Annual Reports

  • 10-K (Feb 5, 2014)
  • 10-K (Feb 6, 2013)
  • 10-K (Feb 9, 2012)
  • 10-K (Feb 10, 2011)
  • 10-K (Feb 19, 2010)
  • 10-K (Feb 26, 2009)

 
Quarterly Reports

 
8-K

 
Other

PULTEGROUP INC 10-K 2010
Form 10-K
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804

 

 

PULTE HOMES, 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.)

100 Bloomfield Hills Parkway, Suite 300

Bloomfield Hills, Michigan 48304

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (248) 647-2750

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01

  New York Stock Exchange

Pulte Homes, Inc. 7.375% Senior Notes due 2046

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  x  NO  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  ¨  NO  x

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Act.  YES  ¨  NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x            Accelerated filer ¨            Non-accelerated filer ¨            Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES  ¨  NO  x

The aggregate market value of the registrant’s voting stock held by nonaffiliates of the registrant as of June 30, 2009, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $1,890,933,614.

As of February 15, 2010, the registrant had 382,266,905 shares of common stock outstanding.

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.

 

 


Table of Contents

PULTE HOMES, INC.

TABLE OF CONTENTS

 

Item
No.

          Page
No.
     Part I       

1

  

Business

     3

1A

  

Risk Factors

     10

1B

  

Unresolved Staff Comments

     16

2

  

Properties

     16

3

  

Legal Proceedings

     16

4

  

Submission of Matters to a Vote of Security Holders

     17

4A

  

Executive Officers of the Registrant

     17
   Part II     

5

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     18

6

  

Selected Financial Data

     20

7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22

7A

  

Quantitative and Qualitative Disclosures About Market Risk

     45

8

  

Financial Statements and Supplementary Data

     47

9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     105

9A

  

Controls and Procedures

     105

9B

  

Other Information

     107
   Part III     

10

  

Directors, Executive Officers and Corporate Governance

     108

11

  

Executive Compensation

     108

12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     108

13

  

Certain Relationships and Related Transactions and Director Independence

     108

14

  

Principal Accountant Fees and Services

     108
   Part IV     

15

  

Exhibits and Financial Statement Schedules

     109
  

Signatures

     113

 

2


Table of Contents

PART I

ITEM I.  BUSINESS

Pulte Homes, Inc.

Pulte Homes, Inc. (“Pulte” or the “Company”) is a publicly-held holding company whose subsidiaries engage in the homebuilding and financial services businesses. Pulte Homes, Inc. is a Michigan corporation organized in 1956. Our assets consist principally of the capital stock of our subsidiaries and our income primarily consists of dividends from our subsidiaries. Our direct subsidiaries include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”), Centex Corporation (“Centex”), and other subsidiaries engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (“International”), and other subsidiaries engaged in the homebuilding business. We also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.

On August 18, 2009, the Company completed the acquisition of Centex through the merger of Pulte’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among Pulte, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of Pulte. Accordingly, the results of Centex are included in the Company’s consolidated financial statements from the date of the merger.

Since early 2006, the U.S. housing market has been unfavorably impacted by a lack of consumer confidence, tightened mortgage standards, and large supplies of resale and new home inventories and related pricing pressures. These factors have contributed to weakened demand for new homes, slower sales, and increased price discounts and sales incentives to attract homebuyers. During 2009, these conditions were accompanied by significant foreclosure activity, a more challenging appraisal environment, increasing unemployment, and significant uncertainty in the U.S. economy. As a result of the combination of these homebuilding industry, mortgage financing, and broader economic factors, we have experienced a net loss in each quarter since the fourth quarter of 2006. Such losses resulted from a combination of reduced operational profitability and significant asset impairments.

Homebuilding, our core business, is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for first-time, first and second move-up, and active adult home buyers. In the third quarter of 2009, in connection with the Centex merger, we realigned the organizational structure for certain of our markets. As a result, our reportable Homebuilding segments are as follows:

 

Northeast:    Northeast Area includes the following states:
  

Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania, Rhode Island, Virginia

Southeast:    Southeast Area includes the following states:
  

Georgia, North Carolina, South Carolina, Tennessee

Gulf Coast:    Gulf Coast Area includes the following states:
  

Florida, Texas

Midwest:    Midwest Area includes the following states:
  

Colorado, Illinois, Indiana, Missouri, Michigan, Minnesota, Ohio

Southwest:    Southwest Area includes the following states:
  

Arizona, Nevada, New Mexico

*West:    West Area includes the following states:
  

California, Oregon, Washington

* Our homebuilding operations located in Reno, Nevada are reported in the West segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment. Also, our Hawaii and Puerto Rico operations are included in Other homebuilding, which does not represent a reportable segment.

We also have one reportable segment for our financial services operations, which consists principally of mortgage banking and title operations. Our Financial Services segment operates generally in the same markets as our Homebuilding segments.

 

3


Table of Contents

Pulte Homes, Inc. (continued)

 

Financial information, including revenues, income (loss) from continuing operations before income taxes, valuation adjustments and write-offs, depreciation and amortization, equity loss, total assets, and inventory for each of our reportable business segments is included in Note 6 of our Consolidated Financial Statements.

Available information

Our internet website address is www.pulte.com/pulteinc/. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our business practices policy, our corporate governance guidelines, and the charters of the Audit, Compensation, and Nominating and Governance committees of our Board of Directors are also posted on our website and are available in print, free of charge, upon request.

Homebuilding Operations

 

     Years Ended December 31,
($000’s omitted)
     2009    2008    2007    2006    2005

Home sale revenues

   $ 3,869,297    $ 5,980,289    $ 8,881,509    $ 13,975,387    $ 14,370,667
                                  

Homebuilding unit settlements

     15,013      21,022      27,540      41,487      45,630
                                  

Through our brands, which include Pulte Homes, Del Webb, Centex, Fox & Jacobs, and DiVosta, we offer a wide variety of home designs including single-family detached, townhouses, condominiums, and duplexes at different prices and with varying levels of options and amenities to all of our major customer segments: first-time, first and second move-up, and active adult. Over our 60-year history, we have delivered over 550,000 homes.

As of December 31, 2009, our Homebuilding operations offered homes for sale in 882 communities. Sales prices of homes currently offered for sale in 88% of our communities fall within the range of $100,000 to $400,000 with a 2009 average unit selling price of $258,000, compared with $284,000 in 2008, $322,000 in 2007, $337,000 in 2006, and $315,000 in 2005. Sales of single-family detached homes, as a percentage of total unit sales, were 77% in 2009, compared with 75% in 2008, 74% in both 2007 and 2006, and 72% in 2005. The increase in the percentage of single-family detached homes can be attributed to a weakened demand for townhouses, condominiums, and duplexes, as prices for detached new homes have become more affordable for first-time and active adult homebuyers. Our Homebuilding operations are geographically diverse and, as a result, help to insulate us from demand changes in individual markets. Since 2006, however, such diversification has not insulated us from demand changes due to the nationwide downturn in the homebuilding industry that has had a significant adverse impact on our operations in each of our markets. As of December 31, 2009, our Homebuilding business operated in 69 markets spanning 29 states.

Ending backlog, which represents orders for homes that have not yet closed, was $1.6 billion (5,931 units) at December 31, 2009 and $631.0 million (2,174 units) at December 31, 2008. For each order in backlog, we have received a signed customer contract and the required customer deposit, which is refundable in certain instances. Of the orders in backlog at December 31, 2009, substantially all are scheduled to be closed during 2010, though all orders are subject to potential cancellation by or final negotiations with the customer. In the event of cancellation, the majority of our sales contracts stipulate that we have the right to retain the customer’s deposit, though we may choose not to retain the deposit in certain instances.

 

4


Table of Contents

Homebuilding Operations (continued)

 

Land acquisition and development

We acquire land primarily for the construction of our homes for sale to homebuyers, though we periodically sell select parcels of land to third parties for commercial or other development. Additionally, we may determine that certain of our land assets no longer fit into our strategic operating plans. We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. We consider factors such as proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We historically have managed the risk of controlling our land positions through the use of option contracts. We typically control land with the intent to complete sales of housing units within 24 to 36 months from the date of opening a community, except in the case of certain Del Webb active adult developments and other large projects for which the completion of community build-out requires a longer time period. As a result, land is generally purchased after it is properly zoned and developed or is ready for development. In addition, we dispose of owned land not required in the business through sales to appropriate end users. Where we develop land, we engage directly in many phases of the development process, including land and site planning, and obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and other amenities. We use our staff and the services of independent engineers and consultants for land development activities. Land development work is performed primarily by independent contractors and local government authorities who construct sewer and water systems in some areas. At December 31, 2009, we controlled 154,694 lots, of which 138,273 were owned and 16,421 were under option agreements.

Sales and marketing

We are dedicated to improving the quality and value of our homes through innovative proprietary architectural and community designs and state-of-the-art customer marketing techniques. Analyzing various qualitative and quantitative data obtained through extensive market research, we segment our potential customers into well-defined buyer groups. Segmentation analysis provides a method for understanding the business opportunities and risks across the full spectrum of consumer groups in each market. Once the demands of potential buyers are understood, we link our home design and community development efforts to the specific lifestyle of each targeted consumer group.

To meet the demands of our various customers, we have established a solid design expertise for a wide array of product lines. We believe that we are an innovator in the design of our homes and we view design capacity as an integral aspect of our marketing strategy. Our in-house architectural services teams and management, supplemented by outside consultants, are successful in creating distinctive design features, both in exterior facades and interior options and features. In certain markets our strategy is to offer “the complete house” in which most features shown in the home are included in the sales price.

Typically, our sales teams, together with outside sales brokers, are responsible for guiding the customer through the sales process. We are committed to industry-leading customer service through a variety of quality initiatives, including our customer care program, which ensures that homeowners are comfortable at every stage of the building process. Using a seven-step, interactive process, homeowners are kept informed during their homebuilding and home owning experience. The steps include (1) a pre-construction meeting with the construction field manager; (2) pre-dry wall frame walk; (3) quality assurance inspection; (4) first homeowner orientation; (5) 30-day follow-up after the close of the home; (6) three-month follow-up; and (7) an 11-month quality list after the close of the home. Fully furnished and landscaped model homes are used to showcase our homes and their distinctive design features. In the case of first-time buyers in the low to moderate price range, financing under United States government-insured and guaranteed programs is often used and is facilitated through our financial services operations. We also enjoy sales to the move-up buyer in higher price ranges.

Through our Del Webb brand, we are better able to address the needs of active adults, among the fastest growing homebuying segments. We offer both destination communities and “in place” communities, for those buyers who prefer to remain in their current geographic area. These communities, with highly amenitized products such as golf courses, recreational centers, and educational classes, offer the active adult buyer many options to maintain an active lifestyle.

 

5


Table of Contents

Homebuilding Operations (continued)

 

Sales and marketing (continued)

 

We have received recognition and awards as a result of our achievements as a homebuilder. Our brands received more top rankings than any other homebuilder in the J.D. Power and Associates® 2009 New-Home Builder Customer Satisfaction Study, and our Atlanta, Austin (tie), Charleston, S.C. (Centex), Chicago, Inland Empire, Calif. (Del Webb), LA/Ventura County/Bakersfield, Calif., Orlando, Philadelphia, Sacramento, San Antonio, Tampa, Tucson, and Washington, D.C. operations were recognized for ranking the highest in their markets. Three of our operations ranked second in their respective markets, while five operations ranked third. Pulte brands, which include Pulte Homes, Del Webb, Centex, Fox & Jacobs, and DiVosta, were surveyed in 22 of the 24 total markets analyzed. The survey assesses nine factors that influence overall customer satisfaction with workmanship and materials increasing in importance to customers in 2009.

Through our portfolio of brands, each serving unique customer segments, we are able to provide a distinct experience to potential customers. We introduce our homes to prospective buyers through a variety of media advertising, illustrated brochures, Internet listings and link placements, and other advertising displays. In addition, our websites, www.pulte.com, www.delwebb.com, www.centex.com, www.divosta.com, and www.foxandjacobs.com provide tools to help users find a home that meets their needs, investigate financing alternatives, communicate moving plans, maintain a home, learn more about us, and communicate directly with us. Approximately 6.8 million potential customers visited our websites during 2009.

Construction

The construction process for our homes begins with the in-house design of the homes we sell. The building phase is conducted under the supervision of our on-site construction field managers. The construction work is usually performed by independent contractors under contracts that, in many instances, cover both labor and materials on a fixed-price basis. We continue to shift toward component off-site manufacturing methods to provide high efficiency, high quality, and lower cost products to our customers. We believe that our trades are an extension of our production system and jointly focus on lean construction techniques to bring the highest value possible to our customers while setting the standard in trade relations. Using a selective process, we have teamed up with what we believe are premier contractors and suppliers to improve all aspects of the house construction process.

We maintain efficient construction operations by using standard materials and components from a variety of sources and utilizing standard construction practices. To minimize the effects of changes in construction costs, the contracting and purchasing of building supplies and materials generally is negotiated at or near the time when related sales contracts are signed. In addition, we leverage our size by actively negotiating certain of our materials needs on a national or regional basis to minimize production component cost. We are also working to establish a more integrated system that can effectively link suppliers, contractors, and the production schedule through various strategic business partnerships and e-business initiatives.

We cannot determine the extent to which necessary building materials will be available at reasonable prices in the future. While the availability of materials and labor is not a significant concern under current market conditions, we have, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets in previous years.

 

6


Table of Contents

Homebuilding Operations (continued)

 

Competition, regulation, and other factors

Our dedication to customer satisfaction is evidenced by our consumer and value-based brand approach to product development and is something that we believe distinguishes us in the homebuilding industry and contributes to our long-term competitive advantage. The housing industry in the United States, however, is fragmented and highly competitive. In each of our local markets, there are numerous homebuilders with which we compete. We also compete with the resales of existing house inventory. Any provider of housing units, for sale or to rent, including apartment operators, may be considered a competitor. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does manufactured housing. We compete primarily on the basis of price, reputation, design, location, and quality of our homes. The housing industry is affected by a number of economic and other factors including: (1) significant national and world events, which impact consumer confidence; (2) changes in the costs of building materials and labor; (3) changes in interest rates; (4) changes in other costs associated with home ownership, such as property taxes and energy costs; (5) various demographic factors; (6) changes in federal income tax laws; (7) changes in government mortgage financing programs; and (8) availability of sufficient mortgage capacity. In addition to these factors, our business and operations could be affected by shifts in the overall demand for new homes.

Our homebuilding operating cycle historically reflected escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth quarters. However, the challenging market conditions experienced in recent years have lessened the seasonal variations of our results.

Our operations are subject to building, environmental, and other regulations of various federal, state, and local governing authorities. For our homes to qualify for Federal Housing Administration (“FHA”) or Veterans Administration (“VA”) mortgages, we must satisfy valuation standards and site, material, and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings, or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

On December 1, 2009, the Environmental Protection Agency (“EPA”) promulgated new regulations regarding effluent limitation guidelines (“ELG”) for discharges from construction and development sites. The new rule requires all construction sites subject to National Pollutant Discharge Elimination System construction storm water permits issued by EPA or an authorized state to implement certain sediment and erosion controls and pollution prevention measures. These rules also require sampling of storm water discharges and compliance with a numeric effluent limitation of 280 nephelometric turbidity units beginning August 1, 2011 for sites disturbing 20 or more acres at once and beginning February 2, 2014 for sites disturbing 10 or more acres at once.

In addition to the new ELG rules, EPA also announced that it is committed to and has begun a rulemaking to address post-construction storm water discharges from newly developed and redeveloped sites. This rulemaking is expected to be completed by November 2012. There can be no assurance whether EPA will adopt final rules regarding post-construction storm water discharges, or, if it does, the form the final rule will take.

The Company is currently assessing the impact that the new ELG rules and potential post-construction rules will have on its business and results of operations.

Financial Services Operations

We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Pulte Mortgage arranges financing through the origination of mortgage loans primarily for the benefit of our homebuyers. We also engage in the sale of such loans and the related servicing rights. We are a lender approved by the FHA and VA and are a seller/servicer approved by Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and other investors. In our conventional mortgage lending activities, we follow underwriting guidelines established by FNMA, FHLMC, and private investors.

