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EX-31.(B) - CERTIFICATION - PULTEGROUP INC/MI/dex31b.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

 

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

Commission File Number 1-9804

 

 

PULTE HOMES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MICHIGAN   38-2766606

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

100 Bloomfield Hills Parkway, Suite 300

Bloomfield Hills, Michigan 48304

(Address of principal executive offices) (Zip Code)

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

 

 

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  ¨    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 October 31, 2009: 380,367,107

 

 

 


Table of Contents

PULTE HOMES, INC.

INDEX

 

          Page No.
PART I    FINANCIAL INFORMATION   
    Item 1    Financial Statements   
   Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008    3
   Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008    4
   Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2009 and 2008    5
   Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008    6
   Notes to Condensed Consolidated Financial Statements    7
    Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations    43
    Item 3    Quantitative and Qualitative Disclosures About Market Risk    61
    Item 4    Controls and Procedures    62
PART II    OTHER INFORMATION   
    Item 1a    Risk Factors    63
    Item 2    Unregistered Sales of Equity Securities and Use of Proceeds    63
    Item 4    Submission of Matters to a Vote of Security Holders    64
    Item 6    Exhibits    64
SIGNATURES    66

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PULTE HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)

 

     September 30,
2009
   December 31,
2008
     (Unaudited)    (Note)

ASSETS

     

Cash and equivalents

   $ 1,516,623    $ 1,655,264

Restricted cash

     34,495      —  

Unfunded settlements

     15,124      11,988

House and land inventory

     5,630,816      4,201,289

Land held for sale

     93,193      164,954

Land, not owned, under option agreements

     203,525      171,101

Residential mortgage loans available-for-sale

     225,798      297,755

Investments in unconsolidated entities

     70,614      134,886

Goodwill

     1,394,965      —  

Intangible assets, net

     193,823      102,554

Other assets

     826,828      595,098

Income taxes receivable

     39,082      373,569

Deferred income tax assets, net

     37,587      —  
             
   $ 10,282,473    $ 7,708,458
             

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Liabilities:

     

Accounts payable, including book overdrafts of $102,807 and $100,232 in 2009 and 2008, respectively

   $ 333,467    $ 218,135

Customer deposits

     93,596      40,950

Accrued and other liabilities

     1,912,899      1,079,195

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

     63,590      237,560

Income tax liabilities

     285,596      130,615

Senior notes

     4,279,915      3,166,305
             

Total liabilities

     6,969,063      4,872,760

Equity:

     

Equity attributable to Pulte Homes, Inc.

     3,309,389      2,835,698

Noncontrolling interests

     4,021      —  
             

Total equity

     3,313,410      2,835,698
             
   $ 10,282,473    $ 7,708,458
             

Note: The Condensed Consolidated Balance Sheet at December 31, 2008, 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


Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(000’s omitted, except per share data)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues:

        

Homebuilding

        

Home sale revenues

   $ 1,053,787      $ 1,508,825      $ 2,272,231      $ 4,460,393   

Land sale revenues

     3,004        12,964        7,785        39,973   
                                
     1,056,791        1,521,789        2,280,016        4,500,366   

Financial Services

     34,303        36,438        73,550        118,871   
                                
     1,091,094        1,558,227        2,353,566        4,619,237   
                                

Homebuilding Cost of Revenues:

        

Home cost of revenues

     1,080,256        1,599,064        2,703,085        4,981,387   

Land cost of revenues

     12,492        27,910        24,760        160,979   
                                
     1,092,748        1,626,974        2,727,845        5,142,366   

Financial Services expenses

     42,921        26,348        92,296        82,980   

Selling, general and administrative expenses

     221,538        200,350        470,360        598,135   

Other expense (income), net

     89,819        2,098        70,407        15,674   

Interest income

     (1,814     (6,362     (7,989     (19,936

Interest expense

     431        723        1,345        2,179   

Equity loss (income) from unconsolidated entities

     4,170        2,687        57,196        713   
                                

Loss from continuing operations before income taxes

     (358,719     (294,591     (1,057,894     (1,202,874

Income tax expense (benefit)

     2,668        (14,204     7,776        (67,926
                                

Net loss

   $ (361,387   $ (280,387   $ (1,065,670   $ (1,134,948
                                

Per share data:

        

Net loss:

        

Basic and diluted

   $ (1.15   $ (1.11   $ (3.88   $ (4.48
                                

Cash dividends declared

   $ —        $ 0.04      $ —        $ 0.12   
                                

Number of shares used in calculation:

        

Basic and diluted

     312,996        253,582        274,327        253,401   
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

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

 

     Common Stock    

Additional

Paid-in

   

Accumulated

Other

Comprehensive

    Retained    

Equity

Attributable to

    Non-
Controlling
   Total
Equity
 
     Shares     $     Capital     Income (Loss)     Earnings     Pulte Homes, Inc.     Interests   

Shareholders’ Equity, January 1, 2009

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

Stock option exercises

   338        3        2,602        —          —          2,605        —        2,605   

Stock awards, net of cancellations

   263        3        (3     —          —          —          —        —     

Stock issued for Centex merger

   122,178        1,222        1,502,761        —          —          1,503,983        —        1,503,983   

Stock repurchases

   (551     (6     (3,881     —          (2,568     (6,455     —        (6,455

Stock-based compensation

   —          —          35,603        —          —          35,603        —        35,603   

Consolidation of noncontrolling interests

   —          —          —          —          —          —          4,021      4,021   

Comprehensive income (loss):

               —             —     

Net loss

   —          —          —          —          (1,065,670     (1,065,670     —        (1,065,670

Change in fair value of derivatives, net of tax

   —          —          —          630        —          630        —        630   

Foreign currency translation adjustments

   —          —          —          2,995        —          2,995        —        2,995   
                                 

Total comprehensive loss

   —          —          —          —          —          (1,062,045     —        (1,062,045
                                                             

Shareholders’ Equity, September 30, 2009

   380,397      $ 3,804      $ 2,931,872      $ (474   $ 374,187      $ 3,309,389      $ 4,021    $ 3,313,410   
                                                             

Shareholders’ Equity, January 1, 2008

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

Stock option exercises

   233        2        1,865        —          —          1,867        —        1,867   

Excess tax benefits (deficiencies) from stock-based compensation

   —          —          (6,305     —          —          (6,305     —        (6,305

Stock awards, net of cancellations

   629        4        (4     —          —          —          —        —     

Cash dividends declared - $0.12 per share

   —          —          —          —          (30,851     (30,851     —        (30,851

Stock repurchases

   (483     (2     (1,348     —          (2,674     (4,024     —        (4,024

Stock-based compensation

   —          —          35,562        —          —          35,562        —        35,562   

Comprehensive income (loss):

               —             —     

Net loss

   —          —          —          —          (1,134,948     (1,134,948     —        (1,134,948

Change in fair value of derivatives, net of tax

   —          —          —          1,325        —          1,325        —        1,325   

Foreign currency translation adjustments

   —          —          —          540        —          540        —        540   
                                 

Total comprehensive loss

   —          —          —          —          —          (1,133,083     —        (1,133,083
                                                             

