PULTEGROUP, INC. Overview
Our home sales revenues increased 18% in 2022 compared to 2021, while our gross margins increased 330 bps. 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 2022 were placed under contract with customers. However, the strength of new home demand rapidly declined starting in the second quarter of 2022 as theFederal 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, waning consumer confidence, and other macroeconomic factors, have tempered new home demand in all of our markets. As a result, net new orders declined 27% for the year ended 2022 compared to 2021. This decline was concentrated in the back half of the year, with net new orders declining 28% and 41% in the third and fourth quarters, respectively, compared with the same periods in 2021. As a result, our order backlog in units decreased 32% fromDecember 31, 2021 toDecember 31, 2022 . In addition to lower new orders, our order cancellation rate also increased significantly in the second half of 2022, ending the year with a fourth quarter cancellation rate of 32% compared with 11% in the fourth quarter of 2021. 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 two months longer in 2022 compared with 2021. 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. For example, lumber experienced heightened volatility during 2022, evidenced by a nearly 75% decrease from its early 2022 peak to its price onDecember 31, 2022 . Despite these challenges, pricing remained elevated in 2022 overall as average selling prices increased 17% compared to 2021. In 2021 and the first half of 2022, we were able to increase pricing to offset the majority of such cost increases, but pricing may 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 the majority of our communities. We are updating the underwriting for each of our land option contracts prior to buying additional land and have made decisions in recent months to terminate a number of land option agreements, which resulted in write-offs of deposits and pre-acquisition costs totaling$63.6 million in 2022. We plan to work 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. Despite these challenges, we remain focused on taking a measured approach to our capital allocation strategy in response to the current operating environment. Accordingly, we are focused on protecting liquidity and closely managing our cash flows, including the following planned actions: -Limiting our investment in land acquisition and development spend in 2023; -Updating the underwriting on each of our land option contracts prior to buying additional land; -Continuing our focus on increasing our lot optionality within our land pipeline for increased flexibility; -Maintaining a sufficient level of spec inventory in response to buyer preference to close in 30 to 90 days; -Taking a more opportunistic approach to share buybacks; and -Maintaining ample liquidity. 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 acrossthe 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. 19
-------------------------------------------------------------------------------- The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years endedDecember 31, 2022 and 2021. For similar operating and financial data and discussion of our fiscal 2021 results compared to our fiscal 2020 results, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II of our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 , which was filed with theSEC onFebruary 7, 2022 .
The following is a summary of our operating results by line of business (
Years Ended December 31,
2022 2021
Income before income taxes:
Homebuilding $ 3,307,328 $2,288,128
Financial Services 132,230 221,717
Income before income taxes 3,439,558 2,509,845
Income tax expense (822,241) (563,525)
Net income $ 2,617,317 $ 1,946,320
Per share data - assuming dilution:
Net income $ 11.01 $ 7.43
•Homebuilding income before income taxes increased 45% in 2022, primarily as the
result of a 17% higher average selling price combined with a 330 bps increase in
gross margin due to the robust consumer demand environment in 2021 and early
2022 when the majority of the homes closed in 2022 were placed under contract
with the customers.
•Financial Services income before income taxes decreased 40% in 2022 compared
with 2021 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 income tax rate was 23.9% and 22.5% for 2022 and 2021,
respectively. The higher effective tax rate in 2022 was primarily due to changes
in valuation allowances relating to projected utilization of certain state net
operating loss carryforwards (see Note 8 ).
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--------------------------------------------------------------------------------Homebuilding Operations
The following is a summary of income before income taxes for our Homebuilding
operations (
Years Ended December 31,
FY 2022 vs. FY
2022 2021 2021
Home sale revenues $ 15,774,135 18 % $ 13,376,812
Land sale and other revenues 143,144 (11) % 160,538
Total Homebuilding revenues 15,917,279 18 % 13,537,350
Home sale cost of revenues (a) (11,093,895) 13 % (9,841,961)
Land sale and other cost of revenues (119,906) (11) % (134,013)
Selling, general, and administrative expenses
("SG&A") (1,381,222) 14 % (1,208,698)
Loss on debt retirement - (b) (61,469)
Other expense, net (c) (14,928) (b) (3,081)
Income before income taxes $ 3,307,328 45 % $ 2,288,128
Supplemental data:
Gross margin from home sales (a) 29.7 % 330 bps 26.4 %
SG&A % of home sale revenues 8.8 % (20) bps 9.0 %
Closings (units) 29,111 1 % 28,894
Average selling price $ 542 17 % $ 463
Net new orders:
Units 23,277 (27) % 31,739
Dollars $ 13,589,392 (17) % $ 16,442,441
Cancellation rate 19 % 9 %
Average active communities 810 1 % 799
Backlog at December 31 :
Units 12,169 (32) % 18,003
Dollars $ 7,674,068 (22) % $ 9,858,811 (a)Includes the amortization of capitalized interest.
