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.

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.

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.

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.

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.

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.

			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

			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

			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.

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.

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

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.

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.

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

$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

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.