 

7


Table of Contents

Financial Services Operations (continued)

 

We utilize a centralized fulfillment center to perform our mortgage underwriting, processing and closing functions and also use centralized loan consultants. We believe centralizing both the fulfillment and origination of our loans improves the speed, efficiency, consistency, and quality of our mortgage operations, improving our profitability and allowing us to focus on creating attractive mortgage financing opportunities for our customers. In 2009, we had a high level of utilization of our online customer questionnaire. The majority of our customers now send us their data online to start the mortgage process. Once the questionnaire is received, an interview is scheduled and the combination of the interview with the data sent online represents our mortgage application.

In originating mortgage loans, we initially use our own funds and borrowings made available to us through various credit arrangements. We subsequently sell such mortgage loans to outside investors. Substantially all of the loans originated by the Company are sold in the secondary market within a short period of time after origination.

During 2009, 2008, and 2007, we originated mortgage loans for 70%, 72%, and 76%, respectively, of the homes we sold. Such originations represented substantially all of our total originations in each of those years. Our capture rate, which we define as loan originations from our homebuilding business as a percentage of total loan opportunities from our homebuilding business excluding cash settlements, was 85% in 2009, while the capture rates for both 2008 and 2007 were 92%.

We sell our servicing rights monthly on a flow basis through fixed price servicing sales contracts to reduce the risks inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time, which substantially reduces the risk of impairment with respect to the fair value of these reported assets. The servicing sales contracts provide for the reimbursement of payments made when loans prepay within specified periods of time, usually 90 to 120 days after sale.

The mortgage industry in the United States is highly competitive. We compete with other mortgage companies and financial institutions to provide attractive mortgage financing to our homebuyers. The Internet is also an important resource for homebuyers in obtaining financing as a number of companies provide online approval for their customers. These Internet-based mortgage companies may also be considered competitors.

In originating and servicing mortgage loans, we are subject to rules and regulations of the FHA, VA, GNMA, FNMA, and FHLMC. In addition to being affected by changes in these programs, our mortgage banking business is also affected by several of the same factors that impact our homebuilding business.

Our mortgage operations are also subject to potential losses associated with mortgage loans originated and sold to investors that may result from borrower fraud, certain borrower early payment defaults, or loans that have not been underwritten in accordance with the investor guidelines. In the normal course of business, our mortgage operations also provide limited indemnities for certain loans sold to investors. During 2009, our mortgage operations have experienced a significant increase in actual and anticipated losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us.

Our subsidiary title insurance companies serve as title insurance agents in selected markets by providing title insurance policies and examination and closing services to buyers of homes we sell.

Financial Information About Geographic Areas

We currently operate primarily within the United States. However, we have some non-operating foreign entities, which are insignificant to our consolidated financial results.

Discontinued Operations

In 2007, income from discontinued operations included $18.7 million in refundable income taxes related to our investment in our discontinued Mexico homebuilding operations. We disposed of our Mexico homebuilding operations in December 2005.

 

8


Table of Contents

Other Non-Operating Expenses

Other non-operating expenses, net consists of income and expenses related to corporate services provided to our subsidiaries. These expenses are incurred for financing, developing, and implementing strategic initiatives centered on new business development and operating efficiencies and providing the necessary administrative support associated with being a publicly-traded entity listed on the New York Stock Exchange.

Organization/Employees

All subsidiaries and operating units operate independently with respect to daily operations. Homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities and similar operating decisions must be approved by the business unit’s management and/or corporate senior management.

At December 31, 2009, we employed approximately 5,700 people, of which approximately 900 people were employed in our vertically-integrated construction operations in our Southwest reporting segment and approximately 800 people were employed in our Financial Services operations. Except for certain employees in our St. Louis homebuilding division, our employees are not represented by any union. Contracted work, however, may be performed by union contractors. Our local and corporate management personnel are paid incentive compensation based on a combination of individual performance and the performance of the applicable business unit, subsidiary, or the Company. Each subsidiary is given a level of autonomy regarding employment of personnel, although our senior corporate management acts in an advisory capacity in the employment of subsidiary officers. We consider our employee and contractor relations to be satisfactory.

 

9


Table of Contents

ITEM 1A.  RISK FACTORS

Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are, or may become, subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.

Downward changes in general economic, real estate construction, or other business conditions could adversely affect our business or our financial results.

The residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any of these conditions generally, or in the markets where we operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes, either of which could result in a decrease in our revenues and earnings and would adversely affect our financial condition.

The homebuilding industry is currently experiencing an economic down cycle, which has had an adverse effect on our business and results of operations.

Prior to 2006, land and home prices rose significantly in many of our markets. However, since early 2006, the homebuilding industry has been impacted by lack of consumer confidence, rising unemployment, a significant increase in the number of foreclosed homes, and large supplies of resale and new home inventories which resulted in an industry-wide softening of demand for new homes. As a result of these factors, we have experienced significant decreases in our revenues and profitability. We have also incurred substantial impairments of our land and certain other assets. We cannot predict the duration or the severity of the current market conditions, nor provide any assurances that the adjustments we have made in our operating strategy to address these conditions will be successful.

If the market value of our land and homes drops significantly, our profits could decrease.

The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. If housing demand decreases below what we anticipated when we acquired our inventory, we may not be able to make profits similar to what we have made in the past, we may experience less than anticipated profits, and/or we may not be able to recover our costs when we sell and build homes. When market conditions are such that land values are not appreciating, option arrangements previously entered into may become less desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreement. In the face of adverse market conditions, we may have substantial inventory carrying costs, we may have to write down our inventory to its fair value, and/or we may have to sell land or homes at a loss.

As a result of the changing market conditions in the homebuilding industry that have occurred since early 2006, we incurred significant land-related charges in each of the respective periods resulting from the write-off of deposits and pre-acquisition costs related to land transactions we no longer plan to pursue, net realizable valuation adjustments related to land positions sold or held for sale, impairments on land assets related to communities under development or to be developed in the future, and impairments of our investments in unconsolidated joint ventures. It is possible that the estimated cash flows from these projects may change and could result in a future need to record additional valuation adjustments. Additionally, if conditions in the homebuilding industry worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for additional impairments or write-downs, which could result in additional charges that might be significant.

 

10


Table of Contents

ITEM 1A.  RISK FACTORS (continued)

 

Our success depends on our ability to acquire land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.

The homebuilding industry is highly competitive for suitable land. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density, and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.

Our long-term ability to build homes depends on our acquiring land suitable for residential building at reasonable prices in locations where we want to build. In recent years, we experienced significant competition for suitable land as a result of land constraints in many of our markets. As competition for suitable land increases, and as available land is developed, the cost of acquiring suitable remaining land could rise, and the availability of suitable land at acceptable prices may decline. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings, and margins.

Future increases in interest rates, reductions in mortgage availability, or increases in the effective costs of owning a home could prevent potential customers from buying our homes and adversely affect our business and financial results.

Most of our customers finance their home purchases through our mortgage bank. Interest rates have been at historical lows for several years. As a result, new homes have been more affordable. Increases in interest rates or decreases in availability of mortgage financing, however, could reduce the market for new homes. Potential homebuyers may be less willing or able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate changes. Lenders may increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their current homes to potential buyers who need financing. These factors could adversely affect the sales or pricing of our homes and could also reduce the volume or margins in our financial services business. Beginning in early 2007, the availability of certain mortgage financing products became more constrained as the mortgage industry began to more closely scrutinize sub-prime, Alt-A, and other non-conforming mortgage products. Our financial services business could also be impacted to the extent we are unable to match interest rates and amounts on loans we have committed to originate through the various hedging strategies we employ. Additionally, these developments have had, and may continue to have, a material adverse effect on the overall demand for new housing and thereby on the results of operations for our homebuilding business.

In addition, the Federal Reserve has purchased a sizeable amount of mortgage-backed securities in part to stabilize mortgage interest rates and to support the market for mortgage-backed securities. Recently, the Federal Reserve announced plans to discontinue its purchase of mortgage-backed securities in the coming months. The availability and affordability of mortgage loans, including the consumer interest rates for such loans, could be adversely affected by the Federal Reserve’s actions.

We also believe that the availability of FHA and VA mortgage financing is an important factor in marketing some of our homes. The FHA recently reported that its cash reserves have fallen below legal requirements due to defaults on mortgages it has insured and, as a result, it has and may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs and/or limit the number of mortgages it insures. The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry is also critical to the housing market. The impact of the federal government’s conservatorship of Fannie Mae and Freddie Mac on the short-term and long-term demand for new housing remains unclear. Any limitations or restrictions on the availability of financing by these agencies could adversely affect interest rates, mortgage financing, and our sales of new homes and mortgage loans.

 

11


Table of Contents

ITEM 1A.  RISK FACTORS (continued)

 

Adverse capital and credit market conditions may significantly affect our access to capital and cost of capital.

The capital and credit markets have been experiencing significant volatility. In many cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity for issuers. We need liquidity for future growth and development of our business. Without sufficient liquidity, we may not be able to purchase additional land or develop land, which could adversely affect our financial results. One source of liquidity is our unsecured revolving credit facility. In the event market conditions deteriorate further or we incur additional land-related charges or other asset impairments, we may violate certain financial covenants in the credit facility. These violations, if not waived by the lenders or cured, could result in an optional maturity date acceleration by the lenders, which might require repayment of any borrowings and replacement or cash collateralization of any letters of credit outstanding under the credit facility, and could also result in a default under our $4.3 billion of senior notes.

The ability to reach an agreement with our lenders or to seek alternative sources of financing, if necessary, would depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the homebuilding industry, our credit ratings and credit capacity, as well as the possibility that lenders could develop a negative perception of our long- or short-term financial prospects if the level of our business activity decreases further due to the market downturn. At December 31, 2009, we had cash and equivalents of $1.9 billion and no borrowings outstanding under our unsecured revolving credit facility. However, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on terms acceptable to us, or at all.

Competition for homebuyers could reduce our deliveries or decrease our profitability.

The housing industry in the United States is highly competitive. We compete primarily on the basis of price, reputation, design, location, and quality of our homes. We compete in each of our markets with numerous national, regional, and local homebuilders. This competition with other homebuilders could reduce the number of homes we deliver or cause us to accept reduced margins in order to maintain sales volume.

We also compete with resales of existing or foreclosed homes, housing speculators, and available rental housing. Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes and increase cancellations of sales contracts in backlog.

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

The homebuilding industry is highly competitive for skilled labor and materials. Increased costs or shortages of skilled labor and/or lumber, framing, concrete, steel, and other building materials could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to those customers who have already entered into sale contracts as those sales contracts generally fix the price of the home at the time the contract is signed, which may be well in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our margins, and pricing competition for materials and labor may restrict our ability to pass on any additional costs, thereby decreasing our margins.

Our income tax provision and tax reserves may be insufficient if a taxing authority is successful in asserting positions that are contrary to our interpretations and related reserves, if any.

Significant judgment is required in determining our provision for income taxes and our reserves for federal, state, and local taxes. In the ordinary course of business, there may be matters for which the ultimate outcome is uncertain. Although we believe our approach to determining the tax treatment is appropriate, no assurance can be given that the final tax authority review will not be materially different than that which is reflected in our income tax provision and related tax reserves. Such differences could have a material adverse effect on our income tax provision in the period in which such determination is made and, consequently, on our net income for such period.

 

12


Table of Contents

ITEM 1A.  RISK FACTORS (continued)

 

Our income tax provision and tax reserves may be insufficient if a taxing authority is successful in asserting positions that are contrary to our interpretations and related reserves, if any. (continued)

 

We are periodically audited by various federal, state, and local authorities regarding tax matters. Our current audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit, appeal and, in some cases, litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial statements in the period determined. To provide for potential tax exposures, we maintain tax reserves based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations.

We have significant goodwill and intangible assets. If the goodwill becomes impaired, then our profits may be significantly reduced or eliminated and shareholders’ equity may be reduced.

We have recorded significant goodwill and intangible assets related to prior business combinations. We evaluate the recoverability of goodwill and intangible assets whenever facts and circumstances indicate the carrying amount may not be recoverable. We also perform our annual impairment testing of goodwill in the fourth quarter of each year. If the carrying value of goodwill exceeds its estimated fair value, impairment is deemed to have occurred and the carrying value of goodwill is written down to fair value. This would result in a charge to our operating earnings. We recorded goodwill impairments of $563.0 million, $5.7 million, and $370.0 million in 2009, 2008, and 2007, respectively, and have $895.9 million and $188.5 million of goodwill and intangible assets, respectively, remaining at December 31, 2009. If management’s expectations of future results and cash flows decrease significantly, additional impairments of either goodwill or intangible assets may occur.

We may not realize our deferred income tax assets.

The ultimate realization of our deferred income tax assets is dependent upon generating future taxable income, executing tax planning strategies, and reversals of existing taxable temporary differences. We have recorded a valuation allowance against our deferred income tax assets. The valuation allowance will fluctuate as conditions change.

Our ability to utilize net operating losses (“NOLs”), built-in losses (“BILs”), and tax credit carryforwards to offset our future taxable income and/or to recover previously paid taxes would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code (the “IRC”). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Section 382 of the IRC) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.

An ownership change under Section 382 of the IRC would establish an annual limitation to the amount of NOLs, BILs, and tax credit carryforwards we could utilize to offset our taxable income in any single year. The application of these limitations might prevent full utilization of the deferred tax assets attributable to our NOLs, BILs, and tax credit carryforwards. We have not experienced an ownership change as defined by Section 382. To preserve our ability utilize NOLs, BILs, and other tax benefits in the future without a Section 382 limitation, we adopted a shareholder rights plan, which is triggered upon certain transfers of our securities, and amended our by-laws to prohibit certain transfers of our securities. Notwithstanding the foregoing measures, there can be no assurance that we will not undergo an ownership change within the meaning of Section 382.

As a result of the merger with Centex, our ability to use certain of Centex’s pre-ownership change NOLs, BILs, or deductions will be limited under Section 382 of the Internal Revenue Code. The applicable Section 382 limitation is approximately $68 million per year for NOLs, losses realized on built-in loss assets that are sold within five years of the ownership change, and certain deductions. The limitation may result in a significant portion of Centex’s pre-ownership change NOLs, BILs, and tax credit carryforwards or deductions not being available for our use.

 

13


Table of Contents

ITEM 1A.  RISK FACTORS (continued)

 

Pulte may not realize all of the anticipated benefits of the Centex merger.

The Company’s ability to realize the anticipated benefits of the Centex merger will depend, to a large extent, on the ability of the Company to integrate the businesses of Centex with the Company. The combination of two independent companies is a complex, costly and time-consuming process. As a result, the Company will be required to devote significant management attention and resources to integrating the business practices and operations of the Company and Centex. The integration process may disrupt the business of the Company and, if implemented ineffectively, would preclude realization of the full benefits expected by the Company. The failure of the Company to meet the challenges involved in integrating successfully the operations of Centex or otherwise to realize the anticipated benefits of the Centex merger could cause an interruption of, or a loss of momentum in, the activities of the Company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and supplier relationships, and diversion of management’s attention.

Government regulations could increase the cost and limit the availability of our development and homebuilding projects or affect our related financial services operations and adversely affect our business or financial results.

Our operations are subject to building, environmental, and other regulations of various federal, state, and local governing authorities. For our homes to qualify for FHA or VA mortgages, we must satisfy valuation standards and site, material, and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings, or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

New housing developments may be subject to various assessments for schools, parks, streets, and other public improvements. These can cause an increase in the effective prices for our homes. In addition, increases in property tax rates by local governmental authorities, as recently experienced in response to reduced federal and state funding, can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes.

We also are subject to a variety of local, state, and federal laws and regulations concerning protection of health, safety, and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas.

Our financial services operations are also subject to numerous federal, state, and local laws and regulations. These include eligibility requirements for participation in federal loan programs and compliance with consumer lending and similar requirements such as disclosure requirements, prohibitions against discrimination, and real estate settlement procedures. They may also subject our operations to examination by applicable agencies. These may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.

 

14


Table of Contents

ITEM 1A.  RISK FACTORS (continued)

 

Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.

As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation, and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. Through our captive insurance subsidiaries, we reserve for costs to cover our self-insured and deductible amounts under these policies and for any costs of claims and lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent in these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements, and our reserves will be adequate to address all our warranty and construction defect claims in the future. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions, and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently costly and limited. We have responded to the recent increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted and become more costly.