(b)Percentage not meaningful.
(c)See "Other expense, net" for a table summarizing significant items (see
Note 1 ).
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--------------------------------------------------------------------------------Home sale revenues
Home sale revenues for 2022 were higher than 2021 by$2.4 billion , or 18%. The increase was attributable to a 17% increase in average selling price combined with a 1% increase in closings. The increase in average selling price reflects 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 in 2022 were placed under contract with 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 increase in average selling price occurred in substantially all of our markets. Home sale gross margins Home sale gross margins were 29.7% in 2022, compared with 26.4% in 2021. Gross margins remained strong in both 2022 and 2021 relative to historical levels. Gross margins reflect the robust consumer demand that existed in 2021 and early 2022 when the majority of the homes that closed were placed under contract with 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 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$23.2 million and$26.5 million in 2022 and 2021, respectively. Income in 2021 included a gain of$12.9 million related to a land sale transaction inCalifornia that had been in the entitlement process for a number of years.
SG&A
SG&A as a percentage of home sale revenues was 8.8% and 9.0% in 2022 and 2021, respectively. The gross dollar amount of our SG&A increased$172.5 million , or 14%, in 2022 compared with 2021. This increase resulted primarily from higher sales commissions expense due to the higher revenues, increased headcount, and other overhead costs to support the increased number of homes in production. These results also reflect insurance reserve reversals of$65.0 million and$81.1 million in 2022 and 2021, respectively, based on favorable claims experience in recent years relative to historical expectations.
Other expense, net
Other expense, net includes the following (
2022 2021
Write-offs of deposits and pre-acquisition costs (Note 2)
$ (12,283) Amortization of intangible assets (Note 1) (11,118) (16,502) Interest income 1,971 1,953 Interest expense (284) (502)
Equity in earnings of unconsolidated entities ( Note 4 ) 50,680
17,200
Miscellaneous, net 7,382 7,053
Total other expense, net $ (14,928) $ (3,081)
The higher write-offs of deposits and pre-acquisition costs in 2022 occurred
primarily in the second half of 2022 as we made decisions to terminate a number
of land option agreements due to the aforementioned lower consumer demand in
recent months. Equity in earnings of unconsolidated entities reflects our share
of earnings from joint ventures and other investments with independent third
parties, and varies between periods based on the performance of the underlying
investments. The 2022 results included a gain of $49.1 million related to a
property sale in an unconsolidated entity in Northern California .
Net new orders
Net new orders in units decreased 27% in 2022 compared with 2021, while net new orders in dollars decreased by 17% compared with 2021. The lower new order volume began in mid-2022 as the market responded to increased affordability
22
--------------------------------------------------------------------------------
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. Likewise, the annual cancellation rate (canceled orders for the
period divided by gross new orders for the period) increased significantly to
19% in 2022 compared to 9% in 2021, including a fourth quarter cancellation rate
of 32% compared with 11% in the fourth quarter of 2021. Ending backlog dollars,
which represents orders for homes that have not yet closed, decreased 22% in
2022 compared with 2021 as the result of the lower net new orders.
Homes in production
The following is a summary of our homes in production atDecember 31, 2022 and 2021: 2022 2021 Sold 10,247 14,228 Unsold Under construction 6,874 4,105 Completed 982 90 7,856 4,195 Models 1,298 1,275 Total 19,401 19,698 The number of homes in production atDecember 31, 2022 was 2% lower compared toDecember 31, 2021 . This decrease is primarily attributable to the lower number of sold homes as a result of decreased new orders and higher cancellations. This decrease was partially offset by 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 2022 also contributed to the increase in unsold inventory. 23 --------------------------------------------------------------------------------
Controlled lots
The following is a summary of our lots under control atDecember 31, 2022 and 2021: December 31, 2022 December 31, 2021 Owned Optioned Controlled Owned Optioned Controlled Northeast 4,295 7,502 11,797 4,422 7,637 12,059 Southeast 16,692 23,433 40,125 15,604 28,887 44,491 Florida 26,413 29,667 56,080 27,654 32,240 59,894 Midwest 12,923 13,128 26,051 11,723 17,118 28,841 Texas 20,197 14,438 34,635 20,538 21,235 41,773 West 28,328 14,096 42,424 29,137 12,101 41,238 Total 108,848 102,264 211,112 109,078 119,218 228,296 52 % 48 % 100 % 48 % 52 % 100 % Developed (%) 43 % 16 % 30 % 38 % 13 % 25 % While competition for well-positioned land remains 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 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. However, the percentage of lots controlled via land option agreements decreased in 2022 as the result of our decision to terminate a number of pending transactions. The remaining purchase price under our land option agreements totaled$5.4 billion atDecember 31, 2022 .
