 2023 and 2022, respectively. We do not expect the total amount of gross unrecognized tax benefits to increase or decrease by a material amount within the next twelve months. A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted): 2023 2022 2021 Unrecognized tax benefits, beginning of period $ 23,612 $ 22,536 $ 30,855 Increases related to positions taken during a prior period 34,687 — 1,428 Decreases related to positions taken during a prior period — ( 303 ) ( 8,896 ) Increases related to positions taken during the current period — 1,450 267 Decreases related to lapse of the applicable statute of limitations ( 71 ) ( 71 ) ( 1,118 ) Unrecognized tax benefits, end of period $ 58,228 $ 23,612 $ 22,536 We continue to participate in the Compliance Assurance Process (“CAP”) with the IRS as an alternative to the traditional IRS examination process. Through the CAP program, we work with the IRS to achieve tax compliance by resolving issues prior to filing the tax return. We are also currently under examination by state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The outcome of these examinations is not yet determinable, and we are not aware of unrecorded liabilities. The statute of limitations for our major tax jurisdictions generally remains open for examination for tax years 2019 to 2023. 9. Fair value disclosures ASC 820, "Fair Value Measurements and Disclosures," provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows: Level 1 Fair value determined based on quoted prices in active markets for identical assets or liabilities. Level 2 Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active. Level 3 Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques 62 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted): Financial Instrument Fair Value Hierarchy Fair Value December 31, 2023 December 31, 2022 Measured at fair value on a recurring basis: Residential mortgage loans available-for-sale Level 2 $ 516,064 $ 677,207 IRLCs Level 2 2,420 9,258 Forward contracts Level 2 ( 25,994 ) ( 16,709 ) Whole loan commitments Level 2 ( 23 ) 641 Measured at fair value on a non-recurring basis: House and land inventory Level 3 $ 12,906 $ 10,873 Disclosed at fair value: Cash and equivalents (including restricted cash) Level 1 $ 1,849,177 $ 1,094,553 Financial Services debt Level 2 499,627 586,711 Senior notes payable Level 2 2,009,221 2,023,990 Other notes payable Level 2 70,966 55,228 Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investor. Fair values for IRLCs, including the value of servicing rights, and forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. See Note 1 for a more detailed discussion of these derivative instruments. Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value during the quarterly period ended as of the respective balance sheet dates. See Note 1 for a more detailed discussion of the valuation methods used for inventory. The carrying amounts of cash and equivalents, Financial Services debt, Other notes payable and the Revolving Credit Facility approximate their fair values due to their short-term nature and floating interest rate terms. The fair values of the Senior notes payable are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues . The carrying value of the senior notes payable was $ 1.9 billion at December 31, 2023 and $ 2.0 billion at December 31, 2022. 63 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Other assets and accrued and other liabilities Other assets are presented below ($000’s omitted): December 31, 2023 2022 Accounts and notes receivable: Insurance receivables (Note 11) $ 26,928 $ 43,746 Other receivables 179,249 193,047 206,177 236,793 Deposits and pre-acquisition costs (Note 1) 704,209 478,755 Prepaid expenses 245,035 223,524 Property and equipment, net (Note 1) 221,488 200,262 Right-of-use assets ( Note 11 ) 77,400 73,485 Income taxes receivable 29,950 24,281 Other 61,408 54,472 $ 1,545,667 $ 1,291,572 We record receivables from various parties in the normal course of business, including amounts due from insurance companies ( Note 11 ) and municipalities. In certain instances, we may accept consideration for land sales or other transactions in the form of a note receivable . Accrued and other liabilities are presented below ($000’s omitted): December 31, 2023 2022 Self-insurance liabilities (Note 11) $ 563,103 $ 635,857 Compensation-related liabilities 250,372 239,459 Land development and construction liabilities 144,121 156,318 Liabilities related to consolidated inventory not owned ( Note 2 ) 120,522 72,058 Warranty liabilities (Note 11) 120,393 108,348 Lease liabilities ( Note 11 ) 91,554 90,083 Income tax liabilities 62,400 98,709 Dividends payable ( Note 6 ) 43,916 36,696 Accrued interest 36,433 41,135 Loan origination liabilities (Note 11) 10,493 12,378 Other (a) 202,383 194,161 $ 1,645,690 $ 1,685,202 (a) Other liabilities primarily include liabilities associated with property taxes, forward contracts on mortgage-backed securities, and other miscellaneous liabilities. 