PulteGroup Inc.

10/26/2021 | Press release | Distributed by Public on 10/26/2021 14:48

Quarterly Report (Form 10-Q)

phm-20210930

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number 1-9804

PULTEGROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2766606
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
3350 Peachtree Road NE, Suite 1500
Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 404 978-6400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Shares, par value $0.01 PHM New York Stock Exchange
Series A Junior Participating Preferred Share Purchase Rights
 		New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
☒ ☐ ☐ ☐ ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of common shares outstanding as of October 20, 2021: 253,185,667
1

PULTEGROUP, INC.
TABLE OF CONTENTS

Page
No.
PART I
FINANCIAL INFORMATION
Item 1
Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2021 and December 31, 2020
3
Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020
4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020
5
Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2021 and 2020
6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020
8
Notes to Condensed Consolidated Financial Statements
9
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4
Controls and Procedures
43
PART II
OTHER INFORMATION
43
Item 1
Legal Proceedings
43
Item 1A
Risk Factors
43
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 6
Exhibits
45
Signatures
47




2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's omitted)
September 30,
2021 		December 31,
2020
(Unaudited)
ASSETS
Cash and equivalents $ 1,568,324 $ 2,582,205
Restricted cash 56,327 50,030
Total cash, cash equivalents, and restricted cash 1,624,651 2,632,235
House and land inventory 8,917,440 7,721,798
Land held for sale 18,585 27,962
Residential mortgage loans available-for-sale 601,408 564,979
Investments in unconsolidated entities 64,284 35,562
Other assets 1,053,871 923,270
Intangible assets 149,854 163,425
Deferred tax assets 141,758 136,267
$ 12,571,851 $ 12,205,498
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 490,717 $ 511,321
Customer deposits 823,545 449,474
Deferred tax liabilities 121,905 103,548
Accrued and other liabilities 1,457,505 1,407,043
Financial Services debt 476,504 411,821
Notes payable 2,059,923 2,752,302
5,430,099 5,635,509
Shareholders' equity 7,141,752 6,569,989
$ 12,571,851 $ 12,205,498




See accompanying Notes to Condensed Consolidated Financial Statements.

3

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenues:
Homebuilding
Home sale revenues $ 3,324,483 $ 2,823,921 $ 9,156,371 $ 7,517,453
Land sale and other revenues 63,085 24,165 123,321 70,042
3,387,568 2,848,086 9,279,692 7,587,495
Financial Services 91,482 106,871 288,632 256,223
Total revenues 3,479,050 2,954,957 9,568,324 7,843,718
Homebuilding Cost of Revenues:
Home sale cost of revenues (2,443,074) (2,131,741) (6,754,204) (5,706,814)
Land sale and other cost of revenues (47,483) (20,502) (103,313) (55,558)
(2,490,557) (2,152,243) (6,857,517) (5,762,372)
Financial Services expenses (42,835) (42,807) (122,921) (112,135)
Selling, general, and administrative expenses (320,506) (271,257) (864,478) (731,785)
Loss on debt retirement - - (61,469) -
Goodwill impairment - - - (20,190)
Other expense, net (4,750) (4,483) (8,011) (12,292)
Income before income taxes 620,402 484,167 1,653,928 1,204,944
Income tax expense (144,853) (67,769) (370,873) (236,216)
Net income $ 475,549 $ 416,398 $ 1,283,055 $ 968,728
Per share:
Basic earnings $ 1.83 $ 1.54 $ 4.86 $ 3.57
Diluted earnings $ 1.82 $ 1.54 $ 4.85 $ 3.56
Cash dividends declared $ 0.14 $ 0.12 $ 0.42 $ 0.36
Number of shares used in calculation:
Basic 258,147 268,363 261,854 268,892
Effect of dilutive securities 752 598 668 839
Diluted 258,899 268,961 262,522 269,731



See accompanying Notes to Condensed Consolidated Financial Statements.

4

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000's omitted)
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 475,549 $ 416,398 $ 1,283,055 $ 968,728
Other comprehensive income, net of tax:
Change in value of derivatives 25 25 75 75
Other comprehensive income 25 25 75 75
Comprehensive income $ 475,574 $ 416,423 $ 1,283,130 $ 968,803




See accompanying Notes to Condensed Consolidated Financial Statements.

5


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's omitted)
(Unaudited)
Common Stock Additional
Paid-in
Capital 		Accumulated
Other
Comprehensive
Income
(Loss) 		Retained
Earnings 		Total
Shares $
Shareholders' equity, June 30, 2021 260,067 $ 2,600 $ 3,280,779 $ (95) $ 3,675,184 $ 6,958,468
Share issuances 1 - - - - -
Dividends declared - - - - (36,166) (36,166)
Share repurchases (5,102) (50) - - (260,550) (260,600)
Cash paid for shares withheld for taxes - - - - (35) (35)
Share-based compensation - - 4,511 - - 4,511
Net income - - - - 475,549 475,549
Other comprehensive income - - - 25 - 25
Shareholders' equity, September 30, 2021 254,966 $ 2,550 $ 3,285,290 $ (70) $ 3,853,982 $ 7,141,752
Shareholders' equity, December 31, 2020 266,464 $ 2,665 $ 3,261,412 $ (145) $ 3,306,057 $ 6,569,989
Stock option exercises 1 - 11 - - 11
Share issuances 518 5 4,176 - - 4,181
Dividends declared - - - - (110,305) (110,305)
Share repurchases (12,017) (120) - - (614,183) (614,303)
Cash paid for shares withheld for taxes - - - - (10,642) (10,642)
Share-based compensation - - 19,691 - - 19,691
Net income - - - - 1,283,055 1,283,055
Other comprehensive income - - - 75 - 75
Shareholders' equity, September 30, 2021 254,966 $ 2,550 $ 3,285,290 $ (70) $ 3,853,982 $ 7,141,752

6

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's omitted)
(Unaudited)
Common Stock Additional
Paid-in
Capital 		Accumulated
Other
Comprehensive
Income
(Loss) 		Retained
Earnings 		Total
Shares $
Shareholders' equity, June 30, 2020 268,178 $ 2,682 $ 3,252,568 $ (195) $ 2,596,613 $ 5,851,668
Stock option exercises 1 - 12 - - 12
Dividends declared - - - - (32,446) (32,446)
Share-based compensation - - 4,358 - - 4,358
Net income - - - - 416,398 416,398
Other comprehensive income - - - 25 - 25
Shareholders' equity, September 30, 2020 268,179 $ 2,682 $ 3,256,938 $ (170) $ 2,980,565 $ 6,240,015
Shareholders' equity, December 31, 2019 270,235 $ 2,702 $ 3,235,149 $ (245) $ 2,220,574 $ 5,458,180
Cumulative effect of accounting change (see Note 1)
- - - - (735) (735)
Stock option exercises 14 - 111 - - 111
Share issuances 755 8 4,088 - - 4,096
Dividends declared - - - - (97,501) (97,501)
Share repurchases (2,825) (28) - - (95,648) (95,676)
Cash paid for shares withheld for taxes - - - - (14,853) (14,853)
Share-based compensation - - 17,590 - - 17,590
Net income - - - - 968,728 968,728
Other comprehensive income - - - 75 - 75
Shareholders' equity, September 30, 2020 268,179 $ 2,682 $ 3,256,938 $ (170) $ 2,980,565 $ 6,240,015

7

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's omitted)
(Unaudited)
Nine Months Ended
September 30,
2021 2020
Cash flows from operating activities:
Net income $ 1,283,055 $ 968,728
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense 12,842 89,492
Land-related charges 6,820 13,930
Loss on debt retirement 61,469 -
Goodwill impairment - 20,190
Depreciation and amortization 53,023 48,536
Share-based compensation expense 28,439 25,010
Other, net (3,274) (1,136)
Increase (decrease) in cash due to:
Inventories (1,137,351) 84,253
Residential mortgage loans available-for-sale (36,816) 108,178
Other assets (114,879) (17,627)
Accounts payable, accrued and other liabilities 394,897 (72,929)
Net cash provided by (used in) operating activities 548,225 1,266,625
Cash flows from investing activities:
Capital expenditures (52,134) (46,925)
Investments in unconsolidated entities (35,812) (663)
Distributions of capital from unconsolidated entities 11,500 19,939
Business acquisition (10,400) (83,251)
Other investing activities, net 378 3,721
Net cash provided by (used in) investing activities (86,468) (107,179)
Cash flows from financing activities:
Repayments of notes payable (797,395) (10,993)
Borrowings under revolving credit facility - 700,000
Repayments under revolving credit facility - (700,000)
Financial Services borrowings (repayments), net 64,684 (77,527)
Stock option exercises 11 111
Share repurchases (614,303) (95,676)
Cash paid for shares withheld for taxes (10,642) (14,853)
Dividends paid (111,696) (97,756)
Net cash provided by (used in) financing activities (1,469,341) (296,694)
Net increase (decrease) in cash, cash equivalents, and restricted cash (1,007,584) 862,752
Cash, cash equivalents, and restricted cash at beginning of period 2,632,235 1,251,456
Cash, cash equivalents, and restricted cash at end of period $ 1,624,651 $ 2,114,208
Supplemental Cash Flow Information:
Interest paid (capitalized), net $ 16,483 $ 16,297
Income taxes paid (refunded), net $ 335,487 $ 195,494

See accompanying Notes to Condensed Consolidated Financial Statements.
8

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade on the New York Stock Exchange under the ticker symbol "PHM". Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also engage in mortgage banking operations, conducted through Pulte Mortgage LLC ("Pulte Mortgage"), and title and insurance brokerage operations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission (the "SEC").