Homebuilding Segment Operations
Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of homebuyers in our targeted markets. As ofDecember 31, 2022 , we conducted our operations in 42 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
We also have a reportable segment for our financial services operations, which consist principally of mortgage banking, title, and insurance brokerage operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.
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--------------------------------------------------------------------------------The following table presents selected financial information for our reportable Homebuilding segments:
Operating Data
by Segment (
Years Ended December 31,
FY 2022 vs. FY
2022 2021 2021
Home sale revenues:
Northeast $ 1,076,710 (4) % $ 1,127,182
Southeast 2,792,324 25 % 2,231,002
Florida 3,867,855 27 % 3,040,360
Midwest 2,314,600 17 % 1,971,593
Texas 2,227,379 24 % 1,800,767
West 3,495,267 9 % 3,205,908
$ 15,774,135 18 % $ 13,376,812
Income before income taxes (a):
Northeast $ 244,233 13 % $ 215,193
Southeast 692,279 66 % 417,880
Florida 939,034 60 % 585,680
Midwest 363,028 26 % 287,956
Texas 465,461 44 % 322,979
West (b) 687,403 16 % 592,845
Other homebuilding (c) (84,110) 37 % (134,405)
$ 3,307,328 45 % $ 2,288,128
Closings (units):
Northeast 1,614 (18) % 1,963
Southeast 5,105 3 % 4,956
Florida 6,928 4 % 6,640
Midwest 4,579 4 % 4,397
Texas 5,692 1 % 5,617
West 5,193 (2) % 5,321
29,111 1 % $ 28,894
Average selling price:
Northeast $ 667 16 % $ 574
Southeast 547 22 % 450
Florida 558 22 % 458
Midwest 505 13 % 448
Texas 391 22 % 321
West 673 12 % 603
$ 542 17 % $ 463
(a)Includes land-related charges as summarized in the following land-related
charges table (see Notes 2 and 3 ).
(b)West includes a gain of $49.1 million related to a property sale in an
unconsolidated entity in Northern California .
(c) Other homebuilding includes the amortization of intangible assets,
amortization of capitalized interest, and other items not allocated to the
operating segments. Also includes: insurance reserve reversals of $65.0 million
and $81.1 million in 2022 and 2021, respectively (see Note 11 ), and a loss
on debt retirement of $61.5 million in 2021 (see Note 5 ).
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--------------------------------------------------------------------------------The following table presents additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment (
Years Ended December 31,
2022 FY 2022 vs. FY 2021 2021
Net new orders - units:
Northeast 1,300 (28)% 1,798
Southeast 4,535 (11)% 5,092
Florida 6,139 (27)% 8,416
Midwest 3,241 (34)% 4,886
Texas 4,382 (23)% 5,663
West 3,680 (37)% 5,884
23,277 (27)% 31,739
Net new orders - dollars:
Northeast $ 908,136 (16)% $ 1,077,091
Southeast 2,561,279 -% 2,562,954
Florida 3,941,197 (12)% 4,470,326
Midwest 1,753,351 (25)% 2,329,112
Texas 1,779,578 (16)% 2,121,278
West 2,645,851 (32)% 3,881,680
$ 13,589,392 (17)% $ 16,442,441
Cancellation rates:
Northeast 11% 7%
Southeast 12% 6%
Florida 15% 8%
Midwest 12% 7%
Texas 26% 13%
West 30% 11%
19% 9%
Unit backlog:
Northeast 474 (40)% 788
Southeast 1,906 (23)% 2,476
Florida 4,641 (15)% 5,430
Midwest 1,350 (50)% 2,688
Texas 1,789 (42)% 3,099
West 2,009 (43)% 3,522
12,169 (32)% 18,003
Backlog dollars:
Northeast $ 342,658 (33)% $ 511,231
Southeast 1,131,817 (17)% 1,362,863
Florida 3,131,174 2% 3,057,832
Midwest 786,905 (42)% 1,348,155
Texas 853,801 (34)% 1,301,602
West 1,427,713 (37)% 2,277,128
$ 7,674,068 (22) % $ 9,858,811
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The following table presents additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000 's omitted)
Years Ended December 31,
2022 2021
Land-related charges*:
Northeast $ 4,597 $ 1,433
Southeast 18,381 5,365
Florida 13,515 1,088
Midwest 6,517 2,150
Texas 6,745 1,357
West 16,406 909
Other homebuilding 495 -
$ 66,656 $ 12,302 * Land-related charges include land impairments, net realizable value adjustments for land held for sale, and write-offs of deposits and pre-acquisition costs. Other homebuilding consists primarily of write-offs of capitalized interest resulting from land-related charges. See Notes 2 and
3 to the Consolidated Financial Statements for additional discussion of these charges.
