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, 2011

 

¨ 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  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    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   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

Number of shares of common stock outstanding as of July 22, 2011: 382,849,123

 

 

 


Table of Contents

PULTEGROUP, INC.

INDEX

 

          Page No.  

PART I

   FINANCIAL INFORMATION   

Item 1

   Financial Statements   
  

Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010

     3   
  

Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010

     4   
  

Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2011 and 2010

     5   
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

     6   
  

Notes to Condensed Consolidated Financial Statements

     7   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      52   

Item 4

   Controls and Procedures      54   

PART II

   OTHER INFORMATION   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      54   

Item 6

   Exhibits      55   

SIGNATURES

     56   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTEGROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)

 

ASSETS

  

     June 30,
2011
     December 31,
2010
 
     (Unaudited)      (Note)  

Cash and equivalents

   $ 1,075,223       $ 1,470,625   

Restricted cash

     128,234         24,601   

Unfunded settlements

     13,634         12,765   

House and land inventory

     4,905,123         4,781,813   

Land held for sale

     128,159         71,055   

Land, not owned, under option agreements

     30,037         50,781   

Residential mortgage loans available-for-sale

     148,549         176,164   

Investments in unconsolidated entities

     41,011         46,313   

Goodwill

     240,541         240,541   

Intangible assets, net

     168,898         175,448   

Other assets

     467,332         567,963   

Income taxes receivable

     78,864         81,307   
                 
   $ 7,425,605       $ 7,699,376   
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Liabilities:

     

Accounts payable, including book overdrafts of $26,941 and $63,594 in 2011 and 2010, respectively

   $ 218,853       $ 226,466   

Customer deposits

     84,570         51,727   

Accrued and other liabilities

     1,448,190         1,599,940   

Income tax liabilities

     292,002         294,408   

Senior notes

     3,332,263         3,391,668   
                 

Total liabilities

     5,375,878         5,564,209   

Shareholders’ equity

     2,049,727         2,135,167   
                 
   $ 7,425,605       $ 7,699,376   
                 

Note: The Condensed Consolidated Balance Sheet at December 31, 2010 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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PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(000’s omitted, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Revenues:

        

Homebuilding

        

Home sale revenues

   $ 899,763      $ 1,262,990      $ 1,682,234      $ 2,239,796   

Land sale revenues

     5,068        6,745        6,364        19,731   
                                
     904,831        1,269,735        1,688,598        2,259,527   

Financial Services

     22,381        36,163        43,816        66,729   
                                

Total revenues

     927,212        1,305,898        1,732,414        2,326,256   
                                

Homebuilding Cost of Revenues:

        

Home sale cost of revenues

     789,678        1,104,456        1,474,708        1,954,551   

Land sale cost of revenues

     3,787        2,563        4,717        11,561   
                                
     793,465        1,107,019        1,479,425        1,966,112   

Financial Services expenses

     39,053        44,772        59,526        69,883   

Selling, general, and administrative expenses

     138,380        157,415        280,826        318,721   

Other expense (income), net

     11,668        9,234        15,578        793   

Interest income

     (1,145     (2,292     (2,582     (5,071

Interest expense

     317        1,018        668        1,500   

Equity in (earnings) loss of unconsolidated entities

     (1,193     (5,542     (2,302     (5,448
                                

Income (loss) before income taxes

     (53,333     (5,726     (98,725     (20,234

Income tax expense (benefit)

     2,052        (82,029     (3,814     (84,049
                                

Net income (loss)

   $ (55,385   $ 76,303      $ (94,911   $ 63,815   
                                

Per share data:

        

Net income (loss):

        

Basic

   $ (0.15   $ 0.20      $ (0.25   $ 0.17   
                                

Diluted

   $ (0.15   $ 0.20      $ (0.25   $ 0.17   
                                

Cash dividends declared

   $ —        $ —        $ —        $ —     
                                

Number of shares used in calculation:

        

Basic

     379,781        378,618        379,663        378,185   
                                

Diluted

     379,781        380,412        379,663        380,087   
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(000’s omitted)

(Unaudited)

 

     Common Stock    

Additional

Paid-in

   

Accumulated

Other

Comprehensive

Income

    Retained
Earnings
(Accumulated
Deficit)
    Total
Shareholders’
Equity
 
     Shares     $     Capital     (Loss)      

Shareholders’ Equity, January 1, 2011

     382,028      $ 3,820      $ 2,972,919      $ (1,519   $ (840,053   $ 2,135,167   

Stock awards, net of cancellations

     1,006        10        (10     —          —          —     

Stock repurchases

     (252     (2     (1,963     —          9        (1,956

Stock-based compensation

     37        —          11,405        —          —          11,405   

Comprehensive income (loss):

            

Net income (loss)

     —          —          —          —          (94,911     (94,911

Change in fair value of derivatives, net of tax

     —          —          —          73        —          73   

Foreign currency translation adjustments

     —          —          —          (51     —          (51
                  

Total comprehensive income (loss)

     —          —          —          —          —          (94,889
                                                

Shareholders’ Equity, June 30, 2011

     382,819      $ 3,828      $ 2,982,351      $ (1,497   $ (934,955   $ 2,049,727   
                                                

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   
                                                

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,
 
     2011     2010  

Cash flows from operating activities:

    

Net income (loss)

   $ (94,911   $ 63,815   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

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

     7,486        33,315   

Goodwill impairments

     —          1,375   

Amortization and depreciation

     16,973        24,356   

Stock-based compensation expense

     11,405        16,485   

Equity in (earnings) loss of unconsolidated entities

     (2,302     (5,448

Distributions of earnings from unconsolidated entities

     440        2,015   

Loss on debt repurchases

     3,537        —     

Other, net

     1,156        3,130   

Increase (decrease) in cash due to:

    

Restricted cash

     307        3,375   

Inventories

     (180,964     30,448   

Residential mortgage loans available-for-sale

     27,590        (66,557

Income taxes receivable

     2,443        868,555   

Other assets

     90,387        42,814   

Accounts payable, accrued and other liabilities

     (101,337     (105,122

Income tax liabilities

     (2,406     (62,489
                

Net cash provided by (used in) operating activities

     (220,196     850,067   
                

Cash flows from investing activities:

    

Distributions from unconsolidated entities

     3,856        3,693   

Investments in unconsolidated entities

     (3,184     (19,619

Net change in loans held for investment

     519        (531

Change in restricted cash related to letters of credit

     (103,940     —     

Proceeds from the sale of fixed assets

     9,178        1,068   

Capital expenditures

     (10,848     (8,698
                

Net cash provided by (used in) investing activities

     (104,419     (24,087
                

Cash flows from financing activities:

    

Net repayments (borrowings) under Financial Services credit arrangements

     —          57,008   

Repayments of other borrowings

     (68,831     (1,464

Issuance of common stock

     —          8,617   

Stock repurchases

     (1,956     (1,749
                

Net cash provided by (used in) financing activities

     (70,787     62,412   
                

Net increase (decrease) in cash and equivalents

     (395,402     888,392   

Cash and equivalents at beginning of period

     1,470,625        1,858,234   
                

Cash and equivalents at end of period

   $ 1,075,223      $ 2,746,626   
                

Supplemental Cash Flow Information:

    

Interest paid (capitalized), net

   $ (5,915   $ 4,412   
                

Income taxes paid (refunded), net

   $ (3,851   $ (890,109
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of presentation and significant accounting policies

Basis of presentation

PulteGroup, Inc. (“PulteGroup”) is a publicly-held holding company traded on the New York Stock Exchange under the ticker symbol “PHM”. The consolidated financial statements include the accounts of PulteGroup and all of its direct and indirect subsidiaries (collectively, the “Company”) and variable interest entities in which the Company is deemed to be the primary beneficiary. While the Company’s subsidiaries engage primarily 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 interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with 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, 2010.