Business acquisition

On January 24, 2020, we acquired the operations of Innovative Construction Group ("ICG"), an offsite construction framing company located in Jacksonville, Florida, for $104.0 million, of which $83.3 million and $10.4 million was paid in January 2020 and 2021, respectively, while an additional payment of $10.4 million will be settled in 2022. The acquired net assets were recorded at their estimated fair values, including intangible assets of $27.8 million associated with customer relationships and $1.8 million associated with the ICG tradename, which are being amortized over seven- and five-year useful lives, respectively, and $48.7 million of goodwill. The acquisition of these assets was not material to our results of operations or financial condition.

Goodwill impairment

In accordance with Accounting Standards Codification ("ASC") 350, "Intangibles - Goodwill and Other", management evaluates the recoverability of goodwill by comparing the carrying value of the Company's reporting units to their fair value. Fair value is determined using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value. As a result of the significant decline in equity market valuations that occurred during the period between our acquisition of ICG in January 2020 and March 31, 2020, we determined that an event-driven goodwill impairment test was appropriate for the ICG goodwill, which resulted in an impairment totaling $20.2 million in the first quarter of 2020. This impairment was not the result of any unique factors specific to ICG's operations but, rather, reflected the broad-based declines in the market capitalizations of publicly-traded construction companies in the period of time between the acquisition and the March 31, 2020 valuation date.

Restructuring costs

We recorded severance expense of $10.3 million in the three months ended June 30, 2020 as we took actions to reduce overhead expenses in response to lower demand in March through May of 2020 resulting from the COVID-19 pandemic.

9

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Other expense, net

Other expense, net consists of the following ($000's omitted):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Write-offs of deposits and pre-acquisition costs $ (3,567) $ (1,692) $ (6,801) $ (8,335)
Amortization of intangible assets (3,612) (5,041) (13,571) (14,643)
Interest income 436 891 1,541 6,024
Interest expense (115) (225) (387) (4,022)
Equity in earnings of unconsolidated entities 604 336 5,620 1,238
Miscellaneous, net 1,504 1,248 5,587 7,446
Total other expense, net $ (4,750) $ (4,483) $ (8,011) $ (12,292)

Revenue recognition

Home sale revenues- Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer, and our performance obligation to deliver the agreed-upon home is generally satisfied at the home closing date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit and classified as cash. Contract liabilities include customer deposits related to sold but undelivered homes, which totaled $823.5 million and $449.5 million at September 30, 2021 and December 31, 2020, respectively. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. See Note 8for information on warranties and related obligations.

Land sale and other revenues- We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied. Revenues related to our construction services operations are generally recognized as materials are delivered and installation services are provided.

Financial services revenues- Loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance brokerage commissions relate to commissions on homeowner and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy, and related contract assets for estimated future renewal commissions are included in other assets and totaled $41.6 million and $38.5 million at September 30, 2021 and December 31, 2020, respectively.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the "Numerator") by the weighted-average number of common shares outstanding, adjusted for unvested shares (the "Denominator") for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of unvested restricted share units and other potentially dilutive instruments.

10

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In accordance with ASC 260, "Earnings Per Share", the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. Our outstanding restricted share units and deferred shares are considered participating securities.The following table presents the earnings per common share (000's omitted, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Numerator:
Net income $ 475,549 $ 416,398 $ 1,283,055 $ 968,728
Less: earnings distributed to participating securities (296) (264) (887) (799)
Less: undistributed earnings allocated to participating securities (3,546) (3,123) (9,559) (7,778)
Numerator for basic earnings per share $ 471,707 $ 413,011 $ 1,272,609 $ 960,151
Add back: undistributed earnings allocated to participating securities 3,546 3,123 9,559 7,778
Less: undistributed earnings reallocated to participating securities (3,536) (3,116) (9,535) (7,754)
Numerator for diluted earnings per share $ 471,717 $ 413,018 $ 1,272,633 $ 960,175
Denominator:
Basic shares outstanding 258,147 268,363 261,854 268,892
Effect of dilutive securities 752 598 668 839
Diluted shares outstanding 258,899 268,961 262,522 269,731
Earnings per share:
Basic $ 1.83 $ 1.54 $ 4.86 $ 3.57
Diluted $ 1.82 $ 1.54 $ 4.85 $ 3.56

Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. At September 30, 2021 and December 31, 2020, residential mortgage loans available-for-sale had an aggregate fair value of $601.4 million and $565.0 million, respectively, and an aggregate outstanding principal balance of $586.4 million and $539.1 million, respectively. Net gains from the sale of mortgages were $58.4 million and $76.6 million for the three months ended September 30, 2021 and 2020, respectively, and $192.6 million and $173.8 million for the nine months ended September 30, 2021 and 2020, respectively, and have been included in Financial Services revenues.

Derivative instruments and hedging activities

We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At September 30, 2021 and December 31, 2020, we had aggregate IRLCs of $521.5 million and $367.2 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan investor commitments, which are obligations of an investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are
11

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. At September 30, 2021 and December 31, 2020, we had unexpired forward contracts of $843.0 million and $686.4 million, respectively, and whole loan investor commitments of $235.5 million and $169.6 million, respectively. Changes in the fair value of IRLCs and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs and residential mortgage loans available-for-sale are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 60 days.The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000's omitted):

September 30, 2021 December 31, 2020
Other Assets Accrued and Other Liabilities Other Assets Accrued and Other Liabilities
Interest rate lock commitments $ 11,857 $ 187 $ 16,179 $ 18
Forward contracts 5,133 569 501 5,937
Whole loan commitments 1,490 313 168 666
$ 18,480 $ 1,069 $ 16,848 $ 6,621

Credit losses

We are exposed to credit losses primarily through our vendors and insurance carriers. We assess and monitor each counterparty's ability to pay amounts owed by considering contractual terms and conditions, the counterparty's financial condition, macroeconomic factors, and business strategy.

At September 30, 2021 and December 31, 2020, we reported $194.5 million and $176.2 million, respectively, of assets in-scope under ASC 326, "Financial Instruments - Credit Losses" ("ASC 326"). These assets consist primarily of insurance receivables, contract assets related to insurance brokerage commissions, and vendor rebate receivables. Counterparties associated with these assets are generally highly rated. Allowances on the aforementioned in-scope assets were not material as of September 30, 2021.

New accounting pronouncements

On January 1, 2021, we adopted Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. Our adoption of ASU 2019-12 did not have a material impact on our financial statements.

On January 1, 2020, we adopted ASC 326, which changed the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to an "expected credit loss" methodology. We adopted ASC 326 using the modified retrospective transition method. ASC 326 requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. Our adoption of ASC 326 resulted in a $0.7 million decrease to retained earnings as of January 1, 2020.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which removed the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard, goodwill impairment is determined by evaluating the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted the standard for annual and interim periods beginning January 1, 2020, and the standard was followed in the previously mentioned assessment of the ICG goodwill.

12

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

2. Inventory

Major components of inventory were as follows ($000's omitted):
September 30,
2021 		December 31,
2020
Homes under construction $ 4,469,295 $ 3,086,740
Land under development 3,849,816 4,137,318
Raw land 598,329 497,740
$ 8,917,440 $ 7,721,798

We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized substantially all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels.Information related to interest capitalized into inventory is as follows ($000's omitted):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Interest in inventory, beginning of period $ 185,433 $ 207,942 $ 193,409 $ 210,383
Interest capitalized 31,707 40,044 97,809 119,643
Interest expensed (41,897) (46,841) (115,975) (128,881)
Interest in inventory, end of period $ 175,243 $ 201,145 $ 175,243 $ 201,145

Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net.

