PULTEGROUP, INC. Overview
Favorable demographic and economic conditions, combined with the recently improving affordability of housing, have supported the ongoing recovery inU.S. new home sales that began in 2012. In recent years, we have made significant investments to acquire and develop land inventory and open new communities. We have grown our investment in the business in a disciplined manner by emphasizing smaller projects and working to shorten our years of owned land supply, including increasing the use of land option agreements, which now account for 41% of our controlled lots as compared with 11% at the beginning of 2012. We have also focused our land investments on closer-in locations where we think demand is more sustainable when the market ultimately moderates. We have accepted the trade-off of having to pay more for certain land positions where we can be more confident in future performance. The combination of favorable demand conditions, our investments in new communities, strategic pricing, and construction efficiencies resulted in growth in our revenues each year during the period from 2012 to 2019. We entered 2019 in the midst of an industry-wide softening in demand that began in mid-2018. To varying degrees, the slowdown occurred across all major buyer groups and substantially all of our geographies. This slowdown was correlated with an increase in mortgage interest rates, which contributed to ongoing affordability challenges confronting many prospective buyers. As a result, we entered 2019 with a smaller backlog than the year before. However, demand improved in mid-2019 as we experienced increased traffic to our communities and higher new order volume relative to the same period in 2018. The improvement continued through the remainder of 2019, especially among first-time buyers, in part due to improving affordability driven by increasing wages, slower price appreciation, and a decline in mortgage interest rates. Based on these favorable economic factors and our investments in new communities, we were able to generate a 9% increase in new orders and a 20% increase in ending backlog in 2019 compared with 2018. While the slow start to 2019 resulted in our full year closings and home sale revenues each increasing only 1% over 2018, we still delivered higher earnings per share in 2019 compared with 2018. We believe that the actions we have taken over the past few years to shorten the duration of our land inventory, increase our use of land option agreements, and drive daily execution of our business while maintaining a conservative financial position allow us to operate effectively in most economic conditions. Additionally, our overall financial condition continues to support investing in the business while returning excess capital to shareholders, including completion of the following capital activities in 2019:
• Continued to invest in new communities, as reflected in the increase to
863 average active communities;
• Acquired the homebuilding operations of American West located in Las
Vegas, Nevada , for $163.7 million ;
• Increased our quarterly dividend by 9% to
• Repurchased
• Increased our share repurchase authorization by
• Completed a tender offer to retire
notes maturing in 2021.
21-------------------------------------------------------------------------------- The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years endedDecember 31, 2019 and 2018. For similar operating and financial data and discussion of our fiscal 2018 results compared to our fiscal 2017 results, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II of our annual report on Form 10-K for the fiscal year endedDecember 31, 2018 , which was filed with theSEC onJanuary 31, 2019 .
The following is a summary of our operating results by line of business (
Years Ended December 31,
2019 2018
Income before income taxes:
Homebuilding $ 1,236,261 $ 1,288,804
Financial Services 103,315 58,736
Income before income taxes 1,339,576 1,347,540
Income tax expense (322,876 ) (325,517 )
Net income $ 1,016,700 $ 1,022,023
Per share data - assuming dilution:
Net income $ 3.66 $ 3.55 • Homebuilding income before income taxes remained strong in 2019.
Homebuilding income before income taxes also reflected the following
significant income (expense) items ($000 's omitted):
2019 2018
Land inventory impairments (see Note Home sale cost of $ (8,617 ) $ (70,965 )
2 ) revenues
Warranty claim (see Note 11 ) Home sale cost of (14,800 ) -
revenuesNet realizable value adjustments Land sale cost of (5,368 )
(11,489 )
("NRV") - land held for sale (see revenues
Note 2 )
California land sale gains (see Note Land sale - 26,401
3 ) revenues / cost
of revenues
Insurance reserve adjustments (see Selling, general, 49,437
35,873
Note 11 ) and
administrative
expenses
Write-offs of insurance receivables Selling, general, (22,617 )
-
(see Note 11 ) and
administrative
expenses
Write-offs of deposits and Other expense, (13,116 ) (16,992 )
pre-acquisition costs (see Note 2 ) net
$ (15,081 ) $ (37,172 ) For additional information on the above, see the applicable Notes to the Consolidated Financial Statements.
• The increase in Financial Services income in 2019 compared with 2018 was
primarily the result of higher volumes, which largely resulted from an
improved capture rate and margin per loan, as well as a
increase in loan origination liabilities in 2018 (see Note 11 ).