Natural disasters and severe weather conditions could delay deliveries, increase costs, and decrease demand for new homes in affected areas.

Our homebuilding operations are located in many areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories, reduce the availability of materials, and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity, or capital resources could be adversely affected.

Inflation may result in increased costs that we may not be able to recoup if demand declines.

Inflation can have a long-term impact on us because increasing costs of land, materials, and labor may require us to increase the sales prices of homes in order to maintain satisfactory margins. In addition, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand, in which case we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease.

Future terrorist attacks against the United States or increased domestic and international instability could have an adverse effect on our operations.

A future terrorist attack against the United States could cause a sharp decrease in the number of new contracts signed for homes and an increase in the cancellation of existing contracts. Accordingly, adverse developments in the war on terrorism, future terrorist attacks against the United States, or increased domestic and international instability could adversely affect our business.

 

15


Table of Contents

ITEM 1B.  UNRESOLVED STAFF COMMENTS

This Item is not applicable.

ITEM 2.  PROPERTIES

Our homebuilding and corporate headquarters are located in leased office facilities at 100 Bloomfield Hills Parkway, Bloomfield Hills, Michigan 48304. Pulte Mortgage leases its primary office facilities in Englewood, Colorado, and we also maintain various support functions in leased facilities in Dallas, Texas and near Phoenix, Arizona. Our homebuilding divisions and financial services branches lease office space in the geographic locations in which they conduct their day-to-day operations.

Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. Such properties are not included in response to this Item.

ITEM 3.  LEGAL PROCEEDINGS

We are involved in various legal and governmental proceedings incidental to our continuing business operations, many involving claims related to certain construction defects. The consequences of these matters are not presently determinable but, in our opinion, after consulting with legal counsel and taking into account insurance and reserves, the ultimate liability is not expected to have a material adverse impact on our results of operations, financial position, or cash flows.

 

16


Table of Contents

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

This Item is not applicable.

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information with respect to our executive officers.

 

Name

  

Age

  

Position

  

Year Became
An Officer

Richard J. Dugas, Jr.    44    Chairman, President and Chief Executive Officer    2002
Steven C. Petruska    51    Executive Vice President and Chief Operating Officer    2004
Roger A. Cregg    53    Executive Vice President and Chief Financial Officer    1997
James R. Ellinghausen    51    Executive Vice President, Human Resources    2005
Deborah W. Meyer    48    Senior Vice President and Chief Marketing Officer    2009
Steven M. Cook    51    Senior Vice President, General Counsel and Secretary    2006
Michael J. Schweninger    41    Vice President and Controller    2009

The following is a brief account of the business experience of each officer during the past five years:

Mr. Dugas was appointed Chairman in August 2009 and President and Chief Executive Officer in July 2003. Prior to that time, he served as Executive Vice President and Chief Operating Officer. He was appointed Chief Operating Officer in May 2002 and Executive Vice President in December 2002. Since joining our company in 1994, he has served in a variety of management positions.

Mr. Petruska was appointed Executive Vice President and Chief Operating Officer in January 2004. Since joining our company in 1984, he has held a number of management positions. Most recently, he was the President for our Arizona and Nevada operations.

Mr. Cregg was appointed Executive Vice President in May 2003 and was named Chief Financial Officer effective January 1998.

Mr. Ellinghausen was appointed Executive Vice President, Human Resources in December 2006 and previously held the position of Senior Vice President, Human Resources since April 2005. Prior to joining our company, Mr. Ellinghausen held the position of Head of Human Resources for Bristol-Meyers Squibb Company Worldwide Businesses and was employed by Bristol-Meyers Squibb Company since 1997.

Ms. Meyer was appointed Senior Vice President and Chief Marketing Officer in September 2009. Prior to joining our company, Ms. Meyer held various senior marketing positions, most recently serving as Vice President and Chief Marketing Officer for Chrysler, LLC. Prior to joining Chrysler, LLC, Ms. Meyer held various marketing positions at Toyota Motor Sales from 2001 to 2007, most recently as Vice President of Marketing for Lexus.

Mr. Cook was appointed Senior Vice President, General Counsel and Secretary in December 2008 and previously held the position of Vice President, General Counsel and Secretary since February 2006. Prior to joining our company, Mr. Cook most recently held the position of Vice President and Deputy General Counsel, Corporate, at Sears Holdings Corporation and was employed by Sears, Roebuck and Co. since 1996.

Mr. Schweninger was appointed Vice President and Controller effective March 2009. Since joining our company in 2005, he held the positions of Director – Finance & Accounting Process Improvement and Director of Corporate Audit. Prior to joining our company, Mr. Schweninger served as Director of Audit and Special Projects for TriMas Corporation.

There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors.

 

17


Table of Contents

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common shares are listed on the New York Stock Exchange (Symbol: PHM).

Related Stockholder Matters

The table below sets forth, for the quarterly periods indicated, the range of high and low closing prices and cash dividends declared per share.

 

     2009         2008
     High    Low    Declared
Dividend
        High    Low    Declared
Dividend

1st Quarter

   $ 12.83    $ 7.90    $     -       $ 16.35    $ 8.66    $ 0.04

2nd Quarter

     12.30      8.47      -         15.91      9.63      0.04

3rd Quarter

     13.32      7.92      -         17.23      8.86      0.04

4th Quarter

     10.95      8.83      -         15.24      7.12      0.04

At February 15, 2010, there were 2,936 shareholders of record.

On November 24, 2008, our Board of Directors discontinued the regular quarterly dividend on the Company’s common stock effective in the first quarter of 2009.

Issuer Purchases of Equity Securities (1)

 

     (a)
Total number
of shares
purchased (2)
   (b)
Average
price paid
per share (2)
   (c)
Total number of
shares purchased
as part of publicly
announced plans
or programs
   (d)
Approximate dollar
value of shares

that may yet be
purchased under
the plans or
programs

($000’s omitted)

October 1, 2009 to October 31, 2009

   6,075    $ 10.39    -    $ 102,342(1)
               

November 1, 2009 to November 30, 2009

   372    $ 9.65    -    $ 102,342(1)
               

December 1, 2009 to December 31, 2009

   94,725    $ 9.10    -    $ 102,342(1)
                       

Total

       101,172    $ 9.18                -   
                   

 

(1) Pursuant to the two $100 million stock repurchase programs authorized and announced by our Board of Directors in October 2002 and 2005 and the $200 million stock repurchase authorized and announced in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 9,688,900 shares for a total of $297.7 million. There are no expiration dates for the programs.

 

(2) During the fourth quarter of 2009, a total of 101,172 shares were surrendered by employees for payment of minimum tax obligations upon the vesting of restricted stock and distribution of restricted stock units. Such shares were not repurchased as part of our publicly-announced stock repurchase programs.

The information required by this item with respect to equity compensation plans is set forth under Item 12 of this annual report on Form 10-K and is incorporated herein by reference.

 

18


Table of Contents

Performance Graph

The following line graph compares for the fiscal years ended December 31, 2005, 2006, 2007, 2008, and 2009 (a) the yearly cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on Pulte’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the cumulative total return on the common stock of publicly-traded peer issuers we deem to be our principal competitors in the homebuilding line of business (assuming dividend reinvestment and weighted based on market capitalization at the beginning of each year):

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*

AMONG PULTE HOMES, INC., S&P 500 INDEX, AND PEER INDEX

Fiscal Year Ended December 31, 2009

Assumes Initial Investment of $100

LOGO

 

     2004   2005   2006   2007   2008   2009
           

PULTE HOMES INC.

  100.00       123.78       104.68       33.63       35.33       32.32    
           

S&P 500 Index - Total Return

  100.00       104.91       121.48       128.15       80.74       102.11    
           

PEER Only**

  100.00       115.69       91.65       39.95       26.83       32.47    

 

  * Assumes $100 invested on December 31, 2004, and the reinvestment of dividends.

 

  ** Includes D.R. Horton Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, The Ryland Group, Inc., Standard Pacific Corporation, and Toll Brothers, Inc.

 

19


Table of Contents

ITEM 6.  SELECTED FINANCIAL DATA

Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included elsewhere in this report.

 

     Years Ended December 31,
($000’s omitted, except per share data)
 
     2009 (b)     2008     2007     2006     2005  

OPERATING DATA:

          

Homebuilding:

          

Revenues

   $ 3,966,589      $ 6,112,038      $ 9,121,730      $ 14,075,248      $ 14,528,236   
                                        

Income (loss) before income taxes

   $ (1,853,297   $ (1,694,711   $ (2,509,492   $ 1,010,368      $ 2,298,822   
                                        

Financial Services:

          

Revenues

   $ 117,800      $ 151,016      $ 134,769      $ 194,596      $ 161,414   
                                        

Income (loss) before income taxes

   $ (55,038   $ 28,045      $ 42,980      $ 115,460      $ 70,586   
                                        

Other non-operating:

          

Income (loss) before income taxes

   $ (66,784   $ (15,933   $ (30,391   $ (43,100   $ (92,394
                                        

Consolidated results:

          

Revenues

   $ 4,084,389      $ 6,263,054      $ 9,256,499      $ 14,269,844      $ 14,689,650   
                                        

Income (loss) from continuing operations before income taxes

   $ (1,975,119   $ (1,682,599   $ (2,496,903   $ 1,082,728      $ 2,277,014   

Income taxes (benefit)

     (792,552     (209,486     (222,486     393,082        840,126   
                                        

Income (loss) from continuing operations

     (1,182,567     (1,473,113     (2,274,417     689,646        1,436,888   

Income (loss) from discontinued operations (a)

     -        -        18,662        (2,175     55,025   
                                        

Net income (loss)

   $ (1,182,567   $ (1,473,113   $ (2,255,755   $ 687,471      $ 1,491,913   
                                        

PER SHARE DATA:

          

Earnings per share - basic:

          

Income (loss) from continuing operations

   $ (3.94   $ (5.81   $ (9.02   $ 2.73      $ 5.62   

Income (loss) from discontinued operations (a)

     -        -        0.07        (0.01     0.22   
                                        

Net income (loss)

   $ (3.94   $ (5.81   $ (8.94   $ 2.73      $ 5.84   
                                        

Weighted-average common shares outstanding (000’s omitted)

     300,179        253,512        252,192        252,200        255,492   
                                        

Earnings per share - assuming dilution:

          

Income (loss) from continuing operations

   $ (3.94   $ (5.81   $ (9.02   $ 2.67      $ 5.47   

Income (loss) from discontinued operations (a)

     -        -        0.07        (0.01     0.21   
                                        

Net income (loss)

   $ (3.94   $ (5.81   $ (8.94   $ 2.66      $ 5.68   
                                        

Weighted-average common shares outstanding and effect of diluted securities (000’s omitted)

     300,179        253,512        252,192        258,621        262,801   
                                        

Shareholders’ equity

   $ 8.39      $ 10.98      $ 16.80      $ 25.76      $ 23.18   
                                        

Cash dividends declared

   $ -      $ 0.16      $ 0.16      $ 0.16      $ 0.13   
                                        

 

(a) Income (loss) from discontinued operations is comprised of our former thrift operation and Argentina and Mexico homebuilding operations which have been presented as discontinued operations for all periods presented.

 

(b) Includes Centex’s operations since August 18, 2009.

 

20


Table of Contents

ITEM 6.  SELECTED FINANCIAL DATA (continued)

 

    December 31,
($000’s omitted)
    2009 (b)   2008   2007   2006   2005

BALANCE SHEET DATA:

         

House and land inventories

  $ 4,940,358   $ 4,201,289   $ 6,835,945   $ 9,374,335   $ 8,756,093

Total assets

    10,051,222     7,708,458     10,225,703     13,176,874     13,060,860

Senior notes

    4,281,532     3,166,305     3,478,230     3,537,947     3,386,527

Shareholders’ equity

    3,194,440     2,835,698     4,320,193     6,577,361     5,957,342
    Years Ended December 31,
    2009 (b)   2008   2007   2006   2005

OTHER DATA:

         

Homebuilding

         

Total markets, at year-end

    69     49     51     52     54

Total active communities

    882     572     737     767     737

Total settlements - units

    15,013     21,022     27,540     41,487     45,630

Total net new orders - units

    14,185     15,306     25,175     33,925     47,531

Backlog units, at year-end

    5,931     2,174     7,890     10,255     17,817

Average unit selling price

  $ 258,000   $ 284,000   $ 322,000   $ 337,000   $ 315,000

Gross profit margin from home sales (a)

    (10.5)%     (10.1)%     (5.0)%     17.4%     23.4%

 

(a) Homebuilding interest expense, which represents the amortization of capitalized interest, and land and community valuation adjustments are included in homebuilding cost of sales.

 

(b) Includes Centex’s operations since August 18, 2009.

 

21


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

On August 18, 2009, we completed the acquisition of Centex through the merger of Pulte’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among Pulte, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of Pulte. Accordingly, the results of Centex are included in our consolidated financial statements from the date of the merger.

Since early 2006, the U.S. housing market has been unfavorably impacted by a lack of consumer confidence, tightened mortgage standards, and large supplies of resale and new home inventories and related pricing pressures. These factors have contributed to weakened demand for new homes, slower sales, and increased price discounts and sales incentives to attract homebuyers. During 2009, these conditions were accompanied by significant foreclosure activity, increasing unemployment, and significant uncertainty in the U.S. economy. As a result of the combination of these homebuilding industry, mortgage financing, and broader economic factors, we have experienced a net loss in each quarter since the fourth quarter of 2006. Such losses resulted from a combination of reduced operational profitability and significant asset impairments. Since the beginning of 2006, we have incurred total land-related charges of $5.2 billion and goodwill impairments of $938.7 million.

The U.S. economy remains in a period of economic uncertainty, and the related financial markets are experiencing significant volatility. These factors have contributed to continued significant declines throughout the homebuilding industry. In response to these adverse macroeconomic conditions, the U.S. government has made significant efforts to stabilize these conditions and increase the regulatory oversight of the financial markets. However, significant uncertainty remains as to the ultimate impact these programs, or their expiration, will have on the demand for new housing, including enactment into law on November 6, 2009, of the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”). The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years (previously limited to a two-year carryback). This change will allow us and certain of our subsidiaries to carry back 2009 taxable losses to prior years and receive refunds of previously paid federal income taxes. The Act also extended and expanded the current homebuyer tax credit until April 30, 2010.

Entering 2010, there are indications that certain of the aforementioned negative trends may be slowing or improving. However, there are also a number of factors that may further worsen market conditions or delay a recovery in the homebuilding industry. Such factors include:

 

   

Continued high levels of foreclosure activity, in part due to lenders more aggressively pursuing foreclosures after lifting voluntary moratoriums;

 

   

High levels of unemployment, which are generally not expected to recede to historical levels during 2010;

 

   

The expiration of the homebuyer tax credit in April 2010;

 

   

Potentially higher mortgage interest rates resulting from the Federal Reserve’s recent announcement that it will discontinue its purchases of mortgage-backed securities in the coming months; and

 

   

Increased costs and standards related to FHA loans, which became a significant source of customer financing for the homebuilding industry in 2009.

 

22


Table of Contents

Overview (continued)

 

Accordingly, we continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term. While we plan to purchase select land positions where it makes strategic and economic sense to do so, our targeted profile for such investments consists of rolling lot option contracts for developed lots that are cash flow positive early in the project cycle and accretive to earnings. Additionally, we are closely managing the number of speculative homes put into production. We have also closely evaluated and made significant reductions in employee headcount and overhead expenses. Due to the persistence of these difficult market conditions, improving the efficiency of our overhead costs will continue to be a significant area of focus. We are also adjusting the content in our homes to provide our customers more affordable alternatives and are building homes with smaller floor plans in certain of our communities. We are maintaining our focus on our lean operating goals, a long-term initiative designed to extract unnecessary waste out of the home construction process. The targeted benefits include better scheduling, direct-order materials, eliminating waste at the construction site, and reducing the amount of time it takes to build our homes. As a result of the Centex merger, we expect to achieve significant savings in corporate and divisional overhead costs and interest costs for the combined entity as well as synergies in the areas of purchasing leverage and operational best practices. We also anticipate that the Centex merger will contribute to growth through expanded geographic and customer segment diversity and the ability to leverage additional brands. We believe that the combination of our operational improvement activities with the benefits of the Centex merger will help strengthen our market position and allow us to take advantage of opportunities that may develop in the future.

