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PULTEGROUP INC 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.(A)
  3. Ex-31.(B)
  4. Ex-32
  5. Ex-32
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2010

 

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

Commission File Number 1-9804

 

 

PULTEGROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MICHIGAN   38-2766606

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

 

 

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  þ    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).    YES  þ    NO  ¨

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  þ    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  þ

Number of shares of common stock outstanding as of July 31, 2010: 382,709,085

 

 

 


Table of Contents

PULTEGROUP, INC.

INDEX

 

          Page No.

PART I

   FINANCIAL INFORMATION   

Item 1

   Financial Statements   
  

Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009

   3
  

Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   4
  

Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2010 and 2009

   5
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   6
  

Notes to Condensed Consolidated Financial Statements

   7

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    39

Item 3

   Quantitative and Qualitative Disclosures About Market Risk    57

Item 4

   Controls and Procedures    58

PART II

   OTHER INFORMATION   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds    58

Item 6

   Exhibits    59

SIGNATURES

      60

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PULTEGROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)

 

     June 30,    December 31,
     2010    2009
     (Unaudited)    (Note)
ASSETS      

Cash and equivalents

   $ 2,746,626    $ 1,858,234

Restricted cash

     29,001      32,376

Unfunded settlements

     23,538      2,153

House and land inventory

     4,883,049      4,940,358

Land held for sale

     54,166      58,645

Land, not owned, under option agreements

     63,742      174,132

Residential mortgage loans available-for-sale

     243,561      166,817

Investments in unconsolidated entities

     87,135      73,815

Goodwill

     895,464      895,918

Intangible assets, net

     181,998      188,548

Other assets

     620,585      705,040

Income taxes receivable

     86,631      955,186
             
   $ 9,915,496    $ 10,051,222
             
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Liabilities:

     

Accounts payable, including book overdrafts of $68,356 and $104,418 in 2010 and 2009, respectively

   $ 275,974    $ 278,333

Customer deposits

     89,606      74,057

Accrued and other liabilities

     1,609,530      1,843,545

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

     75,402      18,394

Income tax liabilities

     298,432      360,921

Senior notes

     4,284,766      4,281,532
             

Total liabilities

     6,633,710      6,856,782

Shareholders’ equity

     3,281,786      3,194,440
             
   $ 9,915,496    $ 10,051,222
             

Note: The Condensed Consolidated Balance Sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(000’ omitted, except per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2010     2009     2010     2009  

Revenues:

        

Homebuilding

        

Home sale revenues

   $ 1,262,990      $ 653,711      $ 2,239,796      $ 1,218,444   

Land sale revenues

     6,745        4,171        19,731        4,781   
                                
     1,269,735        657,882        2,259,527        1,223,225   

Financial Services

     36,163        20,698        66,729        39,247   
                                

Total revenues

     1,305,898        678,580        2,326,256        1,262,472   
                                

Homebuilding Cost of Revenues:

        

Home cost of revenues

     1,104,456        724,891        1,954,551        1,622,829   

Land cost of revenues

     2,563        11,364        11,561        12,268   
                                
     1,107,019        736,255        1,966,112        1,635,097   

Financial Services expenses

     44,772        30,072        69,883        49,375   

Selling, general and administrative expenses

     157,415        122,263        318,721        248,822   

Other expense (income), net

     9,234        (23,375     793        (19,412

Interest income

     (2,292     (2,647     (5,071     (6,175

Interest expense

     1,018        436        1,500        914   

Equity in (earnings) loss of unconsolidated entities

     (5,542     2,505        (5,448     53,026   
                                

Loss before income taxes

     (5,726     (186,929     (20,234     (699,175

Income tax expense (benefit)

     (82,029     2,536        (84,049     5,108   
                                

Net income (loss)

   $ 76,303      $ (189,465   $ 63,815      $ (704,283
                                

Per share data:

        

Basic income (loss) per share

   $ 0.20      $ (0.74   $ 0.17      $ (2.77
                                

Diluted income (loss) per share

   $ 0.20      $ (0.74   $ 0.17      $ (2.77
                                

Cash dividends declared

   $ —        $ —        $ —        $ —     
                                

Number of shares used in calculation:

        

Basic

     378,618        254,764        378,185        254,672   

Effect of dilutive securities

     1,794        —          1,902        —     
                                

Diluted

     380,412        254,764        380,087        254,672   
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(000’s omitted, except per share data)

(Unaudited)

 

     Common Stock     Additional
Paid-in
    Accumulated
Other
Comprehensive
Income
    Retained        
     Shares     $     Capital     (Loss)     Earnings     Total Equity  

Shareholders’ Equity, January 1, 2010

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

Stock option exercises

   895        9        8,608        —          —          8,617   

Stock awards, net of cancellations

   1,260        13        (13     —          —          —     

Stock repurchases

   (151     (2     (1,230     —          (517     (1,749

Stock-based compensation

   —          —          16,485        —          —          16,485   

Comprehensive income (loss):

            

Net income (loss)

   —          —          —          —          63,815        63,815   

Change in fair value of derivatives, net of tax

   —          —          —          169        —          169   

Foreign currency translation adjustments

   —          —          —          9        —          9   
                  

Total comprehensive income (loss)

   —          —          —          —          —          63,993   
                                              

Shareholders’ Equity, June 30, 2010

   382,694      $ 3,827      $ 2,959,587      $ (2,071   $ 320,443      $ 3,281,786   
                                              

Shareholders’ Equity, January 1, 2009

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

Stock option exercises

   89        1        590        —          —          591   

Stock awards, net of cancellations

   507        5        (5     —          —          —     

Stock repurchases

   (158     (2     (856     —          (747     (1,605

Stock-based compensation

   —          —          16,898        —          —          16,898   

Comprehensive income (loss):

            

Net income (loss)

   —          —          —          —          (704,283     (704,283

Change in fair value of derivatives, net of tax

   —          —          —          547        —          547   

Foreign currency translation adjustments

   —          —          —          1,660        —          1,660   
                  

Total comprehensive income (loss)

   —          —          —          —          —          (702,076
                                              

Shareholders’ Equity, June 30, 2009

   258,607      $ 2,586      $ 1,411,417      $ (1,892   $ 737,395      $ 2,149,506   
                                              

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)

 

     For The Six Months Ended  
     June 30,  
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ 63,815      $ (704,283

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

    

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

     33,315        476,649   

Goodwill impairments

     1,375        —     

Amortization and depreciation

     24,356        24,803   

Stock-based compensation expense

     16,485        16,898   

Equity in (earnings) loss of unconsolidated entities

     (5,448     53,026   

Distributions of earnings from unconsolidated entities

     2,015        104   

Gain on debt repurchases

     —          (15,901

Other, net

     3,127        228   

Increase (decrease) in cash due to:

    

Restricted cash

     3,375        —     

Inventories

     19,267        132,756   

Residential mortgage loans available-for-sale

     (66,557     206,356   

Income taxes receivable

     868,555        366,529   

Other assets

     53,995        39,132   

Accounts payable, accrued and other liabilities

     (105,122     (198,934

Income tax liabilities

     (62,489     2,587   
                

Net cash provided by operating activities

     850,064        399,950   
                

Cash flows from investing activities:

    

Distributions from unconsolidated entities

     3,693        234   

Investments in unconsolidated entities

     (19,619     (13,110

Net change in loans held for investment

     (531     2,502   

Proceeds from the sale of fixed assets

     1,068        1,112   

Capital expenditures

     (8,698     (22,320
                

Net cash used in investing activities

     (24,087     (31,582
                

Cash flows from financing activities:

    

Net (repayments) borrowings under Financial Services credit arrangements

     57,008        (209,209

Net repayments of other borrowings

     (1,464     (179,029

Issuance of common stock

     8,617        591   

Stock repurchases

     (1,749     (1,605
                

Net cash provided by (used in) financing activities

     62,412        (389,252
                

Effect of exchange rate changes on cash and equivalents

     3        1,660   
                

Net increase (decrease) in cash and equivalents

     888,392        (19,224

Cash and equivalents at beginning of period

     1,858,234        1,655,264   
                

Cash and equivalents at end of period

   $ 2,746,626      $ 1,636,040   
                

Supplemental Cash Flow Information:

    

Interest paid, net of amounts capitalized

   $ 4,412      $ 3,733   
                

Income taxes paid (refunded), net

   $ (890,109   $ (364,031
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of presentation and significant accounting policies

Basis of presentation

On March 18, 2010, Pulte Homes, Inc. changed its name to PulteGroup, Inc. (“PulteGroup”). The consolidated financial statements include the accounts of PulteGroup and 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 PulteGroup, 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.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Subsequent events

The Company evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission.