Interest rates generally declined during 2019, which led to a less
competitive mortgage environment contributing to improved capture rate
and higher gains from sales of mortgages.
• Our effective tax rate was 24.1% and 24.2%, for 2019 and 2018,
respectively (see Note 8 ).
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Homebuilding Operations
The following is a summary of income before income taxes for our Homebuilding
operations (
Years Ended December 31,
2019 FY 2019 vs. FY 2018 2018
Home sale revenues $ 9,915,705 1 % $ 9,818,445
Land sale and other revenues (a) 62,821 (62 )% 164,504
Total Homebuilding revenues 9,978,526 - % 9,982,949
Home sale cost of revenues (b) (7,628,700 ) 1 % (7,540,937 )
Land sale cost of revenues (a) (c) (56,098 ) (56 )% (126,560 )
Selling, general, and administrative
expenses ("SG&A") (d) (1,044,337 ) 3 % (1,012,023 )
Other expense, net (e) (13,130 ) (10 )% (14,625 )
Income before income taxes $ 1,236,261 (4 )% $ 1,288,804
Supplemental data:
Gross margin from home sales (b) 23.1 % (10) bps 23.2 %
SG&A % of home sale revenues (d) 10.5 % 20 bps 10.3 %
Closings (units) 23,232 1 % 23,107
Average selling price $ 427 0 % $ 425
Net new orders:
Units 24,977 9 % 22,833
Dollars $ 10,615,363 10 % $ 9,675,529
Cancellation rate 14 % 14 %
Average active communities 863 4 % 832
Backlog at December 31 :
Units 10,507 20 % 8,722
Dollars $ 4,535,805 18 % $ 3,836,147 (a) Includes net gains of
in California in 2018 (see Note 3 ).
(b) Includes the amortization of capitalized interest; land inventory
impairments of $8.6 million and $71.0 million in 2019 and 2018,
respectively (see Note 2 ); and warranty charges of
related to a closed-out community in 2019 (see Note 11 ).
(c) Includes net realizable value adjustments on land held for sale of $5.4
million and $11.5 million in 2019 and 2018, respectively (see Note
2 ).
(d) Includes insurance reserve reversals of
in 2019 and 2018, respectively, and write-offs of insurance receivables
of $22.6 million in 2019 (see Note 11 ).
(e) See "Other expense, net" for a table summarizing significant items (see
Note 1 ).
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Home sale revenues
Home sale revenues for 2019 were higher than 2018 by$97.3 million , or 1%. The increase was attributable to a 1% increase in closings. The increase in revenues is attributable to an improved demand environment in the majority of our markets starting in mid-2019 substantially offset by lower revenues in our Northern California Division, which reflects the completion, or near completion, of several high-performing communities combined with moderating demand in that market.
Home sale gross margins
Home sale gross margins were 23.1% in 2019, compared with 23.2% in 2018. Our results in 2019 and 2018 include the effect of the aforementioned land inventory impairments totaling$8.6 million and$71.0 million , respectively. Excluding such impairments, gross margins remained strong in both 2019 and 2018 relative to historical levels and reflect a combination of factors, including shifts in community mix and the aforementioned warranty charge of$14.8 million in 2019 related to a closed-out community in the Southeast. The pricing environment in many of our markets allowed us to effectively manage pressure in house and land costs, though sales discounts have increased moderately in response to the affordability issues faced by homebuyers and our increased use of speculative inventory. Amortized interest costs increased in dollar terms but remained consistent with the prior year as a percentage of revenue at 1.8%.
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 revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales contributed net gains of$6.7 million and$37.9 million in 2019 and 2018, respectively. The gains in 2018 resulted primarily from two land sale transactions inCalifornia that contributed$26.4 million . SG&A SG&A as a percentage of home sale revenues was 10.5% and 10.3% in 2019 and 2018, respectively. The gross dollar amount of our SG&A increased$32.3 million , or 3%, in 2019 compared with 2018. The increase is primarily attributable to higher headcount as order volumes increased in the second half of 2019, increased information technology spend, operating costs associated with the American West transaction, higher model home costs, and insurance receivable write-offs of$22.6 million in 2019 in connection with policy settlement negotiations with certain of our carriers (see Note 11 ). Other expense, net
Other expense, net includes the following (
2019 2018
Write-offs of deposits and pre-acquisition costs
(Note 2)$ (13,116 ) $ (16,992 ) Loss on debt retirement ( Note 5 ) (4,927 ) (76 ) Amortization of intangible assets (Note 1) (14,200 ) (13,800 ) Interest income 16,739 7,593 Interest expense (584 ) (618 ) Equity in earnings (loss) of unconsolidated entities ( Note 4 ) 747 2,690 Miscellaneous, net 2,211 6,578 Total other expense, net$ (13,130 ) $ (14,625 ) 24
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Net new orders
Net new orders in units increased 9% in 2019 compared with 2018. The increase resulted from the higher number of active communities, which increased 4% to 863 in 2019, and a strengthening market in the back half of 2019. Net new orders in dollars increased by 10% compared with 2018. The increase is a result of improved demand which began in the second quarter of 2019 and continued through the remainder of the year, especially among first-time buyers, in part due to improving affordability driven by increasing wages, slower price appreciation, and a decline in mortgage interest rates. The cancellation rate (canceled orders for the period divided by gross new orders for the period) remained stable in 2019 at 14%. Ending backlog units, which represent orders for homes that have not yet closed, increased 20% as measured in units and 18% as measured in dollars atDecember 31, 2019 compared withDecember 31, 2018 . The increase is primarily attributable to increased demand relating to the continued strength in the housing market. Homes in production The following is a summary of our homes in production atDecember 31, 2019 and 2018: 2019 2018 Sold 7,423 6,245 Unsold Under construction 2,672 2,531 Completed 685 715 3,357 3,246 Models 1,342 1,216 Total 12,122 10,707 The number of homes in production atDecember 31, 2019 was 13% higher compared toDecember 31, 2018 . The increase in homes under production resulted primarily from the higher backlog. Controlled lots The following is a summary of our lots under control atDecember 31, 2019 and 2018: December 31, 2019 December 31, 2018 Owned Optioned Controlled Owned Optioned Controlled Northeast 4,999 4,240 9,239 5,813 3,694 9,507 Southeast 16,174 12,802 28,976 15,800 11,806 27,606 Florida 20,281 17,802 38,083 18,652 15,855 34,507 Midwest 10,016 12,027 22,043 10,097 11,883 21,980 Texas 16,256 10,573 26,829 14,380 11,035 25,415 West 25,633 7,459 33,092 24,788 5,774 30,562 Total 93,359 64,903 158,262 89,530 60,047 149,577 Developed (%) 39 % 22 % 32 % 39 % 21 % 32 % Of our controlled lots, 93,359 and 89,530 were owned and 64,903 and 60,047 were under land option agreements atDecember 31, 2019 and 2018, respectively. While competition for well-positioned land is robust, we continue to pursue strategic land investments that we believe can achieve appropriate risk-adjusted returns on invested capital. The remaining purchase price under our land option agreements totaled$3.2 billion atDecember 31, 2019 . 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$299.4 million , of which$11.0 million is refundable, atDecember 31, 2019 . 25
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Homebuilding Segment Operations
Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of homebuyers in our targeted markets. As ofDecember 31, 2019 , we conducted our operations in 42 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
We also have a reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.
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The following table presents selected financial information for our reportable
Homebuilding segments:
Operating Data by Segment ($000 's omitted)
Years Ended December 31,
FY 2019 vs. FY
2019 2018 2018
Home sale revenues:
Northeast $ 771,349 (3 )% $ 795,211
Southeast 1,673,670 (4 )% 1,740,239
Florida 2,068,422 8 % 1,911,537
Midwest 1,485,370 - % 1,492,572
Texas 1,384,533 7 % 1,296,183
West 2,532,361 (2 )% 2,582,703
$ 9,915,705 1 % $ 9,818,445
Income before income taxes (a):
Northeast $ 116,221 292 % $ 29,629
Southeast (b) 175,763 (13 )% 202,639
Florida 309,596 7 % 289,418
Midwest 184,438 3 % 179,568
Texas 195,751 1 % 193,946
West (c) 386,361 (25 )% 511,828
Other homebuilding (d) (131,869 ) (12 )% (118,224 )
$ 1,236,261 (4 )% $ 1,288,804
Closings (units):
Northeast 1,443 (7 )% 1,558
Southeast 3,982 (6 )% 4,220
Florida 5,045 6 % 4,771
Midwest 3,583 (4 )% 3,716
Texas 4,528 8 % 4,212
West 4,651 - % 4,630
23,232 1 % $ 23,107
Average selling price:
Northeast $ 535 5 % $ 510
Southeast 420 2 % 412
Florida 410 2 % 401
Midwest 415 3 % 402
Texas 306 (1 )% 308
West 544 (3 )% 558
$ 427 0 % $ 425
(a) Includes land-related charges as summarized in the following land-related
charges table (see Note 2 ).
