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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 March 31, 2020
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 150
Atlanta, | Georgia | 30326
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area 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 April 16, 2020: 268,148,512
1

PULTEGROUP, INC.
TABLE OF CONTENTS

|  | Page No.
PART I | FINANCIAL INFORMATION |
Item 1 | Financial Statements |
| Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 | 3
| Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 | 4
| Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019 | 5
| Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2020 and 2019 | 6
| Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 | 7
| Notes to Condensed Consolidated Financial Statements | 8
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 30
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 44
Item 4 | Controls and Procedures | 45
PART II | OTHER INFORMATION | 46
Item 1A | Risk Factors | 46
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 47
Item 6 | Exhibits | 48
| Signatures | 50

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)

| March 31, 2020 |  | December 31, 2019
| (Unaudited) |  |
ASSETS |  |  |
Cash and equivalents | $ | 1,816,778 |  |  | $ | 1,217,913 |
Restricted cash | 34,475 |  |  | 33,543 |
Total cash, cash equivalents, and restricted cash | 1,851,253 |  |  | 1,251,456 |
House and land inventory | 7,857,664 |  |  | 7,680,614 |
Land held for sale | 31,636 |  |  | 24,009 |
Residential mortgage loans available-for-sale | 363,854 |  |  | 508,967 |
Investments in unconsolidated entities | 54,495 |  |  | 59,766 |
Other assets | 935,532 |  |  | 895,686 |
Intangible assets | 178,553 |  |  | 124,992 |
Deferred tax assets, net | 150,387 |  |  | 170,107 |
| $ | 11,423,374 |  |  | $ | 10,715,597 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Liabilities: |  |  |
Accounts payable | $ | 429,724 |  |  | $ | 435,916 |
Customer deposits | 344,973 |  |  | 294,427 |
Accrued and other liabilities | 1,319,808 |  |  | 1,399,368 |
Income tax liabilities | 72,546 |  |  | 36,093 |
Financial Services debt | 270,000 |  |  | 326,573 |
Revolving credit facility | 700,000 |  |  | — |
Notes payable | 2,755,932 |  |  | 2,765,040 |
| 5,892,983 |  |  | 5,257,417 |
Shareholders' equity | 5,530,391 |  |  | 5,458,180 |
| $ | 11,423,374 |  |  | $ | 10,715,597 |

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
| March 31,
| 2020 |  | 2019
Revenues: |  |  |
Homebuilding |  |  |
Home sale revenues | $ | 2,221,503 |  |  | $ | 1,949,856 |
Land sale and other revenues | 18,927 |  |  | 2,975 |
| 2,240,430 |  |  | 1,952,831 |
Financial Services | 54,550 |  |  | 43,862 |
Total revenues | 2,294,980 |  |  | 1,996,693 |
Homebuilding Cost of Revenues: |  |  |
Home sale cost of revenues | (1,694,865 | ) |  | (1,492,791 | )
Land sale and other cost of revenues | (15,014 | ) |  | (2,050 | )
| (1,709,879 | ) |  | (1,494,841 | )
Financial Services expenses | (34,949 | ) |  | (31,449 | )
Selling, general, and administrative expenses | (263,669 | ) |  | (252,727 | )
Goodwill impairment | (20,190 | ) |  | — |
Other expense, net | (2,524 | ) |  | (973 | )
Income before income taxes | 263,769 |  |  | 216,703 |
Income tax expense | (60,058 | ) |  | (49,946 | )
Net income | $ | 203,711 |  |  | $ | 166,757 |
Per share: |  |  |
Basic earnings | $ | 0.75 |  |  | $ | 0.59 |
Diluted earnings | $ | 0.74 |  |  | $ | 0.59 |
Cash dividends declared | $ | 0.12 |  |  | $ | 0.11 |
Number of shares used in calculation: |  |  |
Basic | 270,000 |  |  | 277,637 |
Effect of dilutive securities | 1,218 |  |  | 1,003 |
Diluted | 271,218 |  |  | 278,640 |

See accompanying Notes to Condensed Consolidated Financial Statements.
4

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

| Three Months Ended
| March 31,
| 2020 |  | 2019
Net income | $ | 203,711 |  |  | $ | 166,757 |
Other comprehensive income, net of tax: |  |  |
Change in value of derivatives | 25 |  |  | 25 |
Other comprehensive income | 25 |  |  | 25 |
Comprehensive income | $ | 203,736 |  |  | $ | 166,782 |

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, 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 | 1 |  |  | — |  |  | 51 |  |  | — |  |  | — |  |  | 51 |
Share issuances | 738 |  |  | 7 |  |  | 4,088 |  |  | — |  |  | — |  |  | 4,095 |
Dividends declared | — |  |  | — |  |  | — |  |  | — |  |  | (32,609 | ) |  | (32,609 | )
Share repurchases | (2,825 | ) |  | (28 | ) |  | — |  |  | — |  |  | (95,648 | ) |  | (95,676 | )
Cash paid for shares withheld for taxes | — |  |  | — |  |  | — |  |  | — |  |  | (14,838 | ) |  | (14,838 | )
Share-based compensation | — |  |  | — |  |  | 8,187 |  |  | — |  |  | — |  |  | 8,187 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 203,711 |  |  | 203,711 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | 25 |  |  | — |  |  | 25 |
Shareholders' equity, March 31, 2020 | 268,149 |  |  | $ | 2,681 |  |  | $ | 3,247,475 |  |  | $ | (220 | ) |  | $ | 2,280,455 |  |  | $ | 5,530,391 |
Shareholders' equity, December 31, 2018 | 277,110 |  |  | $ | 2,771 |  |  | $ | 3,201,427 |  |  | $ | (345 | ) |  | $ | 1,613,929 |  |  | $ | 4,817,782 |
Stock option exercises | 118 |  |  | 1 |  |  | 1,444 |  |  | — |  |  | — |  |  | 1,445 |
Share issuances | 948 |  |  | 8 |  |  | 5,792 |  |  | — |  |  | — |  |  | 5,800 |
Dividends declared | — |  |  | — |  |  | — |  |  | — |  |  | (30,831 | ) |  | (30,831 | )
Share repurchases | (920 | ) |  | (9 | ) |  | — |  |  | — |  |  | (24,990 | ) |  | (24,999 | )
Cash paid for shares withheld for taxes | — |  |  | — |  |  | — |  |  | — |  |  | (10,350 | ) |  | (10,350 | )
Share-based compensation | — |  |  | — |  |  | 7,810 |  |  | — |  |  | — |  |  | 7,810 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | 166,757 |  |  | 166,757 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | 25 |  |  | — |  |  | 25 |
Shareholders' Equity, March 31, 2019 | 277,256 |  |  | $ | 2,771 |  |  | $ | 3,216,473 |  |  | $ | (320 | ) |  | $ | 1,714,515 |  |  | $ | 4,933,439 |

6

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)

| Three Months Ended
| March 31,
| 2020 |  | 2019
Cash flows from operating activities: |  |  |
Net income | $ | 203,711 |  |  | $ | 166,757 |
Adjustments to reconcile net income to net cash from operating activities: |  |  |
Deferred income tax expense | 19,955 |  |  | 24,690 |
Land-related charges | 9,729 |  |  | 2,979 |
Goodwill impairment | 20,190 |  |  | — |
Depreciation and amortization | 15,149 |  |  | 13,210 |
Share-based compensation expense | 11,479 |  |  | 9,019 |
Other, net | (903 | ) |  | (39 | )
Increase (decrease) in cash due to: |  |  |
Inventories | (189,364 | ) |  | (259,865 | )
Residential mortgage loans available-for-sale | 145,113 |  |  | 134,217 |
Other assets | (3,534 | ) |  | 64,533 |
Accounts payable, accrued and other liabilities | (26,910 | ) |  | 3,404 |
Net cash provided by (used in) operating activities | 204,615 |  |  | 158,905 |
Cash flows from investing activities: |  |  |
Capital expenditures | (20,139 | ) |  | (16,070 | )
Investments in unconsolidated entities | 5,837 |  |  | (1,289 | )
Business acquisition | (83,200 | ) |  | — |
Other investing activities, net | 1,706 |  |  | 291 |
Net cash provided by (used in) investing activities | (95,796 | ) |  | (17,068 | )
Cash flows from financing activities: |  |  |
Repayments of notes payable | (9,245 | ) |  | (3,605 | )
Borrowings under revolving credit facility | 700,000 |  |  | — |
Financial Services borrowings (repayments) | (56,573 | ) |  | (126,273 | )
Stock option exercises | 50 |  |  | 1,445 |
Share repurchases | (95,676 | ) |  | (24,999 | )
Cash paid for shares withheld for taxes | (14,838 | ) |  | (10,350 | )
Dividends paid | (32,740 | ) |  | (30,802 | )
Net cash provided by (used in) financing activities | 490,978 |  |  | (194,584 | )
Net increase (decrease) in cash, cash equivalents, and restricted cash | 599,797 |  |  | (52,747 | )
Cash, cash equivalents, and restricted cash at beginning of period | 1,251,456 |  |  | 1,133,700 |
Cash, cash equivalents, and restricted cash at end of period | $ | 1,851,253 |  |  | $ | 1,080,953 |
Supplemental Cash Flow Information: |  |  |
Interest paid (capitalized), net | $ | 14,019 |  |  | $ | 17,164 |
Income taxes paid (refunded), net | $ | 5,540 |  |  | $ | (30,850 | )

See accompanying Notes to Condensed Consolidated Financial Statements.
7

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, 2019.
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"). On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Since March 31, 2020, the COVID-19 pandemic has continued to spread and various state and local governments have issued or extended “shelter-in-place” orders which have impacted and restricted various aspects of our business. As of the date of this filing, our construction and sales operations have been significantly curtailed in the states of Washington, Michigan, and Pennsylvania and certain counties in Northern California. Most of our other operations are functioning, subject to regulated restrictions and safety constraints we have enacted in order to protect our employees, trade contractors, and customers. In addition, traffic and sales activity has declined. While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the U.S. could materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020 or beyond.
Business acquisition
In January 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 $83.2 million was paid in January 2020 while additional payments of $10.4 million will be settled in 2021 and 2022, respectively. 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. The acquisition also resulted in $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 ASC 350, 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. This impairment was not the result of any unique factors specific to ICG's operations but,
8