Other expense (income), net

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2010    2009     2010     2009  

Write-off of deposits and pre-acquisition costs

   $ 2,309    $ 339      $ 2,852      $ 972   

Lease exit and related costs

     1,257      323        2,612        2,482   

Amortization of intangible assets

     3,275      2,038        6,550        4,076   

Gain on debt retirements - corporate

     —        (15,901     —          (15,901

Goodwill impairments

     1,375      —          1,375        —     

Miscellaneous expense (income), net

     1,018      (10,174     (12,596     (11,041
                               
   $ 9,234    $ (23,375   $ 793      $ (19,412
                               

 

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Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

1. Basis of presentation and significant accounting policies (continued)

 

Earnings per share

Basic earnings per share is computed by dividing income (loss) 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. 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 the three and six months ended June 30, 2010, 21.4 million anti-dilutive outstanding stock options were excluded from the calculations. For the three and six months ended June 30, 2009, all stock options and non-vested restricted stock were excluded from the calculation as they were anti-dilutive due to the net loss recorded during the periods.

Under Accounting Standards Codification (“ASC”) 260, “Earnings Per Share,” 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. Although the Company’s outstanding restricted stock and restricted stock units are considered participating securities under the ASC, there were no earnings attributable to restricted shareholders during the three and six months ended June 30, 2010 or 2009.

Land, not owned, under option agreements

In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, the Company generally provides a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under ASC 810, “Consolidation” (“ASC 810”), if the entity holding the land under option is a variable interest entity (“VIE”), the Company’s deposit represents a variable interest in that entity. If the Company is determined to be the primary beneficiary of the VIE, then the Company is required to consolidate the VIE, though creditors of the VIE have no recourse against the Company.

In applying the provisions of ASC 810, the Company evaluates all land option agreements with VIEs to determine whether the Company is the primary beneficiary. The Company generally has little control or influence over the operations of these VIEs due to the Company’s lack of an equity interest in them. Therefore, when the Company’s requests for financial information are denied, the Company is required to make certain assumptions about the assets, liabilities, and financing of such entities. The VIE is generally protected from the first dollar of loss under the Company’s land option agreement due to the Company’s deposit. Likewise, the VIE’s gains are generally capped based on the purchase price within the land option agreement. The Company’s maximum exposure to loss related to these VIEs is limited to the Company’s deposits and pre-acquisition costs under the applicable land option agreements. In recent years, the Company has canceled a significant number of land option agreements, which has resulted in significant write-offs of the related deposits and pre-acquisition costs but has not exposed the Company to the overall risks or losses of the applicable VIEs.

Generally, financial statements for the VIEs are not available. As a result, for VIEs the Company is required to consolidate, the Company records the remaining contractual purchase price under the applicable land option agreement to land, not owned, under option agreements with an offsetting increase to accrued and other liabilities. Consolidation of these VIEs has no impact on the Company’s results of operations or cash flows. At December 31, 2009, the Company determined that it was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under six of these agreements with scheduled expiration dates through 2010 and consolidated $47.1 million as land, not owned, under option agreements with the corresponding liability classified within accrued and other liabilities. Upon the adoption of ASU 2009-17, “Amendments to FASB Interpretation No. 46(R),” which became effective January 1, 2010, the Company determined that it did not have power to direct the most significant activities of these VIEs and, therefore, de-consolidated them. The Company did not provide financial or other support to any VIEs other than as stipulated in the land option agreements.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

1. Basis of presentation and significant accounting policies (continued)

 

Land, not owned, under option agreements (continued)

 

In addition to land option agreements consolidated under ASC 810, the Company determined that certain land option agreements represent financing arrangements pursuant to ASC 470-40, “Accounting for Product Financing Arrangements” (“ASC 470-40”), even though the Company has no direct obligation to pay these future amounts. As a result, the Company recorded $63.7 million and $127.1 million at June 30, 2010 and December 31, 2009, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. Such amounts represent the remaining purchase price under the land option agreements in the event the Company exercises the purchase rights under the agreements.

The following provides a summary of the Company’s interests in land option agreements as of June 30, 2010 and December 31, 2009 ($000’s omitted):

 

     June 30, 2010        December 31, 2009    
     Deposits
and Pre-
acquisition
Costs
   Total
Purchase
Price
   Land, Not
Owned,
Under
Option
Agreements
       Deposits
and Pre-
acquisition
Costs
   Total
Purchase
Price
   Land, Not
Owned,
Under
Option
Agreements
   

Consolidated VIEs

   $ 41,841    $ 31,328    $ 25,115   (a)    $ 22,298    $ 73,914    $ 63,953   (a)

Unconsolidated VIEs

     30,659      345,612      —          24,320      283,044      —    

Other land option agreements

     29,769      427,336      38,627   (b)      96,884      309,585      110,179   (b)
                                             
   $ 102,269    $ 804,276    $ 63,742      $ 143,502    $ 666,543    $ 174,132  
                                             

 

(a) Represents the remaining purchase price for land option agreements consolidated pursuant to ASC 810 or ASC 470-40 under which the land seller is considered a variable interest entity.
(b) Represents the remaining purchase price for land option agreements consolidated pursuant to ASC 470-40 under which the land seller is not considered a variable interest entity.

The above summary includes land option agreements consolidated under ASC 810 and ASC 470-40 as well as all other land option agreements. The remaining purchase price (total purchase price less deposit) of all land option agreements totaled $753.9 million at June 30, 2010 and $599.8 million at December 31, 2009.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

1. Basis of presentation and significant accounting policies (continued)

 

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one- to two-year comprehensive limited warranty as well as coverage for certain other aspects of the home’s construction and operating systems for periods of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability for each geographic market in which the Company operates and adjusts the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to the Company’s warranty liability were as follows ($000’s omitted):

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2010     2009     2010     2009  

Warranty liability, beginning of period

   $ 88,767      $ 50,130      $ 96,110      $ 58,178   

Warranty reserves provided

     15,169        5,917        25,308        11,384   

Payments

     (18,666     (8,333     (36,776     (18,196

Other adjustments

     (1,033     (5,484     (405     (9,136
                                

Warranty liability, end of period

   $ 84,237      $ 42,230      $ 84,237      $ 42,230   
                                

Residential mortgage loans available-for-sale

Substantially all of the loans originated by the Company are sold in the secondary mortgage market within a short period of time after origination. In accordance with ASC 825, “Financial Instruments,” the Company has elected the fair value option for its portfolio loans available-for-sale. Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. The Company does not designate any derivative instruments or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.” Fair values for conventional agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for government and non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. At June 30, 2010 and December 31, 2009, residential mortgage loans available-for-sale had an aggregate fair value of $243.6 million and $166.8 million, respectively, and an aggregate outstanding principal balance of $230.8 million and $166.4 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $2.3 million and ($0.2) million for the three months ended June 30, 2010 and 2009, respectively, and $1.9 million and ($0.9) million for the six months ended June 30, 2010 and 2009, respectively, and was included in Financial Services revenues. These changes in fair value were mostly offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages were $20.3 million and $12.0 million during the three months ended June 30, 2010 and 2009, respectively, and $35.1 million and $22.0 million for the six months ended June 30, 2010 and 2009, respectively, and have been included in Financial Services revenues.

Mortgage servicing rights

The Company sells its servicing rights monthly on a flow basis through fixed price servicing contracts. In accordance with Staff Accounting Bulletin No. 109, the Company recognizes the fair value of its rights to service a mortgage loan as revenue at the time of entering into an interest rate lock commitment with a borrower. Due to the short period of time the servicing rights are held, the Company does not amortize the servicing asset. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, generally within 90 to 120 days after sale. The Company establishes reserves for this liability at the time the sale is recorded. Such reserves totaled $0.6 million and $1.8 million at June 30, 2010 and December 31, 2009, respectively, and are included in accrued and other liabilities. Servicing rights recognized in Financial Services revenues totaled $6.1 million and $4.3 million during the three months ended June 30, 2010 and 2009, respectively, and $12.8 million and $7.2 million during the six months ended June 30, 2010 and 2009, respectively.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

1. Basis of presentation and significant accounting policies (continued)

 

Derivative instruments and hedging activities

The Company is 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, the Company uses 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. The Company does not use any derivative financial instruments for trading purposes. The Company enters 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 recognized in current period earnings and the fair value is reflected in other assets or other liabilities in the Condensed Consolidated Balance Sheets. The gains and losses are included in Financial Services revenues.

Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. At June 30, 2010 and December 31, 2009, the Company had interest rate lock commitments in the amount of $176.7 million and $126.9 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since the Company can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements of the Company. The Company evaluates the creditworthiness of these transactions through its normal credit policies.

Cash forward placement contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Whole loan investor commitments are obligations of the investor to buy loans at a specified price within a specified time period. Mandatory cash forward contracts on mortgage-backed securities are the predominant derivative financial instruments used to minimize the market risk during the period from the time the Company extends an interest rate lock to a loan applicant until the time the loan is sold to an investor. Forward contracts are valued based on market prices for similar instruments. Fair values for whole loan commitments are based on market prices for similar instruments from the specific whole loan investor. At June 30, 2010, the Company had unexpired cash forward contracts and whole loan investor commitments of $318.5 million and $61.7 million, respectively, compared with cash forward contracts and whole loan investor commitments of $257.9 million and $23.8 million, respectively, at December 31, 2009.

There are no credit-risk-related contingent features within the Company’s derivative agreements. Gains and losses on interest rate lock commitments are offset by corresponding gains or losses on forward contracts and whole loan commitments. At June 30, 2010, the maximum length of time that the Company was exposed to the variability in future cash flows of derivative instruments was approximately 75 days.