Shareholders’ Equity, September 30, 2008

   257,478      $ 2,575      $ 1,392,274      $ (3,018   $ 1,791,528      $ 3,183,359      $ —      $ 3,183,359   
                                                             

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTE HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)

 

     For The Nine Months Ended
September 30,
 
     2009     2008  

Cash flows from operating activities:

    

Net loss

   $ (1,065,670   $ (1,134,948

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

    

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

     634,724        1,147,190   

Amortization and depreciation

     39,342        57,541   

Stock-based compensation expense

     35,603        35,562   

Deferred income taxes

     —          (142,298

Equity loss (income) from unconsolidated entities

     57,196        713   

Distributions of earnings from unconsolidated entities

     890        2,561   

Loss on debt repurchases

     31,501        1,594   

Other, net

     6,147        (854

Increase (decrease) in cash due to:

    

Restricted Cash

     10,458        —     

Inventories

     40,529        567,525   

Residential mortgage loans available-for-sale

     201,924        228,279   

Income taxes receivable

     363,310        231,418   

Other assets

     136,673        66,342   

Accounts payable, accrued and other liabilities

     (167,776     (330,275

Income tax liabilities

     5,660        32,963   
                

Net cash provided by operating activities

     330,511        763,313   
                

Cash flows from investing activities:

    

Distributions from unconsolidated entities

     3,393        6,038   

Investments in unconsolidated entities

     (28,451     (49,554

Cash acquired with Centex merger, net of cash used

     1,748,742        —     

Net change in loans held for investment

     12,526        2,085   

Proceeds from the sale of fixed assets

     1,547        4,903   

Capital expenditures

     (25,458     (14,507
                

Net cash provided by (used in) investing activities

     1,712,299        (51,035
                

Cash flows from financing activities:

    

Net repayments under Financial Services credit arrangements

     (173,970     (248,204

Repayment of other borrowings

     (2,004,201     (317,997

Issuance of common stock

     2,605        1,867   

Stock repurchases

     (6,455     (4,024

Dividends paid

     —          (30,851
                

Net cash used in financing activities

     (2,182,021     (599,209
                

Effect of exchange rate changes on cash and equivalents

     570        512   
                

Net increase (decrease) in cash and equivalents

     (138,641     113,581   

Cash and equivalents at beginning of period

     1,655,264        1,060,311   
                

Cash and equivalents at end of period

   $ 1,516,623      $ 1,173,892   
                

Supplemental Cash Flow Information:

    

Interest paid, net of amounts capitalized

   $ 26,306      $ 28,884   
                

Income taxes refunded, net

   $ (362,864   $ (183,704
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of presentation and significant accounting policies

Basis of presentation

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

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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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

Reclassifications

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

Other expense (income), net

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009     2008  

Loss on debt retirements

   $ 47,402    $ 3      $ 31,501      $ 1,594   

Write-off of deposits and pre-acquisition costs

     17,209      (931     18,181        19,428   

Lease exit and related costs

     12,205      205        14,964        2,287   

Amortization of intangible assets

     4,656      2,038        8,733        6,114   

Miscellaneous expense (income), net

     8,347      783        (2,972     (13,749
                               
   $ 89,819    $ 2,098      $ 70,407      $ 15,674   
                               

 

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Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

Earnings per share

Basic earnings per share is computed by dividing income (loss) available to common shareholders (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and non-vested shares of restricted stock. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. For the three and nine months ended September 30, 2009 and 2008, 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.

Effective January 1, 2009, the Company adopted the two-class method as required by Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” (“ASC 260”). Under ASC 260, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The Company’s outstanding restricted stock and restricted stock units are considered participating securities under the ASC. The following table presents the reconciliation of earnings per share (000’s omitted, except per share data):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Net loss

   $ (361,387   $ (280,387   $ (1,065,670   $ (1,134,948

Earnings attributable to restricted shareholders

     —          (151     —          (463
                                

Net loss available to common shareholders

   $ (361,387   $ (280,538   $ (1,065,670   $ (1,135,411
                                

Per share data:

        

Net loss (basic and diluted)

   $ (1.15   $ (1.11   $ (3.88   $ (4.48

Earnings attributable to restricted shareholders

     —          —          —          —     
                                

Net loss available to common shareholders (basic and diluted)

   $ (1.15   $ (1.11   $ (3.88   $ (4.48
                                

Number of shares used in calculation:

        

Basic and diluted

     312,996        253,582        274,327        253,401   
                                

 

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Table of Contents

PULTE HOMES, 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 will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under ASC 810, “Consolidation” (“ASC 810”), if the entity holding the land under option is a variable interest entity (“VIE”), the Company’s deposit represents a variable interest in that entity. If the Company is determined to be the primary beneficiary of the VIE, then the Company is required to consolidate the VIE, though creditors of the VIE have no recourse against the Company.

In applying the provisions of ASC 810, the Company evaluates all land option agreements with VIEs to determine whether the Company is the primary beneficiary based upon an analysis of the expected gains and losses of the entity. The Company generally has little control or influence over the operations of these VIEs due to the Company’s lack of an equity interest in them. Therefore, when the Company’s requests for financial information are denied, the Company is required to make certain assumptions about the assets, liabilities, and financing of such entities. The VIE is generally protected from the first dollar of loss under the Company’s land option agreement due to the Company’s deposit. Likewise, the VIE’s gains are generally capped based on the purchase price within the land option agreement. The Company’s evaluation of expected gains and losses includes consideration of a number of factors, including the size of the Company’s initial investment relative to the overall contract price, the risk of obtaining necessary entitlement approvals, the risk related to land development required under the land option agreement, and the risk of potential changes in market value of the land under contract during the contract period.

Generally, financial statements for the VIEs are not available. As a result, for VIEs the Company is required to consolidate, the Company records the remaining contractual purchase price under the applicable land option agreement to land, not owned, under option agreements with an offsetting increase to accrued and other liabilities. Consolidation of these VIEs has no impact on the Company’s results of operations or cash flows. As of September 30, 2009 and December 31, 2008, the Company determined that it was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements with scheduled expiration dates through 2010. As a result, the Company recorded $51.3 million and $13.9 million at September 30, 2009 and December 31, 2008, respectively, as land, not owned, under option agreements with the corresponding liability classified within accrued and other liabilities. During the third quarter of 2009, in conjunction with the Centex merger, land option agreements were acquired, increasing the number of VIEs consolidated at September 30, 2009 compared with December 31, 2008. The Company did not provide financial or other support to VIEs other than as stipulated in the land option agreements.

The Company’s maximum exposure to loss related to these VIEs is limited to the Company’s deposits and pre-acquisition costs under the applicable land option agreements. In recent years, the Company has canceled a significant number of land option agreements, which has resulted in significant write-offs of the related deposits and pre-acquisition costs but has not exposed the Company to the overall risks or losses of the applicable VIEs.