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either September 30, 2021 or December 31, 2020 because we determined that we were not the VIEs' primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements. The following provides a summary of our interests in land option agreements as of September 30, 2021 and December 31, 2020 ($000's omitted):

13

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2021 December 31, 2020
Deposits and
Pre-acquisition
Costs 		Remaining Purchase
Price 		Deposits and
Pre-acquisition
Costs 		Remaining Purchase
Price
Land options with VIEs $ 141,168 $ 2,163,429 $ 126,900 $ 1,586,551
Other land options 213,120 3,125,454 164,964 2,187,017
$ 354,288 $ 5,288,883 $ 291,864 $ 3,773,568

Land-related charges

We recorded the following land-related charges ($000's omitted):
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020
Statement of Operations Classification 2021 2020 2021 2020
Land impairments Home sale cost of revenues $ - $ 54 $ - $ 5,440
Net realizable value ("NRV") adjustments - land held for sale Land sale and other cost of revenues - 2 19 155
Write-offs of deposits and pre-acquisition costs Other expense, net 3,567 1,692 6,801 8,335
$ 3,567 $ 1,748 $ 6,820 $ 13,930

Our evaluations for land impairments, NRV adjustments, and write-offs of deposits and pre-acquisition costs are based on our best estimates of the future cash flows of our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of certain of our communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.

3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
Northeast: Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia
Southeast: Georgia, North Carolina, South Carolina, Tennessee
Florida: Florida
Midwest: Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio
Texas: Texas
West: Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking, title, and insurance brokerage operations that operate generally in the same markets as the Homebuilding segments.
14

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Data by Segment
($000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Revenues:
Northeast $ 273,261 $ 242,829 $ 735,602 $ 546,741
Southeast 587,875 434,782 1,541,910 1,275,039
Florida 740,569 623,971 2,157,374 1,712,180
Midwest 505,012 411,797 1,337,416 1,043,646
Texas 412,568 359,358 1,256,983 1,069,444
West 868,283 775,349 2,250,407 1,940,445
3,387,568 2,848,086 9,279,692 7,587,495
Financial Services 91,482 106,871 288,632 256,223
Consolidated revenues $ 3,479,050 $ 2,954,957 $ 9,568,324 $ 7,843,718
Income (loss) before income taxes:
Northeast $ 53,410 $ 39,442 $ 132,604 $ 76,995
Southeast 109,407 69,275 274,174 196,798
Florida (a)
133,642 106,394 382,682 258,991
Midwest 72,537 62,638 196,205 137,707
Texas 71,062 64,646 221,099 178,150
West 173,137 121,974 403,039 279,393
Other homebuilding (b)
(41,432) (44,266) (122,317) (67,128)
571,763 420,103 1,487,486 1,060,906
Financial Services 48,639 64,064 166,442 144,038
Consolidated income before income taxes $ 620,402 $ 484,167 $ 1,653,928 $ 1,204,944

(a)Includes goodwill impairment charge totaling $20.2 million (see Note 1) in the nine months ended September 30, 2020.
(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 adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8). Other homebuilding also includes a loss on debt retirement of $61.5 million in the nine months ended September 30, 2021 (see Note 4).
15

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Data by Segment
($000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Land-related charges (a):
Northeast $ 223 $ 419 $ 357 $ 5,264
Southeast 1,915 725 3,253 2,401
Florida 209 108 642 1,089
Midwest 477 190 969 1,466
Texas 141 82 932 1,068
West 602 170 667 1,844
Other homebuilding - 54 - 798
$ 3,567 $ 1,748 $ 6,820 $ 13,930

(a) Land-related charges include land impairments, NRV adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue.

Operating Data by Segment
($000's omitted)
September 30, 2021
Homes Under
Construction 		Land Under
Development 		Raw Land Total
Inventory 		Total
Assets
Northeast $ 388,349 $ 219,528 $ 19,342 $ 627,219 $ 720,459
Southeast 661,217 546,377 63,626 1,271,220 1,418,078
Florida 921,505 801,772 150,170 1,873,447 2,263,896
Midwest 590,282 426,622 22,623 1,039,527 1,158,792
Texas 575,372 454,218 81,310 1,110,900 1,226,423
West 1,275,338 1,120,100 245,503 2,640,941 2,899,079
Other homebuilding (a)
57,232 281,199 15,755 354,186 2,124,281
4,469,295 3,849,816 598,329 8,917,440 11,811,008
Financial Services - - - - 760,843
$ 4,469,295 $ 3,849,816 $ 598,329 $ 8,917,440 $ 12,571,851
16

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Data by Segment
($000's omitted)
December 31, 2020
Homes Under
Construction 		Land Under
Development 		Raw Land Total
Inventory 		Total
Assets
Northeast $ 342,737 $ 203,561 $ 68,865 $ 615,163 $ 712,205
Southeast 465,950 645,408 69,937 1,181,295 1,296,382
Florida 638,394 921,962 116,709 1,677,065 1,967,788
Midwest 364,839 424,169 18,173 807,181 911,984
Texas 354,256 458,893 66,024 879,173 955,436
West 874,673 1,212,730 142,380 2,229,783 2,519,724
Other homebuilding (a)
45,891 270,595 15,652 332,138 3,149,871
3,086,740 4,137,318 497,740 7,721,798 11,513,390
Financial Services - - - - 692,108
$ 3,086,740 $ 4,137,318 $ 497,740 $ 7,721,798 $ 12,205,498
(a)Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.

4. Debt

Notes payable

Our notes payable are summarized as follows ($000's omitted):
September 30,
2021 		December 31,
2020
4.250% unsecured senior notes due March 2021 (a)
$ - $ 425,954
5.500% unsecured senior notes due March 2026 (a)
500,000 700,000
5.000% unsecured senior notes due January 2027 (a)
500,000 600,000
7.875% unsecured senior notes due June 2032 (a)
300,000 300,000
6.375% unsecured senior notes due May 2033 (a)
400,000 400,000
6.000% unsecured senior notes due February 2035 (a)
300,000 300,000
Net premiums, discounts, and issuance costs (b)
(11,502) (13,750)
Total senior notes 1,988,498 2,712,204
Other notes payable 71,425 40,098
Notes payable $ 2,059,923 $ 2,752,302
Estimated fair value $ 2,582,625 $ 3,415,662

(a)Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.
(b)The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.
In the nine months ended September 30, 2021, we 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.
17

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other notes payable include notes with third parties that totaled $71.4 million and $40.1 million at September 30, 2021 and December 31, 2020, respectively. These notes have maturities ranging up to four years, are secured by the applicable land positions, and generally have no recourse to other assets. The stated interest rates on these notes range up to 6%.

Revolving credit facility

We maintain a revolving credit facility (the "Revolving Credit Facility") maturing in June 2023 that has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 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, with a sublimit of $500.0 million at September 30, 2021. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein. As a precautionary measure during the initial phase of the COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. In June 2020, we repaid the full outstanding balance of $700.0 million. We had no borrowings outstanding at either September 30, 2021 or December 31, 2020, and $282.3 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at September 30, 2021 and December 31, 2020, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2021, we were in compliance with all covenants. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $717.7 million and $750.3 million at September 30, 2021 and December 31, 2020, respectively.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement with third party lenders (as amended, the "Repurchase Agreement") that matures on July 28, 2022. The maximum aggregate commitment was $580.0 million at September 30, 2021, which will increase to $650.0 million during the seasonally high borrowing period from December 27, 2021 through January 13, 2022. At all other times, the maximum aggregate commitment ranges from $460.0 million to $550.0 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 $476.5 million and $411.8 million outstanding under the Repurchase Agreement at September 30, 2021 and December 31, 2020, respectively, and was in compliance with all of its covenants and requirements as of such dates.

5. Shareholders' equity

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. In the nine months ended September 30, 2020, we declared cash dividends totaling $97.5 million and repurchased 2.8 million shares under our repurchase authorization for $95.7 million. On April 26, 2021, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At September 30, 2021, we had remaining authorization to repurchase $740.6 million of common shares.

Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. In the nine months ended September 30, 2021 and 2020, participants surrendered shares valued at $10.6 million and $14.9 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

18

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Income taxes

Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020. 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. Income tax expense for the three and nine months ended September 30, 2020 includes benefits of $53.2 million and $58.0 million, respectively, associated with the extension of federal energy efficient homes tax credits, including to homes closed in prior open tax years. The effective tax rate for the nine months ended September 30, 2021 also reflects a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

At September 30, 2021 and December 31, 2020, we had net deferred tax assets of $19.9 million and $32.7 million, respectively. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We had $23.9 million and $30.9 million of gross unrecognized tax benefits at September 30, 2021 and December 31, 2020, respectively. Additionally, we had accrued interest and penalties of $4.0 million and $2.8 million at September 30, 2021 and December 31, 2020, respectively.