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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
June 30,
     Six Months Ended
June 30,
 
     2011     2010      2011     2010  

Write-off of deposits and pre-acquisition costs

   $ 3,709      $ 2,309       $ 4,332      $ 2,852   

Loss on debt retirements

     3,496        —           3,537        —     

Lease exit and related costs (a)

     6,225        1,257         6,187        2,612   

Amortization of intangible assets

     3,275        3,275         6,550        6,550   

Goodwill impairment

     —          1,375         —          1,375   

Miscellaneous expense (income), net

     (5,037     1,018         (5,028     (12,596
                                 
   $ 11,668      $ 9,234       $ 15,578      $ 793   
                                 

 

(a) Excludes lease exit and related costs classified within Financial Services expense.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

Restricted cash

The Company maintains certain cash balances that are restricted as to their use. Restricted cash consists primarily of deposits maintained with financial institutions under certain cash-collateralized letter of credit agreements (see Note 10). The remaining balances relate to customer deposits on home sales which are temporarily restricted by regulatory requirements until title transfers to the homebuyer as well as certain other accounts with restrictions.

Notes receivable

In certain instances, the Company may accept consideration for land sales or other transactions in the form of a note receivable. The counterparties for these transactions are generally land developers or other strategic investors. The Company considers the creditworthiness of the counterparty when evaluating the relative risk and return involved in pursuing the applicable transaction. Due to the unique facts and circumstances surrounding each receivable, the Company actively monitors each individual receivable separately and assesses the need for an allowance for each receivable on an individual basis. Factors considered as part of this assessment include the counterparty’s payment history, the value of any underlying collateral, communications with the counterparty, knowledge of the counterparty’s financial condition and plans, and the current and expected economic environment. Allowances are recorded when it becomes likely that some amount will not be collectible. Such receivables are reported net of allowance for credit losses within other assets. Notes receivable are written off when it is determined that collection efforts will no longer be pursued. Interest income is recognized as earned.

The following represents the Company’s notes receivable and related allowance for credit losses at June 30, 2011 and December 31, 2010 ($000’s omitted):

 

     June 30,
2011
    December 31,
2010
 

Notes receivable, gross

   $ 77,200      $ 77,853   

Allowance for credit losses

     (24,625     (20,877
                

Notes receivable, net

   $ 52,575      $ 56,976   
                

The Company also records other receivables from various parties in the normal course of business, including amounts due from municipalities, insurance companies, and vendors. Such receivables are generally non-interest bearing and non-collateralized, payable either on demand or upon the occurrence of a specified event, and are generally reported in other assets. See Residential mortgage loans available-for-sale in Note 1 for discussion of the Company’s receivables related to mortgage operations.

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, 2011, 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.

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, there were no earnings attributable to restricted shareholders during the three and six months ended June 30, 2011 or 2010.

 

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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

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 Accounting Standards Codification (“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.

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. 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. Additionally, creditors of the VIE have no recourse against the Company, and the Company does not provide financial or other support to these VIEs other than as stipulated in the land option agreements. The Company’s maximum exposure to loss related to these VIEs is generally 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. No VIEs required consolidation under ASC 810 at either June 30, 2011 or December 31, 2010.

Additionally, 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 $30.0 million and $50.8 million at June 30, 2011 and December 31, 2010, 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, some of which are with VIEs, 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, 2011 and December 31, 2010 ($000’s omitted):

 

     June 30, 2011     December 31, 2010  
     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

   $ 10,116       $ 29,882       $ 22,118 (a)    $ 41,813       $ 51,773       $ 42,401 (a) 

Unconsolidated VIEs

     21,047         295,890         —          10,280         202,214         —     

Other land option agreements

     22,640         365,176         7,919 (b)      42,970         455,481         8,380 (b) 
                                                    
   $ 53,803       $ 690,948       $ 30,037      $ 95,063       $ 709,468       $ 50,781   
                                                    

 

(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 either ASC 810 or 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 $656.2 million at June 30, 2011 and $670.5 million at December 31, 2010.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

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, 2011 and December 31, 2010, residential mortgage loans available-for-sale had an aggregate fair value of $148.5 million and $176.2 million, respectively, and an aggregate outstanding principal balance of $144.3 million and $175.9 million, respectively. The net gain (loss) resulting from changes in fair value of residential mortgage loans available-for-sale totaled $(1.9) million and $2.4 million for the three months ended June 30, 2011 and 2010, respectively, and $(1.4) million and $1.9 million for the six months ended June 30, 2011 and 2010, 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 $12.3 million and $20.3 million during the three months ended June 30, 2011 and 2010, respectively, and $25.1 million and $35.1 million for the six months ended June 30, 2011 and 2010, 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 $0.4 million and $0.5 million at June 30, 2011 and December 31, 2010, respectively, and are included in accrued and other liabilities. Servicing rights recognized in Financial Services revenues totaled $3.8 million and $6.1 million during the three months ended June 30, 2011 and 2010, respectively, and $8.7 million and $12.8 million for the six months ended June 30, 2011 and 2010, respectively.

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 include forward contracts on mortgage-backed securities and whole loan investor commitments. The Company does not use any derivative financial instruments for trading purposes. The Company enters into one of the aforementioned derivative financial instruments upon entering into interest rate lock commitments. 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. 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, 2011 and December 31, 2010, the Company had interest rate lock commitments in the amount of $174.8 million and $99.0 million, respectively, which were originated at interest rates prevailing at the date of commitment. Because 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.

 

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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 (continued)

 

Forward 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. 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 on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor. At June 30, 2011, the Company had unexpired forward contracts and whole loan investor commitments of $252.0 million and $35.6 million, respectively, compared with cash forward contracts on mortgage-backed securities and whole loan investor commitments of $198.0 million and $59.0 million, respectively, at December 31, 2010.