In addition to land option agreements consolidated under ASC 810, the Company determined that certain land option agreements represent financing arrangements pursuant to ASC 470-40, “Accounting for Product Financing Arrangements” (“ASC 470-40”), even though the Company has no direct obligation to pay these future amounts. As a result, the Company recorded $152.2 million and $156.6 million at September 30, 2009 and December 31, 2008, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. Such amounts represent the remaining purchase price under the land option agreements in the event the Company exercises the purchase rights under the agreements. Also included in land, not owned, under option agreements is inventory related to land sales for which the recognition of such sales has been deferred because their terms, primarily related to the Company’s continuing involvement with the land, did not meet the full accrual method criteria under ASC 360-20, “Real Estate Sales.” Such amounts were not material at either September 30, 2009 or December 31, 2008.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

Land, not owned, under option agreements (continued)

 

The following provides a summary of the Company’s interests in land option agreements as of September 30, 2009 and December 31, 2008 ($000’s omitted):

 

     September 30, 2009     December 31, 2008  
     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

   $ 8,228    $ 59,274    $ 51,319  (a)    $ 1,923    $ 15,841    $ 13,918  (a) 

Unconsolidated VIEs

     94,029      602,421      —           81,734      600,136      —      

Other land option agreements

     118,387      426,681      152,206  (b)      141,635      711,182      157,183  (b) 
                                            
   $ 220,644    $ 1,088,376    $ 203,525      $ 225,292    $ 1,327,159    $ 171,101   
                                            

 

(a) Represents the remaining purchase price for land option agreements consolidated pursuant to ASC 810.
(b) Represents the remaining purchase price for other consolidated land option agreements, primarily pursuant to ASC 470-40.

The above summary includes land option agreements consolidated under ASC 810 and ASC 470-40 as well as all other land option agreements. The remaining purchase price of all land option agreements totaled $1.0 billion at September 30, 2009 and $1.3 billion at December 31, 2008.

Allowance for warranties

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

Changes to the Company’s warranty liability were as follows ($000’s omitted):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Warranty liability, beginning of period

   $ 42,230      $ 66,359      $ 58,178      $ 90,917   

Warranty reserves provided

     8,962        12,126        20,346        34,751   

Liabilities assumed with Centex merger

     42,405        —          42,405        —     

Payments

     (12,106     (12,905     (30,302     (47,594

Other adjustments

     (1,056     (1,246     (10,192     (13,740
                                

Warranty liability, end of period

   $ 80,435      $ 64,334      $ 80,435      $ 64,334   
                                

 

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PULTE HOMES, 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,” (“ASC 825”) the Company has elected the fair value option for its portfolio loans available-for-sale and for first mortgage loans originated subsequent to December 31, 2007. ASC 825 permits entities to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. 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 September 30, 2009, residential mortgage loans available-for-sale, all of which were accounted for at fair value, had an aggregate fair value of $225.8 million and an aggregate outstanding principal balance of $225.0 million. Interest income on these loans is recorded in Financial Services revenues. The net gain (loss) resulting from changes in fair value of these loans totaled ($3.2) million and ($2.6) million for the three months ended September 30, 2009 and 2008, respectively, and ($4.0) million and ($1.4) million for the nine months ended September 30, 2009 and 2008, 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 $18.7 million and $19.8 million during the three months ended September 30, 2009 and 2008, respectively, and $40.7 million and $70.2 million for the nine months ended September 30, 2009 and 2008, 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 days after sale. The Company establishes reserves for this liability at the time the sale is recorded. Such reserves totaled $3.2 million and $3.9 million at September 30, 2009 and December 31, 2008, respectively, and are included in accrued and other liabilities. Servicing rights recognized in Financial Services revenues totaled $11.7 million and $9.5 million during the three months ended September 30, 2009 and 2008, respectively, and $18.9 million and $36.2 million during the nine months ended September 30, 2009 and 2008, respectively.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

Derivative instruments and hedging activities

The Company is exposed to market risks from commitments to lend, movements in interest rates, and cancelled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, the Company uses other derivative financial instruments to economically hedge the interest rate lock commitment. These financial instruments can include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury futures contracts, and options on cash forward placement contracts on mortgage-backed securities. The Company does not use any derivative financial instruments for trading purposes. The Company enters into one of the aforementioned derivative financial instruments upon accepting interest rate lock commitments. The changes in the fair value of the interest rate lock commitment and the other derivative financial instruments are recognized in current period earnings and the fair value is reflected in other assets or other liabilities in the Condensed Consolidated Balance Sheets. The gains and losses are included in Financial Services revenues.

Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. At September 30, 2009, the Company had interest rate lock commitments in the total amount of $296.9 million which were originated at interest rates prevailing at the date of commitment. Since the Company can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements of the Company. The Company evaluates the creditworthiness of these transactions through its normal credit policies.

Cash forward placement contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Whole loan investor commitments are obligations of the investor to buy loans at a specified price within a specified time period. Mandatory cash forward contracts on mortgage-backed securities are the predominant derivative financial instruments used to minimize the market risk during the period from the time the Company extends an interest rate lock to a loan applicant until the time the loan is sold to an investor. Forward contracts are valued based on market prices for similar instruments. Fair values for whole loan commitments are based on values in the Company’s whole loan sales agreements. At September 30, 2009, the Company had unexpired cash forward contracts and whole loan investor commitments of $457.1 million and $58.6 million, respectively.

There are no credit-risk-related contingent features within the Company’s derivative agreements. Gains and losses on interest rate lock commitments are offset by corresponding gains or losses on forward contracts and whole loan commitments. At September 30, 2009, the maximum length of time that the Company was exposed to the variability in future cash flows of derivative instruments was approximately 75 days.

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

 

     September 30, 2009
     Other Assets    Other Liabilities

Interest rate lock commitments

   $ 8,031    $ 1

Forward contracts

     262      7,180

Whole loan commitments

     1,193      1
             
   $ 9,486    $ 7,182
             

Subsequent events

The Company evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission on November 6, 2009.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

New accounting pronouncements

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

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (codified in “ASC 805”). ASC 805 modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any non-controlling interest in the acquired company at the acquisition-date fair value. In addition, ASC 805 requires the expensing of acquisition-related transaction and restructuring costs, and certain contingent assets and liabilities acquired, as well as contingent consideration, to be recognized at fair value. ASC 805 also modifies the accounting for certain acquired income tax assets and liabilities. ASC 805 is effective for new acquisitions consummated on or after January 1, 2009. The adoption of ASC 805 had a material impact on the Company’s consolidated financial statements for the period ending September 30, 2009 upon the merger with Centex.

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

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

In June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (codified in “ASC 260”). Under ASC 260, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The Company’s outstanding restricted stock awards are considered participating securities under ASC 260. ASC 260 was effective for the Company’s fiscal year beginning January 1, 2009 and requires retrospective application. The adoption of the ASC 260 did not have a material impact on the Company’s reported earnings per share.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” (codified in “ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for the Company for the period ending June 30, 2009. The adoption did not have a material impact on the Company’s consolidated financial statements.

