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)
Registrants 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
INDEX
2
CONDENSED CONSOLIDATED BALANCE SHEETS
($000s 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.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(000s 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.
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(000s 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.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000s 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.
6
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 Companys 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 Companys consolidated financial statements and footnotes thereto included in the Companys 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 (000s 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. |
7
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 counterpartys payment history, the value of any underlying collateral, communications with the counterparty, knowledge of the counterpartys 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 Companys notes receivable and related allowance for credit losses at June 30, 2011 and December 31, 2010 ($000s 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 Companys 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 Companys 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.
8
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 Companys 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 Companys lack of an equity interest in them. The VIE is generally protected from the first dollar of loss under the Companys land option agreement due to the Companys deposit. Likewise, the VIEs 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 Companys maximum exposure to loss related to these VIEs is generally limited to the Companys 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 Companys interests in land option agreements as of June 30, 2011 and December 31, 2010 ($000s 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.
9
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.
10
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 Companys 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 Companys derivative instruments and their location in the Consolidated Balance Sheet is summarized below ($000s 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 Companys fiscal year beginning January 1, 2012 and is not expected to have a material impact on the Companys 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 Companys 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 Companys fiscal year beginning January 1, 2012.
11
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 Companys 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 Companys 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 Companys markets related to current valuations, current and future economic conditions, and the Companys 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 Companys operating results falling below previously forecasted levels, and a sustained decline in the Companys market capitalization since the Centex merger.
If managements 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 Companys market capitalization in the future may indicate that the fair value of one or more of the Companys reporting units has decreased, which may result in an impairment of goodwill. Of the Companys 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 ($000s 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 Companys reportable segments and were not material to any one segment.
12
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. | Inventory and land held for sale |
Major components of the Companys inventory were as follows ($000s 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 Companys 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 Companys active inventory exceeded the Companys 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 ($000s 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. |
13
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 Companys 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 communitys inventory is less than its carrying value.
The Company determines the fair value of a communitys 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 Companys 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 communitys 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 communitys 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 | |||||||||||||||||||||
14
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 Companys 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 Companys local markets worsen in the future, the current difficult market conditions extend beyond the Companys expectations, or the Companys 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 Companys 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 Companys land held for sale was as follows ($000s 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.
15
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. | Segment information |
The Companys 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 Companys 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 Companys Financial Services segment operates generally in the same markets as the Companys 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 Companys 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 Companys Annual Report on Form 10-K for the year ended December 31, 2010.
16
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. | Segment information (continued) |
Operating Data by Segment ($000s 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. |
17
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. | Segment information (continued) |
Valuation Adjustments and Write-Offs by Segment ($000s 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. |
18
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. | Segment information (continued) |
Total assets and inventory by reportable segment were as follows ($000s 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. |
19
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 Companys joint ventures is presented below ($000s 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 | ||||
PulteGroups 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 | ||||||
PulteGroups 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 ventures 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 Companys 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 ventures 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 Companys 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 Companys 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.
20
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 ($000s 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 Companys 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 Companys 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 Companys consolidated results of operations or financial position. To the extent that the Companys results of operations improve, the deferred tax asset valuation allowance may be reduced, which could result in a non-cash tax benefit.
21
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. | Income taxes (continued) |
As a result of the Companys merger with Centex, the Companys ability to use certain of Centexs pre-ownership net operating losses and built-in losses or deductions will be limited under Section 382 of the Internal Revenue Code. The Companys 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 Centexs 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 Companys 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 Companys 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 Companys financial instruments measured at fair value on a recurring basis are summarized below ($000s 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 Companys 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 Companys assets measured at fair value on a non-recurring basis are summarized below ($000s 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 |
22
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 Companys 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
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 facilitys 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 Companys 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 Companys 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 Companys 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
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 Centexs mortgage operations, but excludes loans originated by Centexs 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 Companys exposure. Requests not immediately refuted undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine the Companys 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 Companys 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 Companys current estimates. Changes in these liabilities were as follows ($000s 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
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 Centexs 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 Companys estimates reflected in the recorded reserves relating to such matter, the Company could incur additional charges that could be significant.
26
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 homes 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 Companys 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 Companys warranty liabilities were as follows ($000s 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys purchased coverage levels. The Companys 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.
27
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 ($000s 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 Companys 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 Companys 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
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. | Supplemental Guarantor information |
All of the Companys senior notes are guaranteed jointly and severally on a senior basis by each of the Companys 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
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. | Supplemental Guarantor information (continued) |
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2011
($000s 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
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. | Supplemental Guarantor information (continued) |
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010
($000s 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
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
($000s 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
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
($000s 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
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
($000s 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
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
($000s 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
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
($000s 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 | ||||||||||
36
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
($000s 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 | ||||||||||
37
Item 2. Managements 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 governments 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.
38
Overview (continued)
The following is a summary of our operating results by line of business ($000s 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: |
||||||||||||||||