There are no credit-risk-related contingent features within the Company’s derivative agreements. Gains and losses on interest rate lock commitments are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. At June 30, 2011, 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 Consolidated Balance Sheet is summarized below ($000’s omitted):

 

     June 30, 2011      December 31, 2010  
     Other Assets      Other Liabilities      Other Assets      Other Liabilities  

Interest rate lock commitments

   $ 4,628       $ 111       $ 2,756       $ 64   

Forward contracts

     982         1,156         4,217         673   

Whole loan commitments

     1,254         1         2,319         —     
                                   
   $ 6,864       $ 1,268       $ 9,292       $ 737   
                                   

New accounting pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”) which amends Accounting Standards Codification (ASC) 820 to clarify existing guidance and minimize differences between U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. ASU 2011-04 will be effective for the Company’s fiscal year beginning January 1, 2012 and is not expected to have a material impact on the Company’s financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 will only impact the Company’s financial statement presentation as the Company currently presents items of other comprehensive income in the statement of changes in equity. ASU 2011-05 will be effective for the Company’s fiscal year beginning January 1, 2012.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Goodwill

Goodwill, which represents the cost of acquired companies in excess of the fair value of the net assets at the acquisition date, has been recorded in connection with various acquisitions 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. Recorded goodwill has been allocated to the Company’s reporting units based on the relative fair value of each acquired reporting unit. 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 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 its recorded carrying value. The determination of fair value is significantly impacted by estimates for each of the Company’s markets related to current valuations, current and future economic conditions, and the Company’s strategic plans. Due to uncertainties in the estimation process and significant volatility in demand for new housing, actual results could differ significantly from such estimates.

The Company recorded $1.5 billion of goodwill in connection with the merger with Centex Corporation (“Centex”), which was completed in August 2009. All goodwill associated with prior transactions has been previously written-off. Since the Centex merger, the Company has recorded impairments of the majority of the associated goodwill, most recently in the third quarter of 2010. These impairments have resulted from a variety of factors, including, among other things, deteriorations in market conditions, the Company’s operating results falling below previously forecasted levels, and a sustained decline in the Company’s market capitalization since the Centex merger.

If management’s expectations of future results and cash flows for any of its reporting units decrease, 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 $240.5 million at June 30, 2011, $228.0 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.

 

3. Restructuring

The Company has taken a series of actions in recent years 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,
 
     2011      2010      2011      2010  

Employee severance benefits

   $ 5,549       $ 1,438       $ 8,537       $ 4,831   

Lease exit costs

     6,308         1,868         6,301         2,654   

Other

     15         —           11         569   
                                   

Total restructuring charges

   $ 11,872       $ 3,306       $ 14,849       $ 8,054   
                                   

Of the total restructuring costs reflected in the above table, $0.5 million and $1.1 million for the three and six months ended June 30, 2011, respectively, and $1.2 million and $1.5 million for the three and six months ended June 30, 2010, respectively, are included within Financial Services expenses. All other employee severance benefits are included within selling, general and administrative expenses while all other lease exit and other costs are included in other expense (income), net. The remaining liabilities for employee severance benefits and exited leases totaled $4.6 million and $38.9 million, respectively, at June 30, 2011 and $8.0 million and $41.7 million, respectively, at December 31, 2010. Substantially all of the employee severance benefits will be paid in 2011 while cash expenditures related to lease exit costs will be incurred over the remaining terms of the applicable 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.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale

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

 

     June 30,
2011
     December 31,
2010
 

Homes under construction

   $ 1,431,750       $ 1,331,618   

Land under development

     2,601,005         2,541,829   

Land held for future development

     872,368         908,366   
                 
   $ 4,905,123       $ 4,781,813   
                 

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 both the three and six months ended June 30, 2011 included $1.3 million of capitalized interest related to land and community valuation adjustments compared with $5.2 million and $6.2 million for the three and six months ended June 30, 2010, respectively. During the three and six months ended June 30, 2011, the Company capitalized all of its Homebuilding interest costs into inventory because the level of the Company’s active inventory exceeded the Company’s debt levels. During the three and six months ended June 30, 2010, the Company capitalized all of its Homebuilding interest costs into inventory except for $0.6 million that was expensed directly to interest expense.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Interest in inventory, beginning of period

   $ 344,754      $ 281,261      $ 323,379      $ 239,365   

Interest capitalized

     55,946        67,289        112,137        136,185   

Interest expensed

     (41,894     (37,928     (76,710     (64,928
                                

Interest in inventory, end of period

   $ 358,806      $ 310,622      $ 358,806      $ 310,622   
                                

Interest incurred*

   $ 55,946      $ 67,878      $ 112,137      $ 136,774   
                                

 

* 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.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale (continued)

 

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 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. 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. A portion of the Company’s land inventory and communities under development demonstrated potential impairment indicators during the three and six months ended June 30, 2011 and 2010 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 value. 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. 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 in the near term. 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):

 

     2011      2010  

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

     1       $ 0.5       $ 0.1         10       $ 7.2       $ 4.5   

June 30

     6         6.7         3.3         16         35.1         25.6   
                             
         $ 3.4             $ 30.1   
                             

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale (continued)

 

The Company recorded these valuation adjustments within Homebuilding home sale cost of revenues. During the three months ended June 30, 2011, the Company reviewed each of its land positions for potential impairment indicators and performed detailed impairment calculations for 22 communities. The average discount rate used in the Company’s determination of fair value for the impaired communities was 12%. During 2011, the Company has experienced relative stability in market conditions consistent with its expectations, which resulted in total valuation adjustments significantly below those experienced in recent years. 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. Based on this review, a portion of the Company’s land held for sale has been written down to net realizable value. The Company recognized net realizable value adjustments of $(0.2) million during the three and six months ended June 30, 2011, and $(0.2) million and $0.4 million during the three and six months ended June 30, 2010, respectively. The Company records these net realizable value adjustments within Homebuilding land sale cost of revenues.

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

 

     June 30,
2011
    December 31,
2010
 

Land held for sale, gross

   $ 177,065      $ 124,919   

Net realizable value reserves

     (48,906     (53,864
  

 

 

   

 

 

 

Land held for sale, net

   $ 128,159      $ 71,055   
  

 

 

   

 

 

 

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 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 $3.7 million and $4.3 million during the three and six months ended June 30, 2011, respectively, and $2.3 million and $2.9 million during the three and six months ended June 30, 2010, respectively. The Company records these write-offs of deposits and pre-acquisition costs within other expense (income), net.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. 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, each of which represents a reportable segment. As part of its ongoing efforts to structure the Company for profitability in the face of challenging market conditions, the Company realigned its organizational structure during the second quarter of 2011, which reduced the number of Areas from four to three. 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 as follows:

 

East:    Connecticut, Delaware, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia
Gulf Coast:    Florida, Texas
West:    Arizona, California, Colorado, Hawaii, Illinois, Indiana, Michigan, Minnesota, Missouri, Nevada, New Mexico, Ohio, Oregon, Washington

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 sale revenues and land sale revenues less home sale 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, 2010.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

     Operating Data by Segment ($000’s omitted)  
     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Revenues:

        

East

   $ 303,390      $ 425,184      $ 572,256      $ 786,403   

Gulf Coast

     287,658        349,400        535,588        604,207   

West

     313,783        495,151        580,754        868,917   
                                
     904,831        1,269,735        1,688,598        2,259,527   

Financial Services

     22,381        36,163        43,816        66,729   
                                

Consolidated revenues

   $ 927,212      $ 1,305,898      $ 1,732,414      $ 2,326,256   
                                

Income (loss) before income taxes:

        

East

   $ 10,795      $ 26,695      $ 14,451      $ 41,284   

Gulf Coast

     13,265        17,137        17,242        13,739   

West

     (11,721     16,110        (21,944     26,222   

Other homebuilding (a)

     (40,185     (48,143     (78,389     (81,282
                                
     (27,846     11,799        (68,640     (37

Financial Services (b)

     (16,643     (8,585     (15,670     (3,113

Other non-operating (c)

     (8,844     (8,940     (14,415     (17,084
                                

Consolidated income (loss) before income taxes

   $ (53,333   $ (5,726   $ (98,725   $ (20,234
                                

 

(a) Other homebuilding primarily includes the amortization of intangible assets, goodwill impairment, and amortization of capitalized interest.
(b) Financial Services income before income taxes includes interest expense of $0.6 million and $1.1 million for the three and six months ended June 30, 2010, respectively. Interest income included in Financial Services income before income taxes totaled $1.1 million and $2.1 million for the three and six months ended June 30, 2011, respectively, and $1.5 million and $2.9 million for the three and six months ended June 30, 2010, 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.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

    

Valuation Adjustments and

Write-Offs by Segment ($000’s omitted)

 
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Land and community valuation adjustments:

        

East

   $ 228      $ 477      $ 269      $ 477   

Gulf Coast

     —          5,276        —          8,027   

West

     1,818        14,601        1,818        15,368   

Other homebuilding (a)

     1,254        5,192        1,316        6,211   
                                
   $ 3,300      $ 25,546      $ 3,403      $ 30,083   
                                

Net realizable value adjustments - land held for sale:

        

East

   $ —        $ —        $ —        $ —     

Gulf Coast

     —          (184     —          321   

West

     (249     —          (249     59   
                                
   $ (249   $ (184   $ (249   $ 380   
                                

Write-off of deposits and pre-acquisition costs:

        

East

   $ 1,723      $ 178      $ 2,191      $ 215   

Gulf Coast

     166        21        179        495   

West

     1,820        2,110        1,962        2,142   
                                
   $ 3,709      $ 2,309      $ 4,332      $ 2,852   
                                

Impairments of investments in unconsolidated joint ventures:

        

East

   $ —        $ —        $ —        $ —     

Gulf Coast

     —          —          —          —     

West

     —          —          —          1,908   
                                
   $ —        $ —        $ —        $ 1,908   
                                

Total valuation adjustments and write-offs

   $ 6,760      $ 27,671      $ 7,486      $ 35,223   
                                

 

(a) Primarily write-offs of capitalized interest related to land and community valuation adjustments.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

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

 

     June 30, 2011  
     Homes Under
Construction
     Land Under
Development
     Land Held for
Future
Development
     Total
Inventory
     Total
Assets
 

East

   $ 497,924       $ 807,842       $ 266,111       $ 1,571,877       $ 1,742,215   

Gulf Coast

     323,230         585,398         223,309         1,131,937         1,273,869   

West

     555,257         981,736         303,867         1,840,860         2,029,609   

Other homebuilding (a)

     55,339         226,029         79,081         360,449         771,230   
                                            
     1,431,750         2,601,005         872,368         4,905,123         5,816,923   

Financial Services

     —           —           —           —           182,655   

Other non-operating (b)

     —           —           —           —           1,426,027   
                                            
   $ 1,431,750       $ 2,601,005       $ 872,368       $ 4,905,123       $ 7,425,605   
                                            
     December 31, 2010  
     Homes Under
Construction
     Land Under
Development
     Land Held for
Future
Development
     Total
Inventory
     Total
Assets
 

East

   $ 455,637       $ 792,586       $ 262,653       $ 1,510,876       $ 1,712,250   

Gulf Coast

     313,734         564,396         239,950         1,118,080         1,303,749   

West

     518,427         979,710         329,108         1,827,245         1,983,436   

Other homebuilding (a)

     43,820         205,137         76,655         325,612         743,016   
                                            
     1,331,618         2,541,829         908,366         4,781,813         5,742,451   

Financial Services

     —           —           —           —           222,989   

Other non-operating (b)

     —           —           —           —           1,733,936   
                                            
   $ 1,331,618       $ 2,541,829       $ 908,366       $ 4,781,813       $ 7,699,376   
                                            

 

(a) Other homebuilding primarily includes operations in Puerto Rico, certain wind down operations, 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)

 

6. Investments in unconsolidated entities

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

 

     June 30,
2011
     December 31,
2010
 

Investments in joint ventures with limited recourse guaranties

   $ 65       $ 122   

Investments in joint ventures with debt non-recourse to PulteGroup

     11,574         11,486   

Investments in other joint ventures

     29,372         34,705   
                 

Total investments in unconsolidated entities

   $ 41,011       $ 46,313   
                 

Total joint venture debt

   $ 11,449       $ 15,467   

PulteGroup’s proportionate share of joint venture debt:

     

Joint venture debt with limited recourse guaranties

   $ 1,174       $ 1,444   

Joint venture debt non-recourse to PulteGroup

     2,231         3,696   
                 

PulteGroup’s total proportionate share of joint venture debt

   $ 3,405       $ 5,140   
                 

The Company recognized income (expense) from its unconsolidated joint ventures of $1.2 million and $2.3 million during the three and six months ended June 30, 2011, respectively, compared with $5.5 million and $5.4 million during the three and six months ended June 30, 2010, respectively, including impairments of $1.9 million for the six months ended June 30, 2010. During the six months ended June 30, 2011 and 2010, the Company made capital contributions of $3.2 million and $19.6 million, respectively, to its joint ventures and received capital and earnings distributions of $4.3 million and $5.7 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 terminated joint venture financing agreement required the Company and other members of one joint venture to guaranty for the benefit of the lender the completion of the project if the joint venture did not perform the required development and an increment of interest in certain circumstances. This joint venture defaulted under its debt agreement, and the lender 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. In March 2011, the parties to this litigation executed a settlement agreement, and the Company paid its proportionate share of such settlement, which did not have a material impact on the Company’s financial position, results of operations, or cash flows.

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 final stages of liquidation. The Company does not have any significant financing exposures related to these entities.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

7. 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 have been no repurchases under these programs since 2006. The Company had remaining authorization to purchase $102.3 million of common stock at June 30, 2011.

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, 2011 and 2010, the Company repurchased $2.0 million and $1.7 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,
2011
    December 31,
2010
 

Foreign currency translation adjustments:

    

Mexico

   $ —        $ 51   

Fair value of derivatives, net of income taxes of $2,086 in 2011 and 2010

     (1,497     (1,570
                
   $ (1,497   $ (1,519
                

 

8. Income taxes

The Company’s income tax expense (benefit) for the three and six months ended June 30, 2011 was $2.1 million and $(3.8) million, respectively, compared with $(82.0) million and $(84.0) million for the three and six months ended June 30, 2010. Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, the Company’s effective tax rates in 2011 and 2010 are not meaningful as the income tax expense (benefit) is not directly correlated to the amount of pretax income (loss). The income tax expense (benefit) for the periods ended June 30, 2011 and 2010 resulted primarily from the favorable resolution of certain income tax matters and changes in unrecognized tax benefits and related charges.