The fair value of the Company’s derivative instruments and their location in the Condensed Consolidated Balance Sheet is summarized below ($000’s omitted):

 

     June 30, 2010    December 31, 2009
     Other Assets    Other Liabilities    Other Assets    Other Liabilities

Interest rate lock commitments

   $ 9,091    $ 12    $ 2,213    $ 298

Forward contracts

     229      6,653      2,703      228

Whole loan commitments

     1,343      26      920      10
                           
   $ 10,663    $ 6,691    $ 5,836    $ 536
                           

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

1. Basis of presentation and significant accounting policies (continued)

 

New accounting pronouncements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140,” (codified in “ASC 860”). ASC 860 requires enhanced disclosures regarding transfers of financial assets and continuing exposure to the related risks. ASC 860 also eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The Company adopted ASC 860 as of January 1, 2010, which did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (codified in “ASU 2009-17”). ASU 2009-17 amended the consolidation guidance for VIEs, requires ongoing reassessment to determine whether a VIE must be consolidated, and requires additional disclosures regarding involvement with variable interest entities and any significant changes in risk exposure due to that involvement. The Company adopted ASU 2009-17 as of January 1, 2010. As a result of the adoption, the Company de-consolidated six VIEs that were consolidated at December 31, 2009, which reduced land, not owned, under option agreements and accrued and other liabilities in the Consolidated Balance Sheets by $47.1 million.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), amending ASC 820 to increase disclosure requirements regarding recurring and nonrecurring fair value measurements. The Company adopted ASU 2010-06 as of January 1, 2010, except for the disclosures about activity in Level 3 fair value measurements which will be effective for the Company’s fiscal year beginning January 1, 2011. The adoption of ASC 820 did not have a material impact on the Company’s financial statements and is not expected to have a material impact on the Company’s financial statements once fully implemented.

In March 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements.” This update removes the requirements for an SEC filer to disclose a date through which subsequent events are evaluated in both issued and revised financial statements, alleviating potential conflicts with the SEC’s requirements. ASU 2010-09 was effective for the Company upon issuance. The adoption did not have a material impact on the Company’s financial statements.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger

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

Pursuant to the terms and conditions of the Merger Agreement, PulteGroup acquired all of the outstanding shares of Centex common stock at the fixed exchange ratio of 0.975 shares of PulteGroup common stock for each share of Centex common stock. In addition, the majority of the restricted shares of Centex common stock and restricted stock units with respect to Centex common stock granted under Centex’s employee and director stock plans vested and were converted per the exchange ratio into PulteGroup common stock or units with respect to PulteGroup common stock. Each outstanding vested and unvested Centex stock option granted under Centex’s employee and director stock plans was converted into a vested option to purchase shares of PulteGroup common stock, with adjustments to reflect the exchange ratio.

The Merger Agreement required that, with respect to Centex stock options that were granted with an exercise price less than $40.00 per share, the terms of the converted, vested options to purchase shares of PulteGroup common stock provided that, if the holder of the option experiences a severance-qualifying termination of employment during the two-year period following the completion of the merger, the stock option remained exercisable until the later of (1) the third anniversary of the date of the termination of employment and (2) the date on which the option would cease to be exercisable in accordance with its terms (or, in either case, if earlier, the expiration of the scheduled term of the option). This provision will result in an immaterial amount of incremental expense in the post-merger period.

The Centex merger was accounted for in accordance with ASC 805, “Business Combinations”. For accounting purposes, PulteGroup was treated as the acquirer, and the consideration transferred was computed based on PulteGroup’s common stock closing price of $12.33 per share on August 18, 2009, the date the merger was consummated. The acquired assets and assumed liabilities were recorded by PulteGroup at their estimated fair values, with certain limited exceptions. PulteGroup determined the estimated fair values with the assistance of appraisals or valuations performed by independent third party specialists, discounted cash flow analyses, quoted market prices where available, and estimates made by management. To the extent the consideration transferred exceeded the fair value of net assets acquired, such excess was assigned to goodwill.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger (continued)

 

The following table summarizes the calculation of the fair value of the total consideration transferred and the amounts recognized as of the acquisition date (000’s omitted, except per share data):

 

Calculation of consideration transferred

  

Centex common shares exchanged (including restricted stock)

     124,484   

Centex restricted stock units exchanged

     373   
        
     124,857   

Exchange ratio

     0.975   
        

PulteGroup common shares and restricted stock units issued

     121,736   

Closing price per share of PulteGroup common stock, as of August 18, 2009

   $ 12.33   
        

Consideration attributable to common stock

   $ 1,501,005   

Consideration attributable to PulteGroup equity awards exchanged for Centex equity awards (a)

     4,036   

Cash paid for fractional shares

     50   
        

Total consideration transferred

   $ 1,505,091   
        

Assets acquired and liabilities assumed

  

Cash and equivalents

   $ 1,748,792   

Restricted cash

     24,037   

Inventory

     2,053,329   

Residential mortgage loans available-for sale

     129,955   

Intangible assets

     100,000   

Goodwill (b)

     1,461,422   

Other assets

     447,274   
        

Total assets acquired

     5,964,809   

Accounts payable

     (111,905

Accrued and other liabilities

     (1,121,443

Income tax liabilities

     (141,054

Senior notes

     (3,085,316
        

Total liabilities assumed

     (4,459,718
        

Total net assets acquired

   $ 1,505,091   
        

 

(a) Reflects the portion of the fair value of the awards attributable to pre-merger employee service. The remaining fair value of the awards will be recognized in PulteGroup’s operating results over the applicable periods.
(b) Goodwill resulting from the Centex merger is not deductible for federal income tax purposes, though as of the merger date Centex had approximately $39 million of goodwill deductible for tax purposes related to prior acquisitions.

Cash and equivalents, other assets, accounts payable, and accrued and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Because Centex had elected the fair value option under ASC 825 for its residential mortgage loans available-for-sale, the historical carrying value of such assets equaled their fair value. Income tax receivables and liabilities were recorded at historical carrying values in accordance with ASC 805. The fair value of assumed senior notes was determined based on quoted market prices.

The Company determined the fair value of inventory on a community-by-community basis primarily using a combination of market comparable land transactions, where available, and discounted cash flow models, though independent appraisals were also utilized in certain instances. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sales 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. See Note 5 for additional discussion of the factors impacting the fair value of land inventory.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger (continued)

 

The fair values for acquired intangible assets were determined based on valuations performed by independent valuation specialists. Of the $100.0 million of acquired intangible assets, $96.0 million related to tradenames that will generally be amortized over 20 years. Amortization expense for these assets totaled $1.2 million and $2.5 million for the three and six months ended June 30, 2010, respectively, and is included in the Consolidated Statements of Operations within other expense (income), net. The remaining $4.0 million of acquired intangible assets related to acquired backlog at August 18, 2009 and was amortized in 2009 as the related customer orders closed.

During the three months ended June 30, 2010, the Company completed its business combination accounting. This resulted in an increase to goodwill of $2.5 million related to the completion of a final valuation of self-insurance liabilities assumed with the Centex merger.

Goodwill largely consists of the expected economic value attributable to Centex’s deferred tax assets and expected synergies resulting from the merger. As of the merger date, Centex had $1.3 billion of deferred tax assets, which were substantially offset by a valuation allowance due to the uncertainty of realization. While the ultimate realization of these deferred tax assets is dependent upon the generation of taxable income during future periods, the Company believes that such assets have a significant economic value given their long life and the Company’s expectations regarding future operating results. As discussed in Note 9, a portion of the economic value of these deferred tax assets was recognized in the fourth quarter of 2009. The Company also expects the combined entity to achieve significant savings in corporate and divisional overhead costs and interest costs. Additional synergies are expected in the areas of purchasing leverage and integrating the combined organization’s best practices in operational effectiveness. The Company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional brands.

Supplemental pro forma information

The following represents pro forma operating results as if Centex had been included in the Company’s Condensed Consolidated Statements of Operations as of January 1, 2009 ($000’s omitted, except per share data):

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 

Revenue

   $ 1,252,553      $ 2,659,660   

Net loss

   $ (107,588   $ (1,031,157

Loss per common share - basic and diluted

   $ (0.29   $ (2.74

The supplemental pro forma operating results have been determined after adjusting the operating results of Centex to reflect additional amortization that would have been recorded assuming the fair value adjustments to intangible assets had been applied as of January 1, 2009. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts. Additionally, given the significant volatility in the homebuilding industry in recent periods, such a presentation would not be indicative of future operating results.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

3. Goodwill

Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the merger date, has been recorded in connection with various acquisitions and 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. As further explained in Note 2, the Company recorded $1.5 billion of goodwill in connection with the Centex merger. In accordance with ASC 350, management evaluates the recoverability of goodwill by comparing the carrying value of the Company’s reporting units to their fair value. Fair value is determined using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value. Impairment is measured as the difference between the resulting implied fair value of goodwill and the recorded carrying value. The determination of fair value is significantly impacted by estimates related to current market valuations, current and future economic conditions in each of the Company’s geographical markets, and the Company’s strategic plans within each of its markets. Due to uncertainties in the estimation process and significant volatility in demand for new housing, actual results could differ significantly from such estimates. The determinations of fair value in allocating goodwill at the Centex merger date (August 18, 2009) and at the goodwill impairment assessment date (October 31, 2009) followed the same process using similar long-term assumptions. The primary difference is that the valuation at the merger date was based on only the acquired Centex operations reconciled to the purchase price for the Centex merger while the valuation at the assessment date was based on the integrated operations of each reporting unit reconciled to the Company’s overall market capitalization. This valuation approach at the assessment date was consistent with the Company’s operating structure following the merger in that all acquired Centex operations were integrated with the Pulte operations and managed and forecasted at the local market level, not according to legacy operations.