(b) Southeast includes a warranty charge of
a closed-out community (see Note 11 ).
(c) Includes gains of
California in 2018. (d) Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Also includes: write-off of$22.6 million of
insurance receivables associated with the resolution of certain insurance
matters in 2019; insurance reserve reversals of
million in 2019 and 2018, respectively (see Note 11 ).
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The following tables present additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000 's omitted)
Years Ended December 31,
FY 2019 vs. FY
2019 2018 2018
Net new orders - units:
Northeast 1,562 3 % 1,516
Southeast 4,237 3 % 4,114
Florida 5,462 10 % 4,982
Midwest 3,721 2 % 3,631
Texas 4,886 14 % 4,278
West 5,109 18 % 4,312
24,977 9 % 22,833
Net new orders - dollars:
Northeast $ 861,234 8 % $ 799,373
Southeast 1,758,110 2 % 1,721,103
Florida 2,246,631 11 % 2,029,999
Midwest 1,548,927 4 % 1,492,453
Texas 1,489,188 12 % 1,332,598
West 2,711,273 18 % 2,300,003
$ 10,615,363 10 % $ 9,675,529
Cancellation rates:
Northeast 11 % 10 %
Southeast 11 % 12 %
Florida 12 % 13 %
Midwest 12 % 12 %
Texas 17 % 19 %
West 16 % 17 %
14 % 14 %
Unit backlog:
Northeast 589 25 % 470
Southeast 1,865 16 % 1,610
Florida 2,306 22 % 1,889
Midwest 1,540 10 % 1,402
Texas 1,850 24 % 1,492
West 2,357 27 % 1,859
10,507 20 % 8,722
Backlog dollars:
Northeast $ 347,696 35 % $ 257,812
Southeast 783,469 12 % 699,030
Florida 978,261 22 % 800,051
Midwest 651,977 11 % 588,420
Texas 590,868 22 % 486,212
West 1,183,534 18 % 1,004,622
$ 4,535,805 18 % $ 3,836,147
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The following table presents additional selected financial information for our reportable Homebuilding segments:
Operating Data by Segment ($000 's omitted)
Years Ended December 31,
2019 2018
Land-related charges*:
Northeast $ 1,122 $ 74,488
Southeast 15,697 8,140
Florida 2,811 1,166
Midwest 2,581 7,361
Texas 1,151 1,204
West 2,568 5,159
Other homebuilding 1,171 1,928
$ 27,101 $ 99,446
* Land-related charges include land impairments, net realizable value
adjustments for land held for sale, and write-offs of deposits and
pre-acquisition costs. Other homebuilding consists primarily of
write-offs of capitalized interest resulting from land-related charges.
See Notes 2 and 3 to the Consolidated Financial Statements for
additional discussion of these charges.
Northeast:
For 2019, Northeast home sale revenues decreased 3% compared with 2018 due to a 7% decrease in closings, partially offset by a 5% increase in average selling price, reflecting lower results in the Northeast Corridor. The increased income before income taxes resulted primarily from the$74.5 million of land charges taken in 2018. Net new orders increased 3%, which is attributable primarily toNew England and Mid-Atlantic.
Southeast:
For 2019, Southeast home sale revenues decreased 4% compared with 2018 due to a 6% decrease in closings partially offset by a 2% increase in average selling price. The decrease in closings and increase in average selling price occurred across substantially all of our markets. Income before income taxes decreased 13% primarily as a result of lower gross margin, which stemmed partly from charges of$14.8 million related to estimated costs to complete repairs in a closed-out community. Net new orders increased 3%, which is attributable to a majority of our markets.
Florida:
For 2019, Florida home sale revenues increased 8% compared with 2018 due to a 6% increase in closings combined with a 2% increase in average selling price. The increase in closings and average selling price were attributable to the majority of our markets. The increased income before income taxes for 2019 resulted primarily from higher revenues and improved gross margin. Net new orders increased 10%, which is attributable to all of our markets.