The Company had income taxes receivable of $78.9 million and $81.3 million at June 30, 2011 and December 31, 2010, respectively. Income taxes receivable at June 30, 2011 and December 31, 2010 generally related to outstanding federal and state tax refunds from amended returns and net operating loss carrybacks.

In accordance with ASC 740, “Income Taxes,” the Company evaluates its deferred tax assets to determine if a valuation allowance is required. At June 30, 2011 and December 31, 2010, the Company had net deferred tax assets of $2.6 billion, which were offset entirely 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 estimated and actual results could have a material impact on the Company’s consolidated results of operations or financial position. To the extent that the Company’s results of operations improve, the deferred tax asset valuation allowance may be reduced, which could result in a non-cash tax benefit.

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

8. Income taxes (continued)

 

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 $67.4 million per year for net operating losses, losses realized on built-in loss assets that are sold within 60 months 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, 2011, the Company had $248.5 million of gross unrecognized tax benefits and $50.4 million of accrued penalties and interest. The Company is currently under examination by the IRS and various state taxing jurisdictions and anticipates finalizing certain of the 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 $106.9 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements. The statutes of limitations for the Company’s major tax jurisdictions remain open for examination for tax years 1998-2011.

 

9. 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  

Financial Instrument

   Fair Value
Hierarchy
     June 30,
2011
    December 31,
2010
 

Residential mortgage loans available-for-sale

     Level 2       $ 148,549      $ 176,164   

Interest rate lock commitments

     Level 2         4,517        2,692   

Forward contracts

     Level 2         (174     3,544   

Whole loan commitments

     Level 2         1,253        2,319   

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

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  
     Fair Value
Hierarchy
     June 30,
2011
     December 31,
2010
 

Loans held for investment

     Level 2       $ 1,932       $ 3,002   

House and land inventory

     Level 3         6,665         70,862   

 

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PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

9. Fair value disclosures (continued)

 

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 because 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 4 of these Consolidated Financial Statements for a more detailed discussion of the valuation method used.

The carrying amounts of cash and equivalents and restricted cash 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. The fair value of the senior notes outstanding approximated $3.2 billion at both June 30, 2011 and December 31, 2010. The carrying values of the senior notes are presented in Note 10. The carrying value of collateralized short-term debt approximates fair value.

 

10. Debt and other financing arrangements

The Company’s senior notes are summarized as follows:

 

     June 30,
2011
     December 31,
2010
 

8.125% unsecured senior notes due February 2011 (a)

   $ —         $ 13,900   

5.45% unsecured senior notes due August 2012 (b)

     97,116         104,823   

6.25% unsecured senior notes due February 2013 (b)

     62,647         62,617   

5.125% unsecured senior notes due October 2013 (b)

     116,545         160,212   

5.25% unsecured senior notes due January 2014 (b)

     335,859         335,848   

5.70% unsecured senior notes due May 2014 (b)

     310,474         309,048   

5.20% unsecured senior notes due January 2015 (b)

     244,862         244,839   

5.25% unsecured senior notes due June 2015 (b)

     400,702         397,700   

6.50% unsecured senior notes due May 2016 (b)

     467,894         466,644   

7.625% unsecured senior notes due September 2017 (a)

     149,319         149,265   

7.875% unsecured senior notes due May 2032 (b)

     299,087         299,065   

6.375% unsecured senior notes due May 2033 (b)

     398,381         398,344   

6.00% unsecured senior notes due January 2035 (b)

     299,377         299,363   

7.375% unsecured senior notes due June 2046 (b)

     150,000         150,000   
                 

Total senior notes - carrying value (c)

   $ 3,332,263       $ 3,391,668   
                 

Estimated fair value

   $ 3,244,674       $ 3,227,404   
                 

 

(a) Not redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries
(b) Redeemable prior to maturity, guaranteed on a senior basis by certain wholly-owned subsidiaries
(c) The recorded carrying value reflects the impact of various discounts and premiums that are amortized to interest cost over the respective terms of the senior notes

Debt retirement

During the three months ended June 30, 2011, the Company retired prior to their stated maturity dates $53.0 million of senior notes. The Company recorded losses related to these transactions totaling $3.5 million for the three and six months ended June 30, 2011. Losses on these transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense (income), net.

 

23


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

10. Debt and other financing arrangements (continued)

 

Letter of credit facilities

As a cost-saving measure and to provide increased operational flexibility, the Company voluntarily terminated its $250.0 million unsecured revolving credit facility effective March 30, 2011. The credit facility was scheduled to expire in June 2012, had no borrowings outstanding, and was being used solely to issue letters of credit ($221.6 million outstanding at December 31, 2010). The Company did not pay any penalties as a result of the termination. The termination of the facility also:

 

   

released the $250.0 million of cash required by the credit facility to be maintained in liquidity reserve accounts;

 

   

released the Company from the credit facility’s covenant requirements, which included, among other things, a maximum debt to tangible capital ratio and a tangible net worth minimum; and

 

   

resulted in expense of $1.3 million related to the write-off of unamortized issuance costs, which is included within selling, general, and administrative expenses for the six months ended June 30, 2011.

In connection with the termination of the credit facility, the Company entered into separate cash-collateralized letter of credit agreements with a number of financial institutions. These agreements provide capacity to issue letters of credit totaling up to $192.0 million, of which $103.9 million was outstanding at June 30, 2011. Under these agreements, the Company is required to maintain deposits with these financial institutions in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash.

The Company also maintains an unsecured letter of credit facility with Deutsche Bank AG, New York Branch that expires in June 2014 and permits the issuance of up to $200.0 million of letters of credit by the Company. At June 30, 2011 and December 31, 2010, $151.2 million and $167.2 million, respectively, of letters of credit were outstanding under this facility.

Financial Services

Pulte Mortgage provides mortgage financing for many of the Company’s home sales utilizing its own funds and borrowings made available pursuant to certain repurchase agreements. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors, generally within 30 days. Given the Company’s strong liquidity position and the cost of third party financing relative to existing mortgage rates, Pulte Mortgage allowed each of its third party borrowing arrangements to expire during 2010 and began funding its operations using internal Company resources.

 

11. Commitments and contingencies

Loan origination liabilities

The Company’s mortgage operation may be responsible for losses associated with mortgage loans originated and sold to investors that may result from certain representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the type of collateral, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the Company either repurchases the loans from the investors or reimburses the investors’ losses (a “make-whole” payment).