7. Fair value disclosures

ASC 820, "Fair Value Measurements and Disclosures," provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:
Level 1 Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2 Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3 Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Our assets and liabilities measured or disclosed at fair value are summarized below ($000's omitted):
19

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial Instrument Fair Value
Hierarchy 		Fair Value
September 30,
2021 		December 31,
2020
Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale Level 2 $ 601,408 $ 564,979
IRLCs Level 2 11,670 16,161
Forward contracts Level 2 4,564 (5,436)
Whole loan commitments Level 2 1,177 (498)
Measured at fair value on a non-recurring basis:
House and land inventory Level 3 $ - $ 582
Disclosed at fair value:
Cash, cash equivalents, and restricted cash Level 1 $ 1,624,651 $ 2,632,235
Financial Services debt Level 2 476,504 411,821
Senior notes payable Level 2 2,511,200 3,375,564
Other notes payable Level 2 71,425 40,098

Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair values for IRLCs, including the value of servicing rights, and forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

The carrying amounts of cash and equivalents, Financial Services debt and other notes payable approximate their fair values due to their short-term nature and/or floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $2.0 billion and $2.7 billion at September 30, 2021 and December 31, 2020, respectively.

8. Commitments and contingencies

Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $282.3 million and $1.8 billion, respectively, at September 30, 2021 and $249.7 million and $1.5 billion, respectively, at December 31, 2020. In the event any such letter of credit or surety bond is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to 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. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn.

20

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Litigation and regulatory matters

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for litigation, legal claims, and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

Product warranty

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home's construction and operating systems for periods of up to, and, in limited instances, exceeding, 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the projected cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates.Changes to warranty liabilities were as follows ($000's omitted):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Warranty liabilities, beginning of period $ 87,759 $ 86,278 $ 82,744 $ 91,389
Reserves provided 22,993 15,320 61,801 47,364
Payments (19,346) (18,551) (53,150) (52,741)
Other adjustments 317 501 328 (2,464)
Warranty liabilities, end of period $ 91,723 $ 83,548 $ 91,723 $ 83,548

Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers' compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require us to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by us. Policies issued by our captive insurance subsidiaries represent self-insurance of these risks by us. A portion of this self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year.
21

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Our insurance coverage requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims generally apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing approximately 1,000 individual claims related to general liability, property, errors and omissions, workers' compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.

Our recorded reserves for all such claims totaled $624.7 million and $641.8 million at September 30, 2021 and December 31, 2020, respectively. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 70% and 68% of the total general liability reserves at September 30, 2021 and December 31, 2020, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Housing market conditions can be volatile, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are typically reported and resolved over an extended period, often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance 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. We reduced general liability reserves by $56.6 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively, as a result of changes in estimates resulting from actual claim experience 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. Costs associated with our insurance programs are classified within selling, general, and administrative expenses.Changes in these liabilities were as follows ($000's omitted):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Balance, beginning of period $ 620,617 $ 640,014 $ 641,779 $ 709,798
Reserves provided 21,569 21,992 64,018 60,618
Adjustments to previously recorded reserves (1,349) - (56,567) (59,362)
Payments, net (a)
(16,175) (9,460) (24,568) (58,508)
Balance, end of period $ 624,662 $ 652,546 $ 624,662 $ 652,546

(a) Includes net changes in amounts expected to be recovered from our insurance carriers, which are recorded in other assets (see below).

Estimates of anticipated recoveries of our costs under various insurance policies or from subcontractors or other third parties are recorded when recovery is considered probable. Such receivables are recorded in other assets and totaled $67.8 million and
22

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$69.5 million at September 30, 2021 and December 31, 2020, respectively. Those receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers or third parties. In addition, disputes between homebuilders and insurance carriers or third parties over coverage positions relating to construction defect claims are common. Resolution of claims involves the exchange of significant amounts of information and frequently involves legal action.

Leases

We lease certain office space and equipment for use in our operations. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Right-of-use ("ROU") assets and lease liabilities are recorded on the balance sheet for all leases with an expected term of at least one year. Some leases include one or more options to renew. The exercise of lease renewal options is generally at our discretion. The depreciable lives of ROU assets and leasehold improvements are limited to the expected lease term. Certain of our lease agreements include rental payments based on a pro-rata share of the lessor's operating costs which are variable in nature. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
ROU assets are classified within other assets on the balance sheet, while lease liabilities are classified within accrued and other liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet. ROU assets and lease liabilities were $78.0 million and $96.9 million at September 30, 2021, respectively, and $71.3 million and $91.4 million at December 31, 2020, respectively. In the three and nine months ended September 30, 2021, we recorded an additional $2.1 million and $15.2 million of lease liabilities under operating leases, respectively, and $13.0 million in the nine months ended September 30, 2020. Payments on lease liabilities in the three and nine months ended September 30, 2021 totaled $5.1 million and $15.6 million, respectively, and $4.8 million and $14.8 million in the comparable prior year periods.

Lease expense includes costs for leases with terms in excess of one year as well as short-term leases with terms of less than one year. For the three and nine months ended September 30, 2021, our total lease expense was $10.6 million and $31.2 million, respectively, and $9.6 million and $28.2 million in the comparable prior year periods. Our total lease expense is inclusive of variable lease costs of $1.6 million and $5.6 million for the three and nine months ended September 30, 2021, respectively, and $1.5 million and $4.9 million in the comparable prior year periods, as well as short-term lease costs of $3.7 million and $9.7 million for the three and nine months ended September 30, 2021, respectively, and $2.6 million and $6.6 million in the comparable prior year periods. Sublease income was de minimis.

The future minimum lease payments required under our leases as of September 30, 2021 were as follows ($000's omitted):
Years Ending December 31,
2021 (a)
$ 5,571
2022 24,395
2023 22,433
2024 16,270
2025 11,463
Thereafter 26,092
Total lease payments(b)
106,224
Less: Interest (c)
9,292
Present value of lease liabilities (d)
$ 96,932

(a)Remaining payments are for the three months ended December 31, 2021.
(b)Lease payments include options to extend lease terms that are reasonably certain of being exercised. There were $3.0 million of legally binding minimum lease payments for leases signed but not yet commenced at September 30, 2021.
(c)Our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our discount rate for such leases to determine the present value of lease payments at the lease commencement date.
23

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(d)The weighted average remaining lease term and weighted average discount rate used in calculating our lease liabilities were 5.4 years and 5.53%, respectively, at September 30, 2021.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We continue to experience strong demand for our products as new orders increased 12% over the prior year for the nine months ended September 30, 2021. While new orders were 17% lower than the prior year for the three months ended September 30, 2021, the decrease was driven primarily by a 14% reduction in community count in combination with Company actions to strategically manage the pace of sales to better align with current production levels. The favorable demand for new housing has been driven by mortgage interest rates near historical lows, a limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers or to relocate from higher cost geographical regions. As a result, our order backlog increased 33% in units and 56% in dollars as of September 30, 2021 over the prior year.

Home closings increased 9% and 14% in the three and nine months ended September 30, 2021, respectively, compared with the prior year periods. The higher closing volume is despite significant disruption in the homebuilding supply chain, including the availability of certain materials and construction labor combined with delays in municipal approvals and inspections, which has elongated the production cycle of the homes we are constructing. While we are working with our supply partners, have increased our speculative housing starts, and have hired additional construction and customer service employees, our production cycle times have extended in the majority of our markets due to the challenges referenced above. Due to these supply chain challenges, we are moderating lot releases and the pace of new orders in the majority of our communities in order to balance sales volume and production capacity to reduce backlog durations. We believe these conditions will continue to impact our industry for at least the next few quarters.

We are also facing cost pressures related to labor and materials, due in large part to a shortage of workers and supply chain challenges resulting from ongoing effects of the COVID-19 pandemic and other macroeconomic factors. Specifically, the cost of lumber more than quadrupled from mid-2020 to mid-2021. While the cost of lumber has declined significantly since peaking in May 2021, it remains elevated compared to historical norms, and the availability of certain wood products, including roof and floor trusses and oriented strand boards, remains challenged. We also continue to experience significant challenges with the cost and availability of windows, siding, and appliances, among other supply categories. To date, we have been, and believe we will continue to be, able to increase pricing to offset the majority of such cost increases due to ongoing high consumer demand.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, or its related impacts on overall economic conditions or the global supply chain, will last. As a result, the unpredictability of the current economic and public health conditions will continue to evolve. However, all of our operations continue to function at effectively full capacity subject to health and safety protocols, and we remain optimistic about future housing demand and our ability to continue expanding our business. Due to the higher demand and long municipal entitlement timelines, the number of our active communities continues to decrease as we close communities at a pace faster than we are opening new ones. While we have increased our investments in land acquisition and development, we expect that the number of our active communities will not begin to increase meaningfully until 2022.

