Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations are provided as a supplement to and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Our home sales revenues increased 16% and 17% for the three and nine months ended September 30, 2022 over the comparable prior year periods, respectively, while our gross margins increased 360 bps and 390 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 nine months ended September 30, 2022 were placed under contract with the customers. However, the strength of new home demand has progressively declined during 2022 as the Federal Reserve increased benchmark interest rates in response to inflation, which, in turn, drove national mortgage and other interest rates higher, impacting home affordability and consumer sentiment. These increases in interest rates, along with ongoing high inflation, disruptions related to the conflict in Ukraine, and other macroeconomic factors, have tempered new home demand in all of our markets. As a result, net new orders declined 28% and 23% in the three and nine months ended September 30, 2022, respectively, compared with the prior year periods. Our order backlog at September 30, 2022 remained high relative to historical levels, but decreased 11% and 5% in units from June 30, 2022 and December 31, 2021, respectively. These decreases in backlog were driven by the aforementioned lower new orders, combined with an increasing cancellation rate, which increased to 24% in the three months ended September 30, 2022, compared to 10% in the comparable prior year period.

Supply chain constraints that began after the onset of the COVID-19 pandemic have continued to limit the availability of certain materials and construction labor, which, combined with delays in municipal approvals and inspections, continue to pressure production cycle times of the homes we are constructing. The time required to construct a home was approximately seven weeks longer in the third quarter of 2022 as compared with the prior year period and approximately one week longer than the second quarter of 2022. The noted supply chain and labor issues have led to significant cost pressures in almost all areas of our business, but especially related to construction labor and materials. In 2021 and the first half of 2022, we were able to increase pricing to offset the majority of such cost increases, but pricing will be significantly more challenged in the near term given the lower demand for new homes.

In response to the significant shift in market conditions in 2022, we have slowed the pace of our housing starts, have increased sales incentives, and are taking additional pricing actions in many of our communities. We are updating the underwriting for each of our land option contracts prior to buying additional land and have recently made decisions to walk away from a number of land option agreements, which resulted in write-offs of deposits and pre-acquisition costs totaling $24.5 million in the three months ended September 30, 2022. We will be working with our trade partners to update the costs for materials, labor, and services to reflect current market conditions and will adjust our overhead cost structure as necessary to align with demand. We expect that the more challenging environment for new residential housing will continue through at least 2023 and will result in lower revenues and profitability during those periods. Despite these conditions, there remains a housing shortage across the United States, and we are confident in our ability to navigate this environment and to position the Company to take advantage of opportunities as they arise.

Consolidated Operations

The following is a summary of our operating results by line of business ($000's omitted, except per share data):

			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2022						2021						2022						2021
Income before income taxes:
Homebuilding			$	783,763					$	571,763					$	2,167,562					$	1,487,486
Financial Services			27,514						48,639						108,181						166,442
Income before income taxes			811,277						620,402						2,275,743						1,653,928
Income tax expense			(183,349)						(144,853)						(540,657)						(370,873)
Net income			$	627,928					$	475,549					$	1,735,086					$	1,283,055
Per share data - assuming dilution:
Net income			$	2.69					$	1.82					$	7.22					$	4.85

*•*Homebuilding income before income taxes in the three and nine months ended September 30, 2022 increased 37% and 46% compared with the same periods in 2021, respectively. The results are primarily the result of a significantly higher average selling price and gross margin partially offset by higher write-offs of land deposits and pre-acquisition costs. Results for the nine months ended September 30, 2021 also include insurance reserve reversals of $56.6 million and a loss on debt retirement of $61.5 million (see Note 8 and Note 4, respectively).