 

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Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

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

 

New accounting pronouncements (continued)

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140,” (codified in “ASC 860”). ASC 860 requires enhanced disclosures regarding transfers of financial assets and continuing exposure to the related risks. ASC 860 also eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. ASC 860 will be effective for the Company’s fiscal year beginning January 1, 2010. The Company is currently evaluating the effects of ASC 860 on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (codified in “ASC 810-10”). ASC 810 amends existing consolidation guidance for variable interest entities, requires ongoing reassessment to determine whether a variable interest entity must be consolidated, and requires additional disclosures regarding involvement with variable interest entities and any significant changes in risk exposure due to that involvement. ASC 810 will be effective for the Company’s fiscal year beginning January 1, 2010. The Company is currently evaluating the effects of ASC 810-10 on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles,” (codified in “ASC 105”), which created a single source of authoritative nongovernmental U.S. GAAP. The Codification was effective for the Company’s interim and annual periods ending after September 15, 2009. Upon adoption, all existing non-SEC accounting and reporting standards were superseded. All other non-SEC accounting literature not included in the Codification are considered non-authoritative. The required disclosures have been incorporated into and did not have a material impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-5, “Measuring Liabilities at Fair Value” (“ASU 2009-05”), amending ASC 820 to provide additional guidance to clarify the measurement of liabilities at fair value. ASU 2009-05 will be effective for the Company’s quarter ended December 31, 2009. The Company is currently evaluating the effects of ASU 2009-05 on its consolidated financial statements.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger

On August 18, 2009, the Company completed the acquisition of Centex through the merger of Pulte’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among Pulte, Pi Nevada Building Company, and Centex (the “Merger Agreement”). As a result of the merger, Centex became a wholly-owned subsidiary of Pulte. Accordingly, the results of Centex are included in the Company’s consolidated financial statements from the date of the merger. For the period from August 19, 2009 to September 30, 2009, Centex’s revenues and net loss were $342.4 million and $45.5 million, respectively.

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

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

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

 

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Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger (continued)

 

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

 

Calculation of consideration transferred

  

Centex common shares exchanged (including restricted stock)

     124,484   

Centex restricted stock units exchanged

     373   
        
     124,857   

Exchange ratio

     0.975   
        

Pulte common shares and restricted stock units issued

     121,736   

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

   $ 12.33   
        

Consideration attributable to common stock

   $ 1,501,005   

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

     4,036   

Cash paid for fractional shares

     50   
        

Total consideration transferred

   $ 1,505,091   
        

Assets acquired and liabilities assumed

  

Cash and equivalents

   $ 1,748,792   

Restricted cash

     24,037   

Inventory

     2,088,094   

Residential mortgage loans available-for sale

     129,955   

Intangible assets

     100,000   

Goodwill (b)

     1,394,965   

Other assets

     459,772   
        

Total assets acquired

     5,945,615   

Accounts payable

     (113,070

Accrued and other liabilities

     (1,094,466

Income tax liabilities

     (147,672

Senior notes

     (3,085,316
        

Total liabilities assumed

     (4,440,524
        

Total net assets acquired

   $ 1,505,091   
        

 

(a) Reflects the portion of the fair value of the awards attributable to pre-merger employee service. The remaining fair value of the awards will be recognized in Pulte’s operating results over the applicable periods.
(b) Goodwill resulting from the Centex merger is not deductible for federal income tax purposes, though Centex has approximately $40 million of goodwill deductible for tax purposes related to prior acquisitions. The assignment of goodwill to reporting units has not yet been completed.

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

The Company determined the fair value of inventory on a community-by-community basis primarily using a combination of market comparable land transactions, where available, and discounted cash flow models, though independent appraisals were also utilized in certain instances. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. See Note 4 for additional discussion of the factors impacting the fair value of land inventory.

 

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Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

2. Centex merger (continued)

 

The fair values for acquired intangible assets were determined based on valuations performed by independent valuation specialists. Of the $100.0 million of acquired intangible assets, $96.0 million related to tradenames that will generally be amortized over 20 years. The remaining $4.0 million related to acquired backlog at August 18, 2009 and will be amortized as the related customer orders close. Amortization expense for these assets totaled $2.6 million for the three and nine month ended September 30, 2009, which is included in the Condensed Consolidated Statement of Operations within other expense (income), net.

The Company has completed the majority of its business combination accounting as of September 30, 2009 and expects to substantially complete the remainder in the fourth quarter of 2009. As of September 30, 2009, the Company had not received final valuations from certain independent valuation specialists, including the valuation of acquired property and equipment and assumed casualty insurance liabilities. Additionally, the Company had not completed its final review of the valuation of acquired inventory, investments in unconsolidated entities, income taxes and deferred income tax assets and liabilities, and certain other assets and liabilities. Final determinations of the values of assets acquired and liabilities assumed may result in adjustments to the values presented above and a corresponding adjustment to goodwill.

Goodwill largely consists of expected synergies resulting from the acquisition and the estimated economic value attributable to Centex’s deferred tax assets. The Company expects the combined entity to achieve significant savings in corporate and divisional overhead costs and interest costs. Additional synergies are expected in the areas of purchasing leverage and integrating the combined organization’s best practices in operational effectiveness. The Company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional brands.

Transaction and integration costs

Transaction and integration costs directly related to the Centex merger, excluding the impact of restructuring costs and acquisition accounting adjustments, totaled $31.9 million and $37.6 million for the three and nine months ended September 30, 2009, the majority of which are included in the Consolidated Statements of Operations within selling, general and administrative expenses. Such costs were expensed as incurred in accordance with ASC 805. See Note 3 for a discussion of restructuring costs incurred in connection the Centex merger.

Supplemental pro forma information

The following represents pro forma operating results as if Centex had been included in the Company’s Condensed Consolidated Statements of Operations as of the beginning of the fiscal years presented ($000’s omitted):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenue

   $ 1,395,397      $ 2,563,232      $ 4,055,057      $ 9,064,669   

Net loss

   $ (487,783   $ (483,245   $ (1,518,939   $ (2,421,468

Loss per common share - basic and diluted

   $ (1.30   $ (1.29   $ (4.04   $ (6.46

The supplemental pro forma operating results have been determined after adjusting the operating results of Centex to reflect additional amortization that would have been recorded assuming the fair value adjustments to intangible assets had been applied as of January 1, 2009 and 2008. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts. Additionally, given the significant volatility in the homebuilding industry in recent periods, such a presentation would not be indicative of future operating results.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

3. Restructuring

In connection with the Centex merger, the Company initiated a restructuring plan to leverage corporate and divisional overhead costs. The restructuring plan includes the consolidation of selected corporate and divisional offices, the disposal of related property and equipment, and the elimination of approximately 800 positions. Actions related to the restructuring plan are expected to be substantially completed by early 2010. Included below is a summary of charges incurred and expected to be incurred related to the restructuring ($000’s omitted):

 

     Incurred to Date    Total Expected to
be Incurred

Employee severance benefits

   $ 31,788    $ 42,500

Lease exit costs

     10,972      16,500

Other

     1,607      3,500
             

Total restructuring charges

   $ 44,367    $ 62,500
             

Employee severance benefits are included within selling, general and administrative expense while the lease exit and other costs are included in other expense (income), net in the Consolidated Statements of Operations. A significant portion of the cash expenditures related to employee severance benefits had been incurred as of September 30, 2009 while the remainder will be incurred in the near term. Cash expenditures related to lease exit costs will be incurred over the remaining terms of the affected office leases, which generally extend several years. The restructuring costs relate to each of the Company’s reportable segments and were not material to any one segment.