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
rather, reflects the broad-based declines in the market capitalizations of publicly-traded construction companies in the short period of time since the acquisition.
Other expense, net
Other expense, net consists of the following ($000’s omitted):

| Three Months Ended
March 31,
2020 |  | 2019
Write-offs of deposits and pre-acquisition costs | $ | (4,332 | ) |  | $ | (2,917 | )
Amortization of intangible assets | (4,557 | ) |  | (3,450 | )
Interest income | 3,807 |  |  | 4,949 |
Interest expense | (797 | ) |  | (144 | )
Equity in earnings of unconsolidated entities | 567 |  |  | 37 |
Miscellaneous, net | 2,788 |  |  | 552 |
Total other expense, net | $ | (2,524 | ) |  | $ | (973 | )

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. 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 deposit liabilities related to sold but undelivered homes, which totaled $345.0 million and $294.4 million at March 31, 2020 and December 31, 2019, 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 8 for 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 completed.
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 satisfied upon issuance of the initial policy, and related contract assets for estimated future renewal commissions are included in other assets and totaled $35.0 million at March 31, 2020.
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
9

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to include the dilutive effects of stock options, unvested restricted share units, unvested restricted share units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.
In accordance with Accounting Standards Codification ("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
March 31,
2020 |  | 2019
Numerator: |  |  |
Net income | $ | 203,711 |  |  | $ | 166,757 |
Less: earnings distributed to participating securities | (273 | ) |  | (308 | )
Less: undistributed earnings allocated to participating securities | (1,537 | ) |  | (1,410 | )
Numerator for basic earnings per share | $ | 201,901 |  |  | $ | 165,039 |
Add back: undistributed earnings allocated to participating securities | 1,537 |  |  | 1,410 |
Less: undistributed earnings reallocated to participating securities | (1,530 | ) |  | (1,407 | )
Numerator for diluted earnings per share | $ | 201,908 |  |  | $ | 165,042 |
Denominator: |  |  |
Basic shares outstanding | 270,000 |  |  | 277,637 |
Effect of dilutive securities | 1,218 |  |  | 1,003 |
Diluted shares outstanding | 271,218 |  |  | 278,640 |
Earnings per share: |  |  |
Basic | $ | 0.75 |  |  | $ | 0.59 |
Diluted | $ | 0.74 |  |  | $ | 0.59 |

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 March 31, 2020 and December 31, 2019, residential mortgage loans available-for-sale had an aggregate fair value of $363.9 million and $509.0 million, respectively, and an aggregate outstanding principal balance of $351.2 million and $494.1 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $2.2 million and $(1.1) million for the three months ended March 31, 2020 and 2019, respectively. These changes in fair value were substantially offset by changes in the fair value of corresponding hedging instruments. Net gains from the sale of mortgages were $30.9 million and $24.0 million for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019, we had aggregate IRLCs of $440.6 million and $255.3 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
10

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 March 31, 2020 and December 31, 2019, we had unexpired forward contracts of $609.0 million and $518.2 million, respectively, and whole loan investor commitments of $114.8 million and $200.7 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):

| March 31, 2020 |  | December 31, 2019
| Other Assets |  | Accrued and Other Liabilities |  | Other Assets |  | Accrued and Other Liabilities
Interest rate lock commitments | $ | 13,810 |  |  | $ | 180 |  |  | $ | 8,351 |  |  | $ | 149 |
Forward contracts | 3,148 |  |  | 15,579 |  |  | 299 |  |  | 1,372 |
Whole loan commitments | 685 |  |  | 202 |  |  | 880 |  |  | 284 |
| $ | 17,643 |  |  | $ | 15,961 |  |  | $ | 9,530 |  |  | $ | 1,805 |

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 March 31, 2020, we reported $227.1 million of assets in-scope under Accounting Standards Codification 326, "Financial Instruments - Credit Losses" ("ASC 326"). These assets consist primarily of insurance receivables, contract assets related to insurance brokerage commissions, and vendor rebates. Counterparties associated with these assets are generally highly rated. Allowances on the aforementioned in-scope assets were de minimis as of March 31, 2020.
New accounting pronouncements
On January 1, 2020, we adopted ASC 326, which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. We adopted ASC 326 using the modified retrospective transition method. The amendment 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 removes 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.
11

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Inventory
Major components of inventory were as follows ($000’s omitted):

| March 31, 2020 |  | December 31, 2019
Homes under construction | $ | 3,276,279 |  |  | $ | 2,899,016 |
Land under development | 4,132,273 |  |  | 4,347,107 |
Raw land | 449,112 |  |  | 434,491 |
| $ | 7,857,664 |  |  | $ | 7,680,614 |

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
| March 31,
| 2020 |  | 2019
Interest in inventory, beginning of period | $ | 210,383 |  |  | $ | 227,495 |
Interest capitalized | 39,913 |  |  | 42,381 |
Interest expensed | (36,871 | ) |  | (34,563 | )
Interest in inventory, end of period | $ | 213,425 |  |  | $ | 235,313 |

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 March 31, 2020 or December 31, 2019 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.
12

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following provides a summary of our interests in land option agreements as of March 31, 2020 and December 31, 2019 ($000’s omitted):

| March 31, 2020 |  | December 31, 2019
| Deposits and Pre-acquisition Costs |  | Remaining Purchase Price |  | Deposits and Pre-acquisition Costs |  | Remaining Purchase Price
Land options with VIEs | $ | 130,537 |  |  | $ | 1,523,601 |  |  | $ | 123,775 |  |  | $ | 1,466,585 |
Other land options | 173,045 |  |  | 1,807,502 |  |  | 175,662 |  |  | 1,755,377 |
| $ | 303,582 |  |  | $ | 3,331,103 |  |  | $ | 299,437 |  |  | $ | 3,221,962 |

Land-related charges
We recorded the following land-related charges ($000's omitted):

|  | Three Months Ended
|  | March 31, 2020
| Statement of Operations Classification | 2020 |  | 2019
Land impairments | Home sale cost of revenues | $ | 5,386 |  |  | $ | — |
Net realizable value ("NRV") adjustments - land held for sale | Land sale and other cost of revenues | 11 |  |  | 62 |
Write-offs of deposits and pre-acquisition costs | Other expense, net | 4,332 |  |  | 2,917 |
|  | $ | 9,729 |  |  | $ | 2,979 |

As explained in Note 1, 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. NRV adjustments occur when circumstances indicate that the carrying value of land held for sale will not be fully recovered.
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 and title operations and operate generally in the same markets as the Homebuilding segments.
13

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

| Operating Data by Segment ($000’s omitted)
| Three Months Ended
| March 31,
| 2020 |  | 2019
Revenues: |  |  |
Northeast | $ | 162,434 |  |  | $ | 110,492 |
Southeast | 382,394 |  |  | 375,417 |
Florida | 506,689 |  |  | 396,443 |
Midwest | 292,169 |  |  | 293,590 |
Texas | 344,738 |  |  | 269,003 |
West | 552,006 |  |  | 507,886 |
| 2,240,430 |  |  | 1,952,831 |
Financial Services | 54,550 |  |  | 43,862 |
Consolidated revenues | $ | 2,294,980 |  |  | $ | 1,996,693 |
Income (loss) before income taxes: |  |  |
Northeast | $ | 18,609 |  |  | $ | 7,928 |
Southeast | 54,744 |  |  | 37,856 |
Florida (a) | 57,166 |  |  | 49,596 |
Midwest | 31,462 |  |  | 26,158 |
Texas | 53,595 |  |  | 30,971 |
West | 67,255 |  |  | 90,182 |
Other homebuilding (b) | (38,612 | ) |  | (38,397 | )
| 244,219 |  |  | 204,294 |
Financial Services | 19,550 |  |  | 12,409 |
Consolidated income before income taxes | $ | 263,769 |  |  | $ | 216,703 |

(a) | Reflects goodwill impairment charge totaling $20.2 million (see Note 1) in the three months ended March 31, 2020.

(b) | Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments.

14

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

| Operating Data by Segment ($000’s omitted)
| Three Months Ended
| March 31,
| 2020 |  | 2019
Land-related charges*: |  |  |
Northeast | $ | 4,753 |  |  | $ | 324 |
Southeast | 748 |  |  | 572 |
Florida | 522 |  |  | 481 |
Midwest | 777 |  |  | 1,103 |
Texas | 656 |  |  | 68 |
West | 1,529 |  |  | 431 |
Other homebuilding | 744 |  |  | — |
| $ | 9,729 |  |  | $ | 2,979 |

* | 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)
| March 31, 2020
| Homes Under Construction |  | Land Under Development |  | Raw Land |  | Total Inventory |  | Total Assets
Northeast | $ | 376,669 |  |  | $ | 232,799 |  |  | $ | 23,524 |  |  | $ | 632,992 |  |  | $ | 711,522 |
Southeast | 472,381 |  |  | 715,345 |  |  | 71,416 |  |  | 1,259,142 |  |  | 1,406,462 |
Florida | 612,518 |  |  | 893,970 |  |  | 114,013 |  |  | 1,620,501 |  |  | 1,900,299 |
Midwest | 379,818 |  |  | 430,848 |  |  | 29,753 |  |  | 840,419 |  |  | 925,293 |
Texas | 349,799 |  |  | 439,913 |  |  | 88,323 |  |  | 878,035 |  |  | 955,980 |
West | 1,035,681 |  |  | 1,155,349 |  |  | 106,465 |  |  | 2,297,495 |  |  | 2,673,276 |
Other homebuilding (a) | 49,413 |  |  | 264,049 |  |  | 15,618 |  |  | 329,080 |  |  | 2,335,564 |
| 3,276,279 |  |  | 4,132,273 |  |  | 449,112 |  |  | 7,857,664 |  |  | 10,908,396 |
Financial Services | — |  |  | — |  |  | — |  |  | — |  |  | 514,978 |
| $ | 3,276,279 |  |  | $ | 4,132,273 |  |  | $ | 449,112 |  |  | $ | 7,857,664 |  |  | $ | 11,423,374 |

15

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

| Operating Data by Segment
| ($000's omitted)
| December 31, 2019
| Homes Under Construction |  | Land Under Development |  | Raw Land |  | Total Inventory |  | Total Assets
Northeast | $ | 345,644 |  |  | $ | 242,666 |  |  | $ | 25,098 |  |  | $ | 613,408 |  |  | $ | 698,661 |
Southeast | 430,008 |  |  | 724,258 |  |  | 72,804 |  |  | 1,227,070 |  |  | 1,354,086 |
Florida | 539,895 |  |  | 894,716 |  |  | 99,228 |  |  | 1,533,839 |  |  | 1,700,198 |
Midwest | 315,822 |  |  | 464,733 |  |  | 31,881 |  |  | 812,436 |  |  | 886,889 |
Texas | 343,230 |  |  | 447,707 |  |  | 84,926 |  |  | 875,863 |  |  | 949,236 |
West | 881,551 |  |  | 1,289,255 |  |  | 105,606 |  |  | 2,276,412 |  |  | 2,538,803 |
Other homebuilding (a) | 42,866 |  |  | 283,772 |  |  | 14,948 |  |  | 341,586 |  |  | 1,953,440 |
| 2,899,016 |  |  | 4,347,107 |  |  | 434,491 |  |  | 7,680,614 |  |  | 10,081,313 |
Financial Services | — |  |  | — |  |  | — |  |  | — |  |  | 634,284 |
| $ | 2,899,016 |  |  | $ | 4,347,107 |  |  | $ | 434,491 |  |  | $ | 7,680,614 |  |  | $ | 10,715,597 |

(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):

| March 31, 2020 |  | December 31, 2019
4.250% unsecured senior notes due March 2021 (a) | $ | 425,954 |  |  | $ | 425,954 |
5.500% unsecured senior notes due March 2026 (a) | 700,000 |  |  | 700,000 |
5.000% unsecured senior notes due January 2027 (a) | 600,000 |  |  | 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) | (14,158 | ) |  | (14,295 | )
Total senior notes | 2,711,796 |  |  | 2,711,659 |
Other notes payable | 44,136 |  |  | 53,381 |
Notes payable | $ | 2,755,932 |  |  | $ | 2,765,040 |
Estimated fair value | $ | 2,797,273 |  |  | $ | 3,152,046 |

(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.

Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $44.1 million and $53.4 million at March 31, 2020 and December 31, 2019, respectively. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, and have no recourse to any other assets. The stated interest rates on these notes range up to 8%.
16

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revolving credit facility
We maintain a revolving credit facility ("Revolving Credit Facility") maturing in 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 March 31, 2020. 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 COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. As a result, we had $700.0 million and no borrowings outstanding at March 31, 2020 and December 31, 2019, respectively, and $256.1 million and $262.8 million of letters of credit issued under the Revolving Credit Facility at March 31, 2020 and December 31, 2019, 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 March 31, 2020, 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 $43.9 million and $737.2 million at March 31, 2020 and December 31, 2019, respectively.
Financial Services debt
Pulte Mortgage maintains a master repurchase agreement with third party lenders (the "Repurchase Agreement"). In August 2019, Pulte Mortgage entered into an amendment to the Repurchase Agreement to extend the effective date to July 2020. The maximum aggregate commitment was $270.0 million at March 31, 2020 and continues through maturity. 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 $270.0 million and $326.6 million outstanding under the Repurchase Agreement at March 31, 2020 and December 31, 2019, respectively, and was in compliance with all of its covenants and requirements as of such dates.
5. Shareholders’ equity
During the three months ended March 31, 2020, we declared cash dividends totaling $32.6 million and repurchased 2.8 million shares under our repurchase authorization for $95.7 million. For the three months ended March 31, 2019, we declared cash dividends totaling $30.8 million and repurchased 0.9 million shares under our repurchase authorization for $25.0 million. In May 2019, our board of directors approved a $500.0 million increase in our share repurchase authorization. At March 31, 2020, we had remaining authorization to repurchase $429.9 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. During the three months ended March 31, 2020 and 2019, participants surrendered shares valued at $14.8 million and $10.4 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.
6. Income taxes
Our effective tax rate for the three months ended March 31, 2020 was 22.8% compared to 23.0% for the same period in 2019. Our effective tax rate differs from the federal statutory rate primarily due to state income tax expense and tax benefits for equity compensation.
At March 31, 2020 and December 31, 2019, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $150.4 million and $170.1 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.
17

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $42.0 million and $40.3 million of gross unrecognized tax benefits at March 31, 2020 and December 31, 2019, respectively. Additionally, we had accrued interest and penalties of $6.7 million and $6.5 million at March 31, 2020 and December 31, 2019, respectively. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $23.6 million, excluding interest and penalties, primarily due to potential audit settlements.
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):

Financial Instrument |  | Fair Value Hierarchy |  | Fair Value
March 31, 2020 |  | December 31, 2019
Measured at fair value on a recurring basis: |  |  |  |  |  |
Residential mortgage loans available-for-sale |  | Level 2 |  | $ | 363,854 |  |  | $ | 508,967 |
Interest rate lock commitments |  | Level 2 |  | 13,630 |  |  | 8,202 |
Forward contracts |  | Level 2 |  | (12,431 | ) |  | (1,073 | )
Whole loan commitments |  | Level 2 |  | 483 |  |  | 596 |
Measured at fair value on a non-recurring basis: |  |  |  |  |  |
House and land inventory |  | Level 3 |  | $ | 18,754 |  |  | $ | 9,979 |
Land held for sale |  | Level 2 |  | — |  |  | 4,193 |
Disclosed at fair value: |  |  |  |  |  |
Cash, cash equivalents, and restricted cash |  | Level 1 |  | $ | 1,851,253 |  |  | $ | 1,251,456 |
Financial Services debt |  | Level 2 |  | 270,000 |  |  | 326,573 |
Revolving credit facility |  | Level 2 |  | 700,000 |  |  | — |
Senior notes payable |  | Level 2 |  | 2,753,137 |  |  | 3,098,665 |
Other notes payable |  | Level 2 |  | 44,136 |  |  | 53,381 |

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 interest rate lock commitments, 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.
18

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, revolving credit facility, 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 $2.7 billion at both March 31, 2020 and December 31, 2019.
8. Commitments and contingencies
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. In addition, certain trustees and investors continue to attempt to collect damages based on losses from loans that originated prior to 2009. Some of our mortgage subsidiaries are currently defendants in litigation related to such claims.
CTX Mortgage Company, LLC ("CTX Mortgage") was the mortgage subsidiary of Centex and ceased originating loans in December 2009. In the matter Lehman Brothers Holdings, Inc. ("Lehman") in the U.S. Bankruptcy Court in the Southern District of New York, Lehman has initiated an adversary proceeding against CTX Mortgage seeking indemnity for loans sold to it by CTX Mortgage prior to 2009. This claim is part of a broader action by Lehman in U.S. Bankruptcy Court against more than 100 mortgage originators and brokers. On August 13, 2018, the court denied a motion to dismiss filed by CTX Mortgage and other defendants, and on December 17, 2018, Lehman filed an amended adversary complaint against CTX Mortgage. Lehman's complaint alleges claims for indemnifiable losses of up to $261 million due from CTX Mortgage. We believe that CTX Mortgage has meritorious defenses and CTX Mortgage will continue to vigorously defend itself in this matter. We have recorded a liability for an amount that we consider to be the best estimate within a range of potential losses.
In addition, both CTX Mortgage and Pulte Mortgage sold certain loans originated prior to 2009 to financial institutions that were subsequently included in residential mortgage-backed securities or other securitizations issued by such financial institutions. In connection with such sales, CTX Mortgage and Pulte Mortgage have been put on notice of potential direct and / or third-party claims for indemnification arising out of litigation relating to certain of these residential mortgage-backed securities or other securitizations and, in some instances, such claims have resulted in legal proceedings against CTX Mortgage and Pulte Mortgage. We cannot yet quantify CTX Mortgage's or Pulte Mortgage's potential liability as a result of these matters. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company.
Our recorded liabilities for all such claims totaled $25.2 million at March 31, 2020 and December 31, 2019. Determining the liabilities for anticipated losses requires a significant level of management judgment. Given the unsettled litigation, changes in values of underlying collateral over time, unpredictable factors inherent in litigation, and other uncertainties regarding the ultimate resolution of these claims, actual costs could differ from our current estimates.
19

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $256.1 million and $1.4 billion, respectively, at March 31, 2020 and $262.8 million and $1.4 billion, respectively, at December 31, 2019. 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.
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
| March 31,
| 2020 |  | 2019
Warranty liabilities, beginning of period | $ | 91,389 |  |  | $ | 79,154 |
Reserves provided | 15,039 |  |  | 12,262 |
Payments | (18,276 | ) |  | (16,130 | )
Other adjustments | 243 |  |  | 4,461 |
Warranty liabilities, end of period | $ | 88,395 |  |  | $ | 79,747 |

20

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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. 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 over 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 $719.2 million and $709.8 million at March 31, 2020 and December 31, 2019, 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 67% and 68% of the total general liability reserves at March 31, 2020 and December 31, 2019, 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.
21

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
| March 31,
| 2020 |  | 2019
Balance, beginning of period | $ | 709,798 |  |  | $ | 737,013 |
Reserves provided | 18,449 |  |  | 17,396 |
Adjustments to previously recorded reserves | 1,300 |  |  | (3,875 | )
Payments, net (a) | (10,375 | ) |  | (21,364 | )
Balance, end of period | $ | 719,172 |  |  | $ | 729,170 |

(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 $112.5 million and $118.4 million at March 31, 2020 and December 31, 2019, 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. During the three months ended March 31, 2019, we wrote-off $11.6 million of insurance receivables in connection with the settlement of an arbitration with one of our carriers, pursuant to which we received the majority of the coverage under the policy.
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 $76.2 million and $96.8 million at March 31, 2020, respectively and $70.0 million and $91.4 million at December 31, 2019, respectively. During the three months ended March 31, 2020 and 2019, we recorded an additional $9.6 million and $7.8 million of lease liabilities under operating leases, respectively. Payments on lease liabilities during the three months ended March 31, 2020 and 2019 totaled $5.9 million and $5.8 million, respectively.
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 months ended March 31, 2020 and 2019, our total lease expense was $9.9 million and $8.8 million, respectively, inclusive of variable lease costs of $1.9 million and $1.7 million, respectively, as well as short-term lease costs of $2.2 million in both periods. Sublease income was de minimis.
22

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The future minimum lease payments required under our leases as of March 31, 2020 were as follows ($000's omitted):

Years Ending December 31, |
2020 (a) | $ | 13,802 |
2021 | 22,212 |
2022 | 20,306 |
2023 | 18,996 |
2024 | 13,328 |
Thereafter | 26,508 |
Total lease payments (b) | 115,152 |
Less: Interest (c) | 18,376 |
Present value of lease liabilities (d) | $ | 96,776 |

(a) | Remaining payments are for the nine months ending December 31, 2020.

(b) | Lease payments include options to extend lease terms that are reasonably certain of being exercised and exclude $4.1 million of legally binding minimum lease payments for leases signed but not yet commenced at March 31, 2020.

(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.

(d) | The weighted average remaining lease term and weighted average discount rate used in calculating our lease liabilities were 6.1 years and 5.7%, respectively, at March 31, 2020.