Midwest:
For 2019, Midwest home sale revenues decreased slightly compared with the prior
year period due to a 4% decrease in closings partially offset by a 3% increase
in the average selling price. The decrease in closings occurred across the
majority of our markets while the increase in average selling price occurred
across the majority of our markets. Income before income taxes increased 3%
primarily as a result of improved gross margins. Net new orders increased 2%
across the majority of our markets.
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--------------------------------------------------------------------------------For 2019,Texas home sale revenues increased 7% compared with the prior year period due to an 8% increase in closings partially offset by a 1% decrease in the average selling price. The increase in closings occurred in all of our markets exceptHouston .Houston closings were impacted by the timing of new communities as overall demand remains strong. Income before income taxes increased slightly as a result of higher closings offset by lower margins compared to 2018. Net new orders increased 14%, which is attributable to all of our markets. West: For 2019, West home sale revenues decreased 2% compared with the prior year period due to a 3% decrease in the average selling price partially offset by a slight increase in closings. The decreased revenues were concentrated inNorthern California , which resulted from the completion, or near completion, of several high performing communities combined with moderating demand in that market. Income before income taxes decreased 25% primarily as the result of lower volumes and profitability inNorthern California in 2019 as well as two significant land sale gains totaling$26.4 million in 2018. Net new orders increased by 18% in 2019 compared with 2018 with significant increases inLas Vegas , which benefited from the American West acquisition inApril 2019 , andArizona . Financial Services Operations We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, throughPulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following table presents selected financial information for our Financial Services operations ($000 's omitted): Years Ended December 31, 2019 FY 2019 vs. FY 2018 2018 Mortgage revenues$ 169,917 14 %$ 149,642 Title services revenues 51,836 13 % 45,865 Insurance brokerage commissions 12,678 28 %
9,875
Total Financial Services revenues 234,431 14 % 205,382 Expenses (130,770 ) (11 )% (147,422 ) Other income, net (346 ) (145 )% 776 Income before income taxes$ 103,315 76 %$ 58,736 Total originations: Loans 15,821 9 % 14,464 Principal$ 4,976,973 12 %$ 4,456,360 30
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Years Ended December 31,
2019 2018
Supplemental data:
Capture rate 82.4 % 76.2 %
Average FICO score 751 752
Loan application backlog $ 2,804,017 $ 2,012,340
Funded origination breakdown:
Government (FHA, VA, USDA) 20 % 20 %
Other agency 71 % 68 %
Total agency 90 % 88 %
Non-agency 10 % 12 %
Total funded originations 100 % 100 %
Revenues
Total Financial Services revenues during 2019 increased 14% compared with 2018.
The increase occurred primarily as the result of higher volumes, which largely
resulted from an improved capture rate and improved margin per loan. Interest
rates generally declined during 2019, which led to a less competitive mortgage
environment contributing to improved capture rate and higher gains from sales of
mortgages.
Income before income taxes
The increase in income before income taxes for 2019 as compared with 2018 was due primarily to higher volume, higher revenue per loan, and improved expense leverage. Additionally, 2018 included a$16.1 million increase in loan origination liabilities (see Note 11 ).
Income Taxes
Our effective tax rate was 24.1% and 24.2% for 2019 and 2018, respectively. Each year's rate differs from the federal statutory rate primarily due to state income tax expense.
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. AtDecember 31, 2019 , we had unrestricted cash and equivalents of$1.2 billion , restricted cash balances of$33.5 million , and$737.2 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. We retired outstanding debt totaling$310.0 million and$82.8 million during 2019 and 2018, respectively. Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 33.6%, which is within our targeted range of 30.0% to 40.0%, atDecember 31, 2019 .
Unsecured senior notes
During 2019, we completed a tender offer to retire
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--------------------------------------------------------------------------------Other notes payable
Certain of our local homebuilding operations are party to non-recourse and limited recourse collateralized notes payable with third parties that totaled$53.4 million atDecember 31, 2019 . These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within notes payable.