If the current trends in economic conditions or financial market volatility continue, it could adversely affect our business and results of operations in future periods, including a further reduction in the demand for housing as well as difficulties in accessing financing on acceptable terms. Given these conditions and the continued weakness in new home sales and closings, visibility as to future earnings performance is limited. Our evaluation for land-related charges recorded to date assumed our best estimates of cash flows for the communities tested. If conditions in the homebuilding industry or our local markets worsen in the future, or if our strategy related to certain communities changes, we may be required to evaluate our assets, including additional projects, for further impairments or write-downs, which could result in future charges that might be significant.

 

23


Table of Contents

Overview (continued)

 

The following is a summary of our operating results for 2009, 2008, and 2007 ($000’s omitted, except per share data):

 

     Years Ended December 31,  
     2009     2008     2007  

Income (loss) before income taxes:

      

Homebuilding

   $ (1,853,297   $ (1,694,711   $ (2,509,492

Financial Services

     (55,038     28,045        42,980   

Other non-operating

     (66,784     (15,933     (30,391
                        

Loss from continuing operations before income taxes

     (1,975,119     (1,682,599     (2,496,903

Income tax benefit

     (792,552     (209,486     (222,486
                        

Loss from continuing operations

     (1,182,567     (1,473,113     (2,274,417

Income from discontinued operations

     -        -        18,662   
                        

Net loss

   $ (1,182,567   $ (1,473,113   $ (2,255,755
                        

Per share data - assuming dilution:

      

Loss from continuing operations

   $ (3.94   $ (5.81   $ (9.02

Income from discontinued operations

     -        -        0.07   
                        

Net loss

   $ (3.94   $ (5.81   $ (8.94
                        

The following is a comparison of income (loss) before income taxes for 2009, 2008, and 2007:

 

   

Our Homebuilding loss before income taxes for 2009 was $1.9 billion compared with losses before income taxes of $1.7 billion and $2.5 billion in 2008 and 2007, respectively. The losses experienced in 2009, 2008, and 2007 resulted from lower settlement revenues and lower gross margins combined with significant non-cash asset impairments. Land-related charges totaled $973.3 million, $1.5 billion, and $2.2 billion for 2009, 2008, and 2007, respectively. In addition, our Homebuilding operations incurred goodwill impairment charges of $563.0 million, $5.0 million, and $370.0 million for 2009, 2008, and 2007, respectively. The Homebuilding loss before income taxes also includes certain transaction and integration costs directly related to the Centex merger totaling $123.7 million for 2009. Such costs consist primarily of severance benefits, lease exit and related impairment costs, investment banking fees, and other professional fees.

 

   

During 2009, Financial Services experienced a loss before income taxes of $55.0 million, compared with income before income taxes of $28.0 million and $43.0 million for 2008 and 2007, respectively. The loss was primarily due to reduced loan origination volume resulting from the decline in home sale revenues from Homebuilding coupled with a significant increase in loan losses, including $60.9 million related to mortgage loan repurchase obligations. The Financial Services loss before income taxes during 2009 also includes certain transaction and integration costs directly related to the Centex merger totaling $8.4 million. Such costs consist primarily of severance benefits and lease exit and related asset impairment costs. Financial Services incurred goodwill impairment charges of $0.7 million in 2008 but none in either 2009 or 2007.

 

   

Our other non-operating loss during 2009 increased compared with 2008 and 2007, due primarily to a loss realized on the repurchase of debt. The other non-operating loss before income taxes in 2009 also includes certain transaction and integration costs directly related to the Centex merger totaling $5.4 million.

 

   

The income tax benefit for 2009 reflects the impact of the Act, which allows us and certain of our subsidiaries to carry back 2009 taxable losses to prior years and receive refunds of previously paid federal income taxes.

 

24


Table of Contents

Overview (continued)

 

   

The operating results for the year ended December 31, 2009 includes Centex’s results for the period from August 19 to December 31 as follows ($000’s omitted):

 

     Revenues    Loss Before
Income Taxes
    Income
Tax
Benefit
    Net Loss  

Homebuilding

   $ 1,056,597    $ (546,219    

Financial Services

     30,612      (41,564    

Other non-operating

     -      (47,143    
                   

Total Centex

   $ 1,087,209    $ (634,926   $ (192,030   $ (442,896
                               

The above operating results for Centex’s Homebuilding operations include the aforementioned goodwill impairment charges of $563.0 million while the income tax benefit primarily reflects the impact of the Act attributable to Centex’s operations.

 

25


Table of Contents

Homebuilding Operations

The following is a summary of loss before income taxes for our Homebuilding operations ($000’s omitted):

 

     Years Ended December 31,  
     2009     2008     2007  

Home sale revenues (settlements)

   $    3,869,297      $    5,980,289      $    8,881,509   

Land sale revenues

     97,292        131,749        240,221   
                        

Total Homebuilding revenues

     3,966,589        6,112,038        9,121,730   

Home cost of revenues (a)

     (4,274,474     (6,585,177     (9,329,354

Land cost of revenues (b)

     (211,170     (393,998     (418,177

Selling, general and administrative expense

     (630,339     (776,673     (1,060,818

Equity loss (c)

     (49,668     (12,924     (190,383

Other income (expense), net (d)

     (654,235     (37,977     (632,490
                        

Loss before income taxes

   $ (1,853,297   $ (1,694,711   $ (2,509,492
                        

Active communities at December 31 (e)

     882        572        737   

Unit settlements

     15,013        21,022        27,540   

Average selling price

   $ 258      $ 284      $ 322   

Net new orders:

      

Units (f)

     14,185        15,306        25,175   

Dollars (g)

   $ 3,708,000      $ 4,101,000      $ 7,812,000   

Backlog at December 31 (h):

      

Units

     5,931        2,174        7,890   

Dollars

   $ 1,577,000      $ 631,000      $ 2,510,000   

 

(a) Includes homebuilding interest expense, which represents the amortization of capitalized interest. Home cost of sales also includes land and community valuation adjustments of $751.2 million, $1.2 billion, and $1.6 billion for 2009, 2008, and 2007, respectively.

 

(b) Includes net realizable value adjustments for land held for sale of $113.7 million, $271.1 million, and $199.2 million for 2009, 2008, and 2007, respectively.

 

(c) Includes impairments of our investments in unconsolidated joint ventures, which totaled $54.1 million, $18.5 million, and $189.9 million for 2009, 2008, and 2007, respectively.

 

(d) Includes the write-off of deposits and pre-acquisition costs for land option contracts we no longer plan to pursue of $54.3 million, $33.3 million, and $239.7 million for 2009, 2008, and 2007, respectively. For 2009, 2008, and 2007, other income (expense) includes goodwill impairment charges of $563.0 million, $5.0 million, and $370.0 million, respectively.

 

(e) In response to the significant decline in net new order volume in recent periods, the criteria for determining active communities was modified during 2009 in order to provide a more accurate measure of communities with active selling efforts. The active community counts for prior periods have been recalculated to conform to the current presentation. Active communities at December 31, 2009 include 435 active Centex communities.

 

(f) Net new order units for the year ended December 31, 2009 include Centex’s operations, which contributed 2,948 units.

 

(g) 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. Net new order dollars for the year ended December 31, 2009 include $766.0 million related to Centex.

 

(h) Backlog at December 31, 2009 includes 3,246 units and $822.6 million related to Centex.

Home sale revenues for 2009, which include $1.1 billion related to Centex, were lower than those for 2008 by $2.1 billion, or 35%, and in 2008 were lower than those for 2007 by $2.9 billion, or 33%. The decrease in home sale revenues in 2009 and 2008 were attributable to decreases in unit settlements of 29% and 24%, respectively, combined with decreases in the average selling price of 9% and 12%, respectively. The decreases in average selling price in 2009 and 2008 reflect a combination of factors, including changes in the product and geographic mix of homes closed during the periods as well as lower market selling prices and elevated sales incentives. Home sale revenues, unit settlements, and average selling prices decreased in each of our Homebuilding segments during 2009 and 2008.

 

26


Table of Contents

Homebuilding Operations (continued)

 

Homebuilding gross profit margins from home sales in 2009 were negative 10.5%, compared with negative 10.1% in 2008 and positive 5.0% in 2007. We recorded land and community valuation adjustments of $751.2 million, $1.2 billion, and $1.6 billion in 2009, 2008, and 2007, respectively. Gross profit margins were also adversely impacted in 2009 by the fair value adjustment related to homes under construction inventory acquired with the Centex merger. We recognized this fair value adjustment as an increase of $31.1 million to cost of sales as the related homes closed. Excluding these inventory valuation adjustments, gross profit margins held steady in 2009 compared with 2008 while gross margins in 2008 were lower than 2007 primarily as a result of lower average selling prices.

We continue to evaluate our existing land positions to ensure the most effective use of capital. Land sale revenues and their related gains or losses may vary significantly between periods, depending on the timing of land sales. Land sales had negative margin contributions of $113.9 million, $262.2 million, and $178.0 million for 2009, 2008, and 2007, respectively. These negative margin contributions in 2009, 2008, and 2007 included net realizable value adjustments totaling $113.7 million, $271.1 million, and $199.2 million, respectively, related to land held for sale.

Selling, general, and administrative expenses, as a percentage of home sale revenues, increased to 16.3% compared with 13.0% in 2008 and 11.9% in 2007. While our internal initiatives focused on controlling costs and matching our overall cost structure with the current business environment have resulted in significant reductions in our selling, general, and administrative expense, we experienced an increase in our selling, general and administrative expenses relative to home sale revenues during 2009 primarily as the result of duplicative corporate and divisional overhead costs during the transition period following the Centex merger. During 2009, Homebuilding selling, general and administrative expenses also include transaction and integration costs related to the Centex merger, including employee severance costs, totaling $65.0 million. Employee severance costs during 2008 and 2007 totaled $28.1 million and $31.9 million, respectively. During 2009 we experienced a 19% decrease in selling, general and administrative expenses compared with 2008 despite such merger-related costs and the duplicative overhead expenses discussed above. The reductions in selling, general and administrative expenses have been offset by reduced operating leverage resulting from the significant decrease in home sale revenues and lower absorption into inventory of overhead costs due to lower construction volumes. In addition to the significant cuts in overhead spending, such reductions were partially attributable to decreases in certain casualty insurance-related expenses; such expenses totaled $34.9 million, $103.5 million, and $141.2 million in 2009, 2008, and 2007, respectively. While the majority of these decreases resulted from the lower sales volumes between periods, our exposure to general liability product claims did not develop as adversely during 2009 as in 2008 and 2007 when we experienced significant increases in the frequency and severity of claims.

Equity loss was $49.7 million, $12.9 million, and $190.4 million for 2009, 2008, and 2007, respectively. The equity losses experienced for 2009, 2008 and 2007 included impairments related to investments in unconsolidated joint ventures totaling $54.1 million, $18.5 million, and $189.9 million, respectively.

Other income (expense), net includes the write-off of deposits and pre-acquisition costs resulting from decisions not to pursue certain land acquisitions which totaled $54.3 million, $33.3 million, and $239.7 million in 2009, 2008, and 2007, respectively. These write-offs vary in amount from year to year as we continue to evaluate potential land acquisitions for the most effective use of capital. Other income (expense), net includes certain integration costs, including lease exit costs, directly related to the Centex merger totaling $27.5 million in 2009. Other income (expense) during 2008 and 2007 includes lease termination costs and asset impairments totaling $13.3 million and $13.7 million, respectively, related to overhead reduction efforts.

Other income (expense), net also includes goodwill impairment charges of $563.0 million, $5.0 million, and $370.0 million in 2009, 2008, and 2007, respectively. The 2008 and 2007 impairments resulted from the deteriorating market conditions throughout the homebuilding industry. The 2009 impairment resulted from a number of factors, including a significant decline in our overall market capitalization between the Centex merger date and the goodwill valuation date in the fourth quarter, the relationship of our market capitalization to our stockholders’ equity, and the requirement under ASC 350 to allocate all goodwill to our reporting units even though a significant portion of the goodwill is attributable to the economic value of deferred tax assets and corporate and financing synergies that are not directly reflected in the fair values of the individual reporting units. If our expectations of future results and cash flows decrease significantly, goodwill may be further impaired. Of our remaining goodwill of $895.9 million at December 31, 2009, approximately $350 million relates to reporting units that are at increased risk of future impairment. Management will continue to monitor these reporting units and perform goodwill impairment testing when events or changes in circumstances indicate the carrying amount may not be recoverable.

 

27


Table of Contents

Homebuilding Operations (continued)

 

For 2009, net new order units decreased 7% to 14,185 units compared with 2008. Excluding Centex, net new order units decreased significantly during 2009. For 2008, net new order units decreased 39% to 15,306 units compared with 2007. Cancellation rates were 23% in 2009 and 33% in both 2008 and 2007. Most markets continued to have significant resale and new home inventory on the market, and this, combined with low consumer confidence, difficulties experienced by customers in selling their existing homes, the high rate of foreclosures, and the restrictive mortgage financing market, has resulted in reduced net new orders.

The dollar value of net new orders decreased $393.0 million in 2009 compared to 2008 and decreased $3.7 billion in 2008 compared with 2007. At December 31, 2009, we had 882 active selling communities, an increase of 54% from December 31, 2008. Centex contributed 435 active communities at December 31, 2009. At December 31, 2008, we had 572 active selling communities, a decrease of 22% from December 31, 2007. Ending backlog, which represents orders for homes that have not yet closed, was 5,931 units at December 31, 2009 with a dollar value of $1.6 billion and included 3,246 Centex units with a dollar value of $822.6 million. Ending backlog was 2,174 units at December 31, 2008 with a dollar value of $631.0 million.

We had 6,653 and 5,058 homes in production at December 31, 2009 and 2008, respectively, excluding 1,657 and 1,372 model homes, respectively. Included in our total homes in production were 2,793 and 3,509 homes that were unsold to customers at December 31, 2009 and 2008, respectively, of which 1,309 and 1,857 homes, respectively, were completed.

At December 31, 2009 and 2008, our Homebuilding operations controlled 154,694 and 120,796 lots, respectively. Of these controlled lots, 138,273 and 97,473 lots were owned and 14,208 and 23,250 lots were under option agreements approved for purchase at December 31, 2009 and 2008, respectively. In addition, there were 2,213 and 73 lots under option agreements pending approval at December 31, 2009 and 2008, respectively. During 2009, we withdrew from land option contracts representing 11,944 lots with purchase prices totaling $685.9 million.

The total purchase price related to land under option for use by our Homebuilding operations at future dates approximated $666.5 million at December 31, 2009. These land option agreements, which may be cancelled at our discretion, and may extend over several years, are secured by deposits and pre-acquisition costs totaling $143.5 million, of which $2.7 million is refundable. This balance excludes contingent payment obligations which may or may not become actual obligations to us.

 

28


Table of Contents

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of first-time, first and second move-up, and active adult homebuyers. We have determined that our operating segments are our Areas. In the third quarter of 2009, in connection with the Centex merger, we realigned the organizational structure for certain of our markets. Accordingly, the operating data by segment have been reclassified to conform to the current presentation. We conduct our operations in 69 markets, located throughout 29 states, and have presented our reportable Homebuilding segments as follows:

 

Northeast:    Northeast Area includes the following states:
  

Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania, Rhode Island, Virginia

Southeast:    Southeast Area includes the following states:
  

Georgia, North Carolina, South Carolina, Tennessee

Gulf Coast:    Gulf Coast Area includes the following states:
  

Florida, Texas

Midwest:    Midwest Area includes the following states:
  

Colorado, Illinois, Indiana, Missouri, Michigan, Minnesota, Ohio

Southwest:    Southwest Area includes the following states:
  

Arizona, Nevada, New Mexico

*West:    West Area includes the following states:
  

California, Oregon, Washington

* Our homebuilding operations located in Reno, Nevada are reported in the West segment, while our remaining Nevada homebuilding operations are reported in the Southwest segment. Also, our Hawaii and Puerto Rico operations are included in Other homebuilding, which does not represent a reportable segment.

We also have one reportable segment for our financial services operations which consists principally of mortgage banking and title operations conducted through Pulte Mortgage and our other subsidiaries. Our Financial Services segment operates generally in the same markets as our Homebuilding segments.