9. Supplemental guarantor information
All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in unconsolidated entities are presented using the equity method of accounting.
23

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2020
($000’s omitted)

| Unconsolidated |  | Eliminating Entries |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |
ASSETS |  |  |  |  |  |  |  |  |
Cash and equivalents | $ | — |  |  | $ | 1,752,047 |  |  | $ | 64,731 |  |  | $ | — |  |  | $ | 1,816,778 |
Restricted cash | — |  |  | 29,351 |  |  | 5,124 |  |  | — |  |  | 34,475 |
Total cash, cash equivalents, and restricted cash | — |  |  | 1,781,398 |  |  | 69,855 |  |  | — |  |  | 1,851,253 |
House and land inventory | — |  |  | 7,723,741 |  |  | 133,923 |  |  | — |  |  | 7,857,664 |
Land held for sale | — |  |  | 31,636 |  |  | — |  |  | — |  |  | 31,636 |
Residential mortgage loans available- for-sale | — |  |  | — |  |  | 363,854 |  |  | — |  |  | 363,854 |
Investments in unconsolidated entities | — |  |  | 53,304 |  |  | 1,191 |  |  | — |  |  | 54,495 |
Other assets | 9,519 |  |  | 692,313 |  |  | 233,700 |  |  | — |  |  | 935,532 |
Intangible assets | — |  |  | 121,392 |  |  | 57,161 |  |  | — |  |  | 178,553 |
Deferred tax assets, net | 162,661 |  |  | — |  |  | (12,274 | ) |  | — |  |  | 150,387 |
Investments in subsidiaries and intercompany accounts, net | 8,914,412 |  |  | 260,346 |  |  | 9,707,683 |  |  | (18,882,441 | ) |  | — |
| $ | 9,086,592 |  |  | $ | 10,664,130 |  |  | $ | 10,555,093 |  |  | $ | (18,882,441 | ) |  | $ | 11,423,374 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |
Accounts payable, customer deposits, accrued and other liabilities | $ | 71,859 |  |  | $ | 1,749,600 |  |  | $ | 273,046 |  |  | $ | — |  |  | $ | 2,094,505 |
Income tax liabilities | 72,546 |  |  | — |  |  | — |  |  | — |  |  | 72,546 |
Financial Services debt | — |  |  | — |  |  | 270,000 |  |  | — |  |  | 270,000 |
Revolving credit facility | 700,000 |  |  | — |  |  | — |  |  | — |  |  | 700,000 |
Notes payable | 2,711,796 |  |  | 44,136 |  |  | — |  |  | — |  |  | 2,755,932 |
Total liabilities | 3,556,201 |  |  | 1,793,736 |  |  | 543,046 |  |  | — |  |  | 5,892,983 |
Total shareholders’ equity | 5,530,391 |  |  | 8,870,394 |  |  | 10,012,047 |  |  | (18,882,441 | ) |  | 5,530,391 |
| $ | 9,086,592 |  |  | $ | 10,664,130 |  |  | $ | 10,555,093 |  |  | $ | (18,882,441 | ) |  | $ | 11,423,374 |

24

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2019
($000’s omitted)

| Unconsolidated |  | Eliminating Entries |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |
ASSETS |  |  |  |  |  |  |  |  |
Cash and equivalents | $ | — |  |  | $ | 1,026,743 |  |  | $ | 191,170 |  |  | $ | — |  |  | $ | 1,217,913 |
Restricted cash | — |  |  | 31,328 |  |  | 2,215 |  |  | — |  |  | 33,543 |
Total cash, cash equivalents, and restricted cash | — |  |  | 1,058,071 |  |  | 193,385 |  |  | — |  |  | 1,251,456 |
House and land inventory | — |  |  | 7,554,662 |  |  | 125,952 |  |  | — |  |  | 7,680,614 |
Land held for sale | — |  |  | 24,009 |  |  | — |  |  | — |  |  | 24,009 |
Residential mortgage loans available- for-sale | — |  |  | — |  |  | 508,967 |  |  | — |  |  | 508,967 |
Investments in unconsolidated entities | — |  |  | 59,266 |  |  | 500 |  |  | — |  |  | 59,766 |
Other assets | 8,172 |  |  | 688,996 |  |  | 198,518 |  |  |  |  |  | 895,686 |
Intangible assets | — |  |  | 124,992 |  |  | — |  |  | — |  |  | 124,992 |
Deferred tax assets, net | 182,461 |  |  | — |  |  | (12,354 | ) |  | — |  |  | 170,107 |
Investments in subsidiaries and intercompany accounts, net | 8,103,191 |  |  | 1,081,472 |  |  | 9,279,403 |  |  | (18,464,066 | ) |  | — |
| $ | 8,293,824 |  |  | $ | 10,591,468 |  |  | $ | 10,294,371 |  |  | $ | (18,464,066 | ) |  | $ | 10,715,597 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |  |
Accounts payable, customer deposits, accrued and other liabilities | $ | 87,892 |  |  | $ | 1,781,893 |  |  | $ | 259,926 |  |  | $ | — |  |  | $ | 2,129,711 |
Income tax liabilities | 36,093 |  |  | — |  |  | — |  |  | — |  |  | 36,093 |
Financial Services debt | — |  |  | — |  |  | 326,573 |  |  | — |  |  | 326,573 |
Notes payable | 2,711,659 |  |  | 53,381 |  |  | — |  |  | — |  |  | 2,765,040 |
Total liabilities | 2,835,644 |  |  | 1,835,274 |  |  | 586,499 |  |  | — |  |  | 5,257,417 |
Total shareholders’ equity | 5,458,180 |  |  | 8,756,194 |  |  | 9,707,872 |  |  | (18,464,066 | ) |  | 5,458,180 |
| $ | 8,293,824 |  |  | $ | 10,591,468 |  |  | $ | 10,294,371 |  |  | $ | (18,464,066 | ) |  | $ | 10,715,597 |

25

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2020
($000’s omitted)

| Unconsolidated |  |  |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |  | Eliminating Entries |
Revenues: |  |  |  |  |  |  |  |  |
Homebuilding |  |  |  |  |  |  |  |  |
Home sale revenues | $ | — |  |  | $ | 2,197,564 |  |  | $ | 23,939 |  |  | $ | — |  |  | $ | 2,221,503 |
Land sale and other revenues | — |  |  | 2,450 |  |  | 16,477 |  |  | — |  |  | 18,927 |
| — |  |  | 2,200,014 |  |  | 40,416 |  |  | — |  |  | 2,240,430 |
Financial Services | — |  |  | — |  |  | 54,550 |  |  | — |  |  | 54,550 |
| — |  |  | 2,200,014 |  |  | 94,966 |  |  | — |  |  | 2,294,980 |
Homebuilding Cost of Revenues: |  |  |  |  |  |  |  |  |
Home sale cost of revenues | — |  |  | (1,675,347 | ) |  | (19,518 | ) |  | — |  |  | (1,694,865 | )
Land sale cost of revenues | — |  |  | (854 | ) |  | (14,160 | ) |  | — |  |  | (15,014 | )
| — |  |  | (1,676,201 | ) |  | (33,678 | ) |  | — |  |  | (1,709,879 | )
Financial Services expenses | — |  |  | (143 | ) |  | (34,806 | ) |  | — |  |  | (34,949 | )
Selling, general, and administrative expenses | — |  |  | (255,635 | ) |  | (8,034 | ) |  | — |  |  | (263,669 | )
Goodwill impairment | — |  |  | — |  |  | (20,190 | ) |  | — |  |  | (20,190 | )
Other income (expense), net | (692 | ) |  | (6,617 | ) |  | 4,785 |  |  | — |  |  | (2,524 | )
Intercompany interest | (1,606 | ) |  | — |  |  | 1,606 |  |  | — |  |  | — |
Income (loss) before income taxes and equity in income (loss) of subsidiaries | (2,298 | ) |  | 261,418 |  |  | 4,649 |  |  | — |  |  | 263,769 |
Income tax (expense) benefit | 574 |  |  | (59,459 | ) |  | (1,173 | ) |  | — |  |  | (60,058 | )
Income (loss) before equity in income (loss) of subsidiaries | (1,724 | ) |  | 201,959 |  |  | 3,476 |  |  | — |  |  | 203,711 |
Equity in income (loss) of subsidiaries | 205,435 |  |  | 18,197 |  |  | 195,720 |  |  | (419,352 | ) |  | — |
Net income (loss) | 203,711 |  |  | 220,156 |  |  | 199,196 |  |  | (419,352 | ) |  | 203,711 |
Other comprehensive income | 25 |  |  | — |  |  | — |  |  | — |  |  | 25 |
Comprehensive income (loss) | $ | 203,736 |  |  | $ | 220,156 |  |  | $ | 199,196 |  |  | $ | (419,352 | ) |  | $ | 203,736 |

26

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2019
($000’s omitted)

| Unconsolidated |  |  |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |  | Eliminating Entries |
Revenues: |  |  |  |  |  |  |  |  |
Homebuilding |  |  |  |  |  |  |  |  |
Home sale revenues | $ | — |  |  | $ | 1,907,808 |  |  | $ | 42,048 |  |  | $ | — |  |  | $ | 1,949,856 |
Land sale and other revenues | — |  |  | 2,325 |  |  | 650 |  |  | — |  |  | 2,975 |
| — |  |  | 1,910,133 |  |  | 42,698 |  |  | — |  |  | 1,952,831 |
Financial Services | — |  |  | — |  |  | 43,862 |  |  | — |  |  | 43,862 |
| — |  |  | 1,910,133 |  |  | 86,560 |  |  | — |  |  | 1,996,693 |
Homebuilding Cost of Revenues: |  |  |  |  |  |  |  |  |
Home sale cost of revenues | — |  |  | (1,460,895 | ) |  | (31,896 | ) |  | — |  |  | (1,492,791 | )
Land sale cost of revenues | — |  |  | (944 | ) |  | (1,106 | ) |  | — |  |  | (2,050 | )
| — |  |  | (1,461,839 | ) |  | (33,002 | ) |  | — |  |  | (1,494,841 | )
Financial Services expenses | — |  |  | (132 | ) |  | (31,317 | ) |  | — |  |  | (31,449 | )
Selling, general, and administrative expenses | — |  |  | (234,118 | ) |  | (18,609 | ) |  | — |  |  | (252,727 | )
Other income (expense), net | (122 | ) |  | (4,986 | ) |  | 4,135 |  |  | — |  |  | (973 | )
Intercompany interest | (1,996 | ) |  | — |  |  | 1,996 |  |  | — |  |  | — |
Income (loss) before income taxes and equity in income (loss) of subsidiaries | (2,118 | ) |  | 209,058 |  |  | 9,763 |  |  | — |  |  | 216,703 |
Income tax (expense) benefit | 508 |  |  | (47,650 | ) |  | (2,804 | ) |  |  |  |  | (49,946 | )
Income (loss) before equity in income (loss) of subsidiaries | (1,610 | ) |  | 161,408 |  |  | 6,959 |  |  | — |  |  | 166,757 |
Equity in income (loss) of subsidiaries | 168,367 |  |  | 18,304 |  |  | 113,696 |  |  | (300,367 | ) |  | — |
Net income (loss) | 166,757 |  |  | 179,712 |  |  | 120,655 |  |  | (300,367 | ) |  | 166,757 |
Other comprehensive income | 25 |  |  | — |  |  | — |  |  | — |  |  | 25 |
Comprehensive income (loss) | $ | 166,782 |  |  | $ | 179,712 |  |  | $ | 120,655 |  |  | $ | (300,367 | ) |  | $ | 166,782 |