Revolving credit facility
InJune 2018 , we entered into the Second Amended and Restated Credit Agreement ("Revolving Credit Facility"), which matures inJune 2023 . The Revolving Credit Facility 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 atDecember 31, 2019 . 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. We had no borrowings outstanding and$262.8 million and$239.4 million of letters of credit issued under the Revolving Credit Facility atDecember 31, 2019 and 2018, respectively. The Revolving Credit Facility contains financial covenants that require us to maintain a minimum TangibleNet Worth , a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As ofDecember 31, 2019 , we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to$737.2 million and$760.6 million as ofDecember 31, 2019 and 2018, respectively.Pulte Mortgage Pulte Mortgage provides mortgage financing for the majority of our home closings by utilizing its own funds and funds made available pursuant to credit agreements with third parties.Pulte Mortgage uses these resources to finance its lending activities until the loans are sold in the secondary market, which generally occurs within 30 days.Pulte Mortgage maintains a master repurchase agreement with third party lenders. InAugust 2019 ,Pulte Mortgage entered into an amended and restated repurchase agreement (the "Repurchase Agreement") to extend the termination date toJuly 2020 . The maximum aggregate commitment was$375.0 million during the seasonally high borrowing period fromDecember 26, 2019 throughJanuary 13, 2020 . At all other times, the maximum aggregate commitment ranges from$220.0 million to$270.0 million . The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable toPulte Mortgage , including quantitative thresholds related to net worth, net income, and liquidity.Pulte Mortgage had$326.6 million and$348.4 million outstanding under the Repurchase Agreement atDecember 31, 2019 , and 2018, respectively, and was in compliance with its covenants and requirements as of such dates. Share repurchase program We repurchased 8.4 million, and 10.9 million shares in 2019 and 2018, respectively, for a total of$274.3 million and$294.6 million in 2019 and 2018, respectively, under this program. In 2018, our Board of Directors authorized a$500.0 million share repurchase program and approved an increase of$500.0 million inMay 2019 . AtDecember 31, 2019 , we had remaining authorization to repurchase$525.5 million of common shares.
Dividends
Our declared quarterly cash dividends totaled
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--------------------------------------------------------------------------------Cash flows Operating activities Our net cash provided by operating activities in 2019 was$1.1 billion , compared with net cash provided by operating activities of$1.4 billion in 2018. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels and residential mortgage loans available-for-sale. Our positive cash flow from operations for 2019 was primarily due to our net income of$1.0 billion , which included non-cash land-related charges of$27.1 million and$105.4 million of deferred income tax expense. These factors were partially offset by a net increase in inventories of$237.7 million and a$48.3 million increase in residential mortgage loans available-for-sale. Our positive cash flow from operations for 2018 was primarily due to our net income of$1.0 billion , which included non-cash land-related charges of$99.4 million and$362.8 million of deferred income tax expense, supplemented by a$107.3 million reduction in residential mortgage loans available-for-sale. These factors were partially offset by a net increase in inventories of$50.4 million resulting from higher levels of spec inventory.
Investing activities
Net cash used in investing activities totaled$226.2 million in 2019, compared with$41.9 million in 2018. The 2019 cash outflows primarily reflect our acquisition of American West inApril 2019 for$163.7 million as well as$58.1 million related to our ongoing capital expenditures in new communities and information technology applications. The use of cash from investing activities in 2018 was primarily due to$59.0 million of capital expenditures for new community openings combined with expenditures on information technology applications.
Financing activities
Net cash used in financing activities was$733.6 million in 2019 compared with$580.3 million during 2018. The net cash used in financing activities for 2019 resulted primarily from the repurchase of 8.4 million common shares for$274.3 million under our repurchase authorization, repayments of debt of$310.0 million , and cash dividends of$122.4 million . Net cash used in financing activities for 2018 resulted primarily from the repurchase of 10.9 million common shares for$294.6 million under our repurchase authorization, repayments of debt of$82.8 million , cash dividends of$104.0 million , and net repayments of$89.4 million under the Repurchase Agreement related to the aforementioned decrease in residential mortgage loans available-for-sale.
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 to our customers 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 during the fourth quarter based on the timing of home
closings. This seasonal activity increases our working capital requirements in
our third and fourth quarters to support our home production and loan
origination volumes. As a result of the seasonality of our operations, our
quarterly results of operations are not necessarily indicative of the results
that may be expected for the full year.
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--------------------------------------------------------------------------------Contractual Obligations and Commercial Commitments
The following table summarizes our payments under contractual obligations as ofDecember 31, 2019 : Payments Due by Period ($000 's omitted) 2020 2021-2022 2023-2024 After 2024 Total Contractual obligations: Notes payable (a)$ 176,435 $ 739,009 $ 271,250 $ 3,016,853 $ 4,203,547 Operating lease obligations 18,995 39,128 28,983 22,476 109,582 Total contractual obligations (b)$ 195,430 $ 778,137 $ 300,233
(a) Represents principal and interest payments related to our senior notes
and limited recourse collateralized financing arrangements.