 

29


Table of Contents

Homebuilding Segment Operations (continued)

 

The following table presents selected financial information for our homebuilding reporting segments ($000’s omitted):

 

     Years Ended December 31,  
     2009     2008     2007  

Home sale revenue (settlements):

      

Northeast

   $ 640,595      $ 870,123      $ 1,113,805   

Southeast

     561,187        924,260        1,173,485   

Gulf Coast

     920,960        1,194,828        1,663,459   

Midwest

     445,059        720,565        1,146,991   

Southwest

     640,554        1,459,385        2,316,147   

West

     598,137        811,128        1,467,622   

Other homebuilding

     62,805        -        -   
                        
   $   3,869,297      $   5,980,289      $    8,881,509   
                        

Income (loss) before income taxes:

      

Northeast

   $ (207,461   $ (129,552   $ (149,793

Southeast

     (52,930     (14,968     72,799   

Gulf Coast

     (276,164     (244,900     (468,938

Midwest

     (66,554     (103,202     (339,193

Southwest

     (308,358     (555,756     (249,173

West

     (109,554     (284,048     (545,369

Other homebuilding (a)

     (832,276     (362,285     (829,825
                        
   $ (1,853,297   $ (1,694,711   $ (2,509,492
                        

Unit settlements:

      

Northeast

     1,748        2,142        2,573   

Southeast

     2,296        3,274        3,990   

Gulf Coast

     4,578        5,391        6,630   

Midwest

     1,810        2,651        3,888   

Southwest

     2,751        5,494        7,318   

West

     1,766        2,070        3,141   

Other homebuilding

     64        -        -   
                        
     15,013        21,022        27,540   
                        

Net new orders - units:

      

Northeast

     1,731        1,563        2,447   

Southeast

     2,297        2,357        3,563   

Gulf Coast

     4,172        3,958        6,418   

Midwest

     1,724        2,094        3,319   

Southwest

     2,675        3,878        6,609   

West

     1,520        1,456        2,819   

Other homebuilding

     66        -        -   
                        
     14,185        15,306        25,175   
                        

Unit backlog:

      

Northeast

     989        212        791   

Southeast

     1,079        364        1,281   

Gulf Coast

     2,081        689        2,122   

Midwest

     583        271        828   

Southwest

     497        394        2,010   

West

     700        244        858   

Other homebuilding

     2        -        -   
                        
     5,931        2,174        7,890   
                        

 

(a) Other homebuilding includes amortization of capitalized interest of $165.4 million, $210.7 million, and $315.0 million for 2009, 2008, and 2007, respectively, and goodwill impairments of $563.0 million, $5.0 million, and $370.0 million for 2009, 2008, and 2007.

 

30


Table of Contents

Homebuilding Segment Operations (continued)

 

     Years Ended December 31,
     2009    2008    2007

Controlled lots:

        

Northeast

   16,156    8,988    13,152

Southeast

   20,803    12,339    17,170

Gulf Cost

   53,759    41,840    48,371

Midwest

   12,226    9,187    14,098

Southwest

   33,091    36,920    49,746

West

   16,272    11,522    15,321

Other homebuilding

   2,387    -    -
              
   154,694    120,796    157,858
              

Northeast:

For 2009, Northeast home sale revenues decreased 26% compared with 2008 due to an 18% decrease in unit settlements combined with a 10% decrease in the average selling price, including significant home sale revenue reductions in our Metro New York/New Jersey and Delaware Valley markets. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with 2008. The increased loss before income taxes was primarily attributable to the reduction in revenues combined with higher land-related charges. Northeast recorded land-related charges of $170.7 million and impairments totaling $31.1 million related to unconsolidated joint ventures during 2009, compared with land related charges totaling $161.1 million in 2008. Gross margins, excluding land-related charges, decreased slightly in 2009, compared with 2008. Net new orders increased 11% compared with 2008 while the cancellation rate decreased to 17% compared with 21% in 2008.

Home sale revenues in 2008 decreased 22% due to a 17% decrease in unit settlements combined with a 6% decrease in the average selling price. Operating results were negatively impacted by $161.1 million and $193.3 million of land-related charges in 2008 and 2007, respectively. Net new orders for 2008 decreased 36% compared with 2007, and cancellation rates for 2008 were 21% compared with 24% for 2007.

Southeast:

For 2009, Southeast home sale revenues decreased 39% compared with 2008 due to a 30% decrease in unit settlements combined with a 13% decrease in the average selling price, including significant home sale revenue reductions in our Georgia and Charlotte markets. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with 2008. The increased loss before income taxes was primarily attributable to the reduction in revenues. Southeast recorded land-related charges of $54.2 million and $59.5 million in 2009 and 2008, respectively. Gross margins, excluding land-related charges, increased slightly during 2009. Net new orders decreased 3% compared with 2008 while the cancellation rate decreased to 21% compared with 33% in 2008.

For 2008, Southeast home sale revenues decreased 21% due to an 18% decrease in unit settlements combined with a 4% decrease in the average selling price. Operating results were negatively impacted by $59.5 million and $26.9 million of land-related charges in 2008 and 2007, respectively. Net new orders for 2008 decreased 34% compared with 2007. During 2008, increased cancellation rates were attributable to lower new order sign-up activity and increased cancellations in all markets. Cancellation rates for 2008 were 33% compared with 28% for 2007.

Gulf Coast:

For 2009, Gulf Coast home sale revenues decreased 23% compared with 2008 due to a 15% decrease in unit settlements combined with a 9% decrease in the average selling price, including a significant decrease in home sale revenues in our North and Central Florida markets. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with the prior year period. The Gulf Coast area experienced an increased loss before income taxes in 2009 compared with 2008 due to decreased home sale revenues and higher land-related charges, which totaled $261.3 million and $247.7 million in 2009 and 2008, respectively. Excluding land-related charges, gross margins increased moderately compared with 2008. Net new orders increased by 5% compared with 2008. The cancellation rate in 2009 was 25% compared with 33% in 2008.

 

31


Table of Contents

Homebuilding Segment Operations (continued)

 

Gulf Coast (continued):

 

For 2008, Gulf Coast home sale revenues decreased 28% compared with 2007 due to a 19% decrease in unit settlements combined with a 12% decrease in the average selling price. While all of our Gulf Coast markets experienced a loss before income taxes in 2008, the overall loss before income taxes decreased in 2008 compared with 2007 due to significantly lower impairments and land-related charges, which totaled $247.7 million and $480.4 million in 2008 and 2007, respectively. Net new orders in 2008 decreased 38% compared with 2007. Cancellation rates for 2008 were 33% compared with 31% for 2007.

Midwest:

Our Midwest segment continues to face difficult local economic conditions in the majority of its markets. For 2009, Midwest home sale revenues decreased 38% compared with 2008 due to a 32% decrease in unit settlements combined with a 10% decrease in the average selling price, including a significant decrease in our Illinois market’s home sale revenues. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with 2008. Despite lower home sale revenues, the segment’s loss before income taxes decreased during 2009 due to lower land-related charges, which totaled $45.7 million in 2009 compared with $100.1 million in 2008. Net new orders declined by 18% compared with 2008 due to the difficult market conditions. Cancellation rates were 18% for 2009 compared with 23% for 2008.

The Midwest operations were one of the most challenged areas in the country in 2008 due to difficult local economic conditions. Midwest home sale revenues decreased 37% compared with 2007 due to a 32% decrease in unit settlements combined with an 8% decrease in average selling prices. For 2008 and 2007, Midwest operating results were negatively impacted by land-related charges of $100.1 million and $354.7 million, respectively. Net new orders in 2008 decreased 37% compared with 2007. For 2008, cancellation rates were 23% compared with 26% for 2007.

Southwest:

For 2009, Southwest home sale revenues decreased 56% compared with 2008 due to a 50% decrease in unit settlements combined with a 12% decrease in average selling prices. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with 2008. The decreased loss before income taxes in 2009 was primarily attributable to lower land-related charges, which totaled $222.5 million in 2009 compared with $588.0 million in 2008. During 2009 the Southwest market also incurred charges of $19.3 million related to investments in unconsolidated joint ventures. Excluding land-related charges, several of our Southwest markets experienced higher gross margins during 2009 compared with 2008, including Phoenix West and New Mexico. Net new orders declined by 31% in 2009 compared with 2008 due to the difficult market conditions. Cancellation rates were 26% for 2009 compared with 37% for 2008.

In 2008, Southwest home sale revenues decreased 37% due to a 25% decrease in unit settlements combined with a 16% decrease in average selling prices. During 2008 and 2007, our Southwest operations recorded impairments and land-related charges of $588.0 million and $404.8 million, respectively. During 2007, Southwest’s results also included impairments of $59.1 million related to unconsolidated joint ventures. Net new orders for 2008 decreased 41% compared with 2007, and cancellation rates remained flat compared with 2007.

West:

For 2009, West home sale revenues decreased 26% compared with 2008 due to a 15% decrease in unit settlements combined with a 14% decrease in average selling prices as the majority of our West markets experienced lower home sale revenues. Excluding Centex, home sale revenues, settlements, and average selling price decreased compared with 2008. During 2009, the reduction in revenues was partially offset by higher gross margins in several of our markets, which also included $96.5 million in land-related charges and a $1.2 million valuation adjustment related to unconsolidated joint ventures. The lower loss before income taxes in 2009 was primarily due to significantly lower land-related charges and impairments in unconsolidated joint ventures, which totaled $270.0 million and $15.4 million, respectively, in 2008. Excluding land-related charges, we experienced increased gross margins in each of our West markets, with the exception of the Bay Area. Net new orders increased by 4% in 2009 compared with 2008. Cancellation rates were 25% in 2009 compared with 44% in 2008.

 

32


Table of Contents

Homebuilding Segment Operations (continued)

 

West (continued):

 

West home sale revenues decreased 45% in 2008 due primarily to a 34% decrease in unit settlements and a 16% decrease in average selling price. In 2008, West recorded impairments and land-related charges of $270.0 million and $15.4 million of valuation adjustments related to unconsolidated joint ventures. In 2007, West recorded land-related charges of $468.1 million and $128.3 million of valuation adjustments related to unconsolidated joint ventures. Net new orders for 2008 decreased 48% compared with 2007. For 2008, cancellation rates were approximately 44% compared with 43% for 2007.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage and title operations, through Pulte Mortgage and other subsidiaries. We originate mortgage loans using our own funds or borrowings made available through various credit arrangements, and then sell such mortgage loans monthly to outside investors. Also, we sell our servicing rights on a flow basis through fixed price servicing sales contracts. The following table presents selected financial information for our Financial Services operations ($000’s omitted):

 

     Years Ended December 31,  
     2009     2008     2007  

Mortgage operations revenues

   $ 92,933      $ 135,409      $ 113,967   

Title services revenues

     24,867        15,607        20,802   
                        

Total Financial Services revenues

     117,800        151,016        134,769   

Expenses

     (172,854     (123,082     (92,150

Equity income

     16        111        361   
                        

Income (loss) before income taxes

   $ (55,038   $ 28,045      $ 42,980   
                        

Total originations:

      

Loans

     10,737        15,227        23,404   
                        

Principal

   $ 2,276,400      $ 3,403,500      $ 5,336,400   
                        

Our Homebuilding customers continue to account for substantially all loan production, representing 98% of loan originations for 2009, and 99% of loan originations in both 2008 and 2007. Total Financial Services revenues during 2009, which include $30.6 million related to Centex, decreased 22% compared with 2008 primarily as a result of lower loan origination volume due to lower home settlements within our Homebuilding operations. Financial Services revenues for 2008 increased 12% compared with 2007. The increase was attributable to a combination of a shift in product mix to agency loans, which are more profitable to us, and the adoption of two new accounting standards, SEC Staff Accounting Bulletin No. 109 “Written Loan Commitments Recorded at Fair Value Through Earnings” (“SAB 109”) and the financial instruments topic of the Accounting Standards Codification. These standards were adopted effective January 1, 2008 and require that the fair value of interest rate lock loan commitments include the fair value of future servicing rights and that loans held for sale for which we elected the fair value option be carried at fair value rather than at the lower of cost or market. The adoption of these standards resulted in an increase to mortgage operations revenues of $32.0 million during 2008 and an increase to expenses of $27.5 million. Partially offsetting these favorable impacts was a significant decrease in loan origination volume. Interest income, which is included in mortgage operations revenues, was significantly lower in 2009 than in 2008 and significantly lower in 2008 than in 2007, primarily due to the decrease in loan origination volume. Revenues from our title operations increased 59% in 2009 compared with 2008 due to the Centex merger, and decreased 25% in 2008 compared with 2007 due to the declines in home settlements.

 

33


Table of Contents

Financial Services Operations (continued)

 

Mortgage origination unit volume and principal volume decreased 29% and 33%, respectively, in 2009 compared with 2008 and 35% and 36%, respectively, in 2008 compared with 2007. The decrease in unit volume is due primarily to lower home settlements. Excluding Centex, mortgage origination unit volume decreased 46% in 2009 compared with 2008, while mortgage origination principal volume decreased 48% in 2009 compared with 2008. Agency production for funded origination principal was 99%, 98%, and 82% in 2009, 2008, and 2007, respectively. Within the funded agency origination principal, FHA loans were approximately 40%, 25%, and 6% in 2009, 2008, and 2007, respectively. Our capture rate for 2009 was 85.3%, while the capture rates for 2008 and 2007 were both 92%. Our capture rate represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash settlements. The decrease in mortgage origination principal volume resulted from the reduced settlement volume combined with lower average selling prices, which reduced the average loan size. At December 31, 2009, our loan application backlog was $877.9 million, compared with $342.0 million at December 31, 2008.

The mortgage industry experienced a significant shift away from adjustable rate mortgages (“ARMs”), which generally have a lower profit per loan, to fixed rate mortgages during 2009 and 2008. Interest-only mortgages, a component of ARMs, also decreased significantly during 2009 and 2008. Substantially all loan production in 2009 and 2008 consisted of fixed rate loans, the majority of which are prime, conforming loans. We define prime loans as full documentation first mortgages with FICO scores of 621 or higher, Alt-A loans as non-full documentation first mortgages with FICO scores of 621 or higher, and sub-prime loans as first mortgages with FICO scores of 620 or lower.

Income before income taxes decreased $83.1 million in 2009 compared with 2008 primarily due to decreased loan origination volumes, lower values of servicing rights, and increased loan loss reserves, including $60.9 million related to mortgage loan repurchase obligations. The 2009 loss before income taxes also includes certain integration costs directly related to the Centex merger totaling $8.4 million. Income before income taxes decreased 35% in 2008 compared with 2007 as the higher mortgage operations revenues were offset by decreased loan origination volumes, increased loan loss reserves, an impairment of goodwill totaling $0.7 million, and restructuring expenses of $4.1 million related to our overhead reduction initiatives.

Since we sell the majority of our loans monthly and retain only limited risk related to the loans we originate, our overall loan loss reserves have historically not been significant. During recent years, however, we experienced increased losses in our loans held for investment, repurchased or re-insured loans, and foreclosed properties. The largest source for these losses has been a significant increase in actual and anticipated losses for loans previously originated and sold to investors, which have increased as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to the Company. Additionally, Centex’s mortgage operations were historically broader than Pulte Mortgage’s, so our exposure to losses related to loans previously originated has increased significantly. As a result, loan loss provisions related to our portfolio loans, real estate owned, and mortgage reinsurance included in expenses totaled $9.8 million, $17.0 million, and $7.8 million for 2009, 2008, and 2007, respectively. Additionally, we recorded provisions for losses related to contingent consideration repurchase obligations of $60.9 million, $2.4 million, and $1.8 million for 2009, 2008 and 2007, respectively,

We are exposed to market risks from commitments to lend, movements in interest rates, and cancelled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, we use other derivative financial instruments to economically hedge the interest rate lock commitment. These financial instruments can include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury futures contracts, and options on cash forward placement contracts on mortgage-backed securities. We enter into one of the aforementioned derivative financial instruments upon accepting interest rate lock commitments. The changes in the fair value of the interest rate lock commitment and the other derivative financial instruments are included in Financial Services revenues. We do not use any derivative financial instruments for trading purposes.