Northeast:
For 2022, Northeast home sale revenues decreased 4% compared with 2021 due to an 18% 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 increased 13% primarily due to improved gross margins across the majority of markets. Net new orders decreased across all markets. Southeast: For 2022, Southeast home sale revenues increased 25% compared with 2021 due to a 3% increase in closings combined with a 22% 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 66% primarily due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across all markets. Florida: For 2022, Florida home sale revenues increased 27% compared with 2021 due to a 4% increase in closings combined with a 22% 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 60% due to increased revenues, as well as improved gross margins across all markets. Net new orders decreased across the majority of markets.
Midwest:
For 2022, Midwest home sale revenues increased 17% compared with 2021 due to a
4% increase in closings combined with a 13% 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 26% primarily due to increased revenues, as well as
improved gross margins across substantially all markets. Net new orders
decreased across all markets.
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--------------------------------------------------------------------------------For 2022,Texas home sale revenues increased 24% compared with 2021 due to a 1% increase in closings combined with a 22% 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 44% primarily due to increased revenues, as well as improved gross margins across substantially all markets. Net new orders decreased across the majority of markets.
West:
For 2022, West home sale revenues increased 9% compared with 2021 primarily due to a 12% increase in the average selling price partially offset by a 2% decrease in closings. The decrease in closings occurred across the majority of markets while the increase in average selling price occurred across all markets. Income before income taxes increased 16% primarily due to increased revenues, as well as improved gross margins, which were mixed among markets. Results for 2022 included a gain of$49.1 million related to a property sale in an unconsolidated entity inNorthern California , while the 2021 results included a gain of$12.9 million related to a land sale transaction inCalifornia that had been in the entitlement process for a number of years. 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, throughPulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000 's omitted): Years Ended December 31, 2022 FY 2022 vs. FY 2021 2021 Mortgage revenues$ 206,932 (32) %$ 304,287 Title services revenues 80,198 14 % 70,084 Insurance brokerage commissions 24,586 62
% 15,161
Total Financial Services revenues 311,716 (20) % 389,532 Expenses (180,696) 7 % (168,486) Other income (expense), net 1,210 (a) 671 Income before income taxes$ 132,230 (40) %$ 221,717 Total originations: Loans 18,186 (14) % 21,213 Principal$ 7,105,486 (5) %$ 7,454,108 (a) Percentage not meaningful 28 --------------------------------------------------------------------------------
Years Ended December 31,
2022 2021
Supplemental data:
Capture rate 77.6 % 85.8 %
Average FICO score 748 751
Funded origination breakdown:
Government (FHA, VA, USDA) 19 % 19 %
Other agency 74 % 73 %
Total agency 93 % 92 %
Non-agency 7 % 8 %
Total funded originations 100 % 100 %
Revenues
The demand for refinancing within the mortgage industry waned in 2021 and
throughout 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 during 2022 decreased 20% compared with 2021.
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
The decrease in income before income taxes for 2022 as compared with 2021 was 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 was 23.9% and 22.5% for 2022 and 2021, respectively. The higher effective tax rate in 2022 was primarily due to changes in valuation allowances relating to projected utilization of certain state net operating loss carryforwards in 2022 (see Note 8 ).