Consolidated Operations

The following is a summary of our operating results by line of business ($000's omitted, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Income before income taxes:
Homebuilding $ 571,763 $ 420,103 $ 1,487,486 $ 1,060,906
Financial Services 48,639 64,064 166,442 144,038
Income before income taxes 620,402 484,167 1,653,928 1,204,944
Income tax expense (144,853) (67,769) (370,873) (236,216)
Net income $ 475,549 $ 416,398 $ 1,283,055 $ 968,728
Per share data - assuming dilution:
Net income $ 1.82 $ 1.54 $ 4.85 $ 3.56
•Homebuilding income before income taxes for the three and nine months ended September 30, 2021 increased 36% and 40%, respectively, compared with the same periods in 2020, respectively. The results are primarily the result of increased closings, higher gross margins, and improved overhead leverage in 2021. The results also include
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insurance adjustments of $53.7 million for the nine months ended September 30, 2021, compared to $59.4 million for the nine months ended September 30, 2020 (see Note 8). This benefit in 2020 was partially offset by severance expense of $10.4 million for the nine months ended September 30, 2020, and a goodwill impairment charge totaling $20.2 million(see Note 1) in the nine months ended September 30, 2020. Results for the nine months ended September 30, 2021 also include a loss on debt retirement of $61.5 million (see Note 4).
•Financial Services income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of increased competition in 2021 resulting in lower revenue per loan. For the nine months ended September 30, 2021, Financial Services income before income taxes increased 16% compared with the same period in 2020 as a result of higher volumes, which largely resulted from increased homebuilding volumes, partially offset by the lower revenue per loan.
•Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020. 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. Income tax expense in the three and nine months ended September 30, 2020 includes benefits of $53.2 million and $58.0 million, respectively, associated with the extension of federal energy efficient homes tax credits, including to homes closed in prior open tax years. The effective tax rate for the nine months ended September 30, 2021 also reflects a reduction in valuation allowances relating to projected utilization of certain state net operating loss carryforwards.

26

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,
2021 2021 vs. 2020 2020 2021 2021 vs. 2020 2020
Home sale revenues $ 3,324,483 18 % $ 2,823,921 $ 9,156,371 22 % $ 7,517,453
Land sale and other revenues 63,085 161 % 24,165 123,321 76 % 70,042
Total Homebuilding revenues 3,387,568 19 % 2,848,086 9,279,692 22 % 7,587,495
Home sale cost of revenues (a)
(2,443,074) 15 % (2,131,741) (6,754,204) 18 % (5,706,814)
Land sale and other cost of revenues (47,483) 132 % (20,502) (103,313) 86 % (55,558)
Selling, general, and administrative
expenses ("SG&A") (b)
(320,506) 18 % (271,257) (864,478) 18 % (731,785)
Loss on debt retirement - (c) - (61,469) (c) -
Goodwill impairment - (c) - - (c) (20,190)
Other expense, net (4,742) 6 % (4,483) (8,742) (29) % (12,242)
Income before income taxes $ 571,763 36 % $ 420,103 $ 1,487,486 40 % $ 1,060,906
Supplemental data:
Gross margin from home sales 26.5 % 200 bps 24.5 % 26.2 % 210 bps 24.1 %
SG&A as a percentage of home
sale revenues 		9.6 % - 9.6 % 9.4 % (30) bps 9.7 %
Closings (units) 7,007 9 % 6,454 20,283 14 % 17,764
Average selling price $ 474 8 % $ 438 $ 451 7 % $ 423
Net new orders (d):
Units 6,796 (17) % 8,202 24,970 12 % 22,219
Dollars $ 3,780,354 4 % $ 3,634,158 $ 12,668,805 32 % $ 9,579,982
Cancellation rate 10 % 12 % 8 % 15 %
Average active communities 768 (14) % 892 804 (9) % 884
Backlog at September:
Units 19,845 33 % 14,962
Dollars $ 10,305,614 56 % $ 6,598,334

(a)Includes the amortization of capitalized interest.
(b)Includes insurance adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8), and severance expense of $10.4 million in the nine months ended September 30, 2020.
(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 for the three and nine months ended September 30, 2021 were higher than the prior year periods by $500.6 million and $1.6 billion, respectively. For the three months ended September 30, 2021, the 18% increase was attributable to a 9% increase in closings combined with an 8% increase in average selling price. For the nine months ended September 30, 2021, the 22% increase was attributable to a 14% increase in closings combined with a 7% increase in average selling price. The increase in closings was primarily the result of favorable demand conditions, including a large backlog of orders. Beginning in March 2020, the COVID-19 pandemic began to unfavorably impact the demand environment. However, demand improved significantly beginning in June 2020 and has remained favorable. The higher average selling price reflects the impact
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of pricing actions taken in response to the higher demand as well as increased input costs, partially offset by a small increase in the mix of first-time buyer homes, which typically carry a lower sales price.

Home sale gross margins

Home sale gross margins were 26.5% and 26.2% for the three and nine months ended September 30, 2021, respectively, compared to 24.5% and 24.1% for the three and nine months ended September 30, 2020, respectively. Gross margins for the three and nine months ended September 30, 2021 remained higher than prior year levels and reflect a combination of factors, including: strong consumer demand, the low mortgage interest rate environment, and limited supplies of new and existing housing inventory. As a result, the pricing environment remains strong, which has allowed us to effectively manage pressure in house and land costs through pricing actions. While costs remain elevated, we have been able to more than offset these cost increases through price increases. Additionally, while speculative home sales (homes started prior to receipt of a customer order) remain the minority of our operations, the current environment is providing opportunities for additional pricing and relative margin gains related to such homes.

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 $15.6 million and $20.0 million for the three and nine months ended September 30, 2021, respectively, compared to $3.7 million and $14.5 million for the three and nine months ended September 30, 2020, 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 9.6% and 9.4% for the three and nine months ended September 30, 2021, respectively, compared with 9.6% and 9.7% for the three and nine months ended September 30, 2020, respectively. The gross dollar amount of our SG&A increased $49.2 million, or 18%, for the three months ended September 30, 2021 compared to September 30, 2020, and increased $132.7 million, or 18%, for the nine months ended September 30, 2021 compared to September 30, 2020. The change in gross dollars in 2021 resulted from the higher production volume primarily as the result of higher sales commissions expense. The improvement in year-to-date SG&A as a percentage of home sale revenues is primarily attributable to leverage gained from the higher revenues. This overhead leverage was partially offset in 2021 by higher headcount to support the increased production volume as well as higher incentive compensation accruals due to the Company's strong operating performance. The nine months ended September 30, 2020 also included severance expense of $10.3 million as we took actions in the second quarter of 2020 to reduce overhead expenses due to the disruption caused by the early stages of the COVID-19 pandemic.

Other expense, net
Other expense, net includes the following ($000's omitted):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Write-offs of deposits and pre-acquisition costs $ (3,567) $ (1,692) $ (6,801) $ (8,335)
Amortization of intangible assets (3,612) (5,041) (13,571) (14,643)
Interest income 436 891 1,541 6,024
Interest expense (115) (225) (387) (4,022)
Equity in earnings of unconsolidated entities 604 336 5,620 1,238
Miscellaneous, net 1,512 1,248 4,856 7,496
Total other expense, net $ (4,742) $ (4,483) $ (8,742) $ (12,242)



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Net new orders

Net new orders in units decreased 17% while net new orders in dollars increased 4% for the three months ended September 30, 2021 as compared with the prior year period. Net new orders in units increased 12% while net new orders in dollars increased 32% for the nine months ended September 30, 2021 as compared with the prior year period. The net new order volume in 2021 reflects favorable demand conditions partially offset by a lower community count, as more fully discussed above. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 10% and 8% for the three and nine months ended September 30, 2021, respectively, and 12% and 15% for the same periods in 2020. Ending backlog dollars, which represents orders for homes that have not yet closed, increased 56% at September 30, 2021 compared with September 30, 2020.