• Financial Services income before income taxes in the three and nine months ended September 30, 2022 decreased 43% and 35% 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 nine months ended September 30, 2022 was 22.6% and 23.8%, respectively, compared to 23.3% and 22.4%, 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 and benefits associated with federal energy efficient home credits, while the 2021 tax rate also included a benefit associated with 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																		Nine Months Ended
			September 30,																		September 30,
			2022						2022 vs. 2021						2021						2022						2022 vs. 2021						2021
Home sale revenues			$	3,840,449					16		%				$	3,324,483					$	10,720,364					17		%				$	9,156,371
Land sale and other revenues			30,658						(51)		%				63,085						97,626						(21)		%				123,321
Total Homebuilding revenues			3,871,107						14		%				3,387,568						10,817,990						17		%				9,279,692
Home sale cost of revenues (a)			(2,685,596)						10		%				(2,443,074)						(7,498,027)						11		%				(6,754,204)
Land sale and other cost of revenues			(26,314)						(45)		%				(47,483)						(89,971)						(13)		%				(103,313)
Selling, general, and administrative expenses ("SG&A") (b)			(350,112)						9		%				(320,506)						(1,030,391)						19		%				(864,478)
Loss on debt retirement			—						—		%				—						—						(c)						(61,469)
Other expense, net			(25,322)						434		%				(4,742)						(32,039)						266		%				(8,742)
Income before income taxes			$	783,763					37		%				$	571,763					$	2,167,562					46		%				$	1,487,486
Supplemental data:
Gross margin from home sales			30.1		%				360 bps						26.5		%				30.1		%				390 bps						26.2		%
SG&A as a percentage of home sale revenues			9.1		%				(50) bps						9.6		%				9.6		%				20 bps						9.4		%
Closings (units)			7,047						1		%				7,007						20,263						—		%				20,283
Average selling price			$	545					15		%				$	474					$	529					17		%				$	451
Net new orders (d):
Units			4,924						(28)		%				6,796						19,313						(23)		%				24,970
Dollars			$	2,807,308					(26)		%				$	3,780,354					$	11,442,579					(10)		%				$	12,668,805
Cancellation rate			24		%										10		%				15		%										8		%
Average active communities			823						7		%				768						797						(1)		%				804
Backlog at September 30:
Units																					17,053						(14)		%				19,845
Dollars																					$	10,581,026					3		%				$	10,305,614

*(a)*Includes the amortization of capitalized interest.

*(b)*Includes insurance reserve reversals of $56.6 million for the nine months ended September 30, 2021, (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 nine months ended September 30, 2022 were higher than the prior year periods by $516.0 million and $1.6 billion, respectively. In the three months ended September 30, 2022, the 16% increase resulted from a 15% increase in average selling price combined with a 1% increase in closings. In the nine months ended September 30, 2022, the 17% increase resulted from a 17% 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 30.1% in both the three and nine months ended September 30, 2022, compared to 26.5% and 26.2% in the three and nine months ended September 30, 2021, respectively. Gross margins reflected the robust consumer demand that existed in 2021 and early 2022 when the majority of the homes that closed 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 increases in house and land costs through pricing actions in the three and nine months ended September 30, 2022.

Land sale and other revenues

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale and other revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales and other revenues contributed income of $4.3 million and $7.7 million for the three and nine months ended September 30, 2022, respectively, compared to $15.6 million and $20.0 million for the three and nine months ended September 30, 2021, respectively. Income in the three and nine months ended September 30, 2021 included a gain of $12.9 million related to a land sale transaction in California that had been in the entitlement process for a number of years.

SG&A

SG&A as a percentage of home sale revenues was 9.1% and 9.6% in the three and nine months ended September 30, 2022, respectively, compared with 9.6% and 9.4% for the three and nine months ended September 30, 2021, respectively. The gross dollar amount of our SG&A increased $29.6 million, or 9%, for the three months ended September 30, 2022 compared to the prior year period, and increased $165.9 million, or 19%, for the nine months ended September 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 $56.6 million recorded in the nine months ended September 30, 2021 (see Note 8).