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. AtDecember 31, 2022 , we had unrestricted cash and equivalents of$1.1 billion , restricted cash balances of$41.4 million , and$946.6 million available under our Revolving Credit Facility (as defined below). 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 18.7% atDecember 31, 2022 as compared with 21.3% atDecember 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 refinancePulte 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 meetPulte Mortgage's anticipated financing needs. Beyond the next twelve months, we will need to repay or refinance our Revolving Credit Facility, which matures inJune 2027 , and our unsecured senior notes, the next tranche of which comes due in 2026. 29 -------------------------------------------------------------------------------- We believe that our current cash position and other available financing resources, coupled with our ongoing operating activities, will provide sufficient liquidity to fund our business needs over the next twelve months and beyond. To the extent the sources of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt, dispose of certain assets to fund our operating activities, or draw on existing or new debt facilities.
Unsecured senior notes
At
During 2021, we retired
Other notes payable
Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled$55.2 million atDecember 31, 2022 . These notes have maturities ranging up to four years, are secured by the applicable land positions to which they relate, and generally have no recourse to other assets. The stated interest rates on these notes range up to 6%.
Joint venture debt
AtDecember 31, 2022 , aggregate outstanding debt of unconsolidated joint ventures was$77.3 million , of which$42.0 million related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties in which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding. Revolving credit facility We maintain a revolving credit facility ("Revolving Credit Facility") maturing inJune 2027 that has a maximum borrowing capacity of$1.3 billion and contains an uncommitted accordion feature that could increase the capacity to$1.8 billion , subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, up to the maximum borrowing capacity. The interest rate on borrowings under the Revolving Credit Facility may be based on either the Secured Overnight Financing Rate or a base rate plus an applicable margin, as defined therein. The Revolving Credit Facility contains financial covenants that require us to maintain a minimum TangibleNet Worth and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As ofDecember 31, 2022 , we were in compliance with all covenants. AtDecember 31, 2022 , we had no borrowings outstanding,$303.4 million of letters of credit issued, and$946.6 million of remaining capacity under the Revolving Credit Facility. AtDecember 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.
Financial Services debt
Pulte Mortgage provides mortgage financing for the majority of our home closings by utilizing its own funds and funds made available pursuant to credit agreements with third parties.Pulte Mortgage uses these resources to finance its lending activities until the loans are sold in the secondary market, which generally occurs within 30 days.Pulte Mortgage maintains the Repurchase Agreement, which matures onJuly 27, 2023 . The maximum aggregate commitment was$800.0 million during the seasonally high borrowing period fromDecember 27, 2022 throughJanuary 12, 2023 . At all other times, the maximum aggregate commitment ranges from$360.0 million to$500.0 million . The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable toPulte Mortgage , including quantitative thresholds related to net worth, net income, and liquidity.Pulte Mortgage had$586.7 million and$626.1 million 30 --------------------------------------------------------------------------------
outstanding under the Repurchase Agreement at
Dividends and share repurchase program
We declared quarterly cash dividends totaling$143.1 million and$148.1 million in 2022 and 2021, respectively, and repurchased 24.2 million and 17.7 million shares in 2022 and 2021, respectively, for a total of$1.1 billion and$897.3 million in 2022 and 2021, respectively. OnJanuary 31, 2022 , the Board of Directors increased our share repurchase authorization by$1.0 billion . AtDecember 31, 2022 , we had remaining authorization to repurchase$382.9 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 ofDecember 31, 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. AtDecember 31, 2022 , we had outstanding letters of credit of$303.4 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 atDecember 31, 2022 , are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed. In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. AtDecember 31, 2022 , these agreements had an aggregate remaining purchase price of$5.4 billion . Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. AtDecember 31, 2022 , outstanding deposits totaled$278.9 million , of which$14.6 million is refundable. For further information regarding our primary obligations, refer to Note 5 , "Debt" and Note 11 , "Commitments and Contingencies" to the Consolidated Financial Statements included elsewhere in this Annual Report on 10-K for amounts outstanding as ofDecember 31, 2022 , related to debt and commitments and contingencies, respectively. Cash flows Operating activities Net cash provided by operating activities in 2022 was$668.5 million , compared with net cash provided by operating activities of$1.0 billion in 2021. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. Our positive cash flow from operations for 2022 was primarily due to our net income of$2.6 billion , which was partially offset by a$2.3 billion net increase in inventories primarily attributable to higher house inventory in production resulting from more unsold units and extended production cycle times combined with investment in land inventory. Cash flow from operations was also favorably impacted by a$266.3 million decrease in residential mortgage loans available-for-sale. Net cash provided by operating activities in 2021 was primarily due to our net income of$1.9 billion , which was partially offset by a$1.3 billion increase in inventories 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. Cash flow from operations was also favorably impacted by an increase of$395.3 million in customer deposits resulting from the higher order backlog but unfavorably impacted by an increase of$382.8 million in residential mortgage loans available-for-sale, resulting from higher loan originations to support revenue growth. 31
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Investing activities
Net cash used in investing activities totaled$171.7 million in 2022, compared with$124.1 million in 2021. The 2022 cash outflows primarily reflect$64.7 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of$112.7 million related to our ongoing investment in new communities, construction operations, and certain information technology applications. Net cash used in investing activities in 2021 primarily reflected$101.6 million of investments in unconsolidated entities primarily in support of our land development activities and capital expenditures of$72.8 million related to our ongoing investment in new communities, construction operations, and certain information technology applications.