During the fourth quarter of 2009, the Company performed its annual goodwill impairment test and determined that $563.0 million of goodwill was impaired. This impairment resulted from a number of factors, including:

 

   

a significant decline in the Company’s overall market capitalization between the Centex merger date and the goodwill assessment date, which implied that the fair values of the Company’s reporting units had decreased;

 

   

the requirement under ASC 350 to allocate all goodwill to the Company’s 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; and

 

   

the relationship of the Company’s market capitalization to the Company’s stockholders’ equity, which were approximately equal. This implied that some reporting units would likely have an excess of fair value above carrying value while others would have a deficiency, which is consistent with the impairment results.

If management’s expectations of future results and cash flows for any of its reporting units decrease significantly, goodwill may be further impaired. Also, while not directly triggering an impairment of goodwill, a significant decrease in the Company’s market capitalization in the future may indicate that the fair value of one or more of the Company’s reporting units has decreased, which may result in an impairment of goodwill. Of the Company’s remaining goodwill of $895.5 million at June 30, 2010, $543.9 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.

As explained in Note 2, the Company recorded an increase of $2.5 million to goodwill in the three months ended June 30, 2010 in conjunction with completing its business combination accounting for the Centex merger. As a result, the Company reperformed the fourth quarter 2009 goodwill impairment test using the revised goodwill figure and recorded an additional impairment of $1.4 million. We recorded the impairment in other expense (income), net in the Consolidated Statements of Operations for the three and six months ended June 30, 2010. The Company also disposed of $1.6 million of goodwill in connection with the sale of the retail title operations acquired with the Centex merger. The following summarizes the change in goodwill during 2010 ($000’s omitted):

 

Balance at December 31, 2009

   $ 895,918   

Adjustments

     2,514   

Impairments

     (1,375

Dispositions

     (1,593
        

Balance at June 30, 2010

   $ 895,464   
        

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Restructuring

The Company has taken a series of actions both in response to the challenging operating environment and in connection with the Centex merger that were designed to reduce ongoing operating costs and improve operating efficiencies. As a result of the combination of these actions, the Company incurred total restructuring charges as summarized below ($000’s omitted):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Employee severance benefits

   $ 1,438    $ 1,171    $ 4,831    $ 3,969

Lease exit costs

     1,868      322      2,654      2,394

Other

     —        1      569      88
                           

Total restructuring charges

   $ 3,306    $ 1,494    $ 8,054    $ 6,451
                           

Financial Services expenses for the three and six months ended June 30, 2010 include $1.2 million and $1.5 million, respectively, of total restructuring charges. All other employee severance benefits are included within selling, general and administrative expense while all other lease exit and other costs are included in other expense (income), net in the Consolidated Statements of Operations. The remaining liabilities for employee severance benefits and exited leases totaled $4.2 million and $28.5 million, respectively, at June 30, 2010 and $14.2 million and $38.6 million, respectively, at December 31, 2009. Substantially all of the employee severance benefits will be paid in 2010, while cash expenditures related to lease exit costs will be incurred over the remaining terms of the applicable office leases, which generally extend several years. The restructuring costs relate to each of the Company’s reportable segments and were not material to any one segment.

 

5. Inventory and land held for sale

Major components of the Company’s inventory were as follows ($000’s omitted):

 

     June 30,
2010
   December 31,
2009

Homes under construction

   $ 1,456,878    $ 1,492,894

Land under development

     2,531,471      2,370,876

Land held for future development

     894,700      1,076,588
             
   $ 4,883,049    $ 4,940,358
             

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Inventory and land held for sale (continued)

 

The Company capitalizes interest cost into inventory during the active development and construction of the Company’s 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 the three and six months ended June 30, 2010 included $5.2 million and $6.2 million, respectively, of capitalized interest related to land and community valuation adjustments compared with $10.2 million and $42.0 million, respectively for the three and six months ended June 30, 2009. The level of the Company’s active inventory was lower than the Company’s debt level at June 30, 2010. Therefore, $0.6 million of Homebuilding interest costs were expensed directly to interest expense. As a result of the Company’s inventory management strategies and potential future inventory impairments, it is reasonably possible that the Company’s debt levels will continue to exceed the amount of the Company’s active inventory at some point during the remainder of 2010, which would require the Company to expense some portion of its Homebuilding interest costs as incurred.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Interest in inventory, beginning of period

   $ 281,261      $ 168,351      $ 239,365      $ 170,020   

Interest capitalized

     67,289        52,365        136,185        105,701   

Interest expensed

     (37,928     (33,318     (64,928     (88,323
                                

Interest in inventory, end of period

   $ 310,622      $ 187,398      $ 310,622      $ 187,398   
                                

Homebuilding interest incurred*

   $ 67,878      $ 52,365      $ 136,774      $ 105,701   
                                

 

* Homebuilding interest incurred includes interest on senior debt, short-term borrowings, and other financing arrangements and excludes interest incurred by the Financial Services segment and certain other interest costs.

Land Valuation Adjustments and Write-Offs

Land and community valuation adjustments

In accordance with ASC 360, “Property, Plant, and Equipment” (“ASC 360”), the Company records 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. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. For communities that are not yet active, a significant additional consideration includes an evaluation of the regulatory environment related to the probability, timing, and cost of obtaining necessary approvals from local municipalities and any potential concessions that may be necessary in order to obtain such approvals.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Inventory and land held for sale (continued)

 

Land and community valuation adjustments (continued)

 

The Company also considers potential changes to the product offerings in a community and any alternative strategies for the land, such as the sale of the land either in whole or in parcels. The weak market conditions throughout the homebuilding industry in recent years have resulted in lower than expected revenues and gross margins. As a result, a portion of the Company’s land inventory and communities under development demonstrated potential impairment indicators and were accordingly tested for impairment. As required by ASC 360, the Company compared the expected undiscounted cash flows for these communities to their carrying values. For those communities whose carrying values exceeded the expected undiscounted cash flows, the Company calculated the fair value of the community in accordance with ASC 360. Impairment charges are required to be recorded if the fair value of the community’s inventory is less than its carrying value.

The Company determines the fair value of a community’s inventory primarily using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sales 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. The assumptions used in the discounted cash flow models are specific to each community tested for impairment and typically do not assume improvements in market conditions except in the latter years of long-lived 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. The Company’s determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community’s fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community’s cash flow streams. For example, communities that are entitled and near completion will generally require a lower discount rate than communities that are not entitled and consist of multiple phases spanning several years of development and construction activity.

The table below provides, as of the date indicated, the number of communities in which the Company recognized impairment charges, the fair value of those communities at such date (net of impairment charges), and the amount of impairment charges recognized ($ in millions):

 

     2010    2009

Quarter Ended

   Number of
Communities
Impaired
   Fair Value of
Communities
Impaired, Net
of Impairment
Charges
   Impairment
Charges
   Number of
Communities
Impaired
   Fair Value of
Communities
Impaired, Net
of Impairment
Charges
   Impairment
Charges

March 31

   10    $ 7.2    $ 4.5    116    $ 351.2    $ 358.6

June 30

   16      35.1      25.6    43      82.4      109.2
                         
         $ 30.1          $ 467.8
                         

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Inventory and land held for sale (continued)

 

The Company recorded these valuation adjustments in its Consolidated Statements of Operations within Homebuilding home cost of revenues. During the three months ended June 30, 2010, the Company reviewed each of its land positions for potential impairment indicators and performed detailed impairment calculations for approximately 30 communities. The discount rate used in the Company’s determination of fair value for the impaired communities ranged from 12% to 18%, with an aggregate average of 13%. The overall stabilization experienced in the homebuilding industry resulted in a significant reduction in the level of valuation adjustments recorded during the three and six months ended June 30, 2010 as compared with the same periods in 2009. However, if conditions in the homebuilding industry or the Company’s local markets worsen in the future, the current difficult market conditions extend beyond the Company’s expectations, or the Company’s strategy related to certain communities changes, the Company may be required to evaluate its assets, including additional projects, for future impairments or write-downs, which could result in future charges that might be significant.

Net realizable value adjustments – land held for sale

The Company acquires land primarily for the construction of homes for sale to customers but periodically sells select parcels of land to third parties for commercial or other development. Additionally, the Company may determine that certain of its land assets no longer fit into its strategic operating plans. In such instances, the Company classifies the land asset as land held for sale, assuming the criteria in ASC 360 are met.