 

34


Table of Contents

Other Non-Operating

Other non-operating expenses consist of income and expenses related to corporate services provided to our subsidiaries. These expenses are incurred for financing, developing, and implementing strategic initiatives centered on new business development and operating efficiencies, and providing the necessary administrative support associated with being a publicly traded entity listed on the New York Stock Exchange. Accordingly, these results will vary from year to year as these strategic initiatives evolve. The following table presents a summary of other non-operating expenses ($000’s omitted):

 

     Years Ended December 31,  
     2009     2008     2007  

Net interest income

   $        6,905      $      23,496      $        2,731   

Other income (expense), net

     (73,689     (39,429     (33,122
                        

Loss before income taxes

   $ (66,784   $ (15,933   $ (30,391
                        

The decrease in net interest income in 2009 compared with 2008 resulted from significantly lower interest rates on our invested cash balances. Net interest income in 2008 exceeded the prior year as a result of higher invested cash balances. Other income (expense), net includes gains (losses) on debt retirements of ($31.6) million, ($1.6) million, and $0.5 million in 2009, 2008, and 2007, respectively. The loss before income taxes also includes certain integration costs directly related to the Centex merger totaling $5.4 million for 2009, which consists primarily of severance benefits. Additionally, compared with the prior year period, compensation-related expenses increased in 2009 primarily as a result of duplicative corporate overhead expenses during the transition period following the Centex merger. Other income (expense), net in 2008 exceeded 2007 primarily as a result of expenses related to the amendments of our unsecured revolving credit facility and the repurchase of $313.4 million of our senior notes due 2009 by means of a tender offer completed in June 2008.

We capitalize interest cost into inventory during the active development and construction of our communities. 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 cyclical timing of unit settlements. Interest expensed to Homebuilding cost of revenues for 2009, 2008, and 2007 includes $68.2 million, $84.8 million, and $110.8 million, respectively, of capitalized interest related to inventory impairments. During 2009, 2008, and 2007, we capitalized all of our Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. As a result of our inventory management strategies and potential future inventory impairments, it is reasonably possible that our debt levels will exceed the amount of our active inventory at some point during 2010, which would require us to expense some portion of our Homebuilding interest costs as incurred.

Information related to interest capitalized into inventory is as follows ($000’s omitted):

 

     Years Ended December 31,  
     2009     2008     2007  

Interest in inventory, beginning of period

   $ 170,020      $ 160,598      $ 235,596   

Interest capitalized

     234,700        220,131        240,000   

Interest expensed

     (165,355     (210,709     (314,998
                        

Interest in inventory, end of period

   $ 239,365      $ 170,020      $ 160,598   
                        

Interest incurred*

   $     236,962      $     223,039      $     243,864   
                        

* Interest incurred includes interest on our senior debt, short-term borrowings, and other financing arrangements and excludes interest incurred by our financial services operations.

Income Taxes

Our income tax assets and liabilities and related effective tax rate are affected by a number of factors, the most significant of which is the valuation allowance recorded against our deferred tax assets. Due to the effect of our valuation allowance adjustments in 2009, 2008, and 2007, our effective tax rates for these years are not meaningful. Our effective tax rates were a benefit of 40.1% for 2009 compared with expense of 12.4% and 8.9% for 2008 and 2007, respectively.

 

35


Table of Contents

Income Taxes (continued)

 

Our 2009 income tax benefit of $792.6 million is primarily due to the impact of the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”), which was enacted into law on November 6, 2009. The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years (previously limited to two years). The Company recorded income taxes receivable of $867.3 million at December 31, 2009, related to net operating losses pursuant to the Act.

The effective tax rate for 2008 differs from the effective tax rate for 2007 primarily as the result of the non-deductible goodwill impairment charge recorded in 2007.

Discontinued Operations

In 2007, income from discontinued operations includes $18.7 million in refundable income taxes related to our investment in our discontinued Mexico homebuilding operations. We disposed of our Mexico homebuilding operations in December 2005.

Liquidity and Capital Resources

We finance our land acquisitions, development, and construction activities by using internally-generated funds and existing credit arrangements. We routinely monitor current and expected operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings. Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources are sufficient to provide for our current and foreseeable capital requirements. However, we continue to evaluate the impact of market conditions on our liquidity and may determine that modifications are appropriate if market conditions continue to deteriorate or if the current difficult market conditions extend beyond our expectations.

At December 31, 2009, we had cash and equivalents of $1.9 billion and no borrowings outstanding under our unsecured revolving credit facility (the “Credit Facility”). We also had $4.3 billion of senior notes outstanding. Other financing included limited recourse land-collateralized financing totaling $2.0 million. Sources of our working capital include our cash and equivalents, our Credit Facility, our unsecured letter of credit facility (the “LOC Agreement”), and Pulte Mortgage’s committed credit arrangements. Additionally, we expect to receive significant federal tax refunds as a result of the carryback of taxable losses provided for under the Worker, Homeownership, and Business Assistance Act of 2009. We expect to receive the majority of these refunds in the first half of 2010, including the receipt of $193.0 million in January 2010.

We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a diversified portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term investments, generally money market funds and federal government or agency securities. We monitor our investments with each bank on a daily basis and do not believe our cash and equivalents are exposed to any material risk of loss. However, given the current volatility in the global financial markets, there can be no assurances that losses of principal balance on our cash and equivalents will not occur.

Our ratio of debt to total capitalization, excluding our land-collateralized and Financial Services debt, was 57.3% at December 31, 2009, and 42.8% net of cash and equivalents.

As of September 30, 2009, the Company was not in compliance with the tangible net worth covenant under the Credit Facility. The Company subsequently requested and received a limited waiver from its banks until December 15, 2009, permitting the Company to utilize letters of credit under the credit facility during the term of the waiver. On December 11, 2009, the Company entered into the Fourth Amendment and Waiver to Third Amended and Restated Credit Agreement, which decreased the Company’s borrowing capacity from $1.0 billion to $750.0 million, reduced the credit facility’s uncommitted accordion feature from $1.75 billion to $1.0 billion, replaced the maximum debt to capitalization ratio with a maximum debt to tangible capital limit, reduced the tangible net worth minimum, and waived any default under the previous credit facility resulting from failure to comply with the tangible net worth financial covenant.

 

36


Table of Contents

Liquidity and Capital Resources (continued)

 

Under the terms of the Credit Facility, we have the capacity to issue letters of credit totaling up to $750.0 million. Borrowing availability is reduced by the amount of letters of credit outstanding. The Credit Facility includes a borrowing base limitation when we do not have an investment grade senior unsecured debt rating from at least two of Fitch Ratings, Moody’s Investor Service, and Standard and Poor’s Corporation (the “Rating Agencies”). We currently do not have investment grade ratings from any of the Rating Agencies and are therefore subject to the borrowing base limitation. Given the uncertainty of current market conditions, we anticipate operating under the borrowing base limitation throughout 2010. Under the borrowing base limitation, the sum of our senior debt and the amount drawn on the Credit Facility may not exceed an amount based on certain percentages of various categories of our unencumbered inventory and other assets. At December 31, 2009, we had no borrowings outstanding and full availability of the remaining $249.4 million under the Credit Facility after consideration of $500.6 million of outstanding letters of credit. As a result, the borrowing base limitation did not restrict our borrowing at December 31, 2009.

We are also required to maintain certain liquidity reserve accounts in the event we fail to satisfy an interest coverage test. Specifically, if the interest coverage ratio (as defined in the Credit Facility) is less than 2.0 to 1.0, we are required to maintain cash and equivalents in designated accounts with certain banks. While our access to and utilization of cash and equivalents maintained in liquidity reserve accounts is not restricted, failure to maintain sufficient balances within the liquidity reserve accounts restricts our ability to utilize the Credit Facility. We maintained the required cash and equivalents of $415.1 million within the liquidity reserve accounts at December 31, 2009, calculated under the Credit Facility as two times the amount by which the interest incurred over the last four quarters exceeds interest income over the last four quarters, excluding Financial Services. Additionally, failure to satisfy the interest coverage test can also result in an increase to LIBOR margin and letter of credit pricing. Our interest coverage ratio for the twelve months ended December 31, 2009 was negative 1.29. Due to the increase in our senior notes outstanding resulting from the Centex merger, we expect the required cash and equivalents to be maintained within the liquidity reserve accounts to increase in 2010. For the period ending March 31, 2010, we will be required to maintain cash and equivalents of $455.6 million within the liquidity reserve accounts, calculated as of December 31, 2009.

The Credit Facility contains certain financial covenants. We are required to not exceed a debt to tangible capital ratio as well as to meet a tangible net worth covenant each quarter. At December 31, 2009, our debt to tangible capital ratio (as defined in the Credit Facility) was 57.3% (compared with the requirement not to exceed 60.0%) while our tangible net worth (as defined in the Credit Facility) cushion was $855.7 million. Violations of the financial covenants in the Credit Facility, if not waived by the lenders or cured, could result in an optional maturity date acceleration by the lenders, which might require repayment of any borrowings and replacement or cash collateralization of any letters of credit outstanding under the Credit Facility. In the event these violations were not waived by the lenders or cured, the violations could also result in a default under the Company’s $4.3 billion of senior notes.

As of December 31, 2009, the Company was in compliance with all of the covenants under the Credit Facility. However, in the event market conditions deteriorate in the future or the Company incurs additional land-related charges, the Company’s compliance with the required covenant levels may be adversely impacted. Additionally, the Company’s ability to utilize the full capacity of the Credit Facility may be limited under the terms of the borrowing base.

In June 2009, the Company entered into the LOC Agreement, a five-year, unsecured letter of credit facility that permits the issuance of up to $200.0 million of letters of credit by the Company. The LOC Agreement supplements the Company’s existing letter of credit capacity included in our Credit Facility. At December 31, 2009, $28.6 million of letters of credit were outstanding under the LOC Agreement.

Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to its committed credit arrangements. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors. At December 31, 2009, Pulte Mortgage had $18.4 million outstanding under three separate master repurchase agreements with a total borrowing capacity of $175.0 million, subject to certain sublimits. These repurchase agreements expire at different dates in 2010 beginning in May and contain various affirmative and negative covenants, including certain financial covenants. Based on current market conditions, there is a reasonable risk that Pulte Mortgage may not be able to comply with at least one of the required covenants prior to the maturity of the related repurchase agreement. Violations of any of the covenants in the repurchase agreements, if not waived by the lenders or cured, could result in an optional maturity date acceleration by the lenders, which might require repayment of any borrowings. Given the uncertainty in the capital markets, there can be no assurances that we will be able to renew or replace the repurchase agreements on commercially reasonable terms upon their expiration. In the event of any of these occurrences, we believe we have adequate liquidity to meet Pulte Mortgage’s anticipated financing needs.

 

37


Table of Contents

Liquidity and Capital Resources (continued)

 

CTX Mortgage, which we acquired with the Centex merger, previously maintained a master repurchase agreement with JP Morgan Chase Bank, N.A. that provided for advances of up to $50.0 million, subject to certain sublimits, and was scheduled to expire on January 31, 2010. As of December 31, 2009 we had transitioned all of CTX Mortgage’s loan origination production to Pulte Mortgage. Accordingly, we terminated CTX Mortgage’s master repurchase agreement in December 2009.

Pursuant to the two $100.0 million stock repurchase programs authorized by our Board of Directors in October 2002 and 2005, and the $200.0 million stock repurchase authorization in February 2007 (for a total stock repurchase authorization of $400 million), we have repurchased a total of 9,688,900 shares for a total of $297.7 million. There were no repurchases under these programs during 2009. We had remaining authorization to purchase common stock aggregating $102.3 million at December 31, 2009.

For the last three years, we have generated significant positive cash flow primarily through the liquidation of land inventory without a corresponding level of reinvestment combined with refunds of income taxes paid in prior years. We have used this positive cash flow to, among other things, increase our cash reserves as well as retire outstanding debt. While we expect to receive significant federal tax refunds in the first half of 2010, there can be no assurances that we will be able to continue to generate positive cash flow at the same levels in the future.

Our net cash provided by operating activities amounted to $738.9 million in 2009 and $1.2 billion in each of 2008 and 2007. The primary drivers of cash flow from operations are profitability and inventory levels. For the years 2007 through 2009, our net loss was largely attributable to non-cash asset impairments, including land-related charges and investments in unconsolidated entities, goodwill impairments, and a deferred tax asset valuation allowance. We have also generated significant cash flow by focusing on right-sizing our land and house inventory in 2009 and 2008 to better match current market conditions, which resulted in a significant net decrease to inventories. In addition, we received federal income tax refunds totaling $362.0 million, $212.1 million, and $67.5 million in 2009, 2008, and 2007, respectively.

Cash provided by investing activities totaled $1.7 billion in 2009, substantially all of which resulted from the $1.7 billion of cash acquired with the Centex merger. Excluding cash acquired with the Centex merger, cash used in investing activities decreased in 2009 from 2008 primarily as a result of lower investments in unconsolidated entities offset by higher capital expenditures. Cash used in investing activities was $55.9 million in 2008 compared with $221.4 million in 2007. The significant decrease in cash used in investing activities during 2008 compared with 2007 resulted primarily from lower investments in unconsolidated entities and lower capital expenditures.

Net cash used in financing activities totaled $2.2 billion, $567.7 million, and $487.6 million in 2009, 2008, and 2007, respectively. The significant increase in cash used in investing activities in 2009 resulted primarily from the repurchase of $1.5 billion of senior notes during a tender offer completed in September 2009. We also retired $236.4 million of senior notes at scheduled maturity dates and repurchased an additional $192.9 million of senior notes during 2009. The increase in net cash used in 2008 compared with 2007 was largely attributable to the repurchase of $313.4 million of senior notes by means of a tender offer in 2008 compared with total senior note repurchases of $61.2 million in 2007. This was partially offset by reduced repayments under our Financial Services credit agreements as the result of lower volumes.

On November 24, 2008, our Board of Directors discontinued the regular quarterly dividend on our common stock effective in the first quarter of 2009.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of high inflation because of higher land and construction costs. Inflation may also increase our financing, labor, and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. While we attempt to pass to our customers increases in our costs through increased sales prices, the current industry conditions have resulted in lower sales prices in substantially all of our markets. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting our prospective homebuyers’ ability to adequately finance home purchases, our revenues, gross margins, and net income would be adversely affected.

 

38


Table of Contents

Liquidity and Capital Resources (continued)

 

Seasonality

We experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. Historically, we have experienced significant increases in revenues and cash flow from operations during the fourth quarter based on the timing of home settlements. However, the challenging market conditions experienced since early 2006 have lessened the seasonal variations of our results. Given the current significant uncertainty in the homebuilding industry, we can make no assurances as to when and whether our historical seasonality will recur.

Contractual Obligations and Commercial Commitments

The following table summarizes our payments under contractual obligations as of December 31, 2009:

 

     Payments Due by Period
($000’s omitted)
     Total    2010    2011-2012    2013-2014    After 2014

Contractual obligations:

              

Long-term debt (a)

   $ 7,229,839    $ 314,937    $ 973,000    $ 1,715,823    $ 4,226,079

Operating lease obligations

     256,092      54,162      76,536      48,992      76,402

Other long-term liabilities (b)

     2,337      990      1,068      129      150
                                  

Total contractual obligations (c)

   $ 7,488,268    $ 370,089    $ 1,050,604    $ 1,764,944    $ 4,302,631
                                  

 

(a) Represents our senior notes and related interest payments.

 

(b) Represents our limited recourse collateralized financing arrangements and related interest payments.

 

(c) We do not have any payments due in connection with capital lease or purchase obligations.

We are subject to the usual obligations associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we are ready to build homes on them. This reduces our financial risks associated with long-term land holdings. At December 31, 2009, we had agreements to acquire 16,421 homesites through option contracts. At December 31, 2009, we had $140.8 million of non-refundable option deposits and pre-acquisition costs related to these agreements.

At December 31, 2009, we had $326.1 million of gross unrecognized tax benefits and $80.6 million of related accrued interest and penalties. We are currently under examination by various taxing jurisdictions and anticipate finalizing the examinations with certain jurisdictions within the next twelve months. However, the final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 1998-2008.

The following table summarizes our other commercial commitments as of December 31, 2009:

 

     Amount of Commitment Expiration by Period
($000’s omitted)
     Total    2010    2011-2012    2013-2014    After 2014

Other commercial commitments:

              

Guarantor credit facilities (a)

   $ 950,000    $ -    $ 750,000    $ 200,000    $         -

Non-guarantor repurchase agreements

     175,000      175,000      -      -      -
                                  

Total commercial commitments (b)

   $ 1,125,000    $ 175,000    $ 750,000    $ 200,000    $ -
                                  

 

(a) Includes capacity to issue up to $950.0 million in letters of credit, of which $529.2 million were outstanding at December 31, 2009.