In response to the challenging operating environment, the Company had taken a series of restructuring actions prior to the Centex merger designed to reduce ongoing operating costs and improve operating efficiencies. As a result of these actions and the merger with Centex, the Company incurred total charges of $45.6 million and $3.5 million during the three months ended September 30, 2009 and 2008, respectively, and $52.0 million and $15.9 million during the nine months ended September 30, 2009 and 2008, respectively. Such costs include those costs described above resulting from the Centex merger and were primarily attributable to employee severance benefits and lease exit costs.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale

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

 

     September 30,
2009
   December 31,
2008

Homes under construction

   $ 1,938,056    $ 1,325,672

Land under development

     2,769,670      2,002,039

Land held for future development

     923,090      873,578
             
   $ 5,630,816    $ 4,201,289
             

The Company capitalizes interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the cyclical timing of closings. Interest expensed to homebuilding home cost of revenues for the three and nine months ended September 30, 2009 included $15.1 million and $57.0 million, respectively, of capitalized interest related to land and community valuation adjustments compared with $19.3 million and $64.3 million, respectively, for the three and nine months ended September 30, 2008. Information related to interest capitalized into homebuilding inventory is as follows ($000’s omitted):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Interest in inventory, beginning of period

   $ 187,398      $ 176,885      $ 170,020      $ 160,598   

Interest capitalized

     60,890        53,369        166,591        166,780   

Interest expensed

     (36,173     (52,526     (124,496     (149,650
                                

Interest in inventory, end of period

   $ 212,115      $ 177,728      $ 212,115      $ 177,728   
                                

Interest incurred*

   $ 61,322      $ 54,092      $ 167,938      $ 168,959   
                                

 

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

Land Valuation Adjustments and Write-Offs

Land and community valuation adjustments

In accordance with ASC 360, “Property, Plant, and Equipment” (“ASC 360”), the Company records valuation adjustments on land inventory and related communities under development when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. For communities that are not yet active, a significant additional consideration includes an evaluation of the regulatory environment related to the probability, timing, and cost of obtaining necessary approvals from local municipalities and any potential concessions that may be necessary in order to obtain such approvals.

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

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale (continued)

 

Land Valuation Adjustments and Write-Offs (continued)

 

Land and community valuation adjustments (continued)

 

The Company determines the fair value of a community’s inventory primarily using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. The assumptions used in our discounted cash flow models are specific to each community tested for impairment and typically do not assume improvements in market conditions except in limited circumstances in the latter years of long-lived communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates. The Company’s determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community’s fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community’s cash flow streams. For example, communities that are entitled and near completion will generally require a lower discount rate than communities that are not entitled and consist of multiple phases spanning several years of development and construction activity.

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

 

     2009    2008

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

   116    $ 351.2    $ 358.6    150    $ 597.8    $ 598.8

June 30

   43      82.4      109.2    48      198.9      153.5

September 30

   48      163.9      132.6    96      232.4      250.4
                         
         $ 600.4          $ 1,002.7
                         

The Company recorded these valuation adjustments in its Consolidated Statements of Operations within Homebuilding home cost of revenues. During the nine months ended September 30, 2009, the Company reviewed each of its land positions for potential impairment indicators and performed detailed impairment calculations for approximately 250 communities. The discount rate used in the Company’s determination of fair value for the impaired communities ranged from 12% to 21%, with an aggregate average of 15%. If conditions in the homebuilding industry or the Company’s local markets worsen in the future, the current difficult market conditions extend beyond the Company’s expectations, or the Company’s strategy related to certain communities changes, the Company may be required to evaluate its assets, including additional projects, for future impairments or write-downs, which could result in future charges that might be significant.

Net realizable value adjustments – land held for sale

The Company acquires land primarily for the construction of homes for sale to customers but periodically sells select parcels of land to third parties for commercial or other development. Additionally, the Company may determine that certain of its land assets no longer fit into its strategic operating plans. In such instances, the Company classifies the land asset as land held for sale, assuming the criteria in ASC 360 are met. During 2009, a significant portion of land previously classified as land held for sale was reclassified to either land under development or land held for future development as a result of either a change in strategy related to the land or a change in market conditions.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

4. Inventory and land held for sale (continued)

Land Valuation Adjustments and Write-Offs (continued)

 

Net realizable value adjustments – land held for sale (continued)

 

In accordance with ASC 360, the Company values land held for sale at the lower of carrying value or fair value less costs to sell. In determining the fair value of land held for sale, the Company considers recent legitimate offers received, prices for land in recent comparable sales transactions, and other factors. As a result of changing market conditions in the real estate industry, a portion of the Company’s land held for sale was written down to net realizable value. During the three months ended September 30, 2009 and 2008, the Company recognized net realizable value adjustments related to land held for sale of $8.3 million and $15.9 million, respectively, and $16.2 million and $125.1 million for the nine months ended September 30, 2009 and 2008, respectively. The Company records these net realizable value adjustments in its Consolidated Statements of Operations within Homebuilding land cost of revenues.

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

 

     September 30,
2009
    December 31,
2008
 

Land held for sale, gross

   $ 156,848      $ 314,112   

Net realizable value reserves

     (63,655     (149,158
                

Land held for sale, net

   $ 93,193      $ 164,954   
                

Write-off of deposits and pre-acquisition costs

From time to time, the Company writes off certain deposits and pre-acquisition costs related to land option contracts the Company no longer plans to pursue. Such decisions take into consideration changes in national and local market conditions, the willingness of land sellers to modify terms of the related purchase agreement, the timing of required land takedowns, the availability and best use of necessary incremental capital, and other factors. The Company wrote off (net of recoveries) deposits and pre-acquisition costs in the amount of $17.2 million and ($0.9) million during the three months ended September 30, 2009 and 2008, respectively, and $18.2 million and $19.4 million for the nine months ended September 30, 2009 and 2008, respectively. The Company records these write-offs of deposits and pre-acquisition costs in its Consolidated Statements of Operations within other expense (income), net.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information

The Company’s Homebuilding operating segments are engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for first-time, first and second move-up, and active adult home buyers. The Company has determined that its Homebuilding operating segments are its Areas. In connection with the Centex merger, the Company realigned the organizational structure for certain of its markets. The operating data by segment provided in this note have been reclassified to conform to the current presentation. Accordingly, the Company’s reportable Homebuilding segments are as follows:

 

Northeast:    Northeast Area includes the following states:
   Connecticut, Delaware, Maryland, Massachusetts, New Jersey,
   New York, Pennsylvania, Rhode Island, Virginia
Southeast:    Southeast Area includes the following states:
   Georgia, North Carolina, South Carolina, Tennessee
Gulf Coast:    Gulf Coast Area includes the following states:
   Florida, Texas
Midwest:    Midwest Area includes the following states:
   Colorado, Illinois, Indiana, Missouri, Michigan, Minnesota, Ohio
Southwest:    Southwest Area includes the following states:
   Arizona, Nevada, New Mexico
*West:    West Area includes the following states:
   California, Oregon, Washington

 