Homes in production

The following is a summary of our homes in production:
September 30,
2021 		September 30,
2020
Sold 15,676 9,696
Unsold
Under construction 3,017 1,405
Completed 109 350
3,126 1,755
Models 1,212 1,277
Total 20,014 12,728

The number of homes in production at September 30, 2021 was 57% higher than at September 30, 2020. The increase in homes under production is the result of the significant increase in demand, coupled with elongated cycle times due to supply chain delays for certain materials and labor and obtaining necessary approvals, permits, and inspections from local municipalities. The higher level of unsold homes, or speculative homes, under construction reflects a conscious decision to increase our housing starts of speculative units in response to the noted supply chain challenges and to meet demand. The lower unsold completed inventory reflects our ability to sell these speculative units given the strong demand environment.

Controlled lots

The following is a summary of our lots under control at September 30, 2021 and December 31, 2020:
September 30, 2021 December 31, 2020
Owned Optioned Controlled Owned Optioned Controlled
Northeast 4,739 7,305 12,044 4,956 4,001 8,957
Southeast 15,621 25,803 41,424 15,051 18,248 33,299
Florida 23,135 34,813 57,948 20,737 24,396 45,133
Midwest 12,186 17,294 29,480 9,728 14,734 24,462
Texas 19,267 20,606 39,873 15,923 17,841 33,764
West 27,882 13,973 41,855 24,968 9,769 34,737
Total 102,830 119,794 222,624 91,363 88,989 180,352
Developed (%) 38 % 14 % 25 % 43 % 16 % 30 %

While competition for well-positioned land is robust, we continue to pursue land investments that we believe can achieve appropriate risk-adjusted returns on invested capital and have increased our controlled lot count as the result of the strong demand environment. Additionally, we continue to seek to increase the percentage of our lots that are controlled via land option agreement. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. The remaining purchase price under our land option agreements totaled $5.3 billion at September 30, 2021.
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These land option agreements generally may be canceled at our discretion and in certain cases extend over several years. Our maximum exposure related to these land option agreements is generally limited to our deposits and pre-acquisition costs, which totaled $354.3 million, of which $19.4 million is refundable, at September 30, 2021.

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Homebuilding Segment Operations

As of September 30, 2021, we conducted our operations in 40 markets located throughout 23 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, 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,
2021 2021 vs. 2020 2020 2021 2021 vs. 2020 2020
Home sale revenues:
Northeast $ 273,206 13 % $ 242,758 $ 735,418 35 % $ 546,437
Southeast 587,292 36 % 432,072 1,539,928 21 % 1,271,001
Florida 707,990 17 % 605,731 2,072,344 25 % 1,655,034
Midwest 504,273 23 % 410,384 1,332,407 28 % 1,039,114
Texas 412,201 15 % 358,177 1,255,377 18 % 1,067,681
West 839,521 8 % 774,799 2,220,897 15 % 1,938,186
$ 3,324,483 18 % $ 2,823,921 $ 9,156,371 22 % $ 7,517,453
Income (loss) before income taxes (a):
Northeast $ 53,410 35 % $ 39,442 $ 132,604 72 % $ 76,995
Southeast 109,407 58 % 69,275 274,174 39 % 196,798
Florida (b)
133,642 26 % 106,394 382,682 48 % 258,991
Midwest 72,537 16 % 62,638 196,205 42 % 137,707
Texas 71,062 10 % 64,646 221,099 24 % 178,150
West 173,137 42 % 121,974 403,039 44 % 279,393
Other homebuilding (c)
(41,432) (6) % (44,266) (122,317) (82) % (67,128)
$ 571,763 36 % $ 420,103 $ 1,487,486 40 % $ 1,060,906
(a)Includes land-related charges as summarized in the table below.
(b) Includes goodwill impairment charge totaling $20.2 million in the nine months ended September 30, 2020.
(c) 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 adjustments of $53.7 million and $59.4 million in the nine months ended September 30, 2021 and 2020, respectively (see Note 8). Other homebuilding also includes a loss on debt retirement of $61.5 million in the nine months ended September 30, 2021 (see Note 4).

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Operating Data by Segment ($000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2021 vs. 2020 2020 2021 2021 vs. 2020 2020
Closings (units):
Northeast 472 10 % 428 1,286 29 % 998
Southeast 1,278 21 % 1,057 3,507 14 % 3,089
Florida 1,502 5 % 1,427 4,614 15 % 4,017
Midwest 1,123 18 % 950 3,004 22 % 2,466
Texas 1,276 10 % 1,162 4,020 15 % 3,484
West 1,356 (5) % 1,430 3,852 4 % 3,710
7,007 9 % 6,454 20,283 14 % 17,764
Average selling price:
Northeast $ 579 2 % $ 567 $ 572 4 % $ 548
Southeast 460 12 % 409 439 7 % 411
Florida 471 11 % 424 449 9 % 412
Midwest 449 4 % 432 444 5 % 421
Texas 323 5 % 308 312 2 % 306
West 619 14 % 542 577 10 % 522
$ 474 8 % $ 438 $ 451 7 % $ 423
Net new orders - units:
Northeast 368 (38) % 591 1,451 2 % 1,422
Southeast 1,085 (14) % 1,255 4,010 15 % 3,491
Florida 1,844 (1) % 1,868 6,451 28 % 5,041
Midwest 1,075 (14) % 1,243 3,936 25 % 3,158
Texas 1,117 (33) % 1,673 4,468 (3) % 4,613
West 1,307 (17) % 1,572 4,654 4 % 4,494
6,796 (17) % 8,202 24,970 12 % 22,219
Net new orders - dollars:
Northeast $ 221,016 (34) % $ 336,514 $ 864,079 9 % $ 796,058
Southeast 588,400 11 % 529,037 1,966,434 35 % 1,452,429
Florida 1,043,871 30 % 803,858 3,308,173 58 % 2,093,957
Midwest 538,621 (2) % 550,500 1,856,704 36 % 1,370,247
Texas 463,727 (10) % 515,721 1,655,023 19 % 1,389,186
West 924,719 3 % 898,528 3,018,392 22 % 2,478,105
$ 3,780,354 4 % $ 3,634,158 $ 12,668,805 32 % $ 9,579,982
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Operating Data by Segment ($000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2021 vs. 2020 2020 2021 2021 vs. 2020 2020
Cancellation rates:
Northeast 9 % 7 % 7 % 10 %
Southeast 6 % 7 % 6 % 11 %
Florida 8 % 12 % 7 % 14 %
Midwest 7 % 8 % 6 % 11 %
Texas 16 % 15 % 12 % 18 %
West 13 % 18 % 11 % 19 %
10 % 12 % 8 % 15 %
Unit backlog:
Northeast 1,118 10 % 1,013
Southeast 2,843 25 % 2,267
Florida 5,491 65 % 3,330
Midwest 3,131 40 % 2,232
Texas 3,501 18 % 2,979
West 3,761 20 % 3,141
19,845 33 % 14,962
Backlog dollars:
Northeast $ 689,984 16 % $ 597,318
Southeast 1,457,415 51 % 964,896
Florida 2,863,695 102 % 1,417,185
Midwest 1,514,932 54 % 983,110
Texas 1,380,737 51 % 912,372
West 2,398,851 39 % 1,723,453
$ 10,305,614 56 % $ 6,598,334


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Operating Data by Segment
($000's omitted)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Land-related charges (a):
Northeast $ 223 $ 419 $ 357 $ 5,264
Southeast 1,915 725 3,253 2,401
Florida 209 108 642 1,089
Midwest 477 190 969 1,466
Texas 141 82 932 1,068
West 602 170 667 1,844
Other homebuilding - 54 - 798
$ 3,567 $ 1,748 $ 6,820 $ 13,930
(a) Land-related charges include land inventory impairments, net realizable value adjustments on land held for sale, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue. Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.
Northeast

For the third quarter of 2021, Northeast home sale revenues increased by 13% when compared with the prior year period due to a 10% increase in closings combined with a 2% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price was mixed among markets. Income before income taxes increased 35% primarily due to increased revenues, as well as improved gross margins and overhead management which occurred across the majority of markets. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Northeast home sale revenues increased by 35% when compared with the prior year period due to a 29% increase in closings combined with a 4% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 72% primarily due to increased revenues, as well as improved gross margins which occurred across all markets and improved overhead management which occurred across the majority of markets. Net new orders increased across the majority of markets.

Southeast

For the third quarter of 2021, Southeast home sale revenues increased 36% compared with the prior year period as the result of a 21% increase in closings combined with a 12% 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 58% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Southeast home sale revenues increased 21% compared with the prior year period as the result of a 14% increase in closings combined with a 7% increase in average selling price. The increase in closings and average selling price occurred across all markets. Income before income taxes increased 39% primarily due to increased revenues, as well as improved gross margins which occurred across the majority of markets. Net new orders increased across all markets.