 

(b) Excludes performance and surety bonds of approximately $2.9 billion, which typically do not have stated expiration dates.

 

39


Table of Contents

Off-Balance Sheet Arrangements

We use letters of credit and performance and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our 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 December 31, 2009, we had outstanding letters of credit of $529.2 million. Performance bonds and surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $2.9 billion at December 31, 2009, are typically outstanding over a period of approximately three to five years. We do not believe that there will be draws upon any such letters of credit or performance or surety bonds.

In the ordinary course of business, we enter into land option or option type agreements in order to procure land for the construction of houses in the future. At December 31, 2009, these agreements totaled approximately $666.5 million. Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. In certain instances, we are required to record the land under option as if we own it. At December 31, 2009, we consolidated certain land option agreements and recorded assets of $174.1 million as land, not owned, under option agreements.

At December 31, 2009, aggregate outstanding debt of unconsolidated joint ventures was $69.5 million, of which our proportionate share of such joint venture debt was $25.3 million. Of our proportionate share of joint venture debt, we provided limited recourse guaranties for $19.0 million of such joint venture debt at December 31, 2009. See Note 7 to the Consolidated Financial Statements included elsewhere in this Form 10-K for additional information.

For 2009, 2008, and 2007, we recognized equity loss from our unconsolidated joint ventures of $49.7 million, $12.8 million, and $190.0 million, respectively. The equity loss recognized during 2009, 2008, and 2007 includes land valuation adjustments of $54.1 million, $18.5 million, and $189.9 million, respectively.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements were prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 of our Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality.

Revenue recognition

Homebuilding – Homebuilding revenue and related profit are generally recognized at the time of the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage, our wholly-owned mortgage subsidiary, and the buyer has not made an adequate initial or continuing investment as required by ASC 360-20, “Property, Plant, and Equipment - Real Estate Sales,” the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed unless there is a loss on the sale in which case the loss on such sale is recognized at the time of closing.

Financial Services – Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. With the adoption of SFAS 159 (codified within ASC 825, “Financial Instruments”) effective January 1, 2008, loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. Previously, such fees and costs were deferred as an adjustment to the cost of the related loans and recognized as an adjustment to revenues upon the sale of such loans. Gains and losses from sales of mortgage loans are recognized when the loans are sold. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan.

 

40


Table of Contents

Critical Accounting Policies and Estimates (continued)

 

Inventory valuation

Inventory is stated at the lower of accumulated cost or fair value, as determined in accordance ASC 360-10, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (“ASC 360-10”). Accumulated cost includes costs associated with 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 cyclical timing of unit settlements.

Cost of sales includes the construction cost, average lot cost, estimated warranty costs, and commissions and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction cost. 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.

In accordance with ASC 360-10, we record valuation adjustments on land inventory and related communities under development when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. For communities that demonstrate indicators of impairment, we compare the expected undiscounted cash flows for these communities to their carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we calculate the fair value of the community. Impairment charges are required to be 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’s inventory using a combination of market comparable transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sale incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates.

Investments in unconsolidated entities

We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. Many of these unconsolidated entities purchase, develop, and/or sell land and homes in the United States and Puerto Rico. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this represents partnership equity or common stock ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the profits and losses of these entities. Certain of these entities sell land to us. In these situations, we defer the recognition of profits from such activities until the time the related homes are sold. The cost method of accounting is used for investments in which we have less than a 20% ownership interest and do not have the ability to exercise significant influence.

 

41


Table of Contents

Critical Accounting Policies and Estimates (continued)

 

Investments in unconsolidated entities (continued)

 

We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC 323, “Investments – Equity Method and Joint Ventures”. If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity loss in the Consolidated Statements of Operations. Additionally, each unconsolidated entity evaluates its long-lived assets, such as inventory, for recoverability in accordance with ASC 360-10. Our proportionate share of any such impairments under ASC 360-10 are also recorded to equity loss in the Consolidated Statements of Operations. Evaluations of recoverability under both ASC 323 and ASC 360-10 are primarily based on projected cash flows. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates.

Residential mortgage loans

Prior to January 1, 2008, residential mortgage loans available-for-sale were stated at the lower of aggregate cost or market value. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we elected the fair value option for our portfolio loans available-for-sale and for first mortgage loans originated subsequent to December 31, 2007. ASC 825 permits entities to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Changes in the fair value of these loans are reflected in revenues as they occur.

Loans held for investment consist of interim financing mortgage loans for certain of our customers as well as a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and reviewed for impairment when recoverability becomes doubtful.

Mortgage loan allowances and loan origination liabilities

Our mortgage operations have established liabilities for anticipated losses associated with mortgage loans originated and sold to investors that may result from borrower fraud, borrower early payment defaults, or loans that have not been underwritten in accordance with the investor guidelines. In the normal course of business, our mortgage operations also provide limited indemnities for certain loans sold to investors. We establish the liabilities for such anticipated losses based upon, among other things, historical loss rates, current trends in loan originations, and the geographic location of the underlying collateral.

From time to time, our mortgage operations will be required to repurchase certain loans we originated and sold to third parties. If a repurchased loan is performing, it is classified as a residential mortgage loan available-for-sale and recorded at fair value. Such repurchased loans are typically re-sold to third party investors. If a repurchased loan is nonperforming, the loan is classified as loans held for investment. We establish an allowance for such loans based on our historical loss experience and current loss trends.

Although we consider our mortgage loan allowances and loan origination liabilities reflected in our Condensed Consolidated Balance Sheets to be adequate, there can be no assurance that these allowances and liabilities will prove to be sufficient over time to cover ultimate losses in connection with our loan originations. These allowances and liabilities may prove to be inadequate due to unanticipated adverse changes in the economy, the mortgage market, or discrete events adversely affecting specific borrowers.

 

42


Table of Contents

Critical Accounting Policies and Estimates (continued)

 

Goodwill and intangible assets

We have recorded a significant amount of goodwill related to the Centex merger completed in 2009. Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the acquisition date, is subject to annual impairment testing in the fourth quarter of each year or when events or changes in circumstances indicate the carrying amount may not be recoverable. We evaluate the recoverability of goodwill by comparing the carrying value of each of our reporting units to their estimated fair value. We determine the fair value of each reporting unit using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value, and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded carrying value. Such fair values are significantly impacted by estimates related to current market valuations, current and future economic conditions in each of our geographical markets, and our strategic plans within each of our markets. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. If our expectations of future results and cash flows decrease significantly, goodwill may be impaired.

We have also recorded certain intangible assets related to tradenames acquired with the Centex merger completed in 2009 and the Del Webb merger completed in 2001, which are being amortized over their estimated useful lives. The carrying values and ultimate realization of these assets are dependent upon estimates of future earnings and benefits that we expect to generate from their use. If we determine that the carrying values of intangible assets may not be recoverable based upon the existence of one or more indicators of impairment, we use a projected undiscounted cash flow method to determine if impairment exists. If the carrying values of the intangible assets exceed the expected undiscounted cash flows, then we measure impairment as the difference between the fair value of the asset and the recorded carrying value. If our expectations of future results and cash flows decrease significantly or if our strategy related to the use of such intangible assets changes, the related intangible assets may be impaired.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one- to two-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to ten years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of our recorded warranty liability for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from our estimates.

Self-insured risks

We have, and require the majority of our subcontractors to have, general liability, property, errors and omissions, workers compensation, and other business insurance. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits. We reserve for costs to cover our self-insured and deductible amounts under those policies and for any costs of claims and related lawsuits, based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. These estimates are subject to a high degree of uncertainty due to a variety of factors, including extended lag times in the reporting and resolution of claims, which generally occur over several years and can occur in excess of ten years, and trends or changes in claim settlement patterns, insurance industry practices, and legal interpretations. As a result, actual costs could differ significantly from the estimated amounts. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

Stock-based compensation

We calculate the fair value of stock options using the Black-Scholes option pricing model. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected dividend yield, and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

 

43


Table of Contents

Critical Accounting Policies and Estimates (continued)

 

Income taxes

We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”, codified within ASC 740, “Income Taxes” (“ASC 740”), effective January 1, 2007. FIN 48 created a single model to address accounting for uncertainty in tax positions and clarifies accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provided guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Significant judgment is required to evaluate uncertain tax positions. Evaluations of our tax positions consider changes in facts or circumstances, changes in law, correspondence with taxing authorities, and settlements of audit issues.

New Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements included elsewhere in this Form 10-K.

 

44


Table of Contents

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following tables set forth, as of December 31, 2009 and 2008, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value ($000’s omitted).

 

    As of December 31, 2009 for the
Years ending December 31,
    2010   2011   2012   2013   2014   Thereafter   Total   Fair
Value

Rate-sensitive liabilities:

               

Fixed interest rate debt:

               

Senior notes

  $     47,427   $ 231,683   $     236,961   $ 495,131   $ 813,996   $ 2,522,865   $ 4,348,063   $ 4,087,269

Average interest rate

    4.55%     7.89%     6.40%     5.64%     5.44%     6.33%     6.15%  

Non-recourse collateralized financing

  $ 835   $ 839   $ 105   $ 42   $ 47   $ 136   $ 2,004   $ 2,004

Average interest rate

    7.35%     7.36%     8.25%     10.00%     10.00%     10.00%     7.70%  
    As of December 31, 2008 for the
Years ending December 31,
    2009   2010   2011   2012   2013   Thereafter   Total   Fair
Value

Rate-sensitive liabilities:

               

Fixed interest rate debt:

               

Senior notes

  $ 25,412   $ -   $ 698,563   $ -   $ 300,000   $ 2,150,000   $ 3,173,975   $ 2,136,628

Average interest rate

    4.88%     -     7.95%     -     6.25%     6.24%     6.60%  

Non-recourse collateralized financing

  $ 3,840   $ 890   $ 890   $ 75   $ -   $ -   $ 5,695   $ 5,695

Average interest rate

    6.22%     7.25%     7.25%     7.25%     -     -     6.55%  

The increase in senior notes outstanding at December 31, 2009 compared with December 31, 2008 resulted from the senior notes assumed with the Centex merger.

Pulte Mortgage, operating as a mortgage banker, is also subject to interest rate risk. Interest rate risk begins when we commit to lend money to a customer at agreed-upon terms (i.e., commit to lend at a certain interest rate for a certain period of time). The interest rate risk continues through the loan closing and until the loan is sold to an investor. During 2009 and 2008, this period of interest rate exposure averaged approximately 60 days. In periods of rising interest rates, the length of exposure will generally increase due to customers locking in an interest rate sooner as opposed to letting the interest rate float.

We minimize interest rate risk by (i) financing the loans via a variable rate borrowing agreement tied to LIBOR and (ii) hedging our loan commitments and closed loans through derivative financial instruments. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury future contracts, and options on cash forward placement contracts on mortgage-backed securities. We do not use any derivative financial instruments for trading purposes.

Hypothetical changes in the fair values of our financial instruments arising from immediate parallel shifts in long-term mortgage rates of plus 50, 100, and 150 basis points would not be material to our financial results.

At December 31, 2009, our aggregate net investment exposed to foreign currency exchange rate risk includes our remaining non-operating investments in Mexico, which approximated $0.2 million.

 

45


Table of Contents

SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 1A., Risk Factors, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A., Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).

Forward-looking statements give current expectations or forecasts of future events. Words such as “anticipate”, “expect”, “intend”, “plan”, “believe”, “seek”, “estimate”, and other words and terms of similar meaning in connection with discussions of future operating or financial performance signify forward-looking statements. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. Such statements are made in good faith by us pursuant to the “Safe Harbor” provisions of the Reform Act. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

Such forward-looking statements involve known risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from our future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, those set forth under Item 1A. - Risk Factors.

 

46


Table of Contents

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PULTE HOMES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

($000’s omitted, except per share data)

 

     2009     2008  
ASSETS   

Cash and equivalents

   $ 1,858,234      $ 1,655,264   

Restricted cash

     32,376        -   

Unfunded settlements

     2,153        11,988   

House and land inventory

     4,940,358        4,201,289   

Land held for sale

     58,645        164,954   

Land, not owned, under option agreements

     174,132        171,101   

Residential mortgage loans available-for-sale

     166,817        297,755   

Investments in unconsolidated entities

     73,815        134,886   

Goodwill

     895,918        -   

Intangible assets, net

     188,548        102,554   

Other assets

     705,040        595,098   

Income taxes receivable

     955,186        373,569   
                
   $ 10,051,222      $ 7,708,458   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Liabilities:

    

Accounts payable, including book overdrafts of $104,418 and $100,232 in 2009 and 2008, respectively

   $ 278,333      $ 218,135   

Customer deposits

     74,057        40,950   

Accrued and other liabilities

     1,843,545        1,079,195   

Collateralized short-term debt, recourse solely to applicable non-guarantor subsidiary assets

     18,394        237,560   

Income tax liabilities

     360,921        130,615   

Senior notes

     4,281,532        3,166,305   
                

Total liabilities

     6,856,782        4,872,760   
                

Shareholders’ equity:

    

Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued

   $ -      $ -   

Common stock, $0.01 par value; 400,000,000 shares authorized, 380,690,487 and 258,169,442 shares issued and outstanding at December 31, 2009 and 2008, respectively

     3,807        2,582   

Additional paid-in capital

     2,935,737        1,394,790   

Accumulated other comprehensive loss

     (2,249     (4,099

Retained earnings

     257,145        1,442,425   
                

Total shareholders’ equity

     3,194,440        2,835,698   
                
   $ 10,051,222      $ 7,708,458   
                

See Notes to Consolidated Financial Statements.

 

47


Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2009, 2008, and 2007

(000’s omitted, except per share data)

 

     2009     2008     2007  

Revenues:

      

Homebuilding

      

Home sale revenues

   $ 3,869,297      $ 5,980,289      $ 8,881,509   

Land sale revenues

     97,292        131,749        240,221   
                        
     3,966,589        6,112,038        9,121,730   

Financial Services

     117,800        151,016        134,769   
                        

Total revenues

     4,084,389        6,263,054        9,256,499   
                        

Homebuilding Cost of Revenues:

      

Home cost of revenues

     4,274,474        6,585,177        9,329,354   

Land cost of revenues

     211,170        393,998        418,177   
                        
     4,485,644        6,979,175        9,747,531   
                        

Financial Services expenses

     172,854        123,082        92,150   

Selling, general and administrative expenses

     672,434        814,508        1,094,483   

Other expense, net

     685,829        39,571        631,947   

Interest income

     (9,167     (26,404     (6,595

Interest expense

     2,262        2,908        3,864   

Equity loss from unconsolidated entities

     49,652        12,813        190,022   
                        

Loss from continuing operations before income taxes

     (1,975,119     (1,682,599     (2,496,903

Income tax benefit

     (792,552     (209,486     (222,486
                        

Loss from continuing operations

     (1,182,567     (1,473,113     (2,274,417

Income from discontinued operations

     -        -        18,662   
                        

Net loss

   $ (1,182,567   $ (1,473,113   $ (2,255,755
                        

Per share data:

      

Basic:

      

Loss from continuing operations

   $ (3.94   $ (5.81   $ (9.02

Income from discontinued operations

     -        -        0.07   
                        

Net loss

   $ (3.94   $ (5.81   $ (8.94
                        

Assuming dilution:

      

Loss from continuing operations

   $ (3.94   $ (5.81   $ (9.02

Income from discontinued operations

     -        -        0.07   
                        

Net loss

   $ (3.94   $ (5.81   $ (8.94
                        

Cash dividends declared

   $ -      $ 0.16      $ 0.16   
                        

Number of shares used in calculation:

      

Basic:

      

Weighted-average common shares outstanding

     300,179        253,512        252,192   

Assuming dilution:

      

Effect of dilutive securities-stock options and restricted stock grants

     -        -        -   
                        

Adjusted weighted-average common shares and effect of dilutive securities

     300,179        253,512        252,192   
                        

See Notes to Consolidated Financial Statements.