Other expense, net

Other expense, net includes the following ($000’s omitted):

			Three Months Ended												Nine Months Ended
September 30,												September 30,
2022						2021						2022						2021
Write-offs of deposits and pre-acquisition costs			$	(24,462)					$	(3,567)					$	(32,475)					$	(6,801)
Amortization of intangible assets			(2,766)						(3,612)						(8,353)						(13,571)
Interest income			370						436						1,048						1,541
Interest expense			(65)						(115)						(216)						(387)
Equity in earnings of unconsolidated entities			446						604						2,390						5,620
Miscellaneous, net			1,155						1,512						5,567						4,856
Total other expense, net			$	(25,322)					$	(4,742)					$	(32,039)					$	(8,742)

Net new orders

Net new orders in units decreased 28% while net new orders in dollars decreased 26% in the three months ended September 30, 2022, as compared to the prior year period. Net new orders in units decreased 23% while net new orders in dollars decreased 10% for the nine months ended September 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, which began 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 a 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 24% and 15% for the three and nine months ended September 30, 2022, respectively, and 10% and 8% for the comparable periods in 2021, respectively. The

increase in cancellation rate occurred primarily in the second and third quarters of 2022 due to a decrease in consumer confidence coupled with the aforementioned increases in mortgage interest rates. Ending backlog dollars, which represents orders for homes that have not yet closed, increased 3% at September 30, 2022 compared with September 30, 2021, as the result of higher average selling prices and elongated production cycle times, partially offset by lower net new orders.

Homes in production

The following is a summary of our homes in production:

			September 30, 2022						September 30, 2021
Sold			14,854						15,676
Unsold
Under construction			7,656						3,017
Completed			500						109
			8,156						3,126
Models			1,272						1,212
Total			24,282						20,014

The number of homes in production at September 30, 2022 was 21% higher than at September 30, 2021. This increase is primarily attributable to a higher level of unsold homes, or speculative homes, under construction, which 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. The higher cancellation rate in the three months ended September 30, 2022 also contributed to the increase in unsold inventory.

Controlled lots

The following is a summary of our lots under control at September 30, 2022 and December 31, 2021:

			September 30, 2022																		December 31, 2021
			Owned						Optioned						Controlled						Owned						Optioned						Controlled
Northeast			4,661						7,773						12,434						4,422						7,637						12,059
Southeast			17,106						27,929						45,035						15,604						28,887						44,491
Florida			28,989						33,625						62,614						27,654						32,240						59,894
Midwest			13,982						14,505						28,487						11,723						17,118						28,841
Texas			20,777						18,683						39,460						20,538						21,235						41,773
West			29,320						14,312						43,632						29,137						12,101						41,238
Total			114,835						116,827						231,662						109,078						119,218						228,296
			50		%				50		%				100		%				48		%				52		%				100		%
Developed (%)			41		%				15		%				28		%				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. We also continue to seek to maintain a high percentage of our lots that are controlled via land option agreements, as such contracts enable us to defer acquiring properties until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. However, the percentage of lots controlled via land option agreements decreased in the three months ended September 30, 2022 as the result of our decision to terminate a number of pending transactions. The remaining purchase price under our land option agreements totaled $6.0 billion at September 30, 2022.

Homebuilding Segment Operations

As of September 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																		Nine Months Ended
			September 30,																		September 30,
			2022						2022 vs. 2021						2021						2022						2022 vs. 2021						2021
Home sale revenues:
Northeast			$	252,760					(7)		%				$	273,206					$	665,488					(10)		%				$	735,418
Southeast			718,506						22		%				587,292						1,833,501						19		%				1,539,928
Florida			931,369						32		%				707,990						2,637,919						27		%				2,072,344
Midwest			562,373						12		%				504,273						1,566,379						18		%				1,332,407
Texas			584,825						42		%				412,201						1,598,873						27		%				1,255,377
West			790,616						(6)		%				839,521						2,418,204						9		%				2,220,897
			$	3,840,449					16		%				$	3,324,483					$	10,720,364					17		%				$	9,156,371
Income (loss) before income taxes (a)****:
Northeast			$	52,682					(1)		%				$	53,410					$	140,052					6		%				$	132,604
Southeast			181,667						66		%				109,407						460,056						68		%				274,174
Florida			220,850						65		%				133,642						628,979						64		%				382,682
Midwest			79,168						9		%				72,537						230,419						17		%				196,205
Texas			133,404						88		%				71,062						351,253						59		%				221,099
West			149,001						(14)		%				173,137						468,873						16		%				403,039
Other homebuilding (b)			(33,009)						20		%				(41,432)						(112,070)						8		%				(122,317)
			$	783,763					37		%				$	571,763					$	2,167,562					46		%				$	1,487,486

*(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 $56.6 million and a loss on debt retirement of $61.5 million in the nine months ended September 30, 2021 (see Note 8 and Note 4**, respectively).