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

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

Evaluation of segment performance is based on operating earnings from continuing operations before provision for income taxes which, for the Homebuilding segments, is defined as home sales (settlements) and land sale revenues less home cost of revenues, land cost of revenues, and certain selling, general, and administrative and other expenses, plus equity income from unconsolidated entities, which are incurred by or allocated to the Homebuilding segments. Operating earnings for the Financial Services segment is defined as revenues less costs associated with the Company’s mortgage and title operations and certain selling, general, and administrative expenses incurred by or allocated to the Financial Services segment. Each reportable segment generally follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

     Operating Data by Segment ($000’s omitted)  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues:

        

Northeast

   $ 189,073      $ 202,445      $ 338,373      $ 596,833   

Southeast

     150,032        222,214        311,885        689,224   

Gulf Coast

     247,362        293,979        550,080        909,995   

Midwest

     134,866        186,956        275,366        528,997   

Southwest

     154,534        409,538        428,155        1,153,747   

West

     174,099        206,657        369,332        621,570   

Other homebuilding (a)

     6,825        —          6,825        —     
                                
     1,056,791        1,521,789        2,280,016        4,500,366   

Financial Services

     34,303        36,438        73,550        118,871   
                                

Consolidated revenues

   $ 1,091,094      $ 1,558,227      $ 2,353,566      $ 4,619,237   
                                

Income (loss) before income taxes:

        

Northeast

   $ (61,516   $ (2,178   $ (190,979   $ (44,692

Southeast

     (6,802     5,202        (47,943     (1,012

Gulf Coast

     (37,315     (12,263     (183,387     (183,211

Midwest

     (6,994     (27,553     (54,798     (80,695

Southwest

     (47,295     (133,770     (223,778     (523,171

West

     (23,350     (29,518     (93,052     (157,736

Other homebuilding (a)

     (108,333     (101,886     (192,584     (237,900
                                
     (291,605     (301,966     (986,521     (1,228,417

Financial Services (b)

     (8,612     10,092        (18,730     35,938   
                                

Total segment income (loss) before income taxes

     (300,217     (291,874     (1,005,251     (1,192,479

Other non-operating (c)

     (58,502     (2,717     (52,643     (10,395
                                

Consolidated loss before income taxes (d)

   $ (358,719   $ (294,591   $ (1,057,894   $ (1,202,874
                                

 

(a) Other homebuilding includes the Company’s operations in Hawaii and Puerto Rico, certain wind down operations, amortization of intangible assets, and amortization of capitalized interest. Capitalized interest amortization totaled $36.2 million and $52.5 million for the three months ended September 30, 2009 and 2008, respectively, and $124.5 million and $149.7 million for the nine months ended September 30, 2009 and 2008, respectively.
(b) Financial Services income before income taxes includes interest expense of $0.2 million and $1.5 million for the three months ended September 30, 2009 and 2008, respectively, and $0.8 million and $4.9 million for the nine months ended September 30, 2009 and 2008, respectively. Financial Services income before income taxes includes interest income of $1.9 million and $3.5 million for the three months ended September 30, 2009 and 2008, respectively, and $5.0 million and $9.9 million for the nine months ended September 30, 2009 and 2008, 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. For the three and nine months ended September 30, 2009, Other non-operating also includes losses of $47.4 million and $31.5 million, respectively, related to the redemption of debt.
(d) Consolidated loss before income taxes includes selling, general and administrative expenses of $221.5 million and $200.4 million for the three months ended September 30, 2009 and 2008, respectively, and $470.4 million and $598.1 million for the nine months ended September 30, 2009 and 2008, respectively.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

     Valuation Adjustments and Write-Offs by Segment
($000’s omitted)
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009     2008  

Land and community valuation adjustments:

         

Northeast

   $ 63,251    $ 4,342      $ 137,752      $ 31,563   

Southeast

     4,919      4,834        29,235        34,780   

Gulf Coast

     4,376      13,006        126,273        162,199   

Midwest

     283      26,826        35,327        72,914   

Southwest

     26,021      144,665        137,129        481,111   

West

     18,638      36,957        77,622        155,348   

Other homebuilding (a)

     15,071      19,679        57,045        64,739   
                               
   $ 132,559    $ 250,309      $ 600,383      $ 1,002,654   
                               

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

         

Northeast

   $ —      $ 6,180      $ 4,796      $ 33,195   

Southeast

     —        127        310        468   

Gulf Coast

     6,987      5,350        10,011        23,112   

Midwest

     420      2,425        420        6,650   

Southwest

     900      4,210        900        52,677   

West

     —        (2,437     (277     9,006   
                               
   $ 8,307    $ 15,855      $ 16,160      $ 125,108   
                               

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

         

Northeast

   $ 49    $ (1,157   $ 328      $ (754

Southeast

     11      127        541        3,520   

Gulf Coast

     17,085      3        17,131        548   

Midwest

     55      61        56        802   

Southwest

     5      32        4        15,328   

West

     4      3        121        (16
                               
   $ 17,209    $ (931   $ 18,181      $ 19,428   
                               

Impairments of investments in unconsolidated joint ventures:

         

Northeast

   $ —      $ —        $ 31,121      $ —     

Southwest

     —        —          19,305        —     

West

     5,752      —          5,752        —     

Other homebuilding (c)

     —        1,378        2,428        3,088   
                               
   $ 5,752    $ 1,378      $ 58,606      $ 3,088   
                               

Total valuation adjustments and write-offs

   $ 163,827    $ 266,611      $ 693,330      $ 1,150,278   
                               

 

(a) Includes $15.1 million and $57.0 million, respectively, of write-offs of capitalized interest related to land and community valuation adjustments during the three and nine months ended September 30, 2009. For the three and nine months ended September 30, 2008, includes write-offs of capitalized interest related to land and community valuation adjustments of $19.3 million and $64.3 million, respectively, and a $0.4 million valuation adjustment related to a non-strategic land parcel recorded during the three and nine months ended September 30, 2008.
(b) Includes settlements related to costs previously in dispute and considered non-recoverable.
(c) Includes impairments related to joint ventures located in Puerto Rico.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

5. Segment information (continued)

 

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

 

     September 30, 2009
     Homes Under
Construction
   Land Under
Development
   Land Held
for Future
Development
   Total
Inventory
   Total
Assets

Northeast

   $ 364,801    $ 487,974    $ 201,001    $ 1,053,776    $ 1,461,811

Southeast

     252,587      422,423      55,387      730,397      976,984

Gulf Coast

     393,121      758,338      204,306      1,355,765      2,040,847

Midwest

     212,320      246,184      18,452      476,956      536,746

Southwest

     271,489      535,936      235,480      1,042,904      1,160,195

West

     294,862      185,145      146,732      626,740      832,539

Other homebuilding (a)

     148,876      133,670      61,732      344,278      479,870

Financial Services

     —        —        —        —        349,057

Other non-operating (b)

     —        —        —        —        2,444,424
                                  
   $ 1,938,056    $ 2,769,670    $ 923,090    $ 5,630,816    $ 10,282,473
                                  
     December 31, 2008
     Homes Under
Construction
   Land Under
Development
   Land Held
for Future
Development
   Total
Inventory
   Total
Assets