27

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2020
($000’s omitted)

| Unconsolidated |  |  |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |  | Eliminating Entries |
Net cash provided by (used in) operating activities | $ | 85,119 |  |  | $ | (14,577 | ) |  | $ | 134,073 |  |  | $ | — |  |  | $ | 204,615 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (18,108 | ) |  | (2,031 | ) |  | — |  |  | (20,139 | )
Investments in unconsolidated entities | — |  |  | 6,500 |  |  | (663 | ) |  | — |  |  | 5,837 |
Other investing activities, net | — |  |  | 48 |  |  | 1,658 |  |  | — |  |  | 1,706 |
Business acquisition | — |  |  | — |  |  | (83,200 | ) |  | — |  |  | (83,200 | )
Net cash provided by (used in) investing activities | — |  |  | (11,560 | ) |  | (84,236 | ) |  | — |  |  | (95,796 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |
Financial Services borrowing (repayments), net | — |  |  | — |  |  | (56,573 | ) |  | — |  |  | (56,573 | )
Repayments of debt | — |  |  | (9,245 | ) |  | — |  |  | — |  |  | (9,245 | )
Borrowings under revolving credit facility | 700,000 |  |  | — |  |  | — |  |  | — |  |  | 700,000 |
Stock option exercises | 50 |  |  | — |  |  | — |  |  | — |  |  | 50 |
Share repurchases | (95,676 | ) |  | — |  |  | — |  |  | — |  |  | (95,676 | )
Cash paid for shares withheld for taxes | (14,838 | ) |  | — |  |  | — |  |  | — |  |  | (14,838 | )
Dividends paid | (32,740 | ) |  | — |  |  | — |  |  | — |  |  | (32,740 | )
Intercompany activities, net | (641,915 | ) |  | 758,709 |  |  | (116,794 | ) |  | — |  |  | — |
Net cash provided by (used in) financing activities | (85,119 | ) |  | 749,464 |  |  | (173,367 | ) |  | — |  |  | 490,978 |
Net increase (decrease) in cash, cash equivalents, and restricted cash | — |  |  | 723,327 |  |  | (123,530 | ) |  | — |  |  | 599,797 |
Cash, cash equivalents, and restricted cash at beginning of year | — |  |  | 1,058,071 |  |  | 193,385 |  |  | — |  |  | 1,251,456 |
Cash, cash equivalents, and restricted cash at end of year | $ | — |  |  | $ | 1,781,398 |  |  | $ | 69,855 |  |  | $ | — |  |  | $ | 1,851,253 |

28

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2019
($000’s omitted)

| Unconsolidated |  |  |  | Consolidated PulteGroup, Inc.
| PulteGroup, Inc. |  | Guarantor Subsidiaries |  | Non-Guarantor Subsidiaries |  | Eliminating Entries |
Net cash provided by (used in) operating activities | $ | 27,739 |  |  | $ | (14,834 | ) |  | $ | 146,000 |  |  | $ | — |  |  | $ | 158,905 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (13,216 | ) |  | (2,854 | ) |  | — |  |  | (16,070 | )
Investments in unconsolidated entities | — |  |  | (1,183 | ) |  | (106 | ) |  | — |  |  | (1,289 | )
Other investing activities, net | — |  |  | 190 |  |  | 101 |  |  | — |  |  | 291 |
Net cash provided by (used in) investing activities | — |  |  | (14,209 | ) |  | (2,859 | ) |  | — |  |  | (17,068 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |
Financial Services borrowings (repayments), net | — |  |  | — |  |  | (126,273 | ) |  | — |  |  | (126,273 | )
Repayments of debt | — |  |  | (3,068 | ) |  | (537 | ) |  | — |  |  | (3,605 | )
Stock option exercises | 1,445 |  |  | — |  |  | — |  |  | — |  |  | 1,445 |
Share repurchases | (24,999 | ) |  | — |  |  | — |  |  |  |  |  | (24,999 | )
Cash paid for shares withheld for taxes | (10,350 | ) |  | — |  |  | — |  |  | — |  |  | (10,350 | )
Dividends paid | (30,802 | ) |  | — |  |  | — |  |  | — |  |  | (30,802 | )
Intercompany activities, net | 36,967 |  |  | 135,907 |  |  | (172,874 | ) |  |  |  |  | — |
Net cash provided by (used in) financing activities | (27,739 | ) |  | 132,839 |  |  | (299,684 | ) |  | — |  |  | (194,584 | )
Net increase (decrease) in cash, cash equivalents, and restricted cash | — |  |  | 103,796 |  |  | (156,543 | ) |  | — |  |  | (52,747 | )
Cash, cash equivalents, and restricted cash at beginning of year | — |  |  | 929,367 |  |  | 204,333 |  |  | — |  |  | 1,133,700 |
Cash, cash equivalents, and restricted cash at end of year | $ | — |  |  | $ | 1,033,163 |  |  | $ | 47,790 |  |  | $ | — |  |  | $ | 1,080,953 |

29

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
COVID-19 Impact and Response
On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Since March 31, 2020, the COVID-19 pandemic has continued to spread and various state and local governments have issued or extended “shelter-in-place” orders which have impacted and restricted various aspects of our business. As of the date of this filing, our construction and sales operations have been significantly curtailed in the states of Washington, Michigan, and Pennsylvania and certain counties in Northern California. Most of our other operations are functioning, subject to regulated restrictions and safety constraints we have enacted in order to protect our employees, trade contractors, and customers.
In response to the pandemic, we instituted the following actions in March which remain in place as of the date of this report:

• | Placed restrictions on business travel for our employees and imposed mandatory quarantine periods for employees who traveled to areas impacted by the pandemic;

• | Closed our sales centers, model homes, and design centers to the general public and shifted to appointment-only interactions with our customers where permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer;

• | Enhanced our virtual sales tools to give customers the ability to shop for a new home from their mobile device or personal computer;

• | Closed the public gathering spaces of our amenity centers as well as community pools and athletic facilities;

• | Modified our corporate and division office functions in order to allow all of our employees to work remotely except for essential minimum basic operations which could only be done in an office setting;

• | Eliminated non-emergency warranty work in our customers’ homes;

• | Modified as much of our customer interactions around the mortgage origination and closing process to be virtual and minimize in-person interactions; and

• | Modified our construction operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening.

While all of the above-referenced steps are necessary and appropriate in light of the COVID-19 pandemic, they do impact our ability to operate our business in its ordinary and traditional course. Those restrictions, combined with a reduction in the availability, capacity, and efficiency of municipal and private services necessary to progress land development, homebuilding, mortgage loan originations, and home sales, which in each case has varied by market depending on the scope of the restrictions local authorities have established, have tempered our sales pace and delayed home construction and deliveries in the latter part of March and through the date of this report. The potential magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 are uncertain and include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period.
As a result of the current challenging economic conditions, our reported results for the three months ended March 31, 2020 are not reflective of current market conditions. We began the year under positive demand conditions that resulted in net new orders increasing more than 30% for both January and February 2020 over the comparable prior year periods. However, demand faded as a result of the pandemic, resulting in net new orders in March 2020 falling 11% below March 2019. As the pandemic has spread and government and business responses have expanded, these unfavorable demand trends have continued into April through the date of this report. Accordingly, we are focused on protecting our liquidity and closely managing our cash flows, including the following actions:

• | Delaying the acquisition of certain land parcels currently under contract and slowing land development where practical;

• | Limiting our investment in house construction, including strictly limiting production of new unsold "spec" homes, and contacting backlog customers to reconfirm status before beginning construction of sold homes;

• | As a precautionary measure, proactively drawing $700.0 million under the Revolving Credit Facility in March; and

• | Suspending the repurchase of shares under our share repurchase program.

30

While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the U.S. could materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020 or beyond.
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
| March 31,
| 2020 |  | 2019
Income before income taxes: |  |  |
Homebuilding | $ | 244,218 |  |  | $ | 204,294 |
Financial Services | 19,551 |  |  | 12,409 |
Income before income taxes | 263,769 |  |  | 216,703 |
Income tax expense | (60,058 | ) |  | (49,946 | )
Net income | $ | 203,711 |  |  | $ | 166,757 |
Per share data - assuming dilution: |  |  |
Net income | $ | 0.74 |  |  | $ | 0.59 |

• | Homebuilding income before income taxes for the three months ended March 31, 2020 increased 20% compared with the same period in 2019 primarily due to increased closings, improved gross margins, and improved overhead leverage. This increase was partially offset by a goodwill impairment charge totaling $20.2 million (see Note 1).

• | Financial Services income before income taxes increased 58% for the three months ended March 31, 2020 compared with the same period in 2019 as the result of higher volumes, which largely resulted from increased homebuilding volumes combined with an improved capture rate, and improved margin per loan. Interest rates declined during the three months ended March 31, 2020, which led to enhanced margins contributing to improved capture rate and higher gains from sales of mortgages.

• | Our effective tax rate for the three months ended March 31, 2020 was 22.8% compared to 23.0% for the same period in 2019.