			Operating Data by Segment ($000's omitted)
			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2022						2022 vs. 2021						2021						2022						2022 vs. 2021						2021
Closings (units):
Northeast			378						(20)		%				472						1,026						(20)		%				1,286
Southeast			1,295						1		%				1,278						3,406						(3)		%				3,507
Florida			1,628						8		%				1,502						4,840						5		%				4,614
Midwest			1,104						(2)		%				1,123						3,179						6		%				3,004
Texas			1,431						12		%				1,276						4,124						3		%				4,020
West			1,211						(11)		%				1,356						3,688						(4)		%				3,852
			7,047						1		%				7,007						20,263						—		%				20,283
Average selling price:
Northeast			$	669					16		%				$	579					$	649					13		%				$	572
Southeast			555						21		%				460						538						23		%				439
Florida			572						21		%				471						545						21		%				449
Midwest			509						13		%				449						493						11		%				444
Texas			409						27		%				323						388						24		%				312
West			653						5		%				619						656						14		%				577
			$	545					15		%				$	474					$	529					17		%				$	451
Net new orders - units:
Northeast			237						(36)		%				368						1,046						(28)		%				1,451
Southeast			1,081						—		%				1,085						3,716						(7)		%				4,010
Florida			1,471						(20)		%				1,844						4,898						(24)		%				6,451
Midwest			655						(39)		%				1,075						2,660						(32)		%				3,936
Texas			979						(12)		%				1,117						3,718						(17)		%				4,468
West			501						(62)		%				1,307						3,275						(30)		%				4,654
			4,924						(28)		%				6,796						19,313						(23)		%				24,970
Net new orders - dollars:
Northeast			$	165,018					(25)		%				$	221,016					$	736,434					(15)		%				$	864,079
Southeast			599,621						2		%				588,400						2,130,969						8		%				1,966,434
Florida			911,099						(13)		%				1,043,871						3,188,807						(4)		%				3,308,173
Midwest			364,849						(32)		%				538,621						1,442,207						(22)		%				1,856,704
Texas			385,634						(17)		%				463,727						1,551,534						(6)		%				1,655,023
West			381,087						(59)		%				924,719						2,392,628						(21)		%				3,018,392
			$	2,807,308					(26)		%				$	3,780,354					$	11,442,579					(10)		%				$	12,668,805

			Operating Data by Segment ($000's omitted)
			Three Months Ended																		Nine Months Ended
			September 30,																		September 30,
			2022												2021						2022						2022 vs. 2021						2021
Cancellation rates:
Northeast			13		%										9		%				9		%										7		%
Southeast			15		%										6		%				9		%										6		%
Florida			18		%										8		%				13		%										7		%
Midwest			14		%										7		%				11		%										6		%
Texas			33		%										16		%				22		%										12		%
West			48		%										13		%				23		%										11		%
			24		%										10		%				15		%										8		%
Unit backlog:
Northeast																					808						(28)		%				1,118
Southeast																					2,786						(2)		%				2,843
Florida																					5,488						—		%				5,491
Midwest																					2,169						(31)		%				3,131
Texas																					2,693						(23)		%				3,501
West																					3,109						(17)		%				3,761
																					17,053						(14)		%				19,845
Backlog dollars:
Northeast																					$	582,178					(16)		%				$	689,984
Southeast																					1,660,331						14		%				1,457,415
Florida																					3,608,719						26		%				2,863,695
Midwest																					1,223,984						(19)		%				1,514,932
Texas																					1,254,262						(9)		%				1,380,737
West																					2,251,552						(6)		%				2,398,851
																					$	10,581,026					3		%				$	10,305,614

			Operating Data by Segment ($000’s omitted)
			Three Months Ended												Nine Months Ended
			September 30,												September 30,
			2022						2021						2022						2021
Land-related charges (a)****:
Northeast			$	3,759					$	223					$	3,961					$	357
Southeast			5,889						1,915						9,724						3,253
Florida			4,881						209						6,493						642
Midwest			1,677						477						2,780						969
Texas			2,794						141						3,328						932
West			5,462						602						6,189						667
Other homebuilding			—						—						—						—
			$	24,462					$	3,567					$	32,475					$	6,820

(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.