Financing activities
Net cash used in financing activities was$1.2 billion in 2022 compared with$1.7 billion during 2021. The net cash used in financing activities for 2022 resulted primarily from the repurchase of 24.2 million common shares for$1.1 billion under our repurchase authorization and cash dividends of$144.1 million . Net cash used in financing activities for 2021 resulted primarily from the repurchase of 17.7 million common shares for$897.3 million under our repurchase authorization, repayments of debt of$836.9 million , and cash dividends of$147.8 million , partially offset by net Financial Services borrowings of$214.3 million . Seasonality Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we have historically experienced variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, supply chain challenges, increase in mortgage interest rates, and other macroeconomic factors, our quarterly results in 2022 and 2021 are not necessarily indicative of results that may be achieved in the future.
Supplemental Guarantor Financial Information
As ofDecember 31, 2022 PulteGroup, Inc. had outstanding$2.0 billion principal amount of unsecured senior notes due at dates fromMarch 2026 throughFebruary 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 ofPulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, byPulteGroup, 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 and 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;
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--------------------------------------------------------------------------------•such Guarantor was a defendant in an action for money damages, or had a judgment for money damages docketed against it, if the judgment is unsatisfied after final judgment.
The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. However, in general, a court would deem a company insolvent if:
•the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets; •the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or •it could not pay its debts as they became due. The guarantees of the senior notes contain a provision to limit each Guarantor's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. However, under recent case law, this provision may not be effective to protect such guarantee from being voided under fraudulent transfer law or otherwise determined to be unenforceable. If a court were to find that the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under that guarantee, could subordinate that guarantee to presently existing and future indebtedness of the Guarantor or could require the holders of the senior notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, holders may not receive any repayment on the senior notes. Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the guarantees to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of senior notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of senior notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code. On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, 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 forPulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated amongPulteGroup, 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 December 31, ASSETS 2022 2021
Cash, cash equivalents, and restricted cash
House and land inventory 10,925,830 8,859,163
Amount due from Non-Guarantor Subsidiaries 674,898 278,531
Total assets 13,074,398 11,658,352
LIABILITIESAccounts payable, customer deposits,
accrued and other liabilities $ 2,785,286 $ 2,788,465
Notes payable 2,045,527 2,029,044
Total liabilities 5,049,079 4,986,491
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Years Ended
Summarized Statement of Operations Data 2022
2021
Revenues $ 15,637,507 $ 13,173,753
Cost of revenues 10,985,982 9,697,959Selling, general, and administrative expenses 1,330,994 1,164,553
Income before income taxes 3,245,925 2,213,419
Critical Accounting Estimates
The preparation of the Company's financial statements in conformity with U.S.
generally accepted accounting principles and the discussion and analysis of its
financial condition and operating results requires management to make estimates
and assumptions, including estimates about the future resolution of existing
uncertainties that affect the amounts reported. As a result, actual results
could differ from these estimates. Management bases its estimates on historical
experience and on various other assumptions it believes to be reasonable under
the circumstances. We believe the following critical accounting estimates
reflect the more significant judgments and estimates used in the preparation of
our consolidated financial statements. For a discussion of all of our
significant accounting policies, refer to Note 1 , "Summary of Significant
Account Policies".