31

Homebuilding Operations
The following presents selected financial information for our Homebuilding operations ($000’s omitted):

| Three Months Ended
| March 31,
| 2020 |  | 2020 vs. 2019 |  | 2019
Home sale revenues | $ | 2,221,503 |  |  | 14 | % |  | $ | 1,949,856 |
Land sale and other revenues | 18,927 |  |  | 536 | % |  | 2,975 |
Total Homebuilding revenues | 2,240,430 |  |  | 15 | % |  | 1,952,831 |
Home sale cost of revenues (a) | (1,694,865 | ) |  | 14 | % |  | (1,492,791 | )
Land sale and other cost of revenues | (15,014 | ) |  | 632 | % |  | (2,050 | )
Selling, general, and administrative expenses ("SG&A") | (263,669 | ) |  | 4 | % |  | (252,727 | )
Goodwill impairment | (20,190 | ) |  | (b) |  | — |
Other expense, net | (2,474 | ) |  | 155 | % |  | (969 | )
Income before income taxes | $ | 244,218 |  |  | 20 | % |  | $ | 204,294 |
Supplemental data: |  |  |  |  |
Gross margin from home sales | 23.7 | % |  | 30 bps |  |  | 23.4 | %
SG&A as a percentage of home sale revenues | 11.9 | % |  | (110) bps |  |  | 13.0 | %
Closings (units) | 5,373 |  |  | 16 | % |  | 4,635 |
Average selling price | $ | 413 |  |  | (2 | )% |  | $ | 421 |
Net new orders (c): |  |  |  |  |
Units | 7,495 |  |  | 16 | % |  | 6,463 |
Dollars | $ | 3,268,749 |  |  | 19 | % |  | $ | 2,735,852 |
Cancellation rate | 13 | % |  |  |  | 12 | %
Average active communities | 873 |  |  | 4 | % |  | 843 |
Backlog at March 31,: |  |  |  |  |
Units | 12,629 |  |  | 20 | % |  | 10,550 |
Dollars | $ | 5,583,051 |  |  | 21 | % |  | $ | 4,622,145 |

(a) | Includes the amortization of capitalized interest.

(b) | Percentage not meaningful

(c) | 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 months ended March 31, 2020 were higher than the prior year by $271.6 million. For the three months ended March 31, 2020, the 14% increase was attributable to a 16% increase in closings partially offset by a 2% decrease in average selling price. The increase was primarily the result of improved demand which began in the second quarter of 2019 and continued through most of the first quarter of 2020, especially among first-time buyers, in part due to meaningfully lower mortgage interest rates.
32

Home sale gross margins
Home sale gross margins were 23.7% for the three months ended March 31, 2020 compared to 23.4% for the three months ended March 31, 2019. Gross margins for the three months ended March 31, 2020 remained strong relative to historical levels and reflect a combination of factors, including shifts in community mix. The pricing environment that existed in many of our markets in the second half of 2019 and the beginning of 2020 allowed us to effectively manage pressure in house and land costs, as well as slightly lower amortized interest costs (1.7% for three months ended March 31, 2020 compared to 1.8% for the three months ended March 31, 2019).
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 $3.9 million for the three months ended March 31, 2020 compared to $0.9 million for the three months ended March 31, 2019.
SG&A
SG&A as a percentage of home sale revenues was 11.9% for the three months ended March 31, 2020, compared with 13.0% for the three months ended March 31, 2019. The gross dollar amount of our SG&A increased $10.9 million, or 4%, for the three months ended March 31, 2020 compared to March 31, 2019. The increase in gross dollars is primarily attributable to higher variable operating costs, including insurance, compensation, and sales commission while the lower percentage is primarily attributable to improved expense leverage on higher volume.
Other expense, net
Other expense, net includes the following ($000’s omitted):

| Three Months Ended
March 31,
2020 |  | 2019
Write-offs of deposits and pre-acquisition costs | $ | (4,332 | ) |  | $ | (2,917 | )
Amortization of intangible assets | (4,557 | ) |  | (3,450 | )
Interest income | 3,807 |  |  | 4,949 |
Interest expense | (797 | ) |  | (144 | )
Equity in earnings of unconsolidated entities | 567 |  |  | 37 |
Miscellaneous, net | 2,838 |  |  | 556 |
Total other expense, net | $ | (2,474 | ) |  | $ | (969 | )

Net new orders
Net new orders in units increased 16% while net new orders in dollars increased 19% for the three months ended March 31, 2020, as compared with the prior year period. The increases are a result of improved demand which began in the second quarter of 2019 and continued through February of 2020, especially among first-time buyers, in part due to meaningfully lower mortgage interest rates. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 13% for the three months ended March 31, 2020 and 12% for the same period in 2019. Ending backlog, which represents orders for homes that have not yet closed, increased 21% at March 31, 2020 compared with March 31, 2019. As previously noted, new order volume slowed dramatically in March 2020, down 11% versus March 2019, as a result of the COVID-19 pandemic. This slowdown continued into April, and we have experienced an increase in cancellations, though our backlog remains well above the comparable prior year level.
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Homes in production
The following is a summary of our homes in production:

| March 31, 2020 |  | March 31, 2019
Sold | 8,955 |  |  | 7,152 |
Unsold |  |  |
Under construction | 2,491 |  |  | 2,513 |
Completed | 642 |  |  | 662 |
| 3,133 |  |  | 3,175 |
Models | 1,357 |  |  | 1,222 |
Total | 13,445 |  |  | 11,549 |

The number of homes in production at March 31, 2020 was 16% higher than at March 31, 2019. The increase in homes under production resulted primarily from the higher backlog.
Controlled lots
The following is a summary of our lots under control at March 31, 2020 and December 31, 2019:

| March 31, 2020 |  | December 31, 2019
| Owned |  | Optioned |  | Controlled |  | Owned |  | Optioned |  | Controlled
Northeast | 4,907 |  |  | 4,473 |  |  | 9,380 |  |  | 4,999 |  |  | 4,240 |  |  | 9,239 |
Southeast | 16,027 |  |  | 13,768 |  |  | 29,795 |  |  | 16,174 |  |  | 12,802 |  |  | 28,976 |
Florida | 20,764 |  |  | 18,006 |  |  | 38,770 |  |  | 20,281 |  |  | 17,802 |  |  | 38,083 |
Midwest | 9,951 |  |  | 11,764 |  |  | 21,715 |  |  | 10,016 |  |  | 12,027 |  |  | 22,043 |
Texas | 16,159 |  |  | 11,216 |  |  | 27,375 |  |  | 16,256 |  |  | 10,573 |  |  | 26,829 |
West | 24,917 |  |  | 7,889 |  |  | 32,806 |  |  | 25,633 |  |  | 7,459 |  |  | 33,092 |
Total | 92,725 |  |  | 67,116 |  |  | 159,841 |  |  | 93,359 |  |  | 64,903 |  |  | 158,262 |
Developed (%) | 42 | % |  | 21 | % |  | 33 | % |  | 39 | % |  | 22 | % |  | 32 | %

Of our total controlled lots, 92,725 and 93,359 were owned and 67,116 and 64,903 were controlled under land option agreements at March 31, 2020 and December 31, 2019, respectively. 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. The remaining purchase price under our land option agreements totaled $3.3 billion at March 31, 2020. 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 $303.6 million, of which $10.0 million is refundable, at March 31, 2020.
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Homebuilding Segment Operations
As of March 31, 2020, 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
| March 31,
| 2020 |  | 2020 vs. 2019 |  | 2019
Home sale revenues: |  |  |  |  |
Northeast | $ | 162,380 |  |  | 47 | % |  | $ | 110,263 |
Southeast | 382,141 |  |  | 2 | % |  | 374,455 |
Florida | 490,028 |  |  | 24 | % |  | 396,131 |
Midwest | 290,933 |  |  | (1 | )% |  | 292,852 |
Texas | 344,508 |  |  | 28 | % |  | 268,741 |
West | 551,513 |  |  | 9 | % |  | 507,414 |
| $ | 2,221,503 |  |  | 14 | % |  | $ | 1,949,856 |
Income (loss) before income taxes (a): |  |  |  |  |
Northeast | $ | 18,609 |  |  | 135 | % |  | $ | 7,928 |
Southeast | 54,744 |  |  | 45 | % |  | 37,856 |
Florida (b) | 57,166 |  |  | 15 | % |  | 49,596 |
Midwest | 31,462 |  |  | 20 | % |  | 26,158 |
Texas | 53,595 |  |  | 73 | % |  | 30,971 |
West | 67,255 |  |  | (25 | )% |  | 90,182 |
Other homebuilding (c) | (38,612 | ) |  | (1 | )% |  | (38,397 | )
| $ | 244,219 |  |  | 20 | % |  | $ | 204,294 |

(a) | Includes land-related charges as summarized in the table below.

(b) | Reflects goodwill impairment charge totaling $20.2 million in the three months ended March 31, 2020.

(c) | Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments.

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| Operating Data by Segment ($000's omitted)
| Three Months Ended
| March 31,
| 2020 |  | 2020 vs. 2019 |  | 2019
Closings (units): |  |  |  |  |
Northeast | 310 |  |  | 42 | % |  | 219 |
Southeast | 928 |  |  | 3 | % |  | 897 |
Florida | 1,210 |  |  | 20 | % |  | 1,008 |
Midwest | 708 |  |  | (2 | )% |  | 726 |
Texas | 1,128 |  |  | 33 | % |  | 849 |
West | 1,089 |  |  | 16 | % |  | 936 |
| 5,373 |  |  | 16 | % |  | 4,635 |
Average selling price: |  |  |  |  |
Northeast | $ | 524 |  |  | 4 | % |  | $ | 503 |
Southeast | 412 |  |  | (1 | )% |  | 417 |
Florida | 405 |  |  | 3 | % |  | 393 |
Midwest | 411 |  |  | 2 | % |  | 403 |
Texas | 305 |  |  | (4 | )% |  | 317 |
West | 506 |  |  | (7 | )% |  | 542 |
| $ | 413 |  |  | (2 | )% |  | $ | 421 |
Net new orders - units: |  |  |  |  |
Northeast | 448 |  |  | 24 | % |  | 361 |
Southeast | 1,141 |  |  | 6 | % |  | 1,073 |
Florida | 1,685 |  |  | 25 | % |  | 1,346 |
Midwest | 1,019 |  |  | — | % |  | 1,024 |
Texas | 1,509 |  |  | 10 | % |  | 1,366 |
West | 1,693 |  |  | 31 | % |  | 1,293 |
| 7,495 |  |  | 16 | % |  | 6,463 |
Net new orders - dollars: |  |  |  |  |
Northeast | $ | 256,013 |  |  | 30 | % |  | $ | 196,298 |
Southeast | 473,880 |  |  | 4 | % |  | 454,388 |
Florida | 692,717 |  |  | 26 | % |  | 550,305 |
Midwest | 446,357 |  |  | 5 | % |  | 425,642 |
Texas | 455,789 |  |  | 11 | % |  | 412,043 |
West | 943,993 |  |  | 35 | % |  | 697,176 |
| $ | 3,268,749 |  |  | 19 | % |  | $ | 2,735,852 |