Northeast

For the third quarter of 2022, Northeast home sale revenues decreased by 7% when compared with the prior year period due to a 20% decrease in closings partially offset by a 16% increase in average selling price. The decrease in closings and increase in average selling price occurred across all markets. Income before income taxes decreased 1% primarily due to the decrease in closings partially offset by increased average selling price and higher gross margins across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2022, Northeast home sale revenues decreased by 10% when compared with the prior year period due to a 20% decrease in closings partially offset by a 13% 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 6% primarily due to higher gross margins across the majority of markets. Net new orders decreased across all markets.

Southeast

For the third quarter of 2022, Southeast home sale revenues increased 22% when compared with the prior year period due to a 21% increase in average selling price combined with a 1% increase in closings. The increase in average selling price occurred across all markets while the increase in closings occurred across the majority of markets. Income before income taxes increased 66% 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 nine months ended September 30, 2022, Southeast home sale revenues increased 19% when compared with the prior year period due to a 23% increase in average selling price partially offset by a 3% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings occurred across the majority of markets. Income before income taxes increased 68% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across the majority of markets.

Florida

For the third quarter of 2022, Florida home sale revenues increased 32% when compared with the prior year period due to a 21% increase in average selling price combined with an 8% increase in closings. The increase in average selling price occurred across all markets, while the increase in closings occurred across the majority of markets. Income before income taxes increased 65% 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 nine months ended September 30, 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 the average selling price. The increase in closings occurred across the majority of markets while the increase in average selling price occurred across all markets. Income before income taxes increased 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 third quarter of 2022, Midwest home sale revenues increased 12% when compared with the prior year period due to a 13% 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 occurred across the majority of markets. Income before income taxes increased 9% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2022, Midwest home sale revenues increased 18% when compared with the prior year period due to a 6% increase in closings combined with an 11% 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 17% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across the majority of markets.

Texas

For the third quarter of 2022, Texas home sale revenues increased 42% when compared with the prior year period due to a 27% increase in average selling price combined with a 12% increase in closings. The increase in average selling price occurred across all markets while the increase in closings occurred across the majority of markets. Income before income taxes increased 88% primarily due to higher revenues and gross margins across the majority of markets. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2022, Texas home sale revenues increased 27% when compared with the prior year period due to a 24% increase in average selling price combined with a 3% increase in closings. The increase in average selling price occurred across all markets while the increase 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.

West

For the third quarter of 2022, West home sale revenues decreased 6% when compared with the prior year period due to an 11% decrease in closings partially offset by a 5% increase in average selling price. The decrease in closings occurred across the majority of markets, while the increase in average selling price occurred across all markets. Income before income taxes decreased 14% primarily due to decreased revenues and gross margins, which was mixed among markets. The prior year period also included gains of $12.9 million related to a land sale transaction in California. Net new orders decreased across all markets.

For the nine months ended September 30, 2022, West home sale revenues increased 9% when compared with the prior year period due to a 14% increase in average selling price partially offset by a 4% 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 16% primarily due to increased revenues and gross margins across the majority of markets. The prior year period also included gains of $12.9 million related to a land sale transaction in California. 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																		Nine Months Ended
			September 30,																		September 30,
			2022						2022 vs. 2021						2021						2022						2022 vs. 2021						2021
Mortgage revenues			$	47,773					(33)		%				$	71,238					$	169,009					(27)		%				$	230,505
Title services revenues			19,893						18		%				16,818						55,617						15		%				48,565
Insurance brokerage commissions			5,043						47		%				3,426						15,001						57		%				9,562
Total Financial Services revenues			72,709						(21)		%				91,482						239,627						(17)		%				288,632
Expenses			(45,323)						6		%				(42,835)						(132,655)						8		%				(122,921)
Other income (expense), net			128						(a)						(8)						1,209						(a)						731
Income before income taxes			$	27,514					(43)		%				$	48,639					$	108,181					(35)		%				$	166,442
Total originations:
Loans			4,369						(14)		%				5,078						12,994						(14)		%				15,082
Principal			$	1,715,344					(5)		%				$	1,810,722					$	5,009,957					(3)		%				$	5,186,913