 

24


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Commitments and contingencies (continued)

 

Beginning in 2009, the Company experienced a significant increase in 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. To date, the significant majority of these losses relate to loans originated in 2006 and 2007 when industry lending standards were less stringent and borrower fraud is believed to have peaked. In 2006 and 2007, the Company originated $37.8 billion of loans, each of which were subject to representations and warranties for which the Company may be liable. This figure includes loans originated by Centex’s mortgage operations, but excludes loans originated by Centex’s former subprime loan business sold by Centex in 2006. This figure has not been adjusted for subsequent activity, such as borrower repayments of principal, foreclosures, or repurchases or make-whole payments completed to date. Because the Company generally does not retain the servicing rights to the loans it originates, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices) as well as actions taken by third parties, including the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S.

Most requests received to date relate to make-whole payments on loans that have been foreclosed, generally after a portion of the loan principal had been paid down, which reduces the Company’s exposure. Requests not immediately refuted undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine the Company’s liability. The Company establishes liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, the ability of the Company to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment. The Company is generally able to cure or refute over 60% of the requests received from investors such that repurchases or make-whole payments are not required. For those requests requiring repurchases or make-whole payments, actual loss severities generally approximate 50% of the outstanding principal balance.

During the three and six months ended June 30, 2011 and 2010, the Company recorded additional provisions for losses as a change in estimate primarily to reflect projected claim volumes in excess of previous estimates. The Company’s current estimates assume that claim volumes will not decline to pre-2009 levels until after 2012. 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 were as follows ($000’s omitted):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Liabilities, beginning of period

   $ 82,460      $ 94,088      $ 93,057      $ 105,914   

Provision for losses

     19,347        17,210        19,347        16,856   

Settlements

     (3,971     (8,060     (14,568     (19,532
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities, end of period

   $ 97,836      $ 103,238      $ 97,836      $ 103,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Commitments and contingencies (continued)

 

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, 2011 and December 31, 2010, the Company had recorded $42.3 million and $73.3 million, respectively, in accrued liabilities for outstanding CDD obligations. During 2011, the Company voluntarily repurchased at a discount prior to their maturity CDD obligations with an aggregate principal balance of $26.6 million in order to improve the future financial performance of the related communities. The discount of $5.2 million will be recognized as a reduction of cost of revenues over the lives of the applicable communities, which extend for several years.

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, 2011 and December 31, 2010 the Company had outstanding letters of credit and surety bonds totaling $1.6 billion and $1.7 billion, respectively.

In addition, the Company was previously subject to $817.4 million 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 estimated that less than $85.0 million of work remained to be performed on these commercial construction projects as of December 31, 2010. The purchaser of the Centex commercial construction business had previously indemnified the Company against potential losses relating to such surety bond obligations, and the Company had purchased for its benefit a back-up indemnity provided by a financial institution as additional security. During 2011, the Company restructured this arrangement such that the Company is no longer directly subject to the surety bonds and is only contingently liable in the event of non-performance by the purchaser of the Centex commercial construction business and its parent company as well as exhaustion of a letter of credit in excess of the estimated amount of work remaining posted by the purchaser with the surety. Accordingly, the Company terminated the back-up indemnity as it believes the risk of this exposure becoming a cash obligation to the Company is not significant.

Litigation

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

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

 

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Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Commitments and contingencies (continued)

 

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-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 and adjusts such amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to the Company’s warranty liabilities were as follows ($000’s omitted):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Warranty liabilities, beginning of period

   $ 74,654      $ 88,767      $ 80,195      $ 96,110   

Warranty reserves provided

     10,019        15,169        19,108        25,308   

Payments

     (14,202     (18,666     (28,209     (36,776

Other adjustments

     50        (1,033     (573     (405
  

 

 

   

 

 

   

 

 

   

 

 

 

Warranty liabilities, end of period

   $ 70,521      $ 84,237      $ 70,521      $ 84,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Self-insured risks

The Company maintains, and requires the majority of its subcontractors to maintain, general liability insurance coverage, including coverage for certain construction defects. The Company also maintains builders’ risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a significant portion of the overall risk for such claims either through policies issued by the Company’s captive insurance subsidiaries or through its own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain higher per occurrence and aggregate retention levels. In certain instances, the Company may offer its subcontractors the opportunity to purchase insurance through one of the Company’s captive insurance subsidiaries or to participate in a project specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies purchased by the Company. General liability coverage for the homebuilding industry is complex, and the Company’s coverage varies from policy year to policy year. The Company is self-insured for a per occurrence deductible which is capped at an overall aggregate retention level. Beginning with the first dollar, amounts paid on insured claims satisfy the Company’s per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by reinsurance up to the Company’s purchased coverage levels. The Company’s insurance policies, including the captive insurance subsidiaries’ reinsurance policies, are maintained with highly-rated underwriters for whom the Company believes counterparty default risk is not significant.

 

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Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Commitments and contingencies (continued)

 

At any point in time, the Company is managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. The Company generally reserves for costs associated with such claims (including expected claims management expenses relating to legal fees, expert fees, and claims handling expenses) based on actuarial analyses of the Company’s historical claims. The actuarial analyses calculate an estimate of the ultimate net cost of all reported and unreported losses incurred but unpaid. These estimates make up a significant portion of the Company’s liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. 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.

The Company’s recorded reserves for all such claims totaled $790.6 million at June 30, 2011, substantially all of which relates to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and their related claim expenses and (ii) incurred but not reported claims and their related claim expenses. Liabilities related to incurred but not reported claims and their related claim expenses represented approximately 77% of the total general liability reserve at June 30, 2011. The actuarial analyses that determine the incurred but not reported portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on the Company’s historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses. As a result of the inherent uncertainty related to each of these factors, actual costs could differ significantly from estimated costs.

Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. Because the majority of the Company’s recorded reserves relates to incurred but not reported claims, adjustments to reserve amounts for individual existing claims generally do not impact the recorded reserves materially. However, changes in the frequency and timing of reported claims and the estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves.

Changes in these liabilities were as follows ($000’s omitted):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Balance, beginning of period

   $ 804,066      $ 569,666      $ 813,841      $ 566,693   

Reserves provided

     17,083        19,318        32,007        35,631   

Liabilities assumed with Centex merger

     —          2,514        —          2,514   

Payments

     (30,552     (13,807     (55,251     (27,147
                                

Balance, end of period

   $ 790,597      $ 577,691      $ 790,597      $ 577,691   
                                

The Company’s insurance-related expenses as reflected in the above table are reflected within selling, general, and administrative expenses. The Company has experienced a high level of insurance-related expenses in recent years, primarily due to the adverse development of general liability claims, the frequency and severity of which have increased significantly over historical levels. As a result of these trends, the actuarial analyses used to estimate the Company’s liabilities assume that the long-term future frequency, severity, and development of claims will most closely resemble the claims activity experienced in recent years. The higher reserve balance at June 30, 2011 compared with June 30, 2010 resulted from recording additional expense to insurance reserves in the third quarter of 2010 when the Company experienced a greater than anticipated frequency of newly reported claims and a significant increase in specific case reserves related to certain known claims for homes closed in prior periods.

 

28


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. 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.