Northeast

   $ 190,287    $ 279,711    $ 146,580    $ 616,578    $ 897,526

Southeast

     146,381      205,152      36,506      388,039      585,450

Gulf Coast

     275,584      464,830      224,469      964,883      1,168,368

Midwest

     157,347      209,640      27,323      394,310      430,110

Southwest

     335,999      531,543      298,421      1,165,963      1,261,163

West

     198,225      208,393      96,083      502,701      612,783

Other homebuilding (a)

     21,849      102,770      44,196      168,815      216,491

Financial Services

     —        —        —        —        360,774

Other non-operating (b)

     —        —        —        —        2,175,793
                                  
   $ 1,325,672    $ 2,002,039    $ 873,578    $ 4,201,289    $ 7,708,458
                                  

 

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

 

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PULTE HOMES, 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. Many of these joint ventures purchase, develop, and/or sell land and homes in the United States and Puerto Rico. A summary of the Company’s joint ventures is presented below ($000’s omitted):

 

     September 30,
2009
   December 31,
2008

Number of joint ventures with limited recourse guaranties

     3      2

Number of joint ventures with debt non-recourse to Pulte

     5      3

Number of other active joint ventures

     35      11
             

Total number of active joint ventures

     43      16
             

Investments in joint ventures with limited recourse guaranties

   $ 19,197    $ 17,258

Investments in joint ventures with debt non-recourse to Pulte

     12,731      14,317

Investments in other active joint ventures

     38,686      103,311
             

Total investments in unconsolidated entities

   $ 70,614    $ 134,886
             

Total joint venture debt

   $ 69,462    $ 84,033

Pulte proportionate share of joint venture debt:

     

Joint venture debt with limited recourse guaranties

   $ 18,517    $ 32,130

Joint venture debt non-recourse to Pulte

     6,795      7,690
             

Pulte’s total proportionate share of joint venture debt

   $ 25,312    $ 39,820
             

The total number of active joint ventures increased significantly in the three months ended September 30, 2009 as a result of the Centex merger. However, the activities are substantially complete for many of the joint ventures acquired with the Centex merger. The consolidation of two joint ventures in which the Company and Centex were partners was the primary cause for the decrease in investments in other active joint ventures as reflected in the above table.

During the three and nine months ended September 30, 2009, the Company recognized an equity loss from its unconsolidated joint ventures of $4.2 million and $57.2 million, respectively, including impairments totaling $5.8 million and $58.6 million, respectively. During the three and nine months ended September 30, 2008, the Company recognized an equity loss of $2.7 million and $0.7 million, respectively, from its unconsolidated joint ventures, including impairments totaling $1.4 million and $3.1 million, respectively. During the nine months ended September 30, 2009 and 2008, the Company made capital contributions of $28.4 million and $49.6 million, respectively, to its joint ventures and received capital and earnings distributions of $4.2 million and $8.6 million, respectively, from its joint ventures.

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

The Company has committed through a limited recourse guaranty that one of the joint ventures will maintain specified loan to value ratios. While such debt is scheduled to be repaid in 2010, the Company and its joint venture partners agreed with the lender to make an early repayment of a portion of the debt, which resulted in the Company making a capital contribution of $14.2 million during the three months ended September 30, 2009.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

6. Investments in unconsolidated entities (continued)

 

Another joint venture agreement providing limited recourse guaranties requires the Company and other members of the joint venture to guarantee for the benefit of the lender the completion of the project if the joint venture does not perform the required development and an increment of interest on the loan. This joint venture defaulted under its debt agreement, and the lender has foreclosed on the joint venture’s property that served as collateral. During 2008, the lender also filed suit against the majority of the members of the joint venture, including the Company, in an effort to enforce the completion guaranty. While the Company believes it has meritorious defenses against the lawsuit, there is no assurance that the Company will not be required to pay damages under the completion guaranty. The Company’s maximum exposure should be limited to its proportionate share of the amount, if any, determined to be owed under such guaranties. Accordingly, the amount of any potential loss the Company might incur as a result of resolving this matter should not exceed the Company’s proportionate share of the joint venture’s outstanding principal plus accumulated interest as of the date the lender foreclosed on the property, the Company’s proportionate share of which totaled approximately $52.2 million at September 30, 2009, representing 12% of the total pre-foreclosure exposure of the joint venture, and which is excluded from the above table.

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

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

 

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PULTE HOMES, 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 were no repurchases under these programs during the nine months ended September 30, 2009. The Company had remaining authorization to purchase $102.3 million of common stock at September 30, 2009.

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 three months ended September 30, 2009 and 2008, the Company repurchased $4.8 million and $0.4 million, respectively, of shares from employees under these plans. Such repurchases are excluded from the $400 million stock repurchase authorization.

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

On March 5, 2009, the Company’s board of directors adopted a Section 382 rights agreement and declared a dividend distribution of one right for each outstanding common share to shareholders of record at the close of business on March 16, 2009. The Company’s board of directors also adopted resolutions on March 5, 2009 providing for the issuance of a series of preferred shares, par value $0.01 per share, designated as Series A Junior Participating Preferred Shares. The rights plan was adopted in an effort to protect shareholder value by attempting to protect against a possible limitation on the Company’s ability to use its net operating loss carryforwards (the “NOLs”) and certain other tax benefits to reduce potential future U.S. federal income tax obligations. Any person or group, together with its affiliates and associates, acquiring beneficial ownership of 4.9% or more of the Company’s securities after March 5, 2009 without the approval of the Company’s board of directors would be subjected to significant dilution in its holdings.

On September 24, 2009, the Company entered into a second amendment to the Section 382 Rights Agreement dated as of March 5, 2009, as previously amended on April 7, 2009. The rights amendment revised certain definitions and also made a number of revisions to the expiration date of the rights. The final expiration date was changed from March 16, 2019 to June 1, 2013. In addition, the rights amendment deleted the provision that the rights would expire when the board of directors of the Company determined that the rights plan was no longer in the best interests of the Company and replaced it with the provision that the rights will expire on June 1, 2010, if the shareholders of the Company do not approve the rights plan at the 2010 Annual Meeting of Shareholders.

Accumulated other comprehensive income (loss)

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

 

     September 30,
2009
    December 31,
2008
 

Foreign currency translation adjustments:

    

Mexico

   $ 1,904      $ (1,091

Fair value of derivatives, net of income taxes of $2,086 in 2009 and 2008

     (2,378     (3,008
                
   $ (474   $ (4,099
                

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

8. Income taxes

The Company’s income tax expense for the three and nine months ended September 30, 2009 was $2.7 million and $7.8 million, respectively, compared with a benefit of $14.2 million and $67.9 million in the corresponding prior year periods. These amounts represent effective tax rates of 0.7% for both the three and nine months ended September 30, 2009, compared with effective tax rates of 4.8% and 5.6% in the corresponding prior year periods. The change in the effective tax rate resulted primarily from adjustments during 2008 to the valuation allowance recorded against the Company’s deferred tax assets.