*(a)*Percentage not meaningful.

			Nine Months Ended
			September 30,
			2022						2021
Supplemental data:
Capture rate			78.7		%				86.1		%
Average FICO score			748						751
Funded origination breakdown:
Government (FHA, VA, USDA)			19		%				20		%
Other agency			74		%				73		%
Total agency			93		%				93		%
Non-agency			7		%				7		%
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 nine months ended September 30, 2022 decreased 21% and 17%, 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 nine months ended September 30, 2022 decreased 43% and 35% compared to the same periods in 2021, respectively, primarily due to 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 nine months ended September 30, 2022 was 22.6% and 23.8%, respectively, compared to 23.3% and 22.4%, respectively, for the same periods in 2021. The 2022 effective income tax rate for the three months ended September 30, 2022 was lower than the same period in 2021 due to the retroactive extension of the federal energy efficient home credits in the current year period. The 2022 effective income tax rate for the nine months ended September 30, 2022 was higher than the same period in 2021 due to a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards in 2021.

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing available financing sources, including revolving bank credit and securities offerings.

At September 30, 2022, we had unrestricted cash and equivalents of $231.3 million, restricted cash balances of $60.1 million, and $590.3 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 22.5% at September 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 September 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 nine months ended September 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 $55.2 million and $40.2 million at September 30, 2022 and December 31, 2021, respectively. These notes have maturities ranging up to five 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 (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 or a base rate plus an applicable margin, as defined therein. The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2022, we were in compliance with all covenants.

At September 30, 2022, we had $319.0 million borrowings outstanding, $340.7 million of letters of credit issued, and $590.3 million of remaining capacity under the Revolving Credit Facility. At December 31, 2021, we had no borrowings outstanding, $298.8 million of letters of credit issued, and $701.2 million of remaining capacity under the Revolving Credit Facility.

Joint venture debt

At September 30, 2022, aggregate outstanding debt of unconsolidated joint ventures was $70.7 million of which $42.0 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 the Repurchase Agreement, which matures on July 27, 2023. The maximum aggregate commitment was $655.0 million at September 30, 2022, which will increase to $800.0 million during the seasonally high borrowing period from December 27, 2022 to January 12, 2023. Thereafter, the maximum aggregate commitment ranges from $360.0 million to $500.0 million. 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 $338.2 million and $626.1 million outstanding under the Repurchase Agreement at September 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 nine months ended September 30, 2022, we declared cash dividends totaling $106.7 million and repurchased 21.8 million shares under our repurchase authorization for $974.7 million. In the nine months ended September 30, 2021, we declared cash dividends totaling $110.3 million and repurchased 12.0 million shares under our repurchase authorization for $614.3 million. On January 31, 2022, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At September 30, 2022, we had remaining authorization to repurchase $482.9 million of common shares.

Contractual Obligations

We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as of September 30, 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 September 30, 2022, we had outstanding letters of credit totaling $340.7 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $2.2 billion at September 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 September 30, 2022, these agreements had an aggregate remaining purchase price of $6.0 billion. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. At September 30, 2022, outstanding deposits totaled $273.1 million, of which $17.2 million is refundable.

For further information regarding our primary obligations, refer to Note 4 and Note 8 to the Consolidated Financial Statements included elsewhere in this Quarterly Report on 10-Q for amounts outstanding as of September 30, 2022 related to debt and commitments and contingencies, respectively.