Inventory and cost of revenues
Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community's remaining lots. We test inventory for impairment when events and circumstances indicate that the undiscounted cash flows estimated to be generated by the community may be less than its carrying amount. Such indicators include gross margins or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. Communities that demonstrate potential impairment indicators are tested for impairment by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we determine the fair value of the community and impairment charges are recorded if the fair value of the community's inventory is less than its carrying value. We generally determine the fair value of each community using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates. Generally, a community must have projected gross margin percentages in the single digits or lower to potentially fail the undiscounted cash flow step and proceed to the fair value step. Our overall gross margin realized during 2022 and our average gross margin in backlog atDecember 31, 2022 both exceeded 25%, and we have only a small minority of communities with gross margins below 10%. However, in the event of an extended economic slowdown that leads to moderate or significant decreases in the price of new homes in certain geographic or buyer submarkets, we could have a larger number of communities that begin to approach these levels such that more detailed impairment analyses would be necessary, and the resulting impairments could be material. Additionally, we have$478.8 million of deposits and pre-acquisition costs atDecember 31, 2022 related to option agreements to acquire additional land. In the event of an extended economic slowdown, we could elect to 34 --------------------------------------------------------------------------------
cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.
Self-insured risks
At any point in time, we are managing numerous individual claims related to
general liability, property, errors and omission, workers compensation, and
other business insurance coverage. We reserve for costs associated with such
claims (including expected claims management expenses) on an undiscounted basis
at the time product revenue is recognized for each home closing and periodically
evaluate the recorded liabilities based on actuarial analyses of our historical
claims. The actuarial analyses calculate estimates of the ultimate cost of all
unpaid losses, including estimates for incurred but not reported losses
("IBNR"). IBNR represents losses related to claims incurred but not yet reported
plus development on reported claims.
Our recorded reserves for all such claims totaled $635.9 million and $627.1
million at December 31, 2022 and 2021, respectively, the vast majority of which
relate to general liability claims. The recorded reserves include loss estimates
related to both (i) existing claims and related claim expenses and (ii) IBNR and
related claim expenses. Liabilities related to IBNR and related claim expenses
represented approximately 74% and 70% of the total general liability reserves at
December 31, 2022 and 2021, respectively. The actuarial analyses that determine
the IBNR portion of reserves consider a variety of factors, including the
frequency and severity of losses, which are based on our historical claims
experience supplemented by industry data. The actuarial analyses of the reserves
also consider historical third party recovery rates and claims management
expenses. Because of the inherent uncertainty in estimating future losses
related to these claims, actual costs could differ significantly from estimated
costs. Based on the actuarial analyses performed, we believe the range of
reasonably possible losses related to these claims is $525 million to $725
million . While this range represents our best estimate of our ultimate liability
related to these claims, due to a variety of factors, including those factors
described above, there can be no assurance that the ultimate costs realized by
us will fall within this range.
Volatility in both national and local housing market conditions can affect the
frequency and cost of construction defect claims. Additionally, IBNR estimates
comprise the majority of our liability and are subject to a high degree of
uncertainty due to a variety of factors, including changes in claims reporting
and resolution patterns, third party recoveries, insurance industry practices,
the regulatory environment, and legal precedent. State regulations vary, but
construction defect claims are reported and resolved over an extended period
often exceeding ten years. Changes in the frequency and timing of reported
claims and estimates of specific claim values can impact the underlying inputs
and trends utilized in the actuarial analyses, which could have a material
impact on the recorded reserves. Additionally, the amount of insurance coverage
available for each policy period also impacts our recorded reserves. Because of
the inherent uncertainty in estimating future losses and the timing of such
losses related to these claims, actual costs could differ significantly from
estimated costs.
Adjustments to reserves are recorded in the period in which the change in
estimate occurs. During 2022 and 2021, we reduced general liability reserves by
$65.0 million and $81.1 million , respectively, as a result of changes in
estimates resulting from actual claim experience observed being less than
anticipated in previous actuarial projections. The changes in actuarial
estimates were driven by changes in actual claims experience that, in turn,
impacted actuarial estimates for potential future claims. These changes in
actuarial estimates did not involve any changes in actuarial methodology but did
impact the development of estimates for future periods, which resulted in
adjustments to the IBNR portion of our recorded liabilities. There were no
material adjustments to individual claims. Rather, the adjustments reflect an
overall lower level of losses related to construction defect claims in recent
years as compared with our previous experience. We attribute this favorable
experience to a variety of factors, including improved construction techniques,
rising home values, and increased participation from our subcontractors in
resolving claims.
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