Florida

For the third quarter of 2021, Florida home sale revenues increased 17% compared with the prior year period due to a 5% increase in closings combined with an 11% 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 26% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets except North Florida.

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For the nine months ended September 30, 2021, Florida home sale revenues increased 25% compared with the prior year period due to a 15% increase in closings combined with an 9% increase in the average selling price. The increase in closings and average selling price occurred across all markets. Income before income taxes increased 48% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across all markets, combined with the impact of a goodwill impairment charge of $20.2 million in the nine months ended September 30, 2020 (see Note 1). Net new orders increased across all markets.

Midwest

For the third quarter of 2021, Midwest home sale revenues increased 23% compared with the prior year period due to a 18% increase in closings combined with a 4% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 16% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, Midwest home sale revenues increased 28% compared with the prior year period due to a 22% increase in closings combined with a 5% increase in average selling price. The increase in closings occurred across all markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 42% primarily due to increased revenues as well as improved gross margins which occurred the majority of markets. Net new orders increased across all markets.

Texas

For the third quarter of 2021, Texas home sale revenues increased 15% compared with the prior year period due to a 10% increase in closings combined with a 5% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 10% primarily due to increased revenues, as well as improved gross margins and improved overhead management which occurred across the majority of markets. Net new orders decreased across all markets.

For the nine months ended September 30, 2021, Texas home sale revenues increased 18% compared with the prior year period due to a 15% increase in closings combined with a 2% increase in the average selling price. The increase in closings occurred across the majority of markets, while the increase in average selling price occurred in all markets. Income before income taxes increased 24% primarily due to increased revenues, as well as improved gross margins and improved overhead management, which occurred across the majority of markets. Net new orders decreased across all markets except Dallas and Austin.

West
For the third quarter of 2021, West home sale revenues increased 8% compared with the prior year period due to a 14% increase in average selling price partially offset by a 5% decrease in closings. The decrease in closings occurred across the majority of markets, while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 42% primarily due to increased revenues, improved overhead management and gross margins across the majority of markets, and gains of $12.9 million related to a land sale transaction in California. Net new orders decreased across the majority of markets.

For the nine months ended September 30, 2021, West home sale revenues increased 15% compared with the prior year period due to a 4% increase in closings combined with an 10% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. Income before income taxes increased 44% primarily due to increased revenues, improved overhead management and gross margins across all markets, and gains of $12.9 million related to a land sale transaction in California. Net new orders increased across the majority of markets.
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Financial Services Operations

We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage LLC ("Pulte Mortgage") and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to 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 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, excluding cash closings, from our Homebuilding operations 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,
2021 2021 vs. 2020 2020 2021 2021 vs. 2020 2020
Mortgage revenues $ 71,238 (20) % $ 88,819 $ 230,505 11 % $ 206,964
Title services revenues 16,818 13 % 14,940 48,565 17 % 41,465
Insurance brokerage commissions 3,426 10 % 3,112 9,562 23 % 7,794
Total Financial Services revenues 91,482 (14) % 106,871 288,632 13 % 256,223
Expenses (42,835) - % (42,807) (122,921) 10 % (112,135)
Other income (expense), net (8) (a) - 731 (a) (50)
Income before income taxes $ 48,639 (24) % $ 64,064 $ 166,442 16 % $ 144,038
Total originations:
Loans 5,078 5 % 4,858 15,082 14 % 13,202
Principal $ 1,810,722 11 % $ 1,625,250 $ 5,186,913 21 % $ 4,274,619

(a)Percentage not meaningful

Nine Months Ended
September 30,
2021 2020
Supplemental data:
Capture rate 86.1 % 86.5 %
Average FICO score 751 751
Funded origination breakdown:
Government (FHA, VA, USDA) 20 % 21 %
Other agency 73 % 71 %
Total agency 93 % 92 %
Non-agency 7 % 8 %
Total funded originations 100 % 100 %
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Revenues

Mortgage interest rates have been at or near historically low levels through 2020 and the first nine months of 2021. In the three and nine months ended September 30, 2021, loan margins are lower than the prior year periods due to competition driven by a reduction in refinance volume within the mortgage industry, which has lowered gains from the sale of mortgages in the secondary market. Total Financial Services revenues for the three months ended September 30, 2021 decreased 14% compared with the same period in 2020 primarily as a result of lower revenue per loan due to this increased competition, partially offset by higher loan origination volume resulting from Homebuilder volume growth. Financial Services revenues for the nine months ended September 30, 2021 increased 13% compared with the same period in 2020 primarily as a result of higher loan origination volume due to Homebuilder volume growth, partially offset by lower revenue per loan.

Income before income taxes

Income before income taxes for the three months ended September 30, 2021 decreased 24% compared to the same period in 2020, primarily as a result of lower revenue per loan, partially offset by higher volume. For the nine months ended September 30, 2021, income before income taxes increased 16% compared with the same period in 2020 as the result of higher volume, partially offset by lower revenue per loan.

Income Taxes

Our effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.4%, respectively, compared to 14.0% and 19.6%, respectively, for the same periods in 2020. The 2020 effective tax rates are lower than the 2021 effective tax rates for the same periods primarily due to federal energy efficient home credits.

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 other available financing sources, including revolving bank credit and securities offerings.

At September 30, 2021, we had unrestricted cash and equivalents of $1.6 billion, restricted cash balances of $56.3 million, and $717.7 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. Given the financial resources available to us, we believe that we have adequate liquidity to continue funding our operations for the foreseeable future.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 22.4% at September 30, 2021, as compared with 29.5% at December 31, 2020.

Unsecured senior notes

We had $2.0 billion and $2.7 billion of unsecured senior notes outstanding at September 30, 2021 and December 31, 2020, respectively, 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 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. We also retired $426.0 million of senior notes at their scheduled maturity date.

Other notes payable

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $71.4 million and $40.1 million at September 30, 2021 and December 31, 2020, respectively. 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%.

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Revolving credit facility
We maintain a revolving credit facility (the "Revolving Credit Facility") maturing in June 2023 that has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 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, with a sublimit of $500.0 million at September 30, 2021. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein. As a precautionary measure during the initial phase of the COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. In June 2020, we repaid the full outstanding balance of $700.0 million. We had no borrowings outstanding at either September 30, 2021 or December 31, 2020, and $282.3 million and $249.7 million of letters of credit issued under the Revolving Credit Facility at September 30, 2021 and December 31, 2020, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2021, we were in compliance with all covenants. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $717.7 million and $750.3 million at September 30, 2021 and December 31, 2020, respectively.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement with third party lenders (as amended, the "Repurchase Agreement") that matures on July 28, 2022. The maximum aggregate commitment was $580.0 million at September 30, 2021, which will increase to $650.0 million during the seasonally high borrowing period from December 27, 2021 through January 13, 2022. At all other times, the maximum aggregate commitment ranges from $460.0 million to $550.0 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 $476.5 million and $411.8 million outstanding under the Repurchase Agreement at September 30, 2021 and December 31, 2020, 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, 2021, we declared cash dividends totaling $110.3 million and repurchased 12.0 million shares under our repurchase authorization for $614.3 million. On April 26, 2021, the Board of Directors approved an additional share repurchase authorization of $1.0 billion. At September 30, 2021, we had remaining authorization to repurchase $740.6 million of common shares.

Cash flows

Operating activities

Net cash provided by operating activities for the nine months ended September 30, 2021 was $548.2 million. Generally, the primary drivers of our cash flow from operations are profitability and changes in the levels of inventory and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. The positive cash flow from operations for the 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.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $1.3 billion. The positive cash flow from operations for the nine months ended September 30, 2020 was primarily due to our net income of $968.7 million, which included various non-cash items, a seasonal $108.2 million decrease in residential mortgage loans available-for-sale, and a net decrease in inventories of $84.3 million. The decrease in inventories resulted from our deliberate efforts to reduce inventory spend, especially land acquisition and development spend, during the second quarter of 2020 in response to the COVID-19 pandemic. While a seasonal increase in house inventory partially offset the reduced land expenditures, the size of the seasonal increase was lower as we tightly managed production levels during the second quarter of 2020.


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Investing activities

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

Net cash used in investing activities for the nine months ended September 30, 2020 was $107.2 million. These cash outflows primarily reflected our acquisition of ICG in January 2020 for $83.3 million, as well as capital expenditures of $46.9 million related to our ongoing investments in new communities and certain information technology applications. These outflows were partially offset by distributions from unconsolidated entities of $19.9 million.

Financing activities

Net cash used in financing activities for the nine months ended September 30, 2021 totaled $1.5 billion. These cash outflows resulted 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 outflows were partially offset by net borrowings of $64.7 million under the Repurchase Agreement to support higher loan originations resulting from growth in home closing volume.