(b) We do not have any payments due in connection with capital lease or
long-term purchase obligations.
We are subject to certain obligations associated with entering into contracts
(including land option contracts) for the purchase, development, and sale of
real estate in the routine conduct of our business. Option contracts for the
purchase of land enable us to defer acquiring portions of properties owned by
third parties and unconsolidated entities until we have determined whether to
exercise our option, which may serve to reduce our financial risks associated
with long-term land holdings. At December 31, 2019 , we had $299.4 million of
deposits and pre-acquisition costs, of which $11.0 million is refundable,
relating to option agreements to acquire 64,903 lots with a remaining purchase
price of $3.2 billion . We expect to acquire the majority of such land within the
next three years.
We are currently under examination by various taxing jurisdictions and
anticipate finalizing the examinations with certain jurisdictions within the
next twelve months. The final outcome of these examinations is not yet
determinable. The statute of limitations for our major tax jurisdictions remains
open for examination for tax years 2015 to 2019. At December 31, 2019 , we had
$40.3 million of gross unrecognized tax benefits and $6.5 million of related
accrued interest and penalties.
The following table summarizes our other commercial commitments as of
December 31, 2019 :
Amount of Commitment Expiration by Period
($000 's omitted)
2020 2021-2022 2023-2024 After 2024 Total
Other commercial
commitments:
Guarantor credit facilities
(a) $ - $ - $ 1,000,000 $ - $ 1,000,000
Non-guarantor credit
facilities (b) 375,000 - - - 375,000
Total commercial
commitments (c) $ 375,000 $ - $ 1,000,000 $ - $ 1,375,000 (a) The
revolving credit facility, under which no borrowings were outstanding,
and $262.8 million of letters of credit were issued at December 31, 2019 .
(b) Represents the capacity of the Repurchase Agreement, of which
$326.6 million was outstanding at December 31, 2019 . The capacity of
$375.0 million was effective through January 13, 2020 after which it
ranges from
2020.
(c) The above table excludes an aggregate $1.4 billion of surety bonds, which
typically do not have stated expiration dates.
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. AtDecember 31, 2019 , we had outstanding letters of credit of$262.8 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$1.4 billion atDecember 31, 2019 , 34 -------------------------------------------------------------------------------- are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed. In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. AtDecember 31, 2019 , these agreements had an aggregate remaining purchase price of$3.2 billion . Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements were prepared in conformity withU.S. generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 to our Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality. 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 at the home closing date. Little to no estimation is involved in recognizing such revenues. Land sale 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. Certain land sale contracts may contain unique terms that require management judgment in determining the appropriate revenue recognition, but the impact of such transactions is generally immaterial. Financial services revenues - Loan origination fees, commitment fees, and 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. The determination of fair value for certain of these financial instruments requires the use of estimates and management judgment. 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 for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. 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 home 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$35.1 million atDecember 31, 2019 . Due to uncertainties in the estimation process and the long duration of renewal policies, which can extend years into the future, actual results could differ from such estimates.
Inventory and cost of revenues
Inventory is stated at cost unless the carrying value is determined to not be
recoverable, in which case the affected inventory is written down to fair value.
Cost includes land acquisition, land development, and home construction costs,
including interest, real estate taxes, and certain direct and indirect overhead
costs related to development and construction. For those communities for which
construction and development activities have been idled, applicable interest and
real estate taxes are expensed as incurred. Land acquisition and development
costs are allocated to individual lots using an average lot cost determined
based on the total expected land acquisition and development costs and the total
expected home closings for the community. The specific identification method is
used to accumulate home construction costs.
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We capitalize interest cost into homebuilding inventories. Each layer of
capitalized interest is amortized over a period that approximates the average
life of communities under development. Interest expense is allocated over the
period based on the timing of home closings.
Cost of revenues includes the construction cost, average lot cost, estimated
warranty costs, and closing costs applicable to the home. Sales commissions are
classified within selling, general, and administrative expenses. The
construction cost of the home includes amounts paid through the closing date of
the home, plus an accrual for costs incurred but not yet paid, based on an
analysis of budgeted construction costs. This accrual is reviewed for accuracy
based on actual payments made after closing compared with the amount accrued,
and adjustments are made if needed. Total community land acquisition and
development costs are based on an analysis of budgeted costs compared with
actual costs incurred to date and estimates to complete. The development cycles
for our communities range from under one year to in excess of ten years for
certain master planned communities. Adjustments to estimated total land
acquisition and development costs for the community affect the amounts costed
for the community's remaining lots.