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| Operating Data by Segment ($000's omitted)
| Three Months Ended
| March 31,
| 2020 |  | 2020 vs. 2019 |  | 2019
Cancellation rates: |  |  |  |  |
Northeast | 13 | % |  |  |  | 10 | %
Southeast | 11 | % |  |  |  | 11 | %
Florida | 12 | % |  |  |  | 11 | %
Midwest | 11 | % |  |  |  | 11 | %
Texas | 17 | % |  |  |  | 13 | %
West | 14 | % |  |  |  | 14 | %
| 13 | % |  |  |  | 12 | %
Unit backlog: |  |  |  |  |
Northeast | 727 |  |  | 19 | % |  | 612 |
Southeast | 2,078 |  |  | 16 | % |  | 1,786 |
Florida | 2,781 |  |  | 25 | % |  | 2,227 |
Midwest | 1,851 |  |  | 9 | % |  | 1,700 |
Texas | 2,231 |  |  | 11 | % |  | 2,009 |
West | 2,961 |  |  | 34 | % |  | 2,216 |
| 12,629 |  |  | 20 | % |  | 10,550 |
Backlog dollars: |  |  |  |  |
Northeast | $ | 441,330 |  |  | 28 | % |  | $ | 343,847 |
Southeast | 875,208 |  |  | 12 | % |  | 778,963 |
Florida | 1,180,950 |  |  | 24 | % |  | 954,226 |
Midwest | 807,401 |  |  | 12 | % |  | 721,210 |
Texas | 702,149 |  |  | 12 | % |  | 629,514 |
West | 1,576,013 |  |  | 32 | % |  | 1,194,385 |
| $ | 5,583,051 |  |  | 21 | % |  | $ | 4,622,145 |

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| Operating Data by Segment ($000’s omitted)
| Three Months Ended
| March 31,
| 2020 |  | 2019
Land-related charges*: |  |  |
Northeast | $ | 4,753 |  |  | $ | 324 |
Southeast | 748 |  |  | 572 |
Florida | 522 |  |  | 481 |
Midwest | 777 |  |  | 1,103 |
Texas | 656 |  |  | 68 |
West | 1,529 |  |  | 431 |
Other homebuilding | 744 |  |  | — |
| $ | 9,729 |  |  | $ | 2,979 |

* | 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 first quarter of 2020, Northeast home sale revenues increased by 47% when compared with the prior year period due to a 42% increase in closings and a 4% increase in average selling price. The increase in closings occurred across all markets except the Northeast Corridor, while average selling price increases occurred across all markets except New England. Income before income taxes increased 135% primarily due to the higher revenues combined with improved gross margins across the majority of markets. Net new orders increased across all markets except the Northeast Corridor.
Southeast
For the first quarter of 2020, Southeast home sale revenues increased 2% compared with the prior period as the result of a 3% increase in closings partially offset by a 1% decrease in average selling price. The increase in closings occurred in all markets except Georgia and Tennessee while the decrease in average selling price was mixed among markets. Income before income taxes increased 45% primarily as a result of improved gross margins which occurred across the majority of markets. Net new orders increased across the majority of markets.
Florida
For the first quarter of 2020, Florida home sale revenues increased 24% compared with the prior year period due to a 20% increase in closings combined with a 3% increase in the average selling price. The increased closings occurred across all markets while the increased average selling price occurred across the majority of markets. Income before income taxes increased 15% due to the higher revenues and improved gross margins across all markets offset by a goodwill impairment charge of $20.2 million (see Note 1). Net new orders increased across all markets.
Midwest
For the first quarter of 2020, Midwest home sale revenues decreased 1% compared with the prior year period due to a 2% decrease in closings partially offset by a 2% increase in average selling price. The decrease in closings occurred primarily in Michigan while the increase in average selling price occurred across the majority of markets. Income before income taxes increased 20% primarily due to improved gross margins.
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Texas
For the first quarter of 2020, Texas home sale revenues increased 28% compared with the prior year period due to a 33% increase in closings partially offset by a 4% decrease in the average selling price. The increase in closings occurred in all markets while the decrease in average selling price occurred in the majority of markets. Income before income taxes increased 73% primarily due to higher revenues and improved margins. Net new orders increased in all markets except Houston.
West
For the first quarter of 2020, West home sale revenues increased 9% compared with the prior year period due to a 16% increase in closings partially offset by a 7% decrease in average selling price. Revenues were higher in most markets with Las Vegas benefiting from the American West acquisition in April 2019. Northern California and Pacific Northwest experienced lower revenues which impacted the overall results. The decline in Northern California is the result of prior period completion, or near completion, of several high performing communities combined with moderating demand in that market. Average selling price decreased across the majority of markets. Income before income taxes decreased 25% primarily due to the aforementioned results from Northern California. Net new orders increased across all markets except Arizona.
Financial Services Operations
We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through 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 the 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 loan production. We believe that our 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
| March 31,
| 2020 |  | 2020 vs. 2019 |  | 2019
Mortgage revenues | $ | 40,734 |  |  | 28 | % |  | $ | 31,873 |
Title services revenues | 12,202 |  |  | 24 | % |  | 9,842 |
Insurance brokerage commissions | 1,614 |  |  | (25 | )% |  | 2,147 |
Total Financial Services revenues | 54,550 |  |  | 24 | % |  | 43,862 |
Expenses | (34,949 | ) |  | 11 | % |  | (31,449 | )
Other income (expense), net | (50 | ) |  | (a) |  | (4 | )
Income before income taxes | $ | 19,551 |  |  | 58 | % |  | $ | 12,409 |
Total originations: |  |  |  |  |
Loans | 3,870 |  |  | 29 | % |  | 2,998 |
Principal | $ | 1,213,266 |  |  | 33 | % |  | $ | 914,711 |

(a) | Percentage not meaningful

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| Three Months Ended
| March 31,
| 2020 |  | 2019
Supplemental data: |  |  |
Capture rate | 86.8 | % |  | 79.7 | %
Average FICO score | 751 |  |  | 752 |
Loan application backlog | $ | 3,698,530 |  |  | $ | 2,508,561 |
Funded origination breakdown: |  |  |
Government (FHA, VA, USDA) | 21 | % |  | 18 | %
Other agency | 71 | % |  | 71 | %
Total agency | 92 | % |  | 89 | %
Non-agency | 8 | % |  | 11 | %
Total funded originations | 100 | % |  | 100 | %

Revenues
Total Financial Services revenues for the three months ended March 31, 2020 increased 24% compared with the same period in 2019 as the result of increased homebuilding volumes combined with an improved capture rate and improved margin per loan. Interest rates declined during the three months ended March 31, 2020, which led to enhanced margins contributing to improved capture rate and higher gains from sales of mortgages. Such gains offset the sharp reduction in values of mortgage servicing rights, which decreased as the result of the increased risk to mortgage servicers related to potential forbearance claims and loan defaults.
Income before income taxes
Income before income taxes for the three months ended March 31, 2020 increased 58%, compared with the same period in 2019 as the result of higher revenues and improved expense leverage.
Income Taxes
Our effective tax rate for the three months ended March 31, 2020 was 22.8% compared to 23.0% for the same period in 2019. Each year's rate differs from the federal statutory rate primarily due to state income tax expense and tax benefits for equity compensation.
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 March 31, 2020, we had unrestricted cash and equivalents of $1.8 billion, restricted cash balances of $34.5 million, and $43.9 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 and the actions we have taken as summarized in the Overview section, 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 38.5% at March 31, 2020, as compared with 33.6% at December 31, 2019, which are within our targeted range of 30.0% to 40.0%.
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Unsecured senior notes
We had $2.7 billion of unsecured senior notes outstanding at March 31, 2020 and December 31, 2019, with no repayments due until 2021, when $426.0 million of unsecured senior notes are scheduled to mature.
Other notes payable
Other notes payable include non-recourse and limited recourse secured notes with third parties that totaled $44.1 million and $53.4 million at March 31, 2020 and December 31, 2019, respectively. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, and have no recourse to any other assets. The stated interest rates on these notes range up to 8%.
Revolving credit facility
We maintain a revolving credit facility ("Revolving Credit Facility") maturing in 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 March 31, 2020. 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 COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. As a result, we had $700.0 million and no borrowings outstanding at March 31, 2020 and December 31, 2019, respectively, and $256.1 million and $262.8 million of letters of credit issued under the Revolving Credit Facility at March 31, 2020 and December 31, 2019, 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 March 31, 2020, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.
Financial Services debt
Pulte Mortgage maintains a Repurchase Agreement with third party lenders. In August 2019, Pulte Mortgage entered into an amendment to the Repurchase Agreement to extend the effective date to July 2020. The maximum aggregate commitment was $270.0 million at March 31, 2020 and continues through maturity. 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 $270.0 million and $326.6 million outstanding under the Repurchase Agreement at March 31, 2020 and December 31, 2019, respectively, and was in compliance with all of its covenants and requirements as of such dates. While there can be no assurances that the Repurchase Agreement can be renewed or replaced on commercially reasonable terms upon its expiration in July 2020, we believe we have adequate liquidity to meet Pulte Mortgage's anticipated financing needs.
Dividends and share repurchase program
During the three months ended March 31, 2020, we declared cash dividends totaling $32.6 million and repurchased 2.8 million shares under our repurchase authorization totaling $95.7 million. At March 31, 2020, we had remaining authorization to repurchase $429.9 million of common shares.
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Cash flows
Operating activities
Our net cash provided by operating activities for the three months ended March 31, 2020 was $204.6 million, compared with net cash provided by operating activities of $158.9 million for the three months ended March 31, 2019. 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 three months ended March 31, 2020 was primarily due to our net income of $203.7 million, which included various non-cash items, and a seasonal $145.1 million decrease in residential mortgage loans available-for-sale. These sources of cash were partially offset by a net increase in inventories of $189.4 million resulting from a seasonal build of house inventory.
Our net cash provided by operating activities for the three months ended March 31, 2019 was $158.9 million. The positive cash flow from operations for the three months ended March 31, 2019 was primarily due to our net income of $166.8 million, supplemented by $24.7 million of deferred income taxes and a $134.2 million reduction in residential mortgage loans available-for-sale, partially offset by a net increase in inventories of $259.9 million resulting from ongoing land acquisition and development investment to support future growth, combined with a seasonal build of house inventory.
Investing activities
Net cash used in investing activities for the three months ended March 31, 2020 was $95.8 million, compared with net cash used in investing activities of $17.1 million for the three months ended March 31, 2019. Cash outflows in 2020 primarily reflected our acquisition of ICG in January 2020 for $83.2 million, as well as capital expenditures of $20.1 million related to our ongoing investments in new communities and certain information technology applications.
Financing activities
Net cash provided by financing activities for the three months ended March 31, 2020 totaled $491.0 million, compared with net cash used in financing activities of $194.6 million for the three months ended March 31, 2019. The net cash provided by financing activities for the three months ended March 31, 2020 resulted primarily from borrowings of $700.0 million on our Revolving Credit Facility partially offset by the repurchase of 2.8 million common shares for $95.7 million under our share repurchase authorization, repayments of debt totaling $9.2 million, payments of $32.7 million in cash dividends, and net repayments of $56.6 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale.
Net cash used in financing activities for the three months ended March 31, 2019 resulted primarily from the repurchase of 0.9 million common shares for $25.0 million under our repurchase authorization, repayments of debt totaling $3.6 million, payments of $30.8 million in cash dividends, and net repayments of $126.3 million for borrowings under the Repurchase Agreement related to a seasonal reduction 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 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. Additionally, given the disruption in economic activity caused by the COVID-19 pandemic, our results for the three months ended March 31, 2020 are not indicative of results that may be achieved in the future.
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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 Operation s, included in our Annual Report on Form 10-K for the year ended December 31, 2019, except as follows:

• | During the three months ended March 31, 2020, we borrowed $700.0 million under our Revolving Credit Facility.