In accordance with ASC 360, the Company values land held for sale at the lower of carrying value or fair value less costs to sell. In determining the fair value of land held for sale, the Company considers recent legitimate offers received, prices for land in recent comparable sales transactions, and other factors. As a result of changing market conditions in the real estate industry, a portion of the Company’s land held for sale was adjusted to net realizable value. During the three month periods ended June 30, 2010 and 2009, the Company recognized net realizable value adjustments related to land held for sale of $(0.2) million and $7.3 million, respectively, and $0.4 million and $7.9 million for the six months ended June 30, 2010 and 2009, respectively. The Company records these net realizable value adjustments in its Consolidated Statements of Operations within Homebuilding land cost of revenues.

The Company’s land held for sale was as follows ($000’s omitted):

 

     June 30,
2010
    December 31,
2009
 

Land held for sale, gross

   $ 79,671      $ 84,495   

Net realizable value reserves

     (25,505     (25,850
                

Land held for sale, net

   $ 54,166      $ 58,645   
                

Write-off of deposits and pre-acquisition costs

From time to time, the Company writes off certain deposits and pre-acquisition costs related to land option contracts the Company no longer plans to pursue. Such decisions take into consideration changes in national and local market conditions, the willingness of land sellers to modify terms of the related purchase agreement, the timing of required land takedowns, the availability and best use of necessary incremental capital, and other factors. The Company wrote off (net of recoveries) deposits and pre-acquisition costs in the amount of $2.3 million and $0.3 million during the three months ended June 30, 2010 and 2009, respectively, and $2.9 million and $1.0 million for the six months ended June 30, 2010 and 2009, respectively. The Company records these write-offs of deposits and pre-acquisition costs in its Consolidated Statements of Operations within other expense (income), net.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

6. Segment information

The Company’s Homebuilding operating segments are 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. The Company has determined that its Homebuilding operating segments are its Areas. In the third quarter of 2009, in connection with the Centex merger, the Company realigned the organizational structure for certain of its markets. The operating data by segment provided in this note have been reclassified to conform to the current presentation. Accordingly, the Company’s reportable Homebuilding segments are located in the following geographies:

 

Northeast:   

Connecticut, Delaware, Maryland, Massachusetts, New Jersey,

New York, Pennsylvania, Rhode Island, Virginia, District of Columbia

Southeast:    Georgia, North Carolina, South Carolina, Tennessee
Gulf Coast:    Florida, Texas
Midwest:    Colorado, Illinois, Indiana, Missouri, Michigan, Minnesota, Ohio
Southwest:    Arizona, Nevada, New Mexico
*West:    California, Oregon, Washington

 

* The Company’s homebuilding operations located in Reno, Nevada are reported in the West segment, while its 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.

The Company also has one reportable segment for its financial services operations, which consist principally of mortgage banking and title operations. The Company’s Financial Services segment operates generally in the same markets as the Company’s Homebuilding segments.

Evaluation of segment performance is based on operating earnings from continuing operations before provision for income taxes which, for the Homebuilding segments, is defined as home sales (settlements) and land sale revenues less home cost of revenues, land cost of revenues, and certain selling, general, and administrative and other expenses, plus equity income from unconsolidated entities, which are incurred by or allocated to the Homebuilding segments. Operating earnings for the Financial Services segment is defined as revenues less costs associated with the Company’s mortgage and title operations and certain selling, general, and administrative expenses incurred by or allocated to the Financial Services segment. Each reportable segment generally follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

6. Segment information (continued)

 

     Operating Data by Segment ($000’s omitted)  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Revenues:

        

Northeast

   $ 200,555      $ 95,640      $ 388,785      $ 149,300   

Southeast

     224,629        85,268        397,618        161,853   

Gulf Coast

     349,400        158,796        604,207        302,718   

Midwest

     157,142        70,122        257,199        140,500   

Southwest

     126,534        138,231        229,904        273,621   

West

     189,969        109,825        358,878        195,233   

Other homebuilding (a)

     21,506        —          22,936        —     
                                
     1,269,735        657,882        2,259,527        1,223,225   

Financial Services

     36,163        20,698        66,729        39,247   
                                

Consolidated revenues

   $ 1,305,898      $ 678,580      $ 2,326,256      $ 1,262,472   
                                

Income (loss) before income taxes:

        

Northeast

   $ 11,800      $ (11,088   $ 19,507      $ (129,463

Southeast

     14,895        (22,899     21,777        (41,141

Gulf Coast

     17,137        (40,624     13,739        (146,072

Midwest

     1,198        (9,758     (2,316     (47,804

Southwest

     6,147        (43,983     9,922        (176,483

West

     7,893        (24,229     20,999        (69,702

Other homebuilding (a)

     (47,271     (34,902     (83,665     (84,251
                                
     11,799        (187,483     (37     (694,916

Financial Services (b)

     (8,585     (9,370     (3,113     (10,118
                                

Total segment income (loss) before income taxes

     3,214        (196,853     (3,150     (705,034

Other non-operating (c)

     (8,940     9,924        (17,084     5,859   
                                

Consolidated loss before income taxes (d)

   $ (5,726   $ (186,929   $ (20,234   $ (699,175
                                

 

(a) Other homebuilding includes the Company’s operations in Hawaii and Puerto Rico, certain wind down operations, amortization of intangible assets, and amortization of capitalized interest. Capitalized interest amortization totaled $37.9 million and $33.3 million for the three months ended June 30, 2010 and 2009, respectively, and $64.9 million and $88.3 million for the six months ended June 30, 2010 and 2009, respectively.
(b) Financial Services income before income taxes includes interest expense of $0.6 million and $0.3 million for the three months ended June 30, 2010 and 2009, respectively, and $1.1 million and $0.6 million for the six months ended June 30, 2010 and 2009, respectively. Financial Services income before income taxes includes interest income of $1.5 million and $1.2 million for the three months ended June 30, 2010 and 2009, respectively, and $2.9 million and $3.1 million for the six months ended June 30, 2010 and 2009, respectively.
(c) Other non-operating includes the costs of certain shared services that benefit all operating segments, a portion of which are not allocated to the operating segments reported above.
(d) Consolidated loss before income taxes includes selling, general and administrative expenses of $157.4 million and $122.3 million for the three months ended June 30, 2010 and 2009, respectively, and $318.7 million and $248.8 million for the six months ended June 30, 2010 and 2009, respectively.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

6. Segment information (continued)

 

     Valuation Adjustments and
Write-Offs by Segment ($000’s omitted)
 
     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2010     2009    2010     2009  

Land and community valuation adjustments:

         

Northeast

   $ 382      $ 26    $ 382      $ 74,501   

Southeast

     95        16,168      95        24,316   

Gulf Coast

     5,276        30,828      8,027        121,897   

Midwest

     4,266        7,185      4,570        35,044   

Southwest

     —          20,844      —          111,108   

West

     10,335        23,973      10,798        58,984   

Other homebuilding (a)

     5,192        10,212      6,211        41,974   
                               
   $ 25,546      $ 109,236    $ 30,083      $ 467,824   
                               

Net realizable value adjustments (NRV) - land held for sale:

         

Northeast

   $ —        $ 4,574    $ —        $ 4,796   

Southeast

     —          310      —          310   

Gulf Coast

     (184     2,327      321        3,024   

Midwest

     —          —        —          —     

Southwest

     —          —        —          —     

West

     —          50      59        (277
                               
   $ (184   $ 7,261    $ 380      $ 7,853   
                               

Write-off of deposits and pre-acquisition costs (b):

         

Northeast

   $ 27      $ 100    $ (3   $ 279   

Southeast

     151        86      218        530   

Gulf Coast

     21        46      495        46   

Midwest

     10        —        30        1   

Southwest

     45        —        47        (1

West

     2,055        107      2,065        117   
                               
   $ 2,309      $ 339    $ 2,852      $ 972   
                               

Impairments of investments in unconsolidated joint ventures:

         

Northeast

   $ —        $ —      $ —        $ 31,121   

Southwest

     —          —        —          19,305   

West

     —          —        1,908        —     

Other homebuilding

     —          2,428      —          2,428   
                               
   $ —        $ 2,428    $ 1,908      $ 52,854   
                               

Total valuation adjustments and write-offs

   $ 27,671      $ 119,264    $ 35,223      $ 529,503   
                               

 

(a) Includes $5.2 million and $6.2 million of write-offs of capitalized interest related to land and community valuation adjustments during the three and six months ended June 30, 2010, respectively, and $10.2 million and $42.0 million for the three and six months ended June 30, 2009, respectively.
(b) Includes settlements related to costs previously in dispute and considered non-recoverable.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

6. Segment information (continued)

 

Total assets and inventory by reportable segment were as follows ($000’s omitted):

 

     June 30, 2010
     Homes Under
Construction
   Land Under
Development
   Land Held
for Future
Development
   Total
Inventory
   Total
Assets