We test inventory for impairment when events and circumstances indicate that the
undiscounted cash flows estimated to be generated by the community may be less
than its carrying amount. Such indicators include gross margins or sales paces
significantly below expectations, construction costs or land development costs
significantly in excess of budgeted amounts, significant delays or changes in
the planned development for the community, and other known qualitative factors.
Communities that demonstrate potential impairment indicators are tested for
impairment by comparing the expected undiscounted cash flows for the community
to its carrying value. For those communities whose carrying values exceed the
expected undiscounted cash flows, we determine the fair value of the community
and impairment charges are recorded if the fair value of the community's
inventory is less than its carrying value.
We generally determine the fair value of each community using a combination of
discounted cash flow models and market comparable transactions, where available.
These estimated cash flows are significantly impacted by estimates related to
expected average selling prices, expected sales paces, expected land development
and construction timelines, and anticipated land development, construction, and
overhead costs. The assumptions used in the discounted cash flow models are
specific to each community. Due to uncertainties in the estimation process, the
significant volatility in demand for new housing, the long life cycles of many
communities, and potential changes in our strategy related to certain
communities, actual results could differ significantly from such estimates.
Residential mortgage loans available-for-sale
In accordance with ASC 825, "Financial Instruments" ("ASC 825"), we use the fair
value option for our residential mortgage loans available-for-sale. Election of
the fair value option for residential mortgage loans available-for-sale allows a
better offset of the changes in fair values of the loans and the derivative
instruments used to economically hedge them without having to apply complex
hedge accounting provisions. Changes in the fair value of these loans are
reflected in revenues as they occur.
Loan origination liabilities
Our mortgage operations may be responsible for losses associated with mortgage
loans originated and sold to investors in the event of errors or omissions
relating to representations and warranties made by us that the loans met certain
requirements, including representations as to underwriting standards, the
existence of primary mortgage insurance, and the validity of certain borrower
representations in connection with the loan. If a loan is determined to be
faulty, we either indemnify the investor for potential future losses, repurchase
the loan from the investor, or reimburse the investor's actual losses.
Estimating the required liability for these potential losses requires a
significant level of management judgment. Given the unsettled litigation,
changes in values of underlying collateral over time, and other uncertainties
regarding the ultimate resolution of these claims, actual costs could differ
from our current estimates.
Allowance for warranties
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 a liability in the amount
of such costs at the time revenue is recognized. Factors that affect our
warranty liability include the number of homes sold, historical and anticipated
rates of warranty claims, and the projected cost of claims. We periodically
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--------------------------------------------------------------------------------assess the adequacy of our recorded warranty liability for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from our estimates.
Income taxes
We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for theU.S. housing industry and broader economy. 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 our 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 follow the provisions of ASC 740, "Income Taxes" ("ASC 740"), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including relevant facts and circumstances, applicable tax law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made. Interest and penalties related to income taxes and unrecognized tax benefits are recognized as a component of income tax expense (benefit). Self-insured risks At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. Our recorded reserves for all such claims totaled$709.8 million and$737.0 million atDecember 31, 2019 and 2018, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 68% and 65% of the total general liability reserves atDecember 31, 2019 and 2018, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs. Based on the actuarial analyses performed, we believe the range of reasonably possible losses related to these claims is$600 million to$800 million . While this range represents our best estimate of our ultimate liability related to these claims, due to a variety of factors, including those factors described above, there can be no assurance that the ultimate costs realized by us will fall within this range. Volatility in both national and local housing market conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs.
Adjustments to reserves are recorded in the period in which the change in
estimate occurs. During 2019 and 2018, we reduced general liability reserves by
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from actual claim experience observed being less than anticipated in previous actuarial projections. The changes in actuarial estimates were driven by changes in actual claims experience that, in turn, impacted actuarial estimates for potential future claims. These changes in actuarial estimates did not involve any changes in actuarial methodology but did impact the development of estimates for future periods, which resulted in adjustments to the IBNR portion of our recorded liabilities. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. Our receivables from insurance carriers totaled$118.4 million and$153.0 million atDecember 31, 2019 and 2018, respectively. The insurance receivables relate to costs incurred or to be incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of both known and anticipated future construction defect claims that we believe to be insured related to previously closed homes. We believe collection of these insurance receivables is probable based on various factors, including the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the credit quality of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies. While the outcome of these matters 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.
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