Cash flows

Operating activities

Net cash used in operating activities in the nine months ended September 30, 2022 was $303.9 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 cash outflows from operations for the nine months ended September 30, 2022 were primarily due to net income of $1.7 billion along with a seasonal $507.9 million decrease in residential mortgage loans available for sale, offset by a net increase in inventories of $2.7 billion, which was primarily attributable to higher house inventory in production resulting from a large order backlog, more unsold units, and extended production cycle times combined with investment in land inventory.

Net cash provided by operating activities in the nine months ended September 30, 2021 was $548.2 million. The positive cash flow from operations in nine months ended September 30, 2021 was primarily due to our net income of $1.3 billion, 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 $1.1 billion, which was primarily attributable to higher house inventory in production resulting from higher sales activity and extended production cycle times combined with higher investment in land inventory to support future growth.

Investing activities

Net cash used in investing activities in the nine months ended September 30, 2022 was $154.7 million. These cash outflows primarily reflected a $10.4 million deferred payment related to the 2020 acquisition of Innovative Construction Group ("ICG"), $58.2 million of investments in unconsolidated entities, and capital expenditures of $88.6 million related to our ongoing investments in new communities, facilities, and information technology applications.

Net cash used in investing activities in the nine months ended September 30, 2021 was $86.5 million. These cash outflows in 2021 primarily reflected a $10.4 million deferred payment related to ICG, $35.8 million of investments in unconsolidated entities, and capital expenditures of $52.1 million related to our ongoing investments in new communities and information technology applications. These outflows were partially offset by distributions from unconsolidated entities of $11.5 million.

Financing activities

Net cash used in financing activities in the nine months ended September 30, 2022 totaled $1.1 billion. These cash outflows resulted primarily from the repurchase of 21.8 million common shares for $974.7 million under our share repurchase authorization, payments of $109.6 million in cash dividends, and net repayments of $287.9 million under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale. These cash outflows were partially offset by net borrowings of $319.0 million under the Revolving Credit Facility.

Net cash used in financing activities in the nine months ended September 30, 2021 totaled $1.5 billion. These cash outflowsresulted primarily from the repurchase of 12.0 million common shares for $614.3 million under our share repurchase authorization, repayments of debt totaling $797.4 million, and payments of $111.7 million in cash dividends. These cash outflows were partially offset by net borrowings of $64.7 million under the Repurchase Agreement.

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 September 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 $319.0 million 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			September 30, 2022						December 31, 2021
Cash, cash equivalents, and restricted cash			$134,930						$1,598,328
House and land inventory			11,475,615						8,859,163
Amount due from Non-Guarantor Subsidiaries			56,535						278,531
Total assets			12,889,975						11,658,352
LIABILITIES
Accounts payable, customer deposits, accrued and other liabilities			$2,846,809						$2,788,465
Notes payable			2,045,167						2,029,044
Total liabilities			5,393,580						4,986,491

			Nine Months Ended
			September 30,
Summarized Statement of Operations Data			2022						2021
Revenues			$10,600,314						$9,035,505
Cost of revenues			7,412,687						6,664,370
Selling, general, and administrative expenses			971,786						852,397
Income before income taxes			2,143,273						1,427,182

Critical Accounting Estimates

While there have been no significant changes to our critical accounting estimates in the nine months ended September 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, the following provides updated disclosure regarding our inventory estimates:

Generally, a community must have projected gross margin percentages in the single digits in order to potentially fail the undiscounted cash flow step and proceed to the fair value step. Our overall gross margin realized in the three months ended September 30, 2022 exceeded 30%, and we have only a small minority of communities with gross margins below 10%. However, in the event of an extended economic slowdown or other factors that lead to moderate or significant decreases in the price of new homes in certain geographic or buyer submarkets, we could have a larger number of communities that begin to approach these levels such that more detailed impairment analyses would be necessary, and the resulting impairments could be material. Additionally, we have $449.5 million of deposits and pre-acquisition costs at September 30, 2022 related to option agreements to acquire additional land. In the event of an extended economic slowdown or moderate to significant decreases in new home prices, we could elect to cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.