Northeast

   $ 243,714    $ 476,627    $ 152,643    $ 872,984    $ 1,017,593

Southeast

     231,773      330,577      130,580      692,930      748,937

Gulf Coast

     325,622      650,027      226,136      1,201,785      1,399,747

Midwest

     182,682      228,428      26,742      437,852      461,679

Southwest

     188,430      489,536      179,378      857,344      948,919

West

     208,789      159,666      110,015      478,470      574,754

Other homebuilding (a)

     75,868      196,610      69,206      341,684      1,435,951
                                  
     1,456,878      2,531,471      894,700      4,883,049      6,587,580

Financial Services

     —        —        —        —        319,555

Other non-operating (b)

     —        —        —        —        3,008,361
                                  
   $ 1,456,878    $ 2,531,471    $ 894,700    $ 4,883,049    $ 9,915,496
                                  
     December 31, 2009
     Homes Under
Construction
   Land Under
Development
   Land Held
for Future
Development
   Total
Inventory
   Total
Assets

Northeast

   $ 273,238    $ 256,486    $ 382,828    $ 912,552    $ 1,169,059

Southeast

     213,216      356,295      68,408      637,919      788,289

Gulf Coast

     318,598      684,598      229,251      1,232,447      1,427,229

Midwest

     172,900      241,069      28,760      442,729      468,192

Southwest

     191,145      522,709      165,604      879,458      951,346

West

     239,613      166,948      126,262      532,823      634,012

Other homebuilding (a)

     84,184      142,771      75,475      302,430      1,463,359
                                  
     1,492,894      2,370,876      1,076,588      4,940,358      6,901,486

Financial Services

     —        —        —        —        250,828

Other non-operating (b)

     —        —        —        —        2,898,908
                                  
   $ 1,492,894    $ 2,370,876    $ 1,076,588    $ 4,940,358    $ 10,051,222
                                  

 

(a) Other homebuilding primarily includes operations in Hawaii, Puerto Rico, certain wind down operations, and capitalized interest, goodwill, and intangibles.
(b) Other non-operating primarily includes cash and equivalents, income taxes receivable, and other corporate items that are not allocated to the operating segments.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

7. Investments in unconsolidated entities

The Company participates in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes in the United States and Puerto Rico. A summary of the Company’s joint ventures is presented below ($000’s omitted):

 

     June 30,
2010
   December 31,
2009

Number of joint ventures with limited recourse guaranties

     2      3

Number of joint ventures with debt non-recourse to Pulte

     3      5

Number of other active joint ventures

     21      19
             

Total number of active joint ventures

     26      27
             

Investments in joint ventures with limited recourse guaranties

   $ —      $ 19,611

Investments in joint ventures with debt non-recourse to Pulte

     13,145      12,859

Investments in other joint ventures

     73,990      41,345
             

Total investments in unconsolidated entities

   $ 87,135    $ 73,815
             

Total joint venture debt

   $ 18,899    $ 69,488

Pulte’s proportionate share of joint venture debt:

     

Joint venture debt with limited recourse guaranties

   $ 1,675    $ 18,970

Joint venture debt non-recourse to Pulte

     4,941      6,357
             

Pulte’s total proportionate share of joint venture debt

   $ 6,616    $ 25,327
             

During the three and six months ended June 30, 2010, the Company recognized income from its unconsolidated joint ventures of $5.5 million and $5.4 million, respectively, including impairments of $1.9 million for the six months ended June 30, 2010. During the three and six months ended June 30, 2009, the Company recognized a loss from its unconsolidated joint ventures of $2.5 million and $53.0 million, respectively, including impairments totaling $2.4 million and $52.9 million, respectively. During the six months ended June 30, 2010 and 2009, the Company made capital contributions of $19.6 million and $13.1 million, respectively, to its joint ventures and received capital and earnings distributions of $5.7 million and $0.3 million, respectively, from its joint ventures.

The timing of cash obligations under the joint venture and related financing agreements varies by agreement and in certain instances is contingent upon the joint venture’s sale of its land holdings. If additional capital infusions are required and approved, the Company would need to contribute its pro rata portion of those capital needs in order not to dilute its ownership in the joint ventures. While future capital contributions may be required, the Company believes the total amount of such contributions will be limited. The Company’s maximum financial loss exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals.

A joint venture agreement providing limited recourse guaranties requires the Company and other members of the joint venture to guarantee for the benefit of the lender the completion of the project if the joint venture does not perform the required development and an increment of interest on the loan. This joint venture defaulted under its debt agreement, and the lender has foreclosed on the joint venture’s property that served as collateral. During 2008, the lender also filed suit against the majority of the members of the joint venture, including the Company, in an effort to enforce the completion guaranty. While the Company believes it has meritorious defenses against the lawsuit, there is no assurance that the Company will not be required to pay damages under the completion guaranty. The Company’s maximum exposure should be limited to its proportionate share of the amount, if any, determined to be owed under such guaranties. Accordingly, the amount of any potential loss the Company might incur as a result of resolving this matter should not exceed the Company’s proportionate share of the joint venture’s outstanding principal plus accumulated interest as of the date the lender foreclosed on the property, the Company’s proportionate share of which totaled approximately $52.2 million, representing 12% of the total pre-foreclosure exposure of the joint venture, and which is excluded from the above table.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

7. Investments in unconsolidated entities (continued)

 

Additionally, the Company has agreed to indemnify the lenders for the two joint ventures with limited recourse guaranties for certain environmental contingencies, and the guaranty arrangements provide that the Company is responsible for its proportionate share of the outstanding debt if the joint venture voluntarily files for bankruptcy. The Company would not be responsible under these guaranties unless the joint venture was unable to meet its contractual borrowing obligations or in instances of fraud, misrepresentation, or other bad faith actions by the Company. To date, the Company has not been requested to perform under the bankruptcy or environmental guaranties described above.

In addition to the joint ventures with limited recourse guaranties, the Company has investments in other unconsolidated entities, some of which have debt. These investments include the Company’s joint ventures in Puerto Rico, which are in the liquidation stage, as well as other entities. The Company does not have any significant financing exposures related to these entities.

 

8. Shareholders’ equity

Pursuant to the two $100 million stock repurchase programs authorized by the Board of Directors in October 2002 and 2005, and the $200 million stock repurchase program authorized 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, though there were no repurchases under these programs during the three months ended June 30, 2010. The Company had remaining authorization to purchase $102.3 million of common stock at June 30, 2010.

Under its stock-based compensation plans, the Company accepts shares as payment under certain conditions related to stock option exercises and vesting of restricted stock, generally related to the payment of minimum tax obligations. During the six months ended June 30, 2010 and 2009, the Company repurchased $1.7 million and $1.6 million, respectively, of shares from employees under these plans. Such repurchases are excluded from the $400 million stock repurchase authorization.

Accumulated other comprehensive income (loss)

The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):

 

     June 30,
2010
    December 31,
2009
 

Foreign currency translation adjustments:

    

Mexico

   $ 54      $ 45   

Fair value of derivatives, net of income taxes of $2,086 in 2010 and 2009

     (2,125     (2,294
                
   $ (2,071   $ (2,249
                

 

9. Income taxes

The Company’s income tax (benefit) expense was $(82.0) million and $2.5 million for the three months ended June 30, 2010 and 2009, respectively, and $(84.0) million and $5.1 million for the six months ended June 30, 2010 and 2009, respectively. Due to the effects of our deferred tax valuation allowance and changes in our unrecognized tax benefits, our effective tax rates in 2010 and 2009 are not meaningful as our income tax (benefit) expense is not directly correlated to the amount of our pretax income (loss). The income tax benefits for 2010 were primarily due to the favorable resolution of certain federal and state income tax matters that resulted in a total income tax benefit of $87.4 million for the three and six months ended June 30, 2010.

The Company had income taxes receivable of $86.6 million and $955.2 million at June 30, 2010 and December 31, 2009, respectively. Income taxes receivable at December 31, 2009 related primarily to the carryback of 2009 federal net operating losses under 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 received federal income tax refunds of $881.6 million during the six months ended June 30, 2010. The income taxes receivable at June 30, 2010 generally represent federal and state tax refunds from amended returns and state net operating loss carrybacks.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

9. Income taxes (continued)

 

In accordance with ASC 740, “Income Taxes,” the Company evaluates its deferred tax assets to determine if a valuation allowance is required. At both June 30, 2010 and December 31, 2009, the Company had net deferred tax assets of $2.3 billion, which were offset by valuation allowances due to the uncertainty of realizing such deferred tax assets. The ultimate realization of these deferred tax assets is dependent upon the generation of taxable income during future periods. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.

As a result of the Company’s merger with Centex, the Company’s ability to use certain of Centex’s pre-ownership net operating losses and built-in losses or deductions will be limited under Section 382 of the Internal Revenue Code. The Company’s Section 382 limitation is approximately $68.0 million per year for net operating losses, 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 net operating loss carryforwards, built-in losses, and certain deductions not being available for use by the Company.

At June 30, 2010 and December 31, 2009, the Company had $248.2 million and $326.1 million, respectively, of gross unrecognized tax benefits and $62.4 million and $80.6 million, respectively, of accrued penalties and interest. The decreases in unrecognized tax benefits and accrued penalties and interest were primarily attributable to the aforementioned favorable resolution of certain federal and state income tax matters. The Company is currently under examination by the IRS and various state taxing jurisdictions and anticipates finalizing certain examinations within the next twelve months. The final outcome of those examinations is not yet determinable. It is reasonably possible, within the next twelve months, that the Company’s unrecognized tax benefits may decrease by $72.7 million, excluding interest and penalties, primarily due to potential settlements and expirations of certain statutes of limitations. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for tax years 1998-2010.

 

10. Fair value disclosures

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

 

Level 1 Fair value determined based on quoted prices in active markets for identical assets or liabilities.

 

Level 2 Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.

 

Level 3 Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

The Company’s financial instruments measured at fair value on a recurring basis are summarized below ($000’s omitted):

 

          Fair Value  at
June 30, 2010
 

Financial Instrument

   Level 1    Level 2     Level 3   

Residential mortgage loans available-for-sale

   $ —      $ 243,561      $ —      $ 243,561   

Whole loan commitments

     —        1,317        —        1,317   

Interest rate lock commitments

     —        5,450        —        5,450   

Forward contracts

     —        (6,423     —        (6,423
                              
   $ —      $ 243,905      $ —      $ 243,905   
                              

See Note 1 of these Condensed Consolidated Financial Statements regarding the fair value of mortgage loans available-for-sale and derivative instruments and hedging activities.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

10. Fair value disclosures (continued)

 

In addition, certain of the Company’s assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The Company’s assets measured at fair value on a non-recurring basis are summarized below ($000’s omitted):

 

         

Fair Value at

June 30, 2010

     Level 1    Level 2    Level 3   

Loans held for investment

   $ —      $ 5,945    $ —      $ 5,945

House and land inventory

     —        —        35,122      35,122
                           
   $ —      $ 5,945    $ 35,122    $ 41,067
                           

The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter. The Company measured certain of its loans held for investment at fair value since the cost of the loans exceeded their fair value. Fair value of the loans was determined based on the fair value of the underlying collateral. For house and land inventory, see Note 5 of these Condensed Consolidated Financial Statements for a more detailed discussion of the valuation method used.

The carrying amounts of cash and equivalents approximate their fair values due to their short-term nature. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. At June 30, 2010, the fair value of the senior notes outstanding approximated $4.1 billion compared with the carrying value of $4.3 billion. The carrying value of collateralized short-term debt approximates fair value. Borrowings under Financial Services’ credit lines are secured by residential mortgage loans available-for-sale. The carrying amounts of such borrowings approximate fair value.

 

11. Debt and other financing arrangements

The Company’s senior notes are summarized as follows ($000’s omitted):

 

     June 30,
2010
   December 31,
2009

4.55% unsecured senior notes, issued by Centex Corp. due 2010 (b)

   $ 47,689    $ 48,082

7.875% unsecured senior notes, issued by Centex Corp. due 2011 (b)

     87,992      90,046

8.125% unsecured senior notes, issued by PulteGroup, Inc. due 2011, (a)

     13,896      13,892

7.875% unsecured senior notes, issued by PulteGroup, Inc. due 2011 (c)

     132,056      131,995

7.50% unsecured senior notes, issued by Centex Corp. due 2012 (b)

     115,538      117,249

5.45% unsecured senior notes, issued by Centex Corp. due 2012 (b)

     128,494      128,916

6.25% unsecured senior notes, issued by PulteGroup, Inc. due 2013 (c)

     224,650      224,542

5.125% unsecured senior notes, issued by Centex Corp. due 2013 (b)

     260,346      258,874

5.25% unsecured senior notes, issued by PulteGroup, Inc. due 2014 (c)

     463,882      463,865

5.70% unsecured senior notes, issued by Centex Corp. due 2014 (b)

     337,865      336,299

5.2% unsecured senior notes, issued by PulteGroup, Inc. due 2015 (c)

     292,613      292,586

5.25% unsecured senior notes, issued by Centex Corp. due 2015 (b)

     418,444      415,262

6.50% unsecured senior notes, issued by Centex Corp. due 2016 (b)

     465,391      464,139

7.625% unsecured senior notes, issued by PulteGroup, Inc. due 2017 (a)

     149,210      149,156

7.875% unsecured senior notes, issued by PulteGroup, Inc. due 2032 (c)

     299,043      299,021

6.375% unsecured senior notes, issued by PulteGroup, Inc. due 2033 (c)

     398,307      398,271

6.0% unsecured senior notes, issued by PulteGroup, Inc. due 2035 (c)

     299,350      299,337

7.375% unsecured senior notes, issued by PulteGroup, Inc. due 2046 (d)

     150,000      150,000
             

Total senior notes - carrying value

   $ 4,284,766    $ 4,281,532
             

Estimated fair value

   $ 4,063,704    $ 4,087,269
             

 

(a) Not redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries
(b) Redeemable prior to maturity, assumed by PulteGroup, Inc., and guaranteed on a senior basis by certain wholly-owned subsidiaries
(c) Redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries
(d) Callable at par on or after June 1, 2011, guaranteed on a senior basis by certain wholly-owned subsidiaries

 

28


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Debt and other financing arrangements (continued)

 

Financial Services

Pulte Mortgage provides mortgage financing for many of the Company’s home sales and uses its own funds and borrowings made available pursuant to certain repurchase agreements and intercompany borrowings. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors. As of June 30, 2010, Pulte Mortgage had a combination of repurchase agreements in place that provided borrowing capacity totaling $105.0 million. Each of the agreements expires in September 2010.

 

12. Commitments and contingencies

Loan repurchase liabilities

The Company’s 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, the Company’s mortgage operations also provide limited indemnities for certain loans sold to the investors. If determined to be at fault, the Company either repurchases the loans from the investors or reimburses the investors’ losses. The Company establishes liabilities for such anticipated losses based upon, among other things, historical loss rates, trends in loan originations, and the geographic location of the underlying collateral. Effective with the Centex merger, the Company assumed loan repurchase liabilities totaling $52.6 million. Beginning in 2009, the Company experienced a significant increase in 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 the Company. The vast majority of these losses relate to loans originated in 2005 through 2007 when lending standards were less stringent and borrower fraud is believed to have peaked. Given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed the Company’s current estimates. Changes in these liabilities are as follows ($000’s omitted):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Liabilities, beginning of period

   $ 94,088      $ 2,823      $ 105,914      $ 3,240   

Provision for losses

     17,210        10,771        16,856        12,125   

Settlements

     (8,060     (2,069     (19,532     (3,840
                                

Liabilities, end of period

   $ 103,238      $ 11,525      $ 103,238      $ 11,525   
                                

Community development and other special district obligations

A community development district or similar development authority (“CDD”) is a unit of local government created under various state statutes that utilizes the proceeds from the sale of bonds to finance the construction or acquisition of infrastructure assets of a development. A portion of the liability associated with the bonds, including principal and interest, is assigned to each parcel of land within the development. This debt is typically paid by subsequent special assessments levied by the CDD on the landowners. Generally, the Company is only responsible for paying the special assessments for the period in which it is the landowner of the applicable parcels. However, in certain limited instances the Company records a liability for future assessments that are fixed or determinable for a fixed or determinable period in accordance with ASC 970-470, “Real Estate Debt”. At June 30, 2010 and December 31, 2009, the Company had recorded $214.8 million and $224.3 million, respectively, in accrued liabilities for outstanding CDD obligations.

Letters of credit and surety bonds

In the normal course of business, the Company posts letters of credit and surety bonds pursuant to certain performance related obligations, as security for certain land option agreements, and under various insurance programs. At June 30, 2010 and December 31, 2009 the Company had outstanding letters of credit and surety bonds totaling $1.9 billion and $2.0 billion, respectively.

 

29


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Commitments and contingencies (continued)

 

Letters of credit and surety bonds (continued)

 

In addition, the Company is subject to approximately $1.1 billion of surety bonds related to certain construction obligations of Centex’s previous commercial construction business, which was sold by Centex on March 30, 2007. The Company estimates that less than $150.0 million of work remains to be performed on these commercial construction projects. No event has occurred that has led the Company to believe that these bonds will be drawn upon. Additionally, the purchaser of the Centex commercial construction business has indemnified the Company against potential losses relating to such surety bond obligations. As additional security, the Company has purchased for its benefit a back-up indemnity provided by a financial institution with an investment grade credit rating. The obligation of such financial institution under the back-up indemnity is limited to $400 million and terminates in 2016, if not previously terminated by the Company.

Litigation

The Company is involved in various litigation incidental to its business operations. While the outcome of such litigation cannot be predicted with certainty, management does not believe that the resolution of such litigation will have a material adverse impact on the results of operations, financial position, or cash flows of the Company.

Self-insured risks

The Company has, and requires the majority of its subcontractors to have, general liability, property, errors and omissions, workers’ compensation, and other business insurance. These insurance policies protect the Company against a portion of its risk of loss from claims, subject to certain self-insured retentions, deductibles, and other coverage limits.