11. Commitments and contingencies Loan origination liabilities Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If a loan is determined to be faulty, we either indemnify the investor for 64 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) potential future losses, repurchase the loan from the investor, or reimburse the investor's actual losses. Reserves provided are reflected in Financial Services expenses, and liabilities related to these exposures totaled $ 10.5 million and $ 12.4 million at December 31, 2023 and 2022, respectively. Given the unsettled claims, changes in values of underlying collateral over time, and other uncertainties regarding the ultimate resolution of known and potential claims, actual costs could differ from our current estimates. Letters of credit and surety bonds In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $ 312.7 million and $ 2.4 billion, respectively, at December 31, 2023, and $ 303.4 million and $ 2.2 billion, respectively, at December 31, 2022. In the event any such letter of credit or surety bonds is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn. Our surety bonds generally do not have stated expiration dates; rather, we are released from the surety bonds as the underlying contractual performance is completed. 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. Litigation and regulatory matters We are involved in litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations. We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant. Warranty liabilities Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the projected cost of claims. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes in warranty liabilities were as follows ($000’s omitted): 2023 2022 2021 Warranty liabilities, beginning of period $ 108,348 $ 107,117 $ 82,744 Reserves provided 107,522 85,011 93,919 Payments ( 99,613 ) ( 90,508 ) ( 73,760 ) Other adjustments 4,136 6,728 4,214 Warranty liabilities, end of period $ 120,393 $ 108,348 $ 107,117 65 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Self-insured risks We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through our own self-insured per occurrence and aggregate retentions, deductibles, policies issued by our captive insurance subsidiaries, and any potential claims in excess of available insurance policy limits. Our general liability insurance includes coverage for certain construction defects. While construction defect claims may relate to a variety of issues, the majority of our claims relate to alleged problems with siding, windows, roofing, and foundations. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to retain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase general liability insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program. Policies issued by our captive insurance subsidiaries represent self-insurance of these risks by us. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage requires a per occurrence retention up to an overall aggregate amount. Amounts paid to resolve insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to the purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated carriers for whom we believe counterparty default risk is not significant. 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 these claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net 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. Volatility in both national and local housing market conditions may 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 time 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. 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, 2022, and 2021, we reduced reserves, primarily general liability reserves, by $ 130.8 million, $ 65.0 million, and $ 81.1 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 claims. These changes in actuarial estimates did not involve any significant 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 the favorable experience in more recent years to a variety of factors, including improved construction techniques, rising home values, and increased participation from our subcontractors in resolving claims. Costs associated with 66 PULTEGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted): 2023 2022 2021 Balance, beginning of period $ 635,857 $ 627,067 $ 641,779 Reserves provided 92,399 111,067 90,863 Adjustments to previously recorded reserves ( 130,841 ) ( 64,965 ) ( 81,131 ) Payments, net (a) ( 34,312 ) ( 37,312 ) ( 24,444 ) Balance, end of period $ 563,103 $ 635,857 $ 627,067 (a) Includes net changes in amounts expected to be recovered from our insurance carriers, which are recorded in other assets (see below). Estimates of anticipated recoveries of our costs under various insurance policies or from subcontractors or other third parties are recorded when recovery is considered probable. Such receivables are recorded in other assets and totaled $ 26.9 million and $ 43.7 million at December 31, 2023 and 2022, respectively. The insurance receivables relate to costs incurred or to be incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of both known and anticipated future construction defect claims that we believe to be insured related to previously closed homes. Given the complexity inherent with resolving construction defect claims in the homebuilding industry, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers or third parties. Leases We lease certain office space and equipment for use in our operations. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Right-of-use ("ROU") assets and lease liabilities are recorded on the balance sheet for all leases with an expected term of at least one year. Some leases include one or more options to renew. The exercise of lease renewal options is generally at our discretion. The depreciable lives of ROU assets and leasehold improvements are limited to the expected lease term. Certain of our lease agreements include rental payments based on a pro-rata share of the lessor’s operating costs, which are variable in nature. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. ROU assets are classified within other assets on the balance sheet, while lease liabilities are classified within accrued and other liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet. ROU assets and lease liabilities were $ 77.4 million and $ 91.6 million, respectively, at December 31, 2023, and $ 73.5 million and $ 90.1 million, respectively, at December 31, 2022. We recorded an additional $ 20.6 million and $ 14.5 million of lease liabilities under operating leases during 2023 and 2022, respectively. Payments on lease liabilities during 2023, 2022, and 2021 totaled $ 23.4 million, $ 21.9 million, and $ 20.8 million respectively. Lease expense includes costs for leases with terms in excess of one year as well as short-term leases with terms of less than one year. Our total lease expense was $ 56.4 million, $ 54.8 million, and $ 43.3 million during 2023, 2022, and 2021, respectively. Our total lease expense in 2023, 2022, and 2021 is inclusive of variable lease costs of $ 11.8 million, $ 9.9 million, and $ 7.7 million respectively, and short-term lease costs of $ 17.3 million, $ 21.2 million, and $ 14.2 million, respectively. Sublease income was de minimis. The future minimum lease payments required under our leases as of December 31, 2023 were as follows ($000's omitted): 67 Years Ending December 31, 2024 $ 26,793 2025 21,746 2026 15,880 2027 12,292 2028 9,715 Thereafter 14,478 Total lease payments (a) 100,904 Less: Interest (b) ( 9,350 ) Present value of lease liabilities (c) $ 91,554 (a) Lease payments include options to extend lease terms that are reasonably certain of being exercised and exclude $ 4.4 million of legally binding minimum lease payments for leases signed but not yet commenced at December 31, 2023. (b) Our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our discount rate for such leases to determine the present value of lease payments at the lease commencement date. (c) The weighted average remaining lease term and weighted average discount rate used in calculating our lease liabilities were 4.8 years and 4.1 %, respectively, at December 31, 2023. 68 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of PulteGroup, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of PulteGroup, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 5, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates. 69 Self-insured Risks Description of the Matter The Company’s reserves for self-insured risks totaled $563.1 million at December 31, 2023, of which the majority relates to incurred but not reported (IBNR) losses associated with exposures to construction defects on previously closed homes. As discussed in Notes 1 and 11 of the consolidated financial statements, the Company reserves for costs associated with construction defect claims (including IBNR losses and expected claims management expense) based on actuarial analyses of the Company’s historical claims activity. The actuarial analyses that determine the IBNR reserves consider a variety of factors, which principally include the frequency and severity of losses. Auditing the Company’s IBNR reserve for construction defects is complex due to the significant measurement uncertainty associated with the estimate, the use of various actuarial methods, and management’s application of significant judgment. In addition, the reserve estimate is sensitive to significant management assumptions, including the frequency and severity assumptions used in the computation of the IBNR reserve and loss development factors for reported claims. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls that address the risks of material misstatement relating to the measurement and valuation of the IBNR reserve. For example, we tested controls over management’s review of the significant actuarial assumptions and the data inputs used by management when estimating IBNR losses. To test the IBNR reserve associated with construction defects exposures, our audit procedures included, among others, testing the completeness and accuracy of the underlying claims data used in the actuarial analyses. Furthermore, we involved our actuarial specialists to assist in our assessment of the methodologies used by management to estimate the IBNR reserve. We compared the Company's self-insurance reserve (inclusive of the IBNR estimate) to a range developed by our actuarial specialists based on independently selected assumptions. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1973. Atlanta, Georgia February 5, 2024 70 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This Item is not applicable.