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 March 31, 2020, we had outstanding letters of credit totaling $256.1 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 at March 31, 2020, 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 March 31, 2020, these agreements had an aggregate remaining purchase price of $3.3 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 during the three months ended March 31, 2020 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019, except for additional impairment sensitivity information reflected in the following:
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.
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
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significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. Communities that demonstrate potential impairment indicators are tested for impairment by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we determine the fair value of the community and impairment charges are recorded if the fair value of the community’s inventory is less than its carrying value.
We generally determine the fair value of each community using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.
Generally, a community must have projected gross margin percentages in the mid single digits in order to potentially fail the undiscounted cash flow step and proceed to the fair value step. Our overall gross margin realized in the three months ended March 31, 2020 and our average gross margin in backlog at March 31, 2020 both exceeded 20%, and we have only a small minority of communities with gross margins below 10%. However, in the event of an extended economic slowdown that leads to moderate or significant decreases in the price of new homes in certain geographic or buyer submarkets, we could have a larger number of communities that begin to approach these levels such that more detailed impairment analyses would be necessary, and the resulting impairments could be material. Additionally, we have $303.6 million of deposits and pre-acquisition costs at March 31, 2020 related to option agreements to acquire additional land. In the event of an extended economic slowdown, we could elect to cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.
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 March 31, 2020 ($000’s omitted):

| As of March 31, 2020 for the Years ending December 31,
| 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | Thereafter |  | Total |  | Fair Value
Rate-sensitive liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed rate debt | $ | 12,082 |  |  | $ | 447,712 |  |  | $ | 10,295 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,300,000 |  |  | $ | 2,770,089 |  |  | $ | 2,797,273 |
Average interest rate | 3.69 | % |  | 4.17 | % |  | 0.39 | % |  | — | % |  | — | % |  | 5.90 | % |  | 5.59 | % |  |
Variable rate debt (a) | $ | 270,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 700,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 970,000 |  |  | $ | 970,000 |
Average interest rate | 3.21 | % |  | — | % |  | — | % |  | 2.05 | % |  | — | % |  | — | % |  | 2.38 | % |  |

(a) Includes the Pulte Mortgage Repurchase Agreement and $700.0 million outstanding under our Revolving Credit Facility.
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, 2019 with the exception of the potentially negative impacts of the COVID-19 pandemic as described within the below section.
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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” 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 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, 2019, 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 March 31, 2020. 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 March 31, 2020.
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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
Except as set forth below, as of the date of this report, there have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Our business has been materially and adversely disrupted by the present outbreak and worldwide spread of COVID-19 and could be materially and adversely disrupted by another epidemic or pandemic, or similar public threat, or fear of such an event, and the measures that international, federal, state and local governments, agencies, law enforcement and/or health authorities implement to address it.
An epidemic, pandemic, or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and/or along with any associated economic and/or social instability or distress, have a significant adverse impact on our consolidated financial statements.
On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures worldwide. On March 13, 2020, the United States declared a national emergency concerning the COVID-19 outbreak, and several states and municipalities have declared public health emergencies. Along with these declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, and “shelter-in-place” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
In response to these steps and as we assessed the risk to our employees, trade partners and customers, in March, we instituted the following actions which remain in place as of the date of this report:

• | Placed restrictions on business travel for our employees and imposed mandatory quarantine periods for employees who traveled to areas impacted by the pandemic;

• | Closed our sales centers, model homes, and design centers to the general public and shifted to appointment-only interactions with our customers where permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer;

• | Enhanced our virtual sales tools to give customers the ability to shop for a new home from their mobile device or personal computer;

• | Closed the public gathering spaces of our amenity centers as well as community pools and athletic facilities;

• | Modified our corporate and division office functions in order to allow all of our employees to work remotely except for essential minimum basic operations which could only be done in an office setting;

• | Eliminated non-emergency warranty work in our customers’ homes;

• | Modified as much of our customer interactions around the mortgage origination and closing process to be virtual and minimize in-person interactions; and

• | Modified our construction operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening.

While all of the above-referenced steps are necessary and appropriate in light of the COVID-19 pandemic, they do impact our ability to operate our business in its ordinary and traditional course. Those restrictions, combined with a reduction in the availability, capacity, and efficiency of municipal and private services necessary to progress land development, homebuilding, mortgage loan originations, and home sales, which in each case has varied by market depending on the scope of the restrictions local authorities have established, have tempered our sales pace and delayed home construction and deliveries in the latter part of March and through the date of this report. The potential magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 are uncertain and include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be
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intensified to such an extent that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period.
Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products, impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows, and/or access the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or decrease the supply of building materials or the availability of subcontractors and other talent, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts; and/or result in our recognizing charges in future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. The unprecedented uncertainty surrounding COVID-19, due to rapidly changing governmental directives, public health challenges and progress, macroeconomic consequences, and market reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our initial or any revised objectives for 2020.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, increases in the cancellation rates for homes in our backlog, and decreases in our net orders, homes delivered, revenues, and profitability, as we have experienced in the first few weeks of our second quarter. Such impacts could be material to our consolidated financial statements in the second quarter and subsequent reporting periods. We could also be forced to reduce our average selling prices in order to generate consumer demand or in reaction to competitive pressures. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under our debt obligations, and/or mortgages and land contracts due to land sellers and other loans; service our outstanding debt; or pay any dividends to our stockholders. Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.
The impact of a pandemic or epidemic like COVID-19 can be mitigated by efficient measures that international, federal, state, and local governments, agencies, law enforcement, and/or health authorities implement to address it. While increased testing, enhanced monitoring, data analysis, and identification of effective therapeutics will enable the country to reduce the public health and economic impact of the crisis, as of the date of this report there are no clear timelines for the implementation of those measures on a meaningful scale in the United States. In addition, efforts to lift restrictions on individuals’ daily activities and businesses’ normal operations may result in a resurgence of a pandemic or epidemic like COVID-19 and potentially prolong and intensify the impact of the crisis. While the economic impact of COVID-19 may be reduced by financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other similar COVID-19 related federal and state programs, such programs may not have a positive impact on our business.
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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)
January 1, 2020 to January 31, 2020 | 380,996 |  |  | $ | 41.56 |  |  | 380,996 |  |  | $ | 509,715 |  | (2)
February 1, 2020 to February 29, 2020 | 346,036 |  |  | $ | 45.76 |  |  | 346,036 |  |  | $ | 493,882 |  | (2)
March 1, 2020 to March 31, 2020 | 2,098,385 |  |  | $ | 30.50 |  |  | 2,098,385 |  |  | $ | 429,872 |  | (2)
Total | 2,825,417 |  |  | $ | 33.86 |  |  | 2,825,417 |  |  |  |

(1) | During the three months ended March 31, 2020, participants surrendered 0.3 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.

(2) | The Board of Directors approved a share repurchase authorization totaling $500.0 million in January 2018 and an increase of $500.0 million to such authorization in May 2019. There is no expiration date for this program, under which $429.9 million remained as of March 31, 2020. During the three months ended March 31, 2020, we repurchased 2.8 million shares for a total of $95.7 million under this program.

Item 6. Exhibits
Exhibit Number and Description

3 |  | (a) |  | Restated Articles of Incorporation, of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed with the SEC on August 18, 2009)
|  | (b) |  | Certificate of Amendment to the Articles of Incorporation, dated March 18, 2010 (Incorporated by reference to Exhibit 3(b) of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)
|  | (c) |  | Certificate of Amendment to the Articles of Incorporation, dated May 21, 2010 (Incorporated by reference to Exhibit 3(c) of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010)
|  | (d) |  | Amended and Restated By-Laws of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K, filed with the SEC on May 5, 2017)
|  | (e) |  | Certificate of Designation of Series A Junior Participating Preferred Shares, dated August 6, 2009 (Incorporated by reference to Exhibit 3(b) of our Registration Statement on Form 8-A, filed with the SEC on August 18, 2009)
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) |  | Amended and Restated Section 382 Rights Agreement, dated as of March 18, 2010, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent, which includes the Form of Rights Certificate as Exhibit B thereto (Incorporated by reference to Exhibit 4 of PulteGroup, Inc.’s Registration Statement on Form 8-A/A, filed with the SEC on March 23, 2010)
|  | (c) |  | First Amendment to Amended and Restated Section 382 Rights Agreement, dated as of March 14, 2013, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of PulteGroup, Inc.’s Current Report on Form 8-K, filed with the SEC on March 15, 2013)

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|  | (d) |  | Second Amendment to Amended and Restated Section 382 Rights Agreement, dated as of March 10, 2016, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of PulteGroup, Inc.’s Current Report on Form 8-K, filed with the SEC on March 10, 2016)
|  | (e) |  | Third Amendment to Amended and Restated Section 382 Rights Agreement, dated as of March 7, 2019, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of PulteGroup, Inc.’s Current Report on Form 8-K, filed with the SEC on March 7, 2019)
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)
32 |  |  |  | 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
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 March 31, 2020, 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: | April 23, 2020 |

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