Net cash used in financing activities for the nine months ended September 30, 2020 totaled $296.7 million. These cash outflows resulted primarily from the repurchase of 2.8 million common shares for $95.7 million under our share repurchase authorization, repayments of debt totaling $11.0 million, payments of $97.8 million in cash dividends, and net repayments of $77.5 million for borrowings under the Repurchase Agreement.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers. While we attempt to pass on increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

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, our quarterly results for 2021 and 2020 are not necessarily indicative of results that may be achieved in the future.

Contractual Obligations and Commercial Commitments

There have been no material changes to our contractual obligations from those disclosed in our "Contractual Obligations and Commercial Commitments" 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, 2020, with the exception of the retirement of $426 million, $200 million, and $100 million of unsecured senior notes previously scheduled to mature in March 2021, March 2026, and January 2027, respectively.




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Supplemental Guarantor Financial Information

As of September 30, 2021, PulteGroup, Inc. had outstanding $2.0 billion principal amount of unsecured senior notes due at dates from March 2026 through February 2035 and no amounts outstanding on its Revolving Credit Facility.

All of our unsecured senior notes and the Revolving Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of PulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc. Our subsidiaries associated with our financial services operations and certain other subsidiaries do not guarantee the unsecured senior notes or the Revolving Credit Facility (collectively, "Non-Guarantor Subsidiaries"). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt.

A court could void or subordinate any Guarantor's guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that such Guarantor:

(a) incurred the guarantee with the intent of hindering, delaying or defrauding creditors; or

(b) received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of any one of the following is also true at the time thereof:

•such Guarantor was insolvent or rendered insolvent by reason of the issuance of the incurrence of the guarantee;
•the incurrence of the guarantee left such Guarantor with an unreasonably small amount of capital or assets to carry on its business;
•such Guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature;
•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.

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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, 2021 December 31, 2020
Cash, cash equivalents, and restricted cash $1,539,275 $2,429,639
House and land inventory 8,748,663 7,600,542
Total assets 11,369,170 11,028,911
LIABILITIES
Accounts payable, customer deposits,
accrued and other liabilities 		$2,528,501 $2,101,427
Notes payable 2,059,923 2,752,302
Amount due to Non-Guarantor Subsidiaries 55,142 12,208
Total liabilities 4,713,444 4,948,275

Nine Months Ended
September 30,
Summarized Statement of Operations Data 2021 2020
Revenues $9,035,505 $7,424,736
Cost of revenues 6,664,370 5,631,840
Selling, general, and administrative expenses 852,397 713,360
Income before income taxes 1,427,182 1,040,803

Off-Balance Sheet Arrangements

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, 2021, we had outstanding letters of credit totaling $282.3 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 $1.8 billion at September 30, 2021, 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, 2021, these agreements had an aggregate remaining purchase price of $5.3 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.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates in the nine months ended September 30, 2021 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K for the year ended December 31, 2020.





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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative disclosure

We are subject to market risk on our debt instruments primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair value of the debt instrument but not our earnings or cash flows. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair value of the debt instrument but could affect our earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity. As a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance or repurchase such debt.

The following table sets forth the principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value of our debt obligations as of September 30, 2021 ($000's omitted):
As of September 30, 2021 for the
Years ending December 31,
2021 2022 2023 2024 2025 Thereafter Total Fair
Value
Rate-sensitive liabilities:
Fixed rate debt $ 26,194 $ 20,156 $ 10,639 $ 14,436 $ - $ 2,000,000 $ 2,071,425 $ 2,582,625
Average interest rate 0.62 % 0.50 % 4.18 % 6.00 % - % 5.98 % 5.85 %
Variable rate debt (a) $ 476,504 $ - $ - $ - $ - $ - $ 476,504 $ 476,504
Average interest rate 2.29 % - % - % - % - % - % 2.29 %

(a) Includes the Pulte Mortgage Repurchase Agreement and amounts outstanding under our Revolving Credit facility, under which there was no amount outstanding at September 30, 2021.

Qualitative disclosure

There have been no material changes to the qualitative disclosure found in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2020.

SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations,and Item 3,Quantitative and Qualitative Disclosures About Market Risk, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or implied by, these statements. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "plan," "project," "may," "can," "could," "might," "should," "will," "seek," and similar expressions identify forward-looking statements, including statements related to any potential impairment charges and the impacts or effects thereof, expected operating and performing results, planned transactions, planned objectives of management, future developments or conditions in the industries in which we participate and other trends, developments and uncertainties that may affect our business in the future.

Such risks, uncertainties and other factors include, among other things: interest rate changes and the availability of mortgage financing; competition within the industries in which we operate; the availability and cost of land and other raw materials used by us in our Homebuilding operations; the impact of any changes to our strategy in responding to the cyclical nature of the industry, including any changes regarding our land positions and the levels of our land spend; the availability and cost of insurance covering risks associated with our businesses; shortages and the cost of labor; weather related slowdowns; slow growth initiatives and/or local building moratoria; governmental regulation directed at or affecting the housing market, the homebuilding industry or construction activities; uncertainty in the mortgage lending industry, including revisions to underwriting standards and repurchase requirements associated with the sale of mortgage loans; the interpretation of or changes to tax, labor and environmental laws which could have a greater impact on our effective tax rate or the value of our deferred tax assets than we anticipate; economic changes nationally or in our local markets, including inflation, deflation, changes in consumer confidence and preferences and the state of the market for homes in general; legal or regulatory proceedings or
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claims; our ability to generate sufficient cash flow in order to successfully implement our capital allocation priorities; required accounting changes; terrorist acts and other acts of war; the negative impact of the COVID-19 pandemic on our financial position and ability to continue our Homebuilding or Financial Services activities at normal levels or at all in impacted areas; the duration, effect and severity of the COVID-19 pandemic; the measures that governmental authorities take to address the COVID-19 pandemic which may precipitate or exacerbate one or more of the above-mentioned and/or other risks and significantly disrupt or prevent us from operating our business in the ordinary course for an extended period of time; and other factors of national, regional and global scale, including those of a political, economic, business and competitive nature. See PulteGroup's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and other public filings with the Securities and Exchange Commission (the "SEC") for a further discussion of these and other risks and uncertainties applicable to our businesses. PulteGroup undertakes no duty to update any forward-looking statement, whether as a result of new information, future events or changes in PulteGroup's expectations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. Based upon, and as of the date of that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2021.

Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There was no change in our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings

There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Total number
of shares
purchased (1)
Average
price paid
per share
Total number of
shares purchased
as part of publicly
announced plans
or programs
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs
($000's omitted) (2)
July 1, 2021 to July 31, 2021 1,274,926 $ 53.23 1,274,926 $ 933,308.45
August 1, 2021 to August 31, 2021 1,371,830 $ 53.68 1,371,830 $ 859,627.47
September 1, 2021 to September 30, 2021 2,455,590 $ 48.50 2,455,590 $ 740,569.08
Total 5,102,346 $ 51.07 5,102,346

(1) In the nine months ended September 30, 2021, participants surrendered 0.2 million shares for payment of minimum tax obligations upon the vesting or exercise of previously granted share-based compensation awards. Such shares were not repurchased as part of our publicly-announced share repurchase programs and are excluded from the table above.

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(2) The Board of Directors approved a share repurchase authorization totaling $500.0 million in May 2019 and an increase of $1.0 billion to such authorization in April 2021. There is no expiration date for this program, under which $740.6 million remained as of September 30, 2021.
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Item 6. Exhibits

Exhibit Number and Description
3 (a)
(b)
(c)
(d)
(e)
4 (a) Any instrument with respect to long-term debt, where the securities authorized thereunder do not exceed 10% of the total assets of PulteGroup, Inc. and its subsidiaries, has not been filed. The Company agrees to furnish a copy of such instruments to the SEC upon request.
(b)
(c)
(d)
(e)

(f)
10 (a)
(b)
First Amendment to Second Amended and Restated Credit Agreement dated as of July 30, 2021 among PulteGroup, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, and the other Lenders party thereto (Filed herewith).
22 (a)
List of Guarantor Subsidiaries
31 (a)
Rule 13a-14(a) Certification by Ryan R. Marshall, President and Chief Executive Officer (Filed herewith)
(b)
Rule 13a-14(a) Certification by Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer (Filed herewith)
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Certification Pursuant to 18 United States Code § 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 (Furnished herewith)
101.INS Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PULTEGROUP, INC.
/s/ Robert T. O'Shaughnessy
Robert T. O'Shaughnessy
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
Date: October 26, 2021


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