 

29


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2011

($000’s omitted)

 

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

ASSETS

           

Cash and equivalents

   $ 98,393      $ 648,352       $ 328,478      $ —        $ 1,075,223   

Restricted cash

     103,941        6,622         17,671        —          128,234   

Unfunded settlements

     —          16,662         (3,028     —          13,634   

House and land inventory

     —          4,900,992         4,131        —          4,905,123   

Land held for sale

     —          128,159         —          —          128,159   

Land, not owned, under option agreements

     —          30,037         —          —          30,037   

Residential mortgage loans available-for-sale

     —          —           148,549        —          148,549   

Securities purchased under agreements to resell

     39,005        —           (39,005       —     

Investments in unconsolidated entities

     1,525        36,878         2,608        —          41,011   

Goodwill

     —          240,541         —          —          240,541   

Intangible assets, net

     —          168,898         —          —          168,898   

Other assets

     20,526        400,873         45,933        —          467,332   

Income taxes receivable

     78,864        —           —          —          78,864   

Deferred income tax assets

     (34,620     27         34,593        —          —     

Investments in subsidiaries and intercompany accounts, net

     5,442,749        6,168,087         6,212,123        (17,822,959     —     
                                         
   $ 5,750,383      $ 12,746,128       $ 6,752,053      $ (17,822,959   $ 7,425,605   
                                         

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Accounts payable, customer deposits, accrued and other liabilities

   $ 76,391      $ 1,060,812       $ 614,410      $ —        $ 1,751,613   

Income tax liabilities

     292,002        —           —          —          292,002   

Senior notes

     3,332,263        —           —          —          3,332,263   
                                         

Total liabilities

     3,700,656        1,060,812         614,410        —          5,375,878   

Total shareholders’ equity

     2,049,727        11,685,316         6,137,643        (17,822,959     2,049,727   
                                         
   $ 5,750,383      $ 12,746,128       $ 6,752,053      $ (17,822,959   $ 7,425,605   
                                         

 

30


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2010

($000’s omitted)

 

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

ASSETS

           

Cash and equivalents

   $ 10,000      $ 1,089,439       $ 371,186      $ —        $ 1,470,625   

Restricted cash

     —          3,927         20,674        —          24,601   

Unfunded settlements

     —          17,184         (4,419     —          12,765   

House and land inventory

     —          4,777,681         4,132        —          4,781,813   

Land held for sale

     —          71,055         —          —          71,055   

Land, not owned, under option agreements

     —          50,781         —          —          50,781   

Residential mortgage loans available-for-sale

     —          —           176,164        —          176,164   

Securities purchased under agreements to resell

     74,500        —           (74,500    

Investments in unconsolidated entities

     1,523        42,261         2,529        —          46,313   

Goodwill

     —          240,541         —          —          240,541   

Intangible assets, net

     —          175,448         —          —          175,448   

Other assets

     24,476        499,075         44,412        —          567,963   

Income taxes receivable

     81,307        —           —          —          81,307   

Deferred income tax assets

     (34,192     27         34,165        —          —     

Investments in subsidiaries and intercompany accounts, net

     5,749,695        5,783,384         6,265,591        (17,798,670     —     
                                         
   $ 5,907,309      $ 12,750,803       $ 6,839,934      $ (17,798,670   $ 7,699,376   
                                         

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Accounts payable, customer deposits, accrued and other liabilities

   $ 86,066      $ 1,166,805       $ 625,262      $ —        $ 1,878,133   

Income tax liabilities

     294,408        —           —          —          294,408   

Senior notes

     3,391,668        —           —          —          3,391,668   
                                         

Total liabilities

     3,772,142        1,166,805         625,262        —          5,564,209   

Total shareholders’ equity

     2,135,167        11,583,998         6,214,672        (17,798,670     2,135,167   
                                         
   $ 5,907,309      $ 12,750,803       $ 6,839,934      $ (17,798,670   $ 7,699,376   
                                         

 

31


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended June 30, 2011

($000’s omitted)

 

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

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 899,763      $ —        $ —         $ 899,763   

Land sale revenues

     —          5,068        —          —           5,068   
                                         
     —          904,831        —          —           904,831   

Financial Services

     —          286        22,095        —           22,381   
                                         
     —          905,117        22,095        —           927,212   
                                         

Homebuilding Cost of Revenues

           

Home sale cost of revenues

     —          789,678        —          —           789,678   

Land sale cost of revenues

     —          3,787        —          —           3,787   
                                         
     —          793,465        —          —           793,465   

Financial Services expenses

     183        55        38,815        —           39,053   

Selling, general, and administrative expenses

     9,823        126,996        1,561        —           138,380   

Other expense (income), net

     3,496        8,749        (577     —           11,668   

Interest income

     (88     (976     (81     —           (1,145

Interest expense

     317        —          —          —           317   

Intercompany interest

     10,691        (8,088     (2,603     —           —     

Equity in (earnings) loss of unconsolidated entities

     (1     (1,174     (18     —           (1,193
                                         

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

     (24,421     (13,910     (15,002     —           (53,333

Income tax expense (benefit)

     1,065        2,118        (1,131     —           2,052   
                                         

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

     (25,486     (16,028     (13,871     —           (55,385

Equity in income (loss) of subsidiaries

     (29,899     (13,004     (53,921     96,824         —     
                                         

Net income (loss)

   $ (55,385   $ (29,032   $ (67,792   $ 96,824       $ (55,385
                                         

 

32


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the six months ended June 30, 2011

($000’s omitted)

 

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

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 1,682,234      $ —        $ —         $ 1,682,234   

Land sale revenues

     —          6,364        —          —           6,364   
                                         
     —          1,688,598        —          —           1,688,598   

Financial Services

     —          569        43,247        —           43,816   
                                         
     —          1,689,167        43,247        —           1,732,414   
                                         

Homebuilding Cost of Revenues

           

Home sale cost of revenues

     —          1,474,708        —          —           1,474,708   

Land sale cost of revenues

     —          4,717        —          —           4,717   
                                         
     —          1,479,425        —          —           1,479,425   

Financial Services expenses

     328        201        58,997        —           59,526   

Selling, general, and administrative expenses

     20,816        256,289        3,721        —           280,826   

Other expense (income), net

     3,537        13,492        (1,451     —           15,578   

Interest income

     (88     (2,303     (191     —           (2,582

Interest expense

     668        —          —          —           668   

Intercompany interest

     21,403        (16,732     (4,671     —           —     

Equity in (earnings) loss of unconsolidated entities

     (1     (2,223     (78     —           (2,302
                                         

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

     (46,663     (38,982     (13,080     —           (98,725

Income tax expense (benefit)

     358        (3,683     (489     —           (3,814
                                         

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

     (47,021     (35,299     (12,591     —           (94,911

Equity in income (loss) of subsidiaries

     (47,890     (11,444     (121,232     180,566         —     
                                         

Net income (loss)

   $ (94,911   $ (46,743   $ (133,823   $ 180,566       $ (94,911
                                         

 

33


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. 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 sale cost of revenues

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

Land sale 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 income (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 income (loss) of subsidiaries

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

Equity in income (loss) of subsidiaries

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

Net income (loss)

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

 

34


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. 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 sale cost of revenues