 

48


Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2009, 2008, and 2007

($000’s omitted, except per share data)

 

    Common Stock     Additional
Paid-in

Capital
    Accumulated
Other
Comprehensive
Income

(Loss)
    Retained
Earnings
    Total  
    Shares     $          

Shareholders’ Equity, January 1, 2007

  255,315      $   2,553      $ 1,284,687      $ (2,986   $ 5,293,107      $ 6,577,361   

Adoption of FASB Interpretation No. 48 (FIN 48)

  -        -        -        -        (31,354     (31,354

Stock option exercises

  683        7        7,855        -        -        7,862   

Excess tax benefits (deficiencies) from stock-based compensation

  -        -        523        -        -        523   

Stock awards, net of cancellations

  1,344        13        (13     -        -        -   

Cash dividends declared - $0.16 per share

  -        -        -          (40,997     (40,997

Stock repurchases

  (243     (2     (1,243     -        (5,000     (6,245

Stock-based compensation

  -        -        70,695        -        -        70,695   

Comprehensive income (loss):

              -   

Net loss

  -        -        -        -        (2,255,755     (2,255,755

Change in fair value of derivatives, net of income tax benefit of $1,080, net of reclassification for net realized gains on derivatives of $978 included in net income

  -        -        -        (1,762     -        (1,762

Foreign currency translation adjustments

  -        -        -        (135     -        (135
                 

Total comprehensive loss

              (2,257,652
                                             

Shareholders’ Equity, December 31, 2007

  257,099      $ 2,571      $ 1,362,504      $ (4,883   $ 2,960,001      $ 4,320,193   

Stock option exercises

  528        5        4,538        -        -        4,543   

Excess tax benefits (deficiencies) from stock-based compensation

  -        -        (9,437     -        -        (9,437

Stock awards, net of cancellations

  900        9        (9     -        -        -   

Cash dividends declared - $0.16 per share

  -        -        -        -        (41,119     (41,119

Stock repurchases

  (358     (3     (1,913     -        (3,344     (5,260

Stock-based compensation

  -        -        39,107        -        -        39,107   

Comprehensive income (loss):

           

Net loss

  -        -        -        -        (1,473,113     (1,473,113

Change in fair value of derivatives, net of income tax benefit of $631, net of reclassification for net realized losses on derivatives of $1,029 included in net income

  -        -        -        1,424        -        1,424   

Foreign currency translation adjustments

  -        -        -        (640     -        (640
                 

Total comprehensive loss

              (1,472,329
                                             

Shareholders’ Equity, December 31, 2008

  258,169      $ 2,582      $ 1,394,790      $ (4,099   $ 1,442,425      $ 2,835,698   

Stock option exercises

  756        8        4,774        -        -        4,782   

Excess tax benefits (deficiencies) from stock-based compensation

  -        -        (8,098     -        -        (8,098

Stock issued for Centex merger

  122,178        1,222        1,502,594        -        -        1,503,816   

Stock awards, net of cancellations

  239        2        (2     -        -        -   

Stock repurchases

  (652     (7     (4,664     -        (2,713     (7,384

Stock-based compensation

  -        -        46,343        -        -        46,343   

Comprehensive income (loss):

           

Net loss

  -        -        -        -        (1,182,567     (1,182,567

Change in fair value of derivatives, net of income tax benefit of $0

  -        -        -        714        -        714   

Foreign currency translation adjustments

  -        -        -                1,136        -        1,136   
                 

Total comprehensive loss

              (1,180,717
                                             

Shareholders’ Equity, December 31, 2009

  380,690      $     3,807      $  2,935,737      $ (2,249   $ 257,145      $ 3,194,440   
                                             

See Notes to Consolidated Financial Statements.

 

49


Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2009, 2008, and 2007

($000’s omitted)

 

     2009     2008     2007  

Cash flows from operating activities:

      

Net loss

   $ (1,182,567   $ (1,473,113   $ (2,255,755

Adjustments to reconcile net loss to net cash flows provided by operating activities:

      

Write-down of land and deposits and pre-acquisition costs

     919,199        1,511,751        2,042,618   

Goodwill impairments

     562,990        5,654        370,023   

Amortization and depreciation

     54,246        73,980        83,852   

Stock-based compensation expense

     46,343        39,107        70,695   

Loss (gain) on debt repurchases

     31,594        1,594        (543

Deferred income taxes

     37,587        105,906        73,164   

Equity loss from unconsolidated entities

     49,652        12,813        190,022   

Distributions of earnings from unconsolidated entities

     911        4,421        4,429   

Other, net

     2,173        3,371        2,315   

Increase (decrease) in cash due to:

      

Restricted cash

     8,339        -        -   

Inventories

     396,593        1,114,686        622,359   

Residential mortgage loans available-for-sale

     263,167        165,035        395,425   

Other assets

     318,829        226,526        257,980   

Accounts payable, accrued and other liabilities

     (300,073     (464,790     (395,751

Income taxes receivable

     (552,794     (110,406     (263,163

Income tax liabilities

     82,664        3,857        20,585   
                        

Net cash provided by operating activities

     738,853        1,220,392        1,218,255   
                        

Cash flows from investing activities:

      

Distributions from unconsolidated entities

     8,612        6,777        60,201   

Investments in unconsolidated entities

     (35,144     (54,619     (217,541

Cash acquired with Centex merger, net of cash used

     1,748,742        -        -   

Net change in loans held for investment

     8,802        5,462        (13,728

Proceeds from the sale of fixed assets

     2,051        5,314        19,767   

Capital expenditures

     (39,252     (18,878     (70,116
                        

Net cash provided by (used in) investing activities

     1,693,811        (55,944     (221,417
                        

Cash flows from financing activities:

      

Net repayments under Financial Services credit arrangements

     (219,166     (203,051     (374,096

Repayment of other borrowings

     (2,005,205     (317,080     (74,687

Excess tax benefits from stock-based compensation

     -        -        523   

Issuance of common stock

     4,782        4,543        7,862   

Stock repurchases

     (7,384     (5,260     (6,245

Debt issuance costs

     (3,058     (5,687     -   

Dividends paid

     -        (41,119     (40,997
                        

Net cash used in financing activities

     (2,230,031     (567,654     (487,640
                        

Effect of exchange rate changes on cash and equivalents

     337        (1,841     (179
                        

Net increase in cash and equivalents

     202,970        594,953        509,019   

Cash and equivalents at beginning of period

     1,655,264        1,060,311        551,292   
                        

Cash and equivalents at end of period

   $     1,858,234      $     1,655,264      $     1,060,311   
                        

Supplemental Cash Flow Information:

      

Interest paid, net of amounts capitalized

   $ 42,362      $ 10,002      $ 14,533   
                        

Income taxes paid (refunded), net

   $ (357,190   $ (194,666   $ (72,364
                        

See Notes to Consolidated Financial Statements.

 

50


Table of Contents

PULTE HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of significant accounting policies

Basis of presentation

The consolidated financial statements include the accounts of Pulte Homes, Inc., all of its direct and indirect subsidiaries (the “Company”), and variable interest entities in which the Company is deemed to be the primary beneficiary. The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”), Centex Corporation (“Centex”), and other subsidiaries that are engaged in the homebuilding business. The Company also has mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.

On August 18, 2009, the Company completed the acquisition of Centex through the merger of Pulte’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among Pulte, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of Pulte. Accordingly, the results of Centex are included in the Company’s consolidated financial statements from the date of the merger.

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles 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.

Reclassification

Certain prior period amounts have been reclassified to conform to the current year presentation, including a revised presentation of the Consolidated Statements of Operations.

Foreign currency

The financial statements of the Company’s foreign subsidiaries were measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses were translated at average exchange rates in effect during the year. Realized foreign currency transaction gains and losses were not significant during 2009, 2008, and 2007.

Subsequent events

The Company evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission on February 19, 2010.

Cash and equivalents

Cash and equivalents includes institutional money market investments and time deposits with a maturity of three months or less when acquired.

Restricted cash

The Company maintains certain cash balances that are restricted as to their use. Restricted cash consists of customer deposits on home sales which are temporarily restricted by regulatory requirements until title transfers to the homebuyer and other accounts with restrictions.

 

51


Table of Contents

PULTE HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of significant accounting policies (continued)

 

Investments in unconsolidated entities

The Company has investments in a number of unconsolidated entities, including joint ventures, with independent third parties. Many of these unconsolidated entities purchase, develop, and/or sell land and homes in the United States and Puerto Rico. The equity method of accounting is used for unconsolidated entities over which the Company has significant influence; generally this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, the Company recognizes its proportionate share of the profits and losses of these entities. Certain of these entities sell land to the Company. In these situations, the Company defers the recognition of profits from such activities until the time the related homes are sold. The cost method of accounting is used for investments in which the Company has less than a 20% ownership interest and does not have the ability to exercise significant influence.

The Company evaluates its investments in unconsolidated entities for recoverability in accordance with Accounting Standards Codification (“ASC”) 323, “Investments – Equity Method and Joint Ventures” (“ASC 323”). If the Company determines that a loss in the value of the investment is other than temporary, the Company writes down the investment to its estimated fair value. Any such losses are recorded to equity loss in the Consolidated Statements of Operations. Additionally, each unconsolidated entity evaluates its long-lived assets, such as inventory, for recoverability in accordance with ASC 360-10, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (“ASC 360-10”). The Company’s proportionate share of any such impairments is also recorded to equity loss in the Consolidated Statements of Operations. Evaluations of recoverability under both ASC 323 and ASC 360-10 are primarily based on projected cash flows. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates.

Intangible assets

Intangible assets consist of trademarks and tradenames acquired in connection with the 2009 acquisition of Centex and the 2001 acquisition of Del Webb. These intangible assets were valued at the acquisition date utilizing proven valuation procedures and are generally being amortized over a 20-year life. The acquired cost and accumulated amortization of the Company’s intangible assets were $259.0 million and $70.5 million, respectively, at December 31, 2009, and $163.0 million and $60.4 million, respectively, at December 31, 2008. Amortization expense totaled $14.0 million in 2009, which included $4.0 million related to the fair value of customer backlog acquired with the Centex merger that was fully amortized as of December 31, 2009. Amortization expense was $8.2 million in both 2008 and 2007. Amortization expense for trademarks and tradenames is expected to be $13.1 million in each of the next five years.

Intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If impairment indicators exist, an assessment of undiscounted future cash flows for the assets related to these intangibles is evaluated accordingly. If the results of the analysis indicate impairment, the assets are adjusted to fair value. During 2009, 2008, and 2007, there were no impairments of intangible assets.

Goodwill

Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the acquisition date, has been recorded in connection with various acquisitions. Recorded goodwill has been allocated to the Company’s reporting units based on the relative fair value of each acquired reporting unit. In accordance with ASC 350, “Intangibles-Goodwill and Other”, the Company assesses the goodwill balance of each reporting unit for impairment annually in the fourth quarter and when events or changes in circumstances indicate the carrying amount may not be recoverable.

 

52


Table of Contents

PULTE HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of significant accounting policies (continued)

 

Fixed assets and depreciation

Fixed assets are recorded at cost. Maintenance and repair costs are expensed as incurred. Depreciation is computed principally by the straight-line method based upon estimated useful lives as follows: vehicles, three to seven years, model and office furniture, two to three years, and equipment, three to ten years. Fixed assets are included in other assets and totaled $82.4 million net of accumulated depreciation of $230.2 million at December 31, 2009 and $69.3 million net of accumulated depreciation of $224.5 million at December 31, 2008. Depreciation expense totaled $40.2 million, $65.8 million, and $75.6 million in 2009, 2008, and 2007, respectively.

Advertising cost

The Company expenses advertising costs as incurred. The Company incurred advertising costs of $47.1 million, $77.8 million, and $104.3 million in 2009, 2008, and 2007, respectively.

Employee benefits

The Company maintains defined contribution retirement plans that cover substantially all of the Company’s employees. Company contributions pursuant to the plans totaled $5.7 million, $15.1 million, and $21.0 million in 2009, 2008, and 2007, respectively.

Other expense (income), net

Other expense (income), net as reflected in the Consolidated Statements of Operations consists of the following ($000’s omitted):

 

     2009     2008     2007  

Loss (gain) on debt retirements

   $ 31,594      $ 1,594      $ (543

Write-off of deposits and pre-acquisition costs

     54,256        33,309        239,716   

Lease exit costs (a)

     24,803        13,260        13,681   

Goodwill impairments (b)

     562,990        4,954        370,023   

Amortization of intangible assets

     14,008        8,151        8,150   

Customer deposit income

     (4,213     (12,960     (14,705

Miscellaneous expense (income), net

     2,391        (8,737     15,625   
                        
   $ 685,829      $ 39,571      $ 631,947   
                        

 

  (a) Excludes lease exit costs classified within Financial Services expenses of $0.7 million in both 2009 and 2008. There were no lease exit costs related to Financial Services in 2007.

 

  (b) Excludes $0.7 million of goodwill impairments classified within Financial Services expenses in 2008.

Discontinued operations

In 2007, income from discontinued operations includes $18.7 million in refundable income taxes related to the Company’s investment in its discontinued Mexico homebuilding operations. The Company disposed of its Mexico homebuilding operations in December 2005.

 

53


Table of Contents

PULTE HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of significant accounting policies (continued)

 

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, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock and restricted stock units. Any 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. For 2009, 2008, and 2007, all stock options and non-vested restricted stock and restricted stock units were excluded from the calculation as they were anti-dilutive due to the net loss recorded during the periods.

Effective January 1, 2009, the Company adopted the two-class method as required by ASC 260, “Earnings Per Share” (“ASC 260”). 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. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The Company’s outstanding restricted stock and restricted stock units are considered participating securities.

The following table presents the reconciliation of earnings per share (000’s omitted, except per share data):

 

     2009     2008     2007  

Net loss

   $ (1,182,567   $ (1,473,113   $ (2,255,755

Earnings attributable to restricted shareholders

     -        (629     (627
                        

Net loss available to common shareholders

   $ (1,182,567   $ (1,473,742   $ (2,256,382
                        

Per share data:

      

Net loss (basic and diluted)

   $ (3.94   $ (5.81   $ (8.94

Earnings attributable to restricted shareholders

     -        -        -   
                        

Net loss available to common shareholders (basic and diluted)

   $ (3.94   $ (5.81   $ (8.94
                        

Number of shares used in calculation:

      

Basic and diluted

     300,179        253,512        252,192   
                        

Stock-based compensation

The Company measures compensation cost for its stock options at fair value on the date of grant and recognizes compensation cost on the graded vesting method over the vesting period, generally four years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater expense in earlier years than the straight-line method. The fair value of the Company’s stock options is determined using primarily the Black-Scholes valuation model. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of the Company’s common stock. Compensation expense related to the Company’s share-based awards is generally included in selling, general, and administrative expense within the Company’s Consolidated Statements of Operations.

 

54


Table of Contents

PULTE HOMES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of significant accounting policies (continued)

 

New accounting pronouncements

Effective January 1, 2009, the Company adopted SFAS No. 157, “Fair Value Measurements” (codified in “ASC 820”), for its non-financial assets and liabilities and for its financial assets and liabilities measured at fair value on a non-recurring basis. ASC 820 provides a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of ASC 820 for the Company’s non-financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements, though it may in the future. In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” and FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (all codified in ASC 820). The Company adopted the FSPs as of January 2009, which did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (codified in “ASC 805”). ASC 805 modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any non-controlling interest in the acquired company at the acquisition-date fair value. In addition, ASC 805 requires the expensing of acquisition-related transaction and restructuring costs, and certain contingent assets and liabilities acquired, as well as contingent consideration, to be recognized at fair value. ASC 805 also modifies the accounting for certain acquired income tax assets and liabilities. ASC 805 is effective for new acquisitions consummated on or after January 1, 2009. The adoption of ASC 805 had a material impact on the Company’s consolidated financial statements for the period ending December 31, 2009 upon the merger with Centex.

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (codified in “ASC 810”). ASC 810 requires all entities to report noncontrolling (i.e. minority) interests in subsidiaries as equity in the consolidated financial statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling financial interest in the subsidiary. ASC 810 also requires expanded disclosure that distinguishes between the interests of the controlling owners and the interests of the noncontrolling owners of a subsidiary. ASC 810 was effective for the Company beginning on January 1, 2009. The adoption of ASC 810-10 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” (codified in “ASC 815”). ASC 815 expands the disclosure requirements regarding an entity’s derivative instruments and hedging activities. ASC 815 was effective for the Company’s fiscal year beginning January 1, 2009, and the required disclosures have been incorporated into the Company’s consolidated financial statements.

In June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (codified in “ASC 260”). Under ASC 260, 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