In certain instances in which the Company believes it is too difficult or expensive for its subcontractors to obtain general liability insurance, the Company may waive its traditional subcontractor general liability insurance requirements and purchase insurance policies from either third party carriers or one of the Company’s wholly-owned captive insurance subsidiaries, and name certain subcontractors as additional insureds. The policies issued by the captive insurance subsidiary represent self insurance of these risks by the Company. As compensation for assuming such additional risks, the Company either collects premiums or receives lower pricing from the subcontractors, depending on the program’s structure.

The Company reserves for costs to cover its self-insured and deductible amounts under these policies, some of which are maintained in its wholly-owned captive insurance subsidiaries, and for any costs of claims and related lawsuits, based on an analysis of the Company’s 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. The Company’s reserves for such items totaled $577.7 million and $566.7 million at June 30, 2010 and December 31, 2009 respectively. In certain instances, the Company has the ability to recover a portion of its costs under various insurance policies or from its subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

 

13. Supplemental Guarantor information

All of the Company’s senior notes are guaranteed jointly and severally on a senior basis by each of the Company’s wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the Guarantors). Such guaranties are full and unconditional. Supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

 

30


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2010

($000’s omitted)

 

     Unconsolidated            
     PulteGroup,
Inc.
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
PulteGroup,
Inc.

ASSETS

           

Cash and equivalents

   $ —        $ 2,371,648    $ 374,978      $ —        $ 2,746,626

Restricted cash

     —          4,034      24,967        —          29,001

Unfunded settlements

     —          27,476      (3,938     —          23,538

House and land inventory

     —          4,879,045      4,004        —          4,883,049

Land held for sale

     —          54,166      —          —          54,166

Land, not owned, under option agreements

     —          63,742      —          —          63,742

Residential mortgage loans available-for-sale

     —          —        243,561        —          243,561

Securities purchased under agreements to resell

     76,900        —        (76,900     —          —  

Investments in unconsolidated entities

     1,519        81,552      4,064        —          87,135

Goodwill

     —          895,464      —          —          895,464

Intangible assets, net

     —          181,998      —          —          181,998

Other assets

     30,053        527,968      62,564        —          620,585

Income taxes receivable

     86,631        —        —          —          86,631

Deferred income tax assets

     (29,784     31      29,753        —          —  

Investments in subsidiaries and intercompany accounts, net

     7,809,543        3,117,309      4,536,719        (15,463,571     —  
                                     
   $ 7,974,862      $ 12,204,433    $ 5,199,772      $ (15,463,571   $ 9,915,496
                                     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Accounts payable, customer deposits, accrued and other liabilities

   $ 109,878      $ 1,375,608    $ 489,624      $ —        $ 1,975,110

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

     —          —        75,402        —          75,402

Income tax liabilities

     298,432        —        —          —          298,432

Senior notes

     4,284,766        —        —          —          4,284,766
                                     

Total liabilities

     4,693,076        1,375,608      565,026        —          6,633,710

Total shareholders’ equity

     3,281,786        10,828,825      4,634,746        (15,463,571     3,281,786
                                     
   $ 7,974,862      $ 12,204,433    $ 5,199,772      $ (15,463,571   $ 9,915,496
                                     

 

31


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2009

($000’s omitted)

 

     Unconsolidated            
     PulteGroup,
Inc.
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
PulteGroup,
Inc.

ASSETS

           

Cash and equivalents

   $ —        $ 1,501,684    $ 356,550      $ —        $ 1,858,234

Restricted cash

     —          3,414      28,962        —          32,376

Unfunded settlements

     —          5,085      (2,932     —          2,153

House and land inventory

     —          4,935,821      4,537        —          4,940,358

Land held for sale

     —          58,645      —          —          58,645

Land, not owned, under option agreements

     —          174,132      —          —          174,132

Residential mortgage loans available-for-sale

     —          —        166,817        —          166,817

Investments in unconsolidated entities

     1,511        64,578      7,726        —          73,815

Goodwill

     —          895,918      —          —          895,918

Intangible assets, net

     —          188,548      —          —          188,548

Other assets

     36,007        599,795      69,238        —          705,040

Income taxes receivable

     955,186        —        —          —          955,186

Deferred income tax assets

     (30,149     31      30,118        —          —  

Investments in subsidiaries and intercompany accounts, net

     6,993,438        3,770,005      4,352,881        (15,116,324     —  
                                     
   $ 7,955,993      $ 12,197,656    $ 5,013,897      $ (15,116,324   $ 10,051,222
                                     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Accounts payable, customer deposits, accrued and other liabilities

   $ 119,100      $ 1,570,406    $ 506,429      $ —        $ 2,195,935

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

     —          —        18,394        —          18,394

Income tax liabilities

     360,921        —        —          —          360,921

Senior notes

     4,281,532        —        —          —          4,281,532
                                     

Total liabilities

     4,761,553        1,570,406      524,823        —          6,856,782

Total shareholders’ equity

     3,194,440        10,627,250      4,489,074        (15,116,324     3,194,440
                                     
   $ 7,955,993      $ 12,197,656    $ 5,013,897      $ (15,116,324   $ 10,051,222
                                     

 

32


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended June 30, 2010

($000’s omitted)

 

     Unconsolidated              
     PulteGroup,
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
PulteGroup,
Inc.
 

Revenues

          

Homebuilding

          

Home sale revenues

   $ —        $ 1,262,990      $ —        $ —        $ 1,262,990   

Land sale revenues

     —          6,745        —          —          6,745   
                                        
     —          1,269,735        —          —          1,269,735   

Financial Services

     —          1,097        35,066        —          36,163   
                                        
     —          1,270,832        35,066        —          1,305,898   
                                        

Homebuilding Cost of Revenues

          

Home cost of revenues

     —          1,104,456        —          —          1,104,456   

Land cost of revenues

     —          2,563        —          —          2,563   
                                        
     —          1,107,019        —          —          1,107,019   

Financial Services expenses

     188        (2,782     47,366        —          44,772   

Selling, general and administrative expenses

     15,533        131,988        9,894        —          157,415   

Other expense (income), net

     (36     11,081        (1,811     —          9,234   

Interest income

     —          (2,176     (116     —          (2,292

Interest expense

     1,018        —          —          —          1,018   

Intercompany interest

     42,867        (42,937     70        —          —     

Equity in earnings (loss) of unconsolidated entities

     (1     (5,756     215        —          (5,542
                                        

Income (loss) before income taxes and equity in earnings (loss) of subsidiaries

     (59,569     74,395        (20,552     —          (5,726

Income tax expense (benefit)

     13,480        (92,996     (2,513     —          (82,029
                                        

Income (loss) before equity in earnings (loss) of subsidiaries

     (73,049     167,391        (18,039     —          76,303   

Equity in earnings (loss) of subsidiaries

     149,352        (10,643     137,487        (276,196     —     
                                        

Net income (loss)

   $ 76,303      $ 156,748      $ 119,448      $ (276,196   $ 76,303   
                                        

 

33


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the six months ended June 30, 2010

($000’s omitted)

 

     Unconsolidated              
     PulteGroup,
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
    Consolidated
PulteGroup,
Inc.
 

Revenues

          

Homebuilding

          

Home sale revenues

   $ —        $ 2,239,796      $ —        $ —        $ 2,239,796   

Land sale revenues

     —          19,731        —          —          19,731   
                                        
     —          2,259,527        —          —          2,259,527   

Financial Services

     —          2,019        64,710        —          66,729   
                                        
     —          2,261,546        64,710        —          2,326,256   
                                        

Homebuilding Cost of Revenues

          

Home cost of revenues

     —          1,954,551        —          —          1,954,551   

Land cost of revenues

     —          11,561        —          —          11,561   
                                        
     —          1,966,112        —          —          1,966,112   

Financial Services expenses

     371        (2,029     71,541        —          69,883   

Selling, general and administrative expenses

     33,514        264,277        20,930        —          318,721   

Other expense (income), net

     (45     4,970        (4,132     —          793   

Interest income

     —          (4,846     (225     —          (5,071

Interest expense

     1,500        —          —          —          1,500   

Intercompany interest

     83,907        (83,977     70        —          —     

Equity in earnings (loss) of unconsolidated entities

     (7     (5,390     (51     —          (5,448
                                        

Income (loss) before income taxes and equity in earnings (loss) of subsidiaries

     (119,240     122,429        (23,423     —          (20,234

Income tax expense (benefit)

     3,341        (83,925     (3,465     —          (84,049
                                        

Income (loss) before equity in earnings (loss) of subsidiaries

     (122,581     206,354        (19,958     —          63,815   

Equity in earnings (loss) of subsidiaries

     186,396        (5,429     174,102        (355,069     —     
                                        

Net income (loss)

   $ 63,815      $ 200,925      $ 154,144      $ (355,069   $ 63,815   
                                        

 

34


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended June 30, 2009

($000’s omitted)

 

     Unconsolidated             
     PulteGroup,
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminating
Entries
   Consolidated
PulteGroup,
Inc.
 

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 653,711      $ —        $ —      $ 653,711   

Land sale revenues

     —          4,171        —          —        4,171   
                                       
     —          657,882        —          —        657,882   

Financial Services

     —          2,344        18,354        —        20,698