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

Land sale 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 income (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 income (loss) of subsidiaries

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

Equity in income (loss) of subsidiaries

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

Net income (loss)

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

 

35


Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2011

($000’s omitted)

 

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

Net cash provided by (used in) operating activities

   $ (31,096   $ (192,408   $ 3,308      $ —         $ (220,196
                                         

Cash flows from investing activities:

           

Distributions from unconsolidated entities

     —          3,856        —          —           3,856   

Investments in unconsolidated entities

     —          (3,184     —          —           (3,184

Change in restricted cash related to letters of credit

     (103,940            (103,940

Net change in loans held for investment

     —          —          519        —           519   

Proceeds from the sale of fixed assets

     —          9,178        —          —           9,178   

Capital expenditures

     —          (9,249     (1,599     —           (10,848
                                         

Net cash provided by (used in) investing activities

     (103,940     601        (1,080     —           (104,419
                                         

Cash flows from financing activities:

           

Repayments of other borrowings

     (69,311     480        —          —           (68,831

Intercompany activities, net

     294,696        (249,760     (44,936     —           —     

Stock repurchases

     (1,956     —          —          —           (1,956
                                         

Net cash provided by (used in) financing activities

     223,429        (249,280     (44,936     —           (70,787
                                         

Net increase (decrease) in cash and equivalents

     88,393        (441,087     (42,708     —           (395,402

Cash and equivalents at beginning of period

     10,000        1,089,439        371,186        —           1,470,625   
                                         

Cash and equivalents at end of period

   $ 98,393      $ 648,352      $ 328,478      $ —         $ 1,075,223   
                                         

 

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Table of Contents

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2010

($000’s omitted)

 

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

Net cash provided by (used in) operating activities

   $ 795,240      $ 152,852      $ (98,025   $ —         $ 850,067   
                                         

Cash flows from investing activities:

           

Distributions from unconsolidated entities

     —          3,693        —          —           3,693   

Investments in unconsolidated entities

     —          (19,619     —          —           (19,619

Net change in loans held for investment

     —            (531     —           (531

Proceeds from the sale of fixed assets

     —          1,063        5        —           1,068   

Capital expenditures

     —          (7,775     (923     —           (8,698
                                         

Net cash provided by (used in) investing activities

     —          (22,638     (1,449     —           (24,087
                                         

Cash flows from financing activities:

           

Net repayments under Financial Services credit arrangements

     —          —          57,008        —           57,008   

Repayment of other borrowings

     —          (1,464     —          —           (1,464

Intercompany activities, net

     (802,108     741,214        60,894        —           —     

Issuance of common stock

     8,617        —          —          —           8,617   

Stock repurchases

     (1,749     —          —          —           (1,749
                                         

Net cash provided by (used in) financing activities

     (795,240     739,750        117,902        —           62,412   
                                         

Net increase (decrease) in cash and equivalents

     —          869,964        18,428        —           888,392   

Cash and equivalents at beginning of period

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

Cash and equivalents at end of period

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

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Since early 2006, the U.S. housing market has been unfavorably impacted by a lack of consumer confidence, large supplies of housing inventories, and related pricing pressures, among other factors. These conditions, combined with significant foreclosure activity, a more challenging appraisal environment, higher than normal unemployment levels, and uncertainty in the U.S. economy, continue to contribute to weakened demand for new homes. As a result, we have experienced a loss before income taxes in each quarter since the fourth quarter of 2006. Such losses resulted from a combination of reduced operational profitability and significant asset impairments.

The U.S. housing market and broader economy remain in a period of uncertainty. While we have experienced some stabilization in certain of our local markets, homebuilding industry volumes remain at near historically low levels. This more stable environment has resulted in a significant reduction in the level of land-related charges recorded during the first half of 2011 compared with recent periods. However, significant short-term uncertainty remains such that we are not anticipating a broad recovery in homebuilding during 2011. Factors that may further worsen market conditions or delay a recovery in the homebuilding industry include:

 

   

High levels of unemployment, which are generally not expected to recede to historical levels during 2011, and associated low levels of consumer confidence;

 

   

Continued high levels of foreclosure activity;

 

   

Potentially higher mortgage interest rates, which might result from a variety of macroeconomic factors, as the historically low rates prevailing in recent periods are not believed to be sustainable for the long-term;

 

   

Increased costs and standards related to FHA loans, which continue to be a significant source of customer financing;

 

   

The overall impact of the federal government’s intervention in the U.S. economy; and

 

   

Potential impacts of reforms to the overall U.S. financial services and mortgage industries that may have an adverse impact on the ability of our customers to finance their home purchases or on our access to the capital markets, including the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted into law on July 21, 2010, potential limitations on the mortgage interest income tax deduction, and the potential future restructurings of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac.

We believe that improved employment levels and consumer confidence are necessary to unlock the pent-up demand that has built up in recent years. Accordingly, we continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term while also positioning ourselves to capitalize upon growth when industry conditions improve. While we are purchasing land positions where it makes strategic and economic sense to do so, the opportunity to purchase developed lots in premium locations has become more limited and competitive. We also continue to evaluate each existing land parcel to determine whether the strategy and economics support holding the parcel or disposing of it. We have closely evaluated and made significant reductions in employee headcount and overhead expenses since the beginning of the industry downturn, including a further consolidation of our field organization and select corporate functions during the second quarter of 2011. Due to the persistence of these difficult market conditions, improving the efficiency of our overhead costs will continue to be a significant area of focus. We are also adjusting the content in our homes to provide our customers more affordable alternatives and are building homes with smaller floor plans in certain of our communities.

Our outlook is cautious for 2011 as the timing of a sustainable recovery in the homebuilding industry remains uncertain. In the long-term, we continue to believe that builders with strong land positions, broad geographic and product diversity, and access to lower-cost capital will benefit as market conditions recover. In the short-term, conditions will remain challenging, and certain of our local markets may continue to experience volatility. We believe that improved gross margins combined with higher volumes and greater overhead leverage should lead to profitability in the second half of 2011. However, given the continued weakness in new home sales, visibility as to future earnings performance is limited. Our evaluations for land-related charges recorded to date were based on our best estimates of the future cash flows for our communities. If conditions in the homebuilding industry or our local markets worsen in the future, or if our strategy related to certain communities changes, we may be required to evaluate our assets for further impairments or write-downs, which could result in future charges that might be significant.

 

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Table of Contents

Overview (continued)

 

The following is a summary of our operating results by line of business ($000’s omitted, except per share data):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Income (loss) before income taxes:

        

Homebuilding

   $ (27,846   $ 11,799      $ (68,640   $ (37

Financial Services

     (16,643     (8,585     (15,670     (3,113

Other non-operating

     (8,844     (8,940     (14,415     (17,084
                                

Income (loss) before income taxes

     (53,333     (5,726     (98,725     (20,234

Income tax expense (benefit)

     2,052        (82,029     (3,814     (84,049
                                

Net income (loss)

   $ (55,385   $ 76,303      $ (94,911   $ 63,815   
                                

Per share data - assuming dilution: