Form 10-Q PULTEGROUP INC/MI/ For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |||||
OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |||||
OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File Number 1-9804
PULTEGROUP, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code) | ||||||||
| Registrant’s telephone number, including area code: | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | ||||||||||||||||||||
| ☒ | ☐ | ☐ | |||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | No | ☒ | ||||||||||||
Number of common shares outstanding as of July 19, 2022: 231,498,300
1
PULTEGROUP, INC.
TABLE OF CONTENTS
Page No. | ||||||||
| PART I | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| PART II | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 6 | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
| June 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash | |||||||||||
| House and land inventory | |||||||||||
| Land held for sale | |||||||||||
| Residential mortgage loans available-for-sale | |||||||||||
| Investments in unconsolidated entities | |||||||||||
| Other assets | |||||||||||
| Intangible assets | |||||||||||
| Deferred tax assets | |||||||||||
| $ | $ | ||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Customer deposits | |||||||||||
| Deferred tax liabilities | |||||||||||
| Accrued and other liabilities | |||||||||||
| Financial Services debt | |||||||||||
| Notes payable | |||||||||||
| Shareholders' equity | |||||||||||
| $ | $ | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Homebuilding | |||||||||||||||||||||||
| Home sale revenues | $ | $ | $ | $ | |||||||||||||||||||
| Land sale and other revenues | |||||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Homebuilding Cost of Revenues: | |||||||||||||||||||||||
| Home sale cost of revenues | ( | ( | ( | ( | |||||||||||||||||||
| Land sale and other cost of revenues | ( | ( | ( | ( | |||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
| Financial Services expenses | ( | ( | ( | ( | |||||||||||||||||||
| Selling, general, and administrative expenses | ( | ( | ( | ( | |||||||||||||||||||
| Loss on debt retirement | ( | ||||||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Per share: | |||||||||||||||||||||||
| Basic earnings | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings | $ | $ | $ | $ | |||||||||||||||||||
| Cash dividends declared | $ | $ | $ | $ | |||||||||||||||||||
| Number of shares used in calculation: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000’s omitted)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||
| Change in value of derivatives | |||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted)
(Unaudited)
| Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $ | ||||||||||||||||||||||||||||||||||
| Shareholders' equity, March 31, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Share issuances | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share repurchases | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Cash paid for shares withheld for taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Shareholders' equity, June 30, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Shareholders' equity, December 31, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Share issuances | — | — | |||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share repurchases | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Cash paid for shares withheld for taxes | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Shareholders' equity, June 30, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
6
| Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Total | ||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $ | ||||||||||||||||||||||||||||||||||
| Shareholders' equity, March 31, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Share issuances | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share repurchases | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Cash paid for shares withheld for taxes | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Shareholders' equity, June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Shareholders' equity, December 31, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | ||||||||||||||||||||||||||||||||
| Share issuances | — | — | |||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share repurchases | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||
| Cash paid for shares withheld for taxes | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Shareholders' equity, June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash from operating activities: | |||||||||||
| Deferred income tax expense | |||||||||||
| Land-related charges | |||||||||||
| Loss on debt retirement | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Other, net | ( | ( | |||||||||
| Increase (decrease) in cash due to: | |||||||||||
| Inventories | ( | ( | |||||||||
| Residential mortgage loans available-for-sale | ( | ||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable, accrued and other liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Investments in unconsolidated entities | ( | ( | |||||||||
| Distributions of capital from unconsolidated entities | |||||||||||
| Business acquisition | ( | ( | |||||||||
| Other investing activities, net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of notes payable | ( | ( | |||||||||
| Borrowings under revolving credit facility | |||||||||||
| Repayments under revolving credit facility | ( | ||||||||||
| Financial Services repayments, net | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Stock option exercises | |||||||||||
| Share repurchases | ( | ( | |||||||||
| Cash paid for shares withheld for taxes | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Interest paid (capitalized), net | $ | $ | |||||||||
| Income taxes paid (refunded), net | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of presentation
PulteGroup, Inc. is one of the largest homebuilders in the United States ("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 engage in mortgage banking operations, conducted through Pulte Mortgage LLC (“Pulte Mortgage”), and title and insurance brokerage operations.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP 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.
Subsequent events
We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission (the "SEC").
Other expense, net
Other expense, net consists of the following ($000’s omitted):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Write-offs of deposits and pre-acquisition costs | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Amortization of intangible assets | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Equity in earnings of unconsolidated entities | |||||||||||||||||||||||
| Miscellaneous, net | |||||||||||||||||||||||
| Total other expense, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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, and 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 deposits related to sold but undelivered homes, which totaled $1.0 billion and $844.8 million at June 30, 2022 and December 31, 2021, 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 8 for information on warranties and related obligations.
9
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 certain direct loan origination costs are recognized as incurred. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments 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. 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. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received.
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 outstanding, 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.
10
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less: earnings distributed to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Less: undistributed earnings allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Numerator for basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Add back: undistributed earnings allocated to participating securities | |||||||||||||||||||||||
| Less: undistributed earnings reallocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Numerator for diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities | |||||||||||||||||||||||
| Diluted shares outstanding | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Residential mortgage loans available-for-sale
Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. At June 30, 2022 and December 31, 2021, residential mortgage loans available-for-sale had an aggregate fair value of $553.8 million and $947.1 million, respectively, and an aggregate outstanding principal balance of $553.9 million and $924.5 million, respectively. Net gains from the sale of mortgages were $45.1 million and $56.7 million for the three months ended June 30, 2022 and 2021, respectively, and $97.5 million and $134.2 million for the six months ended June 30, 2022 and 2021, respectively, and have been included in Financial Services revenues.
Derivative instruments and hedging activities
We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At June 30, 2022 and December 31, 2021, we had aggregate IRLCs of $1.5 billion and $337.9 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 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 June 30, 2022 and December 31, 2021, we had unexpired forward contracts of $1.7 billion and $903.0 million, respectively, and whole loan investor commitments of $316.2 million and $310.0 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.
11
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Other Assets | Accrued and Other Liabilities | Other Assets | Accrued and Other Liabilities | ||||||||||||||||||||
| Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
| Forward contracts | |||||||||||||||||||||||
| Whole loan commitments | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
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.
At June 30, 2022 and December 31, 2021, we reported $199.9 million and $208.4 million, respectively, of assets in-scope under ASC 326, "Financial Instruments - Credit Losses". These assets consist primarily of insurance receivables, contract assets related to insurance brokerage commissions, and vendor rebate receivables. Counterparties associated with these assets are generally highly rated. Allowances on the aforementioned in-scope assets were not material as of June 30, 2022.
New accounting pronouncements
In March 2020, the FASB issued 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. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. We are currently evaluating the effect that such new guidance will have on our consolidated financial statements and related disclosures, but do not expect that the adoption will have a material impact on our consolidated financial statements or related disclosures.
2. Inventory
Major components of inventory were as follows ($000’s omitted):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Homes under construction | $ | $ | |||||||||
| Land under development | |||||||||||
| Raw land | |||||||||||
| $ | $ | ||||||||||
12
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Interest in inventory, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Interest capitalized | |||||||||||||||||||||||
| Interest expensed | ( | ( | ( | ( | |||||||||||||||||||
| Interest in inventory, end of period | $ | $ | $ | $ | |||||||||||||||||||
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 reduces 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 expense, net. We recorded $4.5 million and $1.9 million of such charges during the three months ended June 30, 2022 and 2021, respectively, and $8.0 million and $3.2 million during the six months ended June 30, 2022 and 2021, respectively.
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 June 30, 2022 or December 31, 2021 because we determined that we were not any VIE's primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements. The following provides a summary of our interests in land option agreements as of June 30, 2022 and December 31, 2021 ($000’s omitted):
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Deposits and Pre-acquisition Costs | Remaining Purchase Price | Deposits and Pre-acquisition Costs | Remaining Purchase Price | ||||||||||||||||||||
| Land options with VIEs | $ | $ | $ | $ | |||||||||||||||||||
| Other land options | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
Land-related charges
Our evaluations for land impairments, net realizable value adjustments, and write-offs of deposits and pre-acquisition costs are based on our best estimates of the future cash flows of 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.
13
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
| Northeast: | Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia | |||||||
| Southeast: | Georgia, North Carolina, South Carolina, Tennessee | |||||||
| Florida: | Florida | |||||||
| Midwest: | Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio | |||||||
| Texas: | Texas | |||||||
| West: | Arizona, California, Colorado, Nevada, New Mexico, Washington | |||||||
We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking, title, and insurance brokerage operations that operate generally in the same markets as the Homebuilding segments.
| Operating Data by Segment ($000’s omitted) | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Northeast | $ | $ | $ | $ | |||||||||||||||||||
| Southeast | |||||||||||||||||||||||
| Florida | |||||||||||||||||||||||
| Midwest | |||||||||||||||||||||||
| Texas | |||||||||||||||||||||||
| West | |||||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||
| Consolidated revenues | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) before income taxes: | |||||||||||||||||||||||
| Northeast | $ | $ | $ | $ | |||||||||||||||||||
| Southeast | |||||||||||||||||||||||
| Florida | |||||||||||||||||||||||
| Midwest | |||||||||||||||||||||||
| Texas | |||||||||||||||||||||||
| West | |||||||||||||||||||||||
Other homebuilding (a) | ( | ( | ( | ||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||
| Consolidated income before income taxes | $ | $ | $ | $ | |||||||||||||||||||
(a)Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the other segments. Other homebuilding also includes insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8), and a loss on debt retirement of $61.5 million in the six months ended June 30, 2021 (see Note 4).
14
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Operating Data by Segment ($000’s omitted) | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Land-related charges (a): | |||||||||||||||||||||||
| Northeast | $ | $ | $ | $ | |||||||||||||||||||
| Southeast | |||||||||||||||||||||||
| Florida | |||||||||||||||||||||||
| Midwest | |||||||||||||||||||||||
| Texas | |||||||||||||||||||||||
| West | ( | ||||||||||||||||||||||
| Other homebuilding | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Operating Data by Segment | |||||||||||||||||||||||||||||
| ($000's omitted) | |||||||||||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||||||||
| Homes Under Construction | Land Under Development | Raw Land | Total Inventory | Total Assets | |||||||||||||||||||||||||
| Northeast | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Southeast | |||||||||||||||||||||||||||||
| Florida | |||||||||||||||||||||||||||||
| Midwest | |||||||||||||||||||||||||||||
| Texas | |||||||||||||||||||||||||||||
| West | |||||||||||||||||||||||||||||
Other homebuilding (a) | |||||||||||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
15
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Operating Data by Segment | |||||||||||||||||||||||||||||
| ($000's omitted) | |||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Homes Under Construction | Land Under Development | Raw Land | Total Inventory | Total Assets | |||||||||||||||||||||||||
| Northeast | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Southeast | |||||||||||||||||||||||||||||
| Florida | |||||||||||||||||||||||||||||
| Midwest | |||||||||||||||||||||||||||||
| Texas | |||||||||||||||||||||||||||||
| West | |||||||||||||||||||||||||||||
Other homebuilding (a) | |||||||||||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | |||||||||||||||||||||||||
(a)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.
4. Debt
Notes payable
Our notes payable are summarized as follows ($000’s omitted):
| June 30, 2022 | December 31, 2021 | ||||||||||
| $ | $ | ||||||||||
Net premiums, discounts, and issuance costs (b) | ( | ( | |||||||||
| Total senior notes | $ | $ | |||||||||
| Other notes payable | |||||||||||
| Notes payable | $ | $ | |||||||||
| Estimated fair value | $ | $ | |||||||||
(a)Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.
In the six months ended June 30, 2021, we retired $426.0 million of senior notes at their scheduled maturity date and also accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer. The retirement resulted in a loss of $61.5 million, which includes the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees.
16
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other notes payable
Other notes payable include non-recourse and limited recourse notes with third parties that totaled $40.5 million and $40.2 million at June 30, 2022 and December 31, 2021, respectively. These notes have maturities ranging up to three 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 %. Such notes payable issued to acquire land inventory totaled $4.5 million and $29.4 million in the six months ended June 30, 2022 and 2021, respectively.
Revolving credit facility
In June 2022, we entered into the Third Amended and Restated Credit Agreement (the "Revolving Credit Facility"), which replaced our previous credit agreement. The Revolving Credit Facility contains substantially similar terms to the previous credit agreement, increased our borrowing capacity, and extended the maturity date from June 2023 to June 2027. The Revolving Credit Facility 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 ("SOFR") or a base rate plus an applicable margin, as defined therein. We had no 347.0 million and $298.8 million of letters of credit issued under the Revolving Credit Facility at June 30, 2022 and December 31, 2021, respectively.
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 June 30, 2022, we were in compliance with all covenants. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $903.0 million and $701.2 million at June 30, 2022 and December 31, 2021, respectively.
Joint venture debt
At June 30, 2022, aggregate outstanding debt of unconsolidated joint ventures was $70.7 million, of which $42.4 million was related to one joint venture in which we have a 50 % interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding.
Financial Services debt
Pulte Mortgage maintains a master repurchase agreement with third-party lenders (as amended, the "Repurchase Agreement") that matures on July 28, 2022. The maximum aggregate commitment was $550.0 million at June 30, 2022, which continues through maturity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $442.8 million and $626.1 million outstanding under the Repurchase Agreement at June 30, 2022 and December 31, 2021, respectively, and was in compliance with all of its covenants and requirements as of such dates.
5. Shareholders’ equity
In the six months ended June 30, 2022, we declared cash dividends totaling $72.0 million and repurchased 17.4 million shares under our repurchase authorization for $794.2 million. In the six months ended June 30, 2021, we declared cash dividends totaling $74.1 million and repurchased 6.9 million shares under our repurchase authorization for $353.7 million. On January 31, 2022, the Board of Directors increased our share repurchase authorization by $1.0 billion. At June 30, 2022, we had remaining authorization to repurchase $663.3 million of common shares.
Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. In the six months ended June 30, 2022 and 2021, participants surrendered shares valued at $13.6 million and $10.6 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.
17
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Income taxes
Our effective tax rate in the three and six months ended June 30, 2022 was 24.5 % and 24.4 %, respectively, compared to 21.3 % and 21.9 %, respectively, for the same periods in 2021. Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense. The 2021 tax rate also included a benefit for federal energy efficient home credits, which expired at December 31, 2021, and a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.
At June 30, 2022 and December 31, 2021, we had net deferred tax liabilities of $47.3 million and $26.5 million, respectively. 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 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 $23.7 million and $22.5 million of gross unrecognized tax benefits at June 30, 2022 and December 31, 2021, respectively. Additionally, we had accrued interest and penalties of $3.4 million and $2.9 million at June 30, 2022 and December 31, 2021, respectively.
7. 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. | |||||||
Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted):
| Financial Instrument | Fair Value Hierarchy | Fair Value | ||||||||||||||||||
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||
| Measured at fair value on a recurring basis: | ||||||||||||||||||||
| Residential mortgage loans available-for-sale | Level 2 | $ | $ | |||||||||||||||||
| IRLCs | Level 2 | |||||||||||||||||||
| Forward contracts | Level 2 | ( | ||||||||||||||||||
| Whole loan commitments | Level 2 | |||||||||||||||||||
| Disclosed at fair value: | ||||||||||||||||||||
| Cash, cash equivalents, and restricted cash | Level 1 | $ | $ | |||||||||||||||||
| Financial Services debt | Level 2 | |||||||||||||||||||
| Senior notes payable | Level 2 | |||||||||||||||||||
| Other notes payable | Level 2 | |||||||||||||||||||
18
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Commitments and contingencies
Litigation and regulatory matters
We are involved in various 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.
Product warranty
19
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Warranty liabilities, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserves provided | |||||||||||||||||||||||
| Payments | ( | ( | ( | ( | |||||||||||||||||||
| Other adjustments | |||||||||||||||||||||||
| Warranty liabilities, end of period | $ | $ | $ | $ | |||||||||||||||||||
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 policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.
Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation, and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require us to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by us. Policies issued by our captive insurance subsidiaries represent self-insurance of these risks by us. A portion of 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 deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims generally 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 our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.
At any point in time, we are managing approximately 1,000 individual claims related to general liability, property, errors and omissions, 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 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 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 $652.7 million and $627.1 million at June 30, 2022 and December 31, 2021, respectively. 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 74 % and 70 % of the total general liability reserves at June 30, 2022 and December 31, 2021, 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.
Housing market conditions can be volatile, and we believe such 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 typically 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
20
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Adjustments to reserves are recorded in the period in which the change in estimate occurs. We reduced general liability reserves by $49.1 million and $55.2 million during the three and six months ended June 30, 2021, respectively, as a result of changes in estimates resulting from actual claim experience being less than anticipated in previous actuarial projections. 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. Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Reserves provided | |||||||||||||||||||||||
| Adjustments to previously recorded reserves | ( | ( | |||||||||||||||||||||
Payments, net (a) | ( | ( | ( | ( | |||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | |||||||||||||||||||
(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 $49.2 million and $57.5 million at June 30, 2022 and December 31, 2021, respectively. Those receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers or third parties. In addition, disputes between homebuilders and insurance carriers or third parties over coverage positions relating to construction defect claims are common. Resolution of claims involves the exchange of significant amounts of information and frequently involves legal action.
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 $70.8 million and $87.2 million at June 30, 2022, respectively, and $74.3 million and $92.7 million at December 31, 2021, respectively. In the three and six months ended June 30, 2022, we recorded an additional $3.7 million and $4.2 million, respectively, of lease liabilities under operating leases, and $12.0 million and $13.1 million in the comparable prior year periods. Payments on lease liabilities in the three and six months ended June 30, 2022 totaled $5.6 million and $11.1 million, respectively, and $5.2 million and $10.5 million in the comparable prior year periods.
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. In the three and six months ended June 30, 2022 our total lease expense was $13.4 million and $26.2 million, respectively, and $10.3 million and $20.6 million in the comparable prior year periods. Our total lease expense is inclusive of variable lease
21
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
costs of $2.2 million and $4.4 million in the three and six months ended June 30, 2022, respectively, and $2.2 million and $4.0 million in the comparable prior year periods, as well as short-term lease costs of $5.5 million and $10.5 million in the three and six months ended June 30, 2022, respectively and $3.1 million and $6.0 million in the comparable prior year periods. Sublease income was de minimis.
The future minimum lease payments required under our leases as of June 30, 2022 were as follows ($000's omitted):
| Years Ending December 31, | |||||
2022 (a) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
Total lease payments (b) | |||||
Less: Interest (c) | ( | ||||
Present value of lease liabilities (d) | $ | ||||
(a)Remaining payments are for the six months ending December 31, 2022.
(b)Lease payments include options to extend lease terms that are reasonably certain of being exercised and exclude $2.5 million of legally binding minimum lease payments for leases signed but not yet commenced at June 30, 2022.
(c)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.
(d)The weighted average remaining lease term and weighted average discount rate used in calculating our lease liabilities were 5.2 years and 5.5 %, respectively, at June 30, 2022.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations is provided as a supplement to and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our home sales revenues increased 18% for both the three and six months ended June 30, 2022 over the comparable prior year periods while our gross margins increased 430 bps and 400 bps, respectively, over the same periods. These results were driven by increases in selling prices in response to robust consumer demand in 2021 and early 2022 when the majority of the homes closed in the three and six months ended June 30, 2022 were placed under contract with the customers. The strength in new home demand and pricing during that period resulted from an extremely limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and positive demographic trends, along with low unemployment levels and resulting wage growth. While many of these economic conditions continue, a historic increase in mortgage interest rates during the first half of 2022 has tempered demand for new homes. The rising cost of housing due to increases in average sales prices in recent years and the recent increases in mortgage interest rates, coupled with general inflation in the U.S. economy, have placed additional pressure on overall housing affordability and have caused many potential home buyers to pause and reconsider their housing choices. As a result, new orders were 23% and 21% lower for the three and six months ended June 30, 2022, respectively, compared with the comparable prior year periods.
Due to the increased level of new homebuilding activity in the US, coupled with impacts on the US supply chain and construction and municipal workforces due to the COVID-19 pandemic, the availability of certain materials and construction labor, combined with delays in municipal approvals and inspections, have elongated the production cycle of the homes we are constructing. While we are working with our supply partners, have significantly increased our speculative housing starts, and have hired additional construction and customer service employees, our production cycle times have extended in substantially all of our markets. The time required to construct a home was approximately eight weeks longer in the second quarter of 2022 as compared with the prior year period and approximately two weeks longer than the first quarter of 2022. Due to these supply chain and labor challenges, we moderated lot releases and the pace of new orders in the majority of our communities in 2021 and early 2022 in order to balance sales volume and production capacity to reduce backlog durations. Given the affordability challenges described above and the resulting impact on demand, we have reduced the number of communities where we are moderating lot releases and have increased sales incentives moderately in certain communities. We believe these conditions will continue to impact our industry for the remainder of 2022.
The noted supply chain and labor issues are also leading to significant cost pressures in almost all areas of our business, but especially related to construction labor and materials. Specifically, the cost of lumber continues to be extremely volatile and remains elevated compared to historical norms. Additionally, the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged. We also continue to experience significant challenges with the cost and availability of windows, siding, cabinets, and appliances, among other supply categories. To date, we have been able to increase pricing to offset the majority of such cost increases, but there can be no assurances that we will continue to be able to do so in the future.
Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, or its related impacts on overall economic conditions or the global supply chain, will last. As a result, the unpredictability of the current economic and public health conditions will continue to evolve. The unpredictability of current economic conditions will also continue to evolve due to disruptions occurring as a result of the military conflict in Ukraine and related sanctions or other actions against Russia imposed by the U.S. and other countries. However, all of our operations continue to function at effectively full capacity subject to health and safety protocols, and we remain optimistic about future housing demand and our ability to continue expanding our business. Due to the strength of consumer demand and extended municipal entitlement timelines, the number of our active communities decreased in 2021 as we sold out communities at a pace faster than we opened new ones. We have increased our investments in land acquisition and development and expect that the number of our active communities will increase as we proceed through 2022.
23
Consolidated Operations
The following is a summary of our operating results by line of business ($000's omitted, except per share data):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Income before income taxes: | |||||||||||||||||||||||
| Homebuilding | $ | 824,498 | $ | 588,019 | $ | 1,383,798 | $ | 915,723 | |||||||||||||||
| Financial Services | 40,075 | 51,454 | 80,668 | 117,803 | |||||||||||||||||||
| Income before income taxes | 864,573 | 639,473 | 1,464,466 | 1,033,526 | |||||||||||||||||||
| Income tax expense | (212,138) | (136,074) | (357,308) | (226,020) | |||||||||||||||||||
| Net income | $ | 652,435 | $ | 503,399 | $ | 1,107,158 | $ | 807,506 | |||||||||||||||
| Per share data - assuming dilution: | |||||||||||||||||||||||
| Net income | $ | 2.73 | $ | 1.90 | $ | 4.54 | $ | 3.03 | |||||||||||||||
•Homebuilding income before income taxes in the three and six months ended June 30, 2022 increased 40% and 51% compared with the same periods in 2021, respectively. The results are primarily the result of a significantly higher average selling price and gross margin. The results include insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8). Results for the six months ended June 30, 2021 also include a loss on debt retirement of $61.5 million (see Note 4).
•Financial Services income before income taxes in the three and six months ended June 30, 2022 decreased 22% and 32% compared to the same periods in 2021, respectively, primarily as the result of a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2022.
•Our effective tax rate in the three and six months ended June 30, 2022 was 24.5% and 24.4%, respectively, compared to 21.3% and 21.9%, respectively, for the same periods in 2021. Our effective tax rate for each of these periods differs from the federal statutory rate primarily due to state income tax expense, while the 2021 tax rate also included benefits associated with federal energy efficient home credits, which expired at December 31, 2021, and a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.
24
Homebuilding Operations
The following presents selected financial information for our Homebuilding operations ($000’s omitted):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2022 vs. 2021 | 2021 | 2022 | 2022 vs. 2021 | 2021 | ||||||||||||||||||||||||||||||
| Home sale revenues | $ | 3,809,601 | 18 | % | $ | 3,235,379 | $ | 6,879,914 | 18 | % | $ | 5,831,889 | |||||||||||||||||||||||
| Land sale and other revenues | 33,810 | 2 | % | 33,076 | 66,969 | 11 | % | 60,235 | |||||||||||||||||||||||||||
| Total Homebuilding revenues | 3,843,411 | 18 | % | 3,268,455 | 6,946,883 | 18 | % | 5,892,124 | |||||||||||||||||||||||||||
Home sale cost of revenues (a) | (2,631,356) | 11 | % | (2,375,495) | (4,812,430) | 12 | % | (4,311,130) | |||||||||||||||||||||||||||
| Land sale and other cost of revenues | (31,656) | 1 | % | (31,195) | (63,657) | 14 | % | (55,831) | |||||||||||||||||||||||||||
Selling, general, and administrative expenses ("SG&A") (b) | (351,256) | 29 | % | (272,286) | (680,279) | 25 | % | (543,973) | |||||||||||||||||||||||||||
| Loss on debt retirement | — | (c) | — | — | (c) | (61,469) | |||||||||||||||||||||||||||||
| Other expense, net | (4,645) | 218 | % | (1,460) | (6,719) | 68 | % | (3,998) | |||||||||||||||||||||||||||
| Income before income taxes | $ | 824,498 | 40 | % | $ | 588,019 | $ | 1,383,798 | 51 | % | $ | 915,723 | |||||||||||||||||||||||
| Supplemental data: | |||||||||||||||||||||||||||||||||||
| Gross margin from home sales | 30.9 | % | 430 bps | 26.6 | % | 30.1 | % | 400 bps | 26.1 | % | |||||||||||||||||||||||||
| SG&A as a percentage of home sale revenues | 9.2 | % | 80 bps | 8.4 | % | 9.9 | % | 60 bps | 9.3 | % | |||||||||||||||||||||||||
| Closings (units) | 7,177 | (1) | % | 7,232 | 13,216 | — | % | 13,276 | |||||||||||||||||||||||||||
| Average selling price | $ | 531 | 19 | % | $ | 447 | $ | 521 | 19 | % | $ | 439 | |||||||||||||||||||||||
Net new orders (d): | |||||||||||||||||||||||||||||||||||
| Units | 6,418 | (23) | % | 8,322 | 14,389 | (21) | % | 18,174 | |||||||||||||||||||||||||||
| Dollars | $ | 3,903,999 | (8) | % | $ | 4,258,133 | $ | 8,635,271 | (3) | % | $ | 8,888,450 | |||||||||||||||||||||||
| Cancellation rate | 15 | % | 7 | % | 12 | % | 8 | % | |||||||||||||||||||||||||||
| Average active communities | 791 | (2) | % | 808 | 784 | (5) | % | 822 | |||||||||||||||||||||||||||
| Backlog at June 30: | |||||||||||||||||||||||||||||||||||
| Units | 19,176 | (4) | % | 20,056 | |||||||||||||||||||||||||||||||
| Dollars | $ | 11,614,167 | 18 | % | $ | 9,849,743 | |||||||||||||||||||||||||||||
(a)Includes the amortization of capitalized interest.
(b)Includes insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8).
(c)Percentage not meaningful.
(d)Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.
Home sale revenues
Home sale revenues in the three and six months ended June 30, 2022 were higher than the prior year periods by $574.2 million and $1.0 billion, respectively. In the three months ended June 30, 2022, the 18% increase resulted from a 19% increase in average selling price partially offset by a 1% decrease in closings. In the six months ended June 30, 2022, the 18% increase resulted from a 19% increase in average selling price. The increases in average selling price reflected the impact of pricing actions taken in response to robust consumer demand in 2021 and early 2022 when the majority of the homes that closed were placed under contract with the customers, partially offset by an increase in the mix of first-time buyer homes, which typically carry a lower sales price. The year-over-year increases in average selling price occurred in substantially all of our markets.
25
Home sale gross margins
Home sale gross margins were 30.9% and 30.1% in the three and six months ended June 30, 2022, respectively, compared to 26.6% and 26.1% in the three and six months ended June 30, 2021, respectively. Gross margins reflect the robust consumer demand that existed in 2021 and early 2022 when the majority of the homes were placed under contract with the customers combined with limited supplies of new and existing housing inventory. This resulted in a strong pricing environment, which allowed us to offset pressure in house and land costs through pricing actions.
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 $2.2 million and $3.3 million for the three and six months ended June 30, 2022, respectively, compared to $1.9 million and $4.4 million for the three and six months ended June 30, 2021, respectively.
SG&A
SG&A as a percentage of home sale revenues was 9.2% and 9.9% in the three and six months ended June 30, 2022, respectively, compared with 8.4% and 9.3% for the three and six months ended June 30, 2021, respectively. The gross dollar amount of our SG&A increased $79.0 million, or 29%, for the three months ended June 30, 2022 compared to the prior year period, and increased $136.3 million, or 25%, for the six months ended June 30, 2022 compared to the prior year period. The increases in gross dollars in 2022 resulted primarily from higher headcount and other overhead costs to support growth expectations and the increased number of homes in production, combined with insurance reserve reversals of $49.1 million and $55.2 million recorded in the three and six months ended June 30, 2021, respectively (see Note 8).
Other expense, net
Other expense, net includes the following ($000’s omitted):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Write-offs of deposits and pre-acquisition costs | $ | (4,503) | $ | (1,866) | $ | (8,013) | $ | (3,235) | |||||||||||||||
| Amortization of intangible assets | (2,766) | (4,968) | (5,587) | (9,961) | |||||||||||||||||||
| Interest income | 290 | 473 | 678 | 1,105 | |||||||||||||||||||
| Interest expense | (65) | (138) | (150) | (272) | |||||||||||||||||||
| Equity in earnings of unconsolidated entities | 723 | 4,190 | 1,944 | 5,017 | |||||||||||||||||||
| Miscellaneous, net | 1,676 | 849 | 4,409 | 3,348 | |||||||||||||||||||
| Total other expense, net | $ | (4,645) | $ | (1,460) | $ | (6,719) | $ | (3,998) | |||||||||||||||
Net new orders
Net new orders in units decreased 23% while net new orders in dollars decreased 8% in the three months ended June 30, 2022 compared to the prior year period. Net new orders in units decreased 21% while net new orders in dollars decreased 3% for the six months ended June 30, 2022 as compared with the prior year period. The decreases in net new order volume in 2022 are due primarily to reduced buyer demand in the second quarter of 2022, particularly for homes that are estimated to close further out in time, as the market responded to increased affordability challenges resulting from an historic increase in mortgage interest rates, increases in the price of homes, and the impact of inflationary pressures in the broader economy. Contributing factors also include our lower average community count and Company actions to intentionally moderate sales pace earlier in 2022 in order to manage our large backlog of orders and supply chain challenges. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 15% and 12% for the three and six months ended June 30, 2022, respectively, and 7% and 8% for the comparable periods in 2021, respectively. The increase in cancellation rates occurred primarily in the second quarter of 2022 due to a decrease in consumer confidence coupled with the increase in mortgage interest rates. Ending backlog dollars, which represents orders for homes that have not yet closed, increased 18% at June 30, 2022 compared with June 30, 2021, as the result of higher average selling prices coupled with elongated production cycle times.
26
Homes in production
The following is a summary of our homes in production:
| June 30, 2022 | June 30, 2021 | ||||||||||
| Sold | 16,560 | 15,111 | |||||||||
| Unsold | |||||||||||
| Under construction | 6,598 | 2,145 | |||||||||
| Completed | 191 | 88 | |||||||||
| 6,789 | 2,233 | ||||||||||
| Models | 1,286 | 1,198 | |||||||||
| Total | 24,635 | 18,542 | |||||||||
The number of homes in production at June 30, 2022 was 33% higher than at June 30, 2021. The increase in sold homes under production reflects the size of our backlog combined with elongated cycle times, as more fully discussed above, due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities. The significantly higher level of unsold homes, or speculative homes, under construction reflects our strategic decision to increase housing starts of speculative units in response to the noted supply chain challenges and to have product available that can close quickly for customers that are concerned about potentially higher mortgage interest rates.
Controlled lots
The following is a summary of our lots under control at June 30, 2022 and December 31, 2021:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Owned | Optioned | Controlled | Owned | Optioned | Controlled | ||||||||||||||||||||||||||||||
| Northeast | 4,781 | 6,726 | 11,507 | 4,422 | 7,637 | 12,059 | |||||||||||||||||||||||||||||
| Southeast | 16,761 | 30,225 | 46,986 | 15,604 | 28,887 | 44,491 | |||||||||||||||||||||||||||||
| Florida | 28,435 | 34,319 | 62,754 | 27,654 | 32,240 | 59,894 | |||||||||||||||||||||||||||||
| Midwest | 12,704 | 16,909 | 29,613 | 11,723 | 17,118 | 28,841 | |||||||||||||||||||||||||||||
| Texas | 20,751 | 26,399 | 47,150 | 20,538 | 21,235 | 41,773 | |||||||||||||||||||||||||||||
| West | 29,524 | 15,724 | 45,248 | 29,137 | 12,101 | 41,238 | |||||||||||||||||||||||||||||
| Total | 112,956 | 130,302 | 243,258 | 109,078 | 119,218 | 228,296 | |||||||||||||||||||||||||||||
| 46 | % | 54 | % | 100 | % | 48 | % | 52 | % | 100 | % | ||||||||||||||||||||||||
| Developed (%) | 40 | % | 15 | % | 27 | % | 38 | % | 13 | % | 25 | % | |||||||||||||||||||||||
While competition for well-positioned land is robust, we continue to pursue land investments that we believe can achieve appropriate risk-adjusted returns on invested capital and have increased our controlled lot count in response to the demand environment. Additionally, we continue to seek to increase the percentage of our lots that are controlled via land option agreements. 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 $6.5 billion at June 30, 2022.
27
Homebuilding Segment Operations
As of June 30, 2022, we conducted our operations in over 40 markets located throughout 24 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
| Northeast: | Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia | |||||||
| Southeast: | Georgia, North Carolina, South Carolina, Tennessee | |||||||
| Florida: | Florida | |||||||
| Midwest: | Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio | |||||||
| Texas: | Texas | |||||||
| West: | Arizona, California, Colorado, Nevada, New Mexico, Washington | |||||||
The following tables present selected financial information for our reportable Homebuilding segments:
| Operating Data by Segment ($000's omitted) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2022 vs. 2021 | 2021 | 2022 | 2022 vs. 2021 | 2021 | ||||||||||||||||||||||||||||||
| Home sale revenues: | |||||||||||||||||||||||||||||||||||
| Northeast | $ | 248,399 | (13) | % | $ | 285,794 | $ | 412,729 | (11) | % | $ | 462,211 | |||||||||||||||||||||||
| Southeast | 587,184 | 14 | % | 516,369 | 1,114,995 | 17 | % | 952,636 | |||||||||||||||||||||||||||
| Florida | 967,600 | 27 | % | 763,412 | 1,706,549 | 25 | % | 1,364,354 | |||||||||||||||||||||||||||
| Midwest | 552,803 | 20 | % | 462,357 | 1,004,006 | 21 | % | 828,135 | |||||||||||||||||||||||||||
| Texas | 569,842 | 21 | % | 469,916 | 1,014,048 | 20 | % | 843,177 | |||||||||||||||||||||||||||
| West | 883,773 | 20 | % | 737,531 | 1,627,587 | 18 | % | 1,381,376 | |||||||||||||||||||||||||||
| $ | 3,809,601 | 18 | % | $ | 3,235,379 | $ | 6,879,914 | 18 | % | $ | 5,831,889 | ||||||||||||||||||||||||
Income (loss) before income taxes (a): | |||||||||||||||||||||||||||||||||||
| Northeast | $ | 59,971 | 13 | % | $ | 53,300 | $ | 87,370 | 10 | % | $ | 79,194 | |||||||||||||||||||||||
| Southeast | 152,257 | 63 | % | 93,444 | 278,389 | 69 | % | 164,766 | |||||||||||||||||||||||||||
| Florida | 247,435 | 67 | % | 147,833 | 408,129 | 64 | % | 249,040 | |||||||||||||||||||||||||||
| Midwest | 86,550 | 22 | % | 70,804 | 151,251 | 22 | % | 123,668 | |||||||||||||||||||||||||||
| Texas | 134,133 | 59 | % | 84,388 | 217,849 | 45 | % | 150,037 | |||||||||||||||||||||||||||
| West | 186,561 | 42 | % | 131,070 | 319,872 | 39 | % | 229,902 | |||||||||||||||||||||||||||
Other homebuilding (b) | (42,409) | (c) | 7,180 | (79,062) | 2 | % | (80,884) | ||||||||||||||||||||||||||||
| $ | 824,498 | 40 | % | $ | 588,019 | $ | 1,383,798 | 51 | % | $ | 915,723 | ||||||||||||||||||||||||
(a)Includes land-related charges as summarized in the table below.
(b) Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments. Other homebuilding also includes insurance reserve reversals of $49.1 million and $55.2 million for the three and six months ended June 30, 2021, respectively (see Note 8) and a loss on debt retirement of $61.5 million in the six months ended June 30, 2021 (see Note 4).
(c) Percentage not meaningful.
28
| Operating Data by Segment ($000's omitted) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2022 vs. 2021 | 2021 | 2022 | 2022 vs. 2021 | 2021 | ||||||||||||||||||||||||||||||
| Closings (units): | |||||||||||||||||||||||||||||||||||
| Northeast | 386 | (22) | % | 497 | 648 | (20) | % | 814 | |||||||||||||||||||||||||||
| Southeast | 1,085 | (8) | % | 1,175 | 2,111 | (5) | % | 2,229 | |||||||||||||||||||||||||||
| Florida | 1,779 | 5 | % | 1,692 | 3,212 | 3 | % | 3,112 | |||||||||||||||||||||||||||
| Midwest | 1,131 | 9 | % | 1,042 | 2,075 | 10 | % | 1,881 | |||||||||||||||||||||||||||
| Texas | 1,483 | (2) | % | 1,519 | 2,693 | (2) | % | 2,744 | |||||||||||||||||||||||||||
| West | 1,313 | — | % | 1,307 | 2,477 | (1) | % | 2,496 | |||||||||||||||||||||||||||
| 7,177 | (1) | % | 7,232 | 13,216 | — | % | 13,276 | ||||||||||||||||||||||||||||
| Average selling price: | |||||||||||||||||||||||||||||||||||
| Northeast | $ | 644 | 12 | % | $ | 575 | $ | 637 | 12 | % | $ | 568 | |||||||||||||||||||||||
| Southeast | 541 | 23 | % | 439 | 528 | 24 | % | 427 | |||||||||||||||||||||||||||
| Florida | 544 | 21 | % | 451 | 531 | 21 | % | 438 | |||||||||||||||||||||||||||
| Midwest | 489 | 10 | % | 444 | 484 | 10 | % | 440 | |||||||||||||||||||||||||||
| Texas | 384 | 24 | % | 309 | 377 | 23 | % | 307 | |||||||||||||||||||||||||||
| West | 673 | 19 | % | 564 | 657 | 19 | % | 553 | |||||||||||||||||||||||||||
| $ | 531 | 19 | % | $ | 447 | $ | 521 | 19 | % | $ | 439 | ||||||||||||||||||||||||
| Net new orders - units: | |||||||||||||||||||||||||||||||||||
| Northeast | 384 | (19) | % | 475 | 809 | (25) | % | 1,083 | |||||||||||||||||||||||||||
| Southeast | 1,304 | (4) | % | 1,364 | 2,635 | (10) | % | 2,925 | |||||||||||||||||||||||||||
| Florida | 1,554 | (29) | % | 2,203 | 3,427 | (26) | % | 4,607 | |||||||||||||||||||||||||||
| Midwest | 842 | (35) | % | 1,300 | 2,005 | (30) | % | 2,861 | |||||||||||||||||||||||||||
| Texas | 1,225 | (16) | % | 1,459 | 2,739 | (18) | % | 3,351 | |||||||||||||||||||||||||||
| West | 1,109 | (27) | % | 1,521 | 2,774 | (17) | % | 3,347 | |||||||||||||||||||||||||||
| 6,418 | (23) | % | 8,322 | 14,389 | (21) | % | 18,174 | ||||||||||||||||||||||||||||
| Net new orders - dollars: | |||||||||||||||||||||||||||||||||||
| Northeast | $ | 276,044 | (5) | % | $ | 291,824 | $ | 571,415 | (11) | % | $ | 643,064 | |||||||||||||||||||||||
| Southeast | 767,628 | 15 | % | 669,740 | 1,531,349 | 11 | % | 1,378,034 | |||||||||||||||||||||||||||
| Florida | 1,062,458 | (6) | % | 1,130,005 | 2,277,708 | 1 | % | 2,264,301 | |||||||||||||||||||||||||||
| Midwest | 465,728 | (24) | % | 611,652 | 1,077,358 | (18) | % | 1,318,082 | |||||||||||||||||||||||||||
| Texas | 522,691 | (7) | % | 561,005 | 1,165,900 | (2) | % | 1,191,296 | |||||||||||||||||||||||||||
| West | 809,450 | (19) | % | 993,907 | 2,011,541 | (4) | % | 2,093,673 | |||||||||||||||||||||||||||
| $ | 3,903,999 | (8) | % | $ | 4,258,133 | $ | 8,635,271 | (3) | % | $ | 8,888,450 | ||||||||||||||||||||||||
29
| Operating Data by Segment ($000's omitted) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2022 vs. 2021 | 2021 | |||||||||||||||||||||||||||||||
| Cancellation rates: | |||||||||||||||||||||||||||||||||||
| Northeast | 9 | % | 8 | % | 7 | % | 6 | % | |||||||||||||||||||||||||||
| Southeast | 7 | % | 6 | % | 6 | % | 6 | % | |||||||||||||||||||||||||||
| Florida | 13 | % | 5 | % | 10 | % | 7 | % | |||||||||||||||||||||||||||
| Midwest | 12 | % | 7 | % | 10 | % | 6 | % | |||||||||||||||||||||||||||
| Texas | 21 | % | 10 | % | 17 | % | 10 | % | |||||||||||||||||||||||||||
| West | 23 | % | 10 | % | 16 | % | 10 | % | |||||||||||||||||||||||||||
| 15 | % | 7 | % | 12 | % | 8 | % | ||||||||||||||||||||||||||||
| Unit backlog: | |||||||||||||||||||||||||||||||||||
| Northeast | 949 | (22) | % | 1,222 | |||||||||||||||||||||||||||||||
| Southeast | 3,000 | (1) | % | 3,036 | |||||||||||||||||||||||||||||||
| Florida | 5,645 | 10 | % | 5,149 | |||||||||||||||||||||||||||||||
| Midwest | 2,618 | (18) | % | 3,179 | |||||||||||||||||||||||||||||||
| Texas | 3,145 | (14) | % | 3,660 | |||||||||||||||||||||||||||||||
| West | 3,819 | — | % | 3,810 | |||||||||||||||||||||||||||||||
| 19,176 | (4) | % | 20,056 | ||||||||||||||||||||||||||||||||
| Backlog dollars: | |||||||||||||||||||||||||||||||||||
| Northeast | $ | 669,919 | (10) | % | $ | 742,175 | |||||||||||||||||||||||||||||
| Southeast | 1,779,216 | 22 | % | 1,456,308 | |||||||||||||||||||||||||||||||
| Florida | 3,628,990 | 44 | % | 2,527,814 | |||||||||||||||||||||||||||||||
| Midwest | 1,421,507 | (4) | % | 1,480,583 | |||||||||||||||||||||||||||||||
| Texas | 1,453,453 | 9 | % | 1,329,210 | |||||||||||||||||||||||||||||||
| West | 2,661,082 | 15 | % | 2,313,653 | |||||||||||||||||||||||||||||||
| $ | 11,614,167 | 18 | % | $ | 9,849,743 | ||||||||||||||||||||||||||||||
30
| Operating Data by Segment ($000’s omitted) | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Land-related charges (a): | |||||||||||||||||||||||
| Northeast | $ | 100 | $ | 18 | $ | 202 | $ | 134 | |||||||||||||||
| Southeast | 1,933 | 883 | 3,835 | 1,339 | |||||||||||||||||||
| Florida | 641 | 302 | 1,612 | 433 | |||||||||||||||||||
| Midwest | 944 | 438 | 1,102 | 492 | |||||||||||||||||||
| Texas | 294 | 263 | 534 | 791 | |||||||||||||||||||
| West | 591 | (19) | 728 | 65 | |||||||||||||||||||
| Other homebuilding | — | — | — | — | |||||||||||||||||||
| $ | 4,503 | $ | 1,885 | $ | 8,013 | $ | 3,254 | ||||||||||||||||
(a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.
Northeast
For the second quarter of 2022, Northeast home sale revenues decreased by 13% when compared with the prior year period due to a 22% decrease in closings partially offset by a 12% increase in average selling price. The decrease in closings was primarily due to the timing of projects in our Mid-Atlantic operations, while the increase in average selling price occurred across all markets. Income before income taxes increased 13% primarily due to higher gross margins. Net new orders decreased across all markets.
For the six months ended June 30, 2022, Northeast home sale revenues decreased by 11% when compared with the prior year period due to a 20% decrease in closings partially offset by a 12% increase in average selling price. The decrease in closings was primarily due to the timing of projects in our Mid-Atlantic operations, while the increase in average selling price occurred across all markets. Income before income taxes increased 10% primarily due to higher gross margins. Net new orders decreased across all markets.
Southeast
For the second quarter of 2022, Southeast home sale revenues increased 14% when compared with the prior year period due to a 23% increase in average selling price partially offset by a 8% decrease in closings. The increase in average selling price and the decrease in closings occurred across all markets. Income before income taxes increased 63% primarily due to increased revenues, as well as improved gross margins across all markets. The decrease in net new orders was mixed among markets.
For the six months ended June 30, 2022, Southeast home sale revenues increased 17% when compared with the prior year period due to a 24% increase in average selling price partially offset by a 5% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings occurred across the majority of markets. Income before income taxes increased 69% primarily due to increased revenues, as well as improved gross margins across all markets. The decrease in net new orders was mixed among markets.
Florida
For the second quarter of 2022, Florida home sale revenues increased 27% when compared with the prior year period due to a 5% increase in closings combined with a 21% 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 67% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across the majority of markets.
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For the six months ended June 30, 2022, Florida home sale revenues increased 25% when compared with the prior year period due to a 3% increase in closings combined with a 21% increase in the average selling price. The increase in closings occurred across the majority of markets. The increase in average selling price occurred across all markets. Income before income taxes increased 64% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across the majority of markets.
Midwest
For the second quarter of 2022, Midwest home sale revenues increased 20% when compared with the prior year period due to a 9% increase in closings combined with a 10% increase in average selling price. The increase in closings occurred across the majority of markets while the increase in average selling price occurred across all markets. Income before income taxes increased 22% primarily due to higher revenues and gross margins. Net new orders decreased across the majority of markets.
For the six months ended June 30, 2022, Midwest home sale revenues increased 21% when compared with the prior year period due to a 10% increase in closings combined with a 10% increase in average selling price. The increase in closings and the increase in average selling price occurred across the majority of markets. Income before income taxes increased 22% primarily due to higher revenues and gross margins. Net new orders decreased across the majority of markets.
Texas
For the second quarter of 2022, Texas home sale revenues increased 21% when compared with the prior year period due to a 24% increase in average selling price partially offset by a 2% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings was mixed among markets. Income before income taxes increased 59% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across the majority of markets.
For the six months ended June 30, 2022, Texas home sale revenues increased 20% when compared with the prior year period due to a 23% increase in average selling price partially offset by a 2% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings was mixed among markets. Income before income taxes increased 45% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across the majority of markets.
West
For the second quarter of 2022, West home sale revenues increased 20% when compared with the prior year period due to a 19% increase in average selling price. The increase in average selling price occurred across all markets. Income before income taxes increased 42% primarily due to increased revenues and gross margins across the majority of markets. Net new orders decreased across all markets.
For the six months ended June 30, 2022, West home sale revenues increased 18% when compared with the prior year period due to a 19% increase in average selling price partially offset by a 1% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings occurred across the majority of markets. Income before income taxes increased 39% primarily due to increased revenues and gross margins across the majority of markets. Net new orders decreased across all markets.
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Financial Services Operations
We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage LLC ("Pulte Mortgage") and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to a credit agreement with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to support our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding, as Homebuilding customers continue to account for substantially all of its business. We believe that our mortgage capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000's omitted):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2022 vs. 2021 | 2021 | 2022 | 2022 vs. 2021 | 2021 | ||||||||||||||||||||||||||||||
| Mortgage revenues | $ | 58,082 | (17) | % | $ | 70,227 | $ | 121,237 | (24) | % | $ | 159,267 | |||||||||||||||||||||||
| Title services revenues | 19,762 | 13 | % | 17,414 | 35,724 | 13 | % | 31,747 | |||||||||||||||||||||||||||
| Insurance brokerage commissions | 4,931 | 46 | % | 3,388 | 9,957 | 62 | % | 6,136 | |||||||||||||||||||||||||||
| Total Financial Services revenues | 82,775 | (9) | % | 91,029 | 166,918 | (15) | % | 197,150 | |||||||||||||||||||||||||||
| Expenses | (43,847) | 9 | % | (40,411) | (87,333) | 9 | % | (80,086) | |||||||||||||||||||||||||||
| Other income (expense), net | 1,147 | (a) | 836 | 1,083 | (a) | 739 | |||||||||||||||||||||||||||||
| Income before income taxes | $ | 40,075 | (22) | % | $ | 51,454 | $ | 80,668 | (32) | % | $ | 117,803 | |||||||||||||||||||||||
| Total originations: | |||||||||||||||||||||||||||||||||||
| Loans | 4,568 | (14) | % | 5,296 | 8,625 | (14) | % | 10,004 | |||||||||||||||||||||||||||
| Principal | $ | 1,754,715 | (3) | % | $ | 1,811,523 | $ | 3,294,613 | (2) | % | $ | 3,376,191 | |||||||||||||||||||||||
(a)Percentage not meaningful.
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental data: | |||||||||||
| Capture rate | 79.5 | % | 86.9 | % | |||||||
| Average FICO score | 748 | 751 | |||||||||
| Funded origination breakdown: | |||||||||||
| Government (FHA, VA, USDA) | 20 | % | 21 | % | |||||||
| Other agency | 73 | % | 73 | % | |||||||
| Total agency | 93 | % | 94 | % | |||||||
| Non-agency | 7 | % | 6 | % | |||||||
| Total funded originations | 100 | % | 100 | % | |||||||
Revenues
The demand for refinancing within the mortgage industry waned in 2021 and into 2022 as mortgage interest rates began to rise, which led to an increase in competition among lenders and lower margins per loan. As a result, total Financial Services revenues for the three and six months ended June 30, 2022 decreased 9% and 15%, respectively, compared with the same
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periods in 2021. The decreases occurred as the result of a decrease in the number of loans originated due to the lower capture rate combined with lower revenue per loan resulting from the competitive lending environment. These factors were partially offset by a higher average loan amount as the result of the higher average selling price within Homebuilding.
Income before income taxes
Income before income taxes in the three and six months ended June 30, 2022 decreased 22% and 32% compared to the same periods in 2021, respectively, primarily as the result of a lower capture rate and revenue per loan due to increased competitiveness in the mortgage industry in 2022.
Income Taxes
Our effective income tax rate for the three and six months ended June 30, 2022 was 24.5% and 24.4%, respectively, compared to 21.3% and 21.9%, respectively, for the same periods in 2021. The 2022 effective tax rates are higher than the 2021 effective tax rates for the same periods primarily due to the benefit of federal energy efficient home credits in 2021, which expired at December 31, 2021, and a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.
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 June 30, 2022, we had unrestricted cash and equivalents of $662.8 million, restricted cash balances of $69.3 million, and $903.0 million available under our Revolving Credit Facility. We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments. Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 20.8% at June 30, 2022, as compared with 21.3% at December 31, 2021.
For the next twelve months, we expect our principal demand for funds will be for the acquisition and development of land inventory, construction of house inventory, and operating expenses, including our general and administrative expenses. The elongation of our production cycle has required a greater investment of cash in our homes under production. Additionally, we plan to continue our dividend payments and repurchases of common stock. Within the next twelve months, we need to repay or refinance Pulte Mortgage's master repurchase agreement with third-party lenders (the "Repurchase Agreement"). While we intend to refinance the Repurchase Agreement prior to its maturity, there can be no assurances that the Repurchase Agreement can be renewed or replaced on commercially reasonable terms upon its expiration. However, we believe we have adequate liquidity to meet Pulte Mortgage's anticipated financing needs. Beyond the next twelve months, we will need to repay or refinance our Revolving Credit Facility, which matures in June 2027, and our unsecured senior notes, the next tranche of which becomes due in 2026.
We believe that our current cash position and other available financing resources, coupled with our ongoing operating activities, will provide sufficient liquidity to fund our business needs over the next twelve months and beyond. To the extent the sources of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt, dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities.
Unsecured senior notes
We had $2.0 billion of unsecured senior notes outstanding at both June 30, 2022 and December 31, 2021 with no repayments due until March 2026, when $500.0 million of unsecured senior notes are scheduled to mature.
In the six months ended June 30, 2021, we retired $426.0 million of senior notes at their scheduled maturity date and also accelerated the retirement of $200.0 million and $100.0 million of our unsecured notes scheduled to mature in 2026 and 2027, respectively, through a cash tender offer. The retirement resulted in a loss of $61.5 million, which includes the write-off of debt issuance costs, unamortized discounts and premiums, and transaction fees.
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Other notes payable
Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $40.5 million and $40.2 million at June 30, 2022 and December 31, 2021, respectively. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, and generally have no recourse to other assets. The stated interest rates on these notes range up to 6%.
Revolving credit facility
In June 2022, we entered into the Third Amended and Restated Credit Agreement ("Revolving Credit Facility"), which replaced our previous credit agreement. The Revolving Credit Facility contains substantially similar terms to the previous credit agreement, increased our borrowing capacity, and extended the maturity date from June 2023 to June 2027. The Revolving Credit Facility 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 ("SOFR") or a base rate plus an applicable margin, as defined therein. We had no borrowings outstanding at either June 30, 2022 or December 31, 2021, and $347.0 million and $298.8 million of letters of credit issued under the Revolving Credit Facility at June 30, 2022 and December 31, 2021, respectively.
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 June 30, 2022, we were in compliance with all covenants. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $903.0 million and $701.2 million at June 30, 2022 and December 31, 2021, respectively.
Joint venture debt
At June 30, 2022, aggregate outstanding debt of unconsolidated joint ventures was $70.7 million of which $42.4 million was related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding.
Financial Services debt
The Repurchase Agreement matures on July 28, 2022. The maximum aggregate commitment was $550.0 million at June 30, 2022, which continues through maturity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $442.8 million and $626.1 million outstanding under the Repurchase Agreement at June 30, 2022 and December 31, 2021, respectively, and was in compliance with all of its covenants and requirements as of such dates.
Dividends and share repurchase program
In the six months ended June 30, 2022, we declared cash dividends totaling $72.0 million and repurchased 17.4 million shares under our repurchase authorization for $794.2 million. In the six months ended June 30, 2021, we declared cash dividends totaling $74.1 million and repurchased 6.9 million shares under our repurchase authorization for $353.7 million. On January 31, 2022, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At June 30, 2022, we had remaining authorization to repurchase $663.3 million of common shares.
Contractual Obligations
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as of June 30, 2022, 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.
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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 June 30, 2022, we had outstanding letters of credit totaling $347.0 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $2.1 billion at June 30, 2022, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.
In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At June 30, 2022, these agreements had an aggregate remaining purchase price of $6.5 billion. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. At June 30, 2022, outstanding deposits totaled $291.9 million, of which $22.7 million is refundable.
For further information regarding our primary obligations, refer to Note 4 and Note 8 to the Consolidated Financial Statements included elsewhere in this Quarterly Report on 10-Q for amounts outstanding as of June 30, 2022 related to debt and commitments and contingencies, respectively.
Cash flows
Operating activities
Net cash provided by operating activities in the six months ended June 30, 2022 was $102.3 million. Generally, the primary drivers of our cash flow from operations are profitability and changes in the levels of inventory and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. The positive cash flow from operations for the six months ended June 30, 2022 was primarily due to net income of $1.1 billion along with a seasonal $393.4 million decrease in residential mortgage loans available for sale, offset by a net increase in inventories of $1.7 billion, which was primarily attributable to higher house inventory in production combined with investment in land inventory to support future growth. Reflecting the higher house inventory levels, we also experienced an increase in accounts payable.
Net cash provided by operating activities in the six months ended June 30, 2021 was $432.1 million. The positive cash flow from operations in six months ended June 30, 2021 was primarily due to our net income of $807.5 million, which included various non-cash items including a loss on debt retirement of $61.5 million, partially offset by a net increase in inventories of $632.6 million, which was primarily attributable to higher house inventory in production. Reflecting the higher house inventory levels, we also experienced an increase in accounts payable.
Investing activities
Net cash used in investing activities in the six months ended June 30, 2022 was $123.1 million. These cash outflows primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of Innovative Construction Group ("ICG"), $50.5 million of investments in unconsolidated entities as well as capital expenditures of $62.6 million related to our ongoing investments in new communities, facilities, and certain information technology applications.
Net cash used in investing activities in the six months ended June 30, 2021 was $47.4 million. These cash outflows in 2021 primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of ICG, as well as capital expenditures of $31.5 million related to our ongoing investments in new communities and information technology applications.
Financing activities
Net cash used in financing activities in the six months ended June 30, 2022 totaled $1.1 billion. These cash outflows resulted primarily from the repurchase of 17.4 million common shares for $794.2 million under our share repurchase authorization, payments of $74.2 million in cash dividends, and net repayments of $183.3 million under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.
Net cash used in financing activities in the six months ended June 30, 2021 totaled $1.3 billion. These cash outflows in 2021 resulted primarily from the repurchase of 6.9 million common shares for $353.7 million under our share repurchase authorization, repayments of debt totaling $797.4 million, payments of $74.9 million in cash dividends, and net repayments of
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$59.2 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.
Seasonality
Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations in the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, supply chain challenges, increase in mortgage interest rates, and other macroeconomic factors, our quarterly results for 2022 and 2021 are not necessarily indicative of results that may be achieved in the future.
Supplemental Guarantor Financial Information
As of June 30, 2022, PulteGroup, Inc. had outstanding $2.0 billion principal amount of unsecured senior notes due at dates from March 2026 through February 2035 and no amounts outstanding on its Revolving Credit Facility.
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:
•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; or
•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 salable value of all of its assets;
•the present fair salable 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
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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, you 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. There can be no 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):
| PulteGroup, Inc. and Guarantor Subsidiaries | |||||||||||
| Summarized Balance Sheet Data | |||||||||||
| ASSETS | June 30, 2022 | December 31, 2021 | |||||||||
| Cash, cash equivalents, and restricted cash | $608,113 | $1,598,328 | |||||||||
| House and land inventory | 10,518,299 | 8,859,163 | |||||||||
| Amount due from Non-Guarantor Subsidiaries | — | 278,531 | |||||||||
| Total assets | 12,431,145 | 11,658,352 | |||||||||
| LIABILITIES | |||||||||||
| Accounts payable, customer deposits, accrued and other liabilities | $3,050,111 | $2,788,465 | |||||||||
| Notes payable | 2,030,112 | 2,029,044 | |||||||||
| Amount due to Non-Guarantor Subsidiaries | 50,055 | — | |||||||||
| Total liabilities | 5,251,531 | 4,986,491 | |||||||||
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| Summarized Statement of Operations Data | 2022 | 2021 | |||||||||
| Revenues | $6,778,198 | $5,726,823 | |||||||||
| Cost of revenues | 4,747,604 | 4,231,460 | |||||||||
| Selling, general, and administrative expenses | 641,500 | 539,275 | |||||||||
| Income before income taxes | 1,356,409 | 875,942 | |||||||||
Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates in the six months ended June 30, 2022 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative disclosure
We are subject to market risk on our debt instruments primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair value of the debt instrument but not our earnings or cash flows. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair value of the debt instrument but could affect our earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity. As a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance or repurchase such debt.
The following table sets forth the principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value of our debt obligations as of June 30, 2022 ($000’s omitted):
| As of June 30, 2022 for the Years ending December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||||||||||||||||||
| Rate-sensitive liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Fixed rate debt | $ | 5,204 | $ | 13,055 | $ | 22,274 | $ | — | $ | 500,000 | $ | 1,500,000 | $ | 2,040,533 | $ | 2,101,783 | |||||||||||||||||||||||||||||||
| Average interest rate | — | % | 3.41 | % | 5.09 | % | — | % | 5.50 | % | 6.14 | % | 5.94 | % | |||||||||||||||||||||||||||||||||
| Variable rate debt (a) | $ | 442,816 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 442,816 | $ | 442,816 | |||||||||||||||||||||||||||||||
| Average interest rate | 2.69 | % | — | % | — | % | — | % | — | % | — | % | 2.69 | % | |||||||||||||||||||||||||||||||||
(a) Includes the Pulte Mortgage Repurchase Agreement and amounts outstanding under our Revolving Credit Facility, under which there was no amount outstanding at June 30, 2022.
Qualitative disclosure
There have been no material changes to the qualitative disclosure found in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2021.
SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS
As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or implied by, these statements. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “project,” “may,” “can,” “could,” “might,” "should", “will” and similar expressions identify forward-looking statements, including statements related to any potential impairment charges and the impacts or effects thereof, expected operating and performing results, planned transactions, planned objectives of management, future developments or conditions in the industries in which we participate and other trends, developments and uncertainties that may affect our business in the future.
Such risks, uncertainties and other factors include, among other things: interest rate changes and the availability of mortgage financing; competition within the industries in which we operate; including as it relates to our ability to take pricing actions to offset rising expenses; the availability and cost of land and other raw materials used by us in our homebuilding operations; the impact of any changes to our strategy in responding to the cyclical nature of the industry, including any changes regarding our land positions and the levels of our land spend; the availability and cost of insurance covering risks associated with our businesses; shortages and the cost of labor; weather related slowdowns; slow growth initiatives and/or local building moratoria; governmental regulation directed at or affecting the housing market, the homebuilding industry or construction activities; uncertainty in the mortgage lending industry, including revisions to underwriting standards and repurchase requirements associated with the sale of mortgage loans; the interpretation of or changes to tax, labor and environmental laws which could have a greater impact on our effective tax rate or the value of our deferred tax assets than we anticipate; economic changes nationally or in our local markets, including inflation, deflation, changes in consumer confidence and preferences and the state of the market for homes in general; legal or regulatory proceedings or claims; our ability to generate sufficient cash flow in
39
order to successfully implement our capital allocation priorities; required accounting changes; terrorist acts and other acts of war; the negative impact of the COVID-19 pandemic on our financial position and ability to continue our Homebuilding or Financial Services activities at normal levels or at all in impacted areas; the duration, effect and severity of the COVID-19 pandemic; the measures that governmental authorities take to address the COVID-19 pandemic which may precipitate or exacerbate one or more of the above-mentioned and/or other risks and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period of time; and other factors of national, regional and global scale, including those of a political, economic, business and competitive nature. See PulteGroup's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and other public filings with the Securities and Exchange Commission (the "SEC") for a further discussion of these and other risks and uncertainties applicable to our businesses. PulteGroup undertakes no duty to update any forward-looking statement, whether as a result of new information, future events or changes in PulteGroup's expectations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based upon, and as of the date of that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2022.
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There was no change in our internal control over financial reporting during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs ($000’s omitted) (2) | ||||||||||||||||||||
| April 1, 2022 to April 30, 2022 | 2,616,453 | $ | 42.04 | 2,616,453 | $ | 847,573 | |||||||||||||||||
| May 1, 2022 to May 31, 2022 | 1,645,373 | $ | 42.55 | 1,645,373 | $ | 777,567 | |||||||||||||||||
| June 1, 2022 to June 30, 2022 | 2,838,253 | $ | 40.24 | 2,838,253 | $ | 663,343 | |||||||||||||||||
| Total | 7,100,079 | $ | 41.44 | 7,100,079 | |||||||||||||||||||
(1) In the six months ended June 30, 2022, participants surrendered 0.3 million shares for payment of minimum tax obligations upon the vesting or exercise of previously granted share-based compensation awards. Such shares were not repurchased as part of our publicly-announced share repurchase programs and are excluded from the table above.
(2) The Board of Directors approved a share repurchase authorization increase of $1.0 billion on January 31, 2022. There is no expiration date for this program, under which $663.3 million remained as of June 30, 2022.
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Item 6. Exhibits
Exhibit Number and Description
| 3 | (a) | |||||||||||||
| (b) | ||||||||||||||
| (c) | ||||||||||||||
| (d) | ||||||||||||||
| (e) | ||||||||||||||
| 4 | (a) | Any instrument with respect to long-term debt, where the securities authorized thereunder do not exceed 10% of the total assets of PulteGroup, Inc. and its subsidiaries, has not been filed. The Company agrees to furnish a copy of such instruments to the SEC upon request. | ||||||||||||
| (b) | ||||||||||||||
| (c) | ||||||||||||||
| (d) | ||||||||||||||
| (e) | ||||||||||||||
| (f) | ||||||||||||||
| (g) | ||||||||||||||
| 10 | (a) | |||||||||||||
| 22 | (a) | |||||||||||||
| 31 | (a) | |||||||||||||
| (b) | ||||||||||||||
| 32 | ||||||||||||||
| 101.INS | Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||||||
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| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL | |||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PULTEGROUP, INC. | ||||||||
| /s/ Robert T. O'Shaughnessy | ||||||||
| Robert T. O'Shaughnessy | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial Officer and duly authorized officer) | ||||||||
| Date: | July 26, 2022 | |||||||
44
EXHIBIT 31(a)
CHIEF EXECUTIVE OFFICER'S CERTIFICATION
I, Ryan R. Marshall, certify that:
1.I have reviewed this quarterly report on Form 10-Q of PulteGroup, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | July 26, 2022 | /s/ Ryan R. Marshall | ||||||
| Ryan R. Marshall | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 31(b)
CHIEF FINANCIAL OFFICER'S CERTIFICATION
I, Robert T. O'Shaughnessy, certify that:
1.I have reviewed this quarterly report on Form 10-Q of PulteGroup, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | July 26, 2022 | /s/ Robert T. O'Shaughnessy | ||||||
Robert T. O'Shaughnessy | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
EXHIBIT 32
Certification
Pursuant to 18 United States Code § 1350 and
Rule 13a-14(b) of the Securities Exchange Act of 1934
In connection with the Quarterly Report of PulteGroup, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies that to his knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | July 26, 2022 | ||||
| /s/ Ryan R. Marshall | ||
| Ryan R. Marshall | ||
| President and Chief Executive Officer | ||
| /s/ Robert T. O'Shaughnessy | ||
| Robert T. O'Shaughnessy | ||
| Executive Vice President and Chief Financial Officer | ||
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