In accordance with ASC 740, “Income Taxes”, the Company evaluates its deferred tax assets to determine if a valuation allowance is required. At September 30, 2009 and December 31, 2008, the Company had net deferred tax assets of $3.1 billion and $1.1 billion, respectively, which was substantially offset by a valuation allowance, due to the uncertainty of realizing such deferred tax assets. The Company has $37.6 million of net deferred tax assets (and related tax liability) that are realizable as a result of uncertain tax positions that generate a future source of taxable income. The increase in the net deferred tax asset and valuation allowance is principally due to the merger with Centex on August 18, 2009. The ultimate realization of these deferred tax assets is dependent upon the generation of taxable income during future periods. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.

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

The Company’s gross unrecognized tax benefits, as of September 30, 2009, increased by $126 million to $252 million. In addition, accrued interest and penalties increased by $48 million to $84 million. These increases result primarily from the Company’s merger with Centex. It is reasonably possible, within the next twelve months, that the Company’s unrecognized tax benefits may decrease by $82 million due to expirations of certain statutes of limitations and potential settlements with various tax jurisdictions. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for tax years 1998-2008.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

9. Fair value disclosures

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

 

Level 1    Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2    Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3    Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

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

 

Financial Instrument

   Level 1    Level 2     Level 3    Fair Value at
September 30, 2009
 

Residential mortgage loans available-for-sale

   $ —      $ 225,798      $ —      $ 225,798   

Whole loan commitments

     —        1,192        —        1,192   

Interest rate lock commitments

     —        8,030        —        8,030   

Forward contracts

     —        (6,918     —        (6,918
                              
   $ —      $ 228,102      $ —      $ 228,102   
                              

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

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

 

     Level 1    Level 2    Level 3    Fair Value at
September 30, 2009

Loans held for investment

   $ —      $ —      $ 3,696    $ 3,696

House and land inventory

     —        —        163,881      163,881
                           
   $ —      $ —      $ 167,577    $ 167,577
                           

The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter and exclude any assets acquired with the Centex merger, which were adjusted to fair value as of the merger date as described in Note 2. The Company measured certain of its loans held for investment at fair value since the cost of the loans exceeded their fair value. Fair value of the loans was determined based on the fair value of the underlying collateral. For house and land inventory, see Note 4 of these Condensed Consolidated Financial Statements for a more detailed discussion of the valuation method used.

The carrying amounts of cash and equivalents approximate their fair values due to their short-term nature. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. At September 30, 2009, the fair value of the senior notes outstanding approximated $4.1 billion. The carrying values of the senior notes are presented in Note 10. The carrying value of collateralized short-term debt approximates fair value. Borrowings under Financial Services’ credit lines are secured by residential mortgage loans available-for-sale. The carrying amounts of such borrowings approximate fair value.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

10. Debt and other financing arrangements

 

     September 30,
2009
   December 31,
2008

4.875% unsecured senior notes, issued by Pulte Homes, Inc. due 2009 (a)

   $ —      $ 25,405

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

     48,278      —  

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

     91,073      —  

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

     13,890      199,736

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

     131,965      497,388

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

     118,104      —  

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

     129,127      —  

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

     224,488      298,816

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

     258,138      —  

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

     463,858      499,824

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

     335,516      —  

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

     292,572      349,602

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

     413,671      —  

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

     463,514      —  

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

     149,129      149,048

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

     299,010      298,978

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

     398,252      398,197

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

     299,330      299,311

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

     150,000      150,000
             

Total senior notes - carrying value

   $ 4,279,915    $ 3,166,305
             

Estimated fair value

   $ 4,079,707    $ 2,136,628
             

 

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

The Company retired a significant amount of its outstanding senior notes during 2009 through a number of separate transactions. The Company repurchased $1.5 billion of senior notes during a tender offer completed in September 2009 that resulted in a loss of $47.4 million. Also in September 2009, the Company retired at their scheduled maturity date the remaining $211.0 million of the 5.800% senior notes due 2009 assumed with the Centex merger. In July 2009, the Company retired at their scheduled maturity date the remaining $25.4 million of the 4.875% senior notes due 2009. In May and June 2009, the Company repurchased a total of $192.9 million of senior notes that resulted in a net gain of $15.9 million. As a net result of these transactions, other expense (income), net as reflected in the Consolidated Statements of Operations includes losses on debt repurchases of $47.4 million and $31.5 million for the three months and nine months ended September 30, 2009, respectively.

The Company repurchased $313.4 million of its 4.875% senior notes due 2009 during a tender offer completed in June 2008, which resulted in a loss of $1.6 million. In February 2008, the Company amended its unsecured revolving credit facility, which resulted in a loss of $1.5 million. Both such losses are included in the Consolidated Statements of Operations within other expense (income), net.

As of September 30, 2009, the Company was not in compliance with the tangible net worth covenant under its revolving credit facility. The Company subsequently requested and received a limited waiver from its banks until December 15, 2009, permitting the Company to utilize letters of credit under the credit facility during the term of the waiver. The Company expects to negotiate a permanent amendment by December 15, 2009, but there can be no assurance that any agreement regarding the amendment can be reached. If the Company does not reach an agreement with its banks prior to expiration of the waiver, the Company may seek an extension of the waiver or alternatively terminate the credit facility.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

10. Debt and other financing arrangements (continued)

 

In June 2009, the Company entered into a five-year, unsecured letter of credit facility (the “LOC Agreement”) with Deutsche Bank AG, New York Branch, which permits the issuance of up to $200 million of letters of credit (“LOCs”) by the Company. This credit facility supplements the Company’s existing letter of credit capacity included in the Company’s unsecured revolving credit facility. The LOCs will be used for general corporate purposes of the Company and its subsidiaries. LOCs may be issued to support the obligations of any wholly-owned subsidiary of the Company.

Financial Services

As of September 30, 2009, Pulte Mortgage had a combination of repurchase agreements in place that provided borrowing capacity totaling $175 million:

 

   

In May 2009, Pulte Mortgage entered into a master repurchase agreement with Comerica Bank, which was subsequently amended in September 2009. The repurchase agreement provides for advances of up to $70 million, subject to certain sublimits, and includes an accordion feature under which Pulte Mortgage may request that the aggregate commitments be increased to an amount up to $140 million. The repurchase agreement expires on May 14, 2010 and replaced Pulte Mortgage’s previous revolving credit agreement, which expired on May 15, 2009. The repurchase agreement contains various affirmative and negative covenants, including the following financial covenants: (i) adjusted tangible net worth shall not be less than $52.8 million, (ii) the adjusted tangible net worth ratio shall not be more than 10.0 to 1.0, (iii) quarterly net income shall not be less than $1, and (iv) liquidity shall be no less than $15.0 million. In the event Pulte Mortgage fails to comply with the net income covenant, the Company can cure the failure via a corresponding capital contribution. However, such cure right can only be exercised one time for periods ending after June 30, 2009 and is limited to $5 million.

 

   

In 2009, Pulte Mortgage entered into a master repurchase agreement with Bank of America, N.A., which expires on July 30, 2010 and provides advances for up to $35 million, subject to certain sublimits. The other terms and conditions of the repurchase agreement with Bank of America, N.A., including the financial covenants, are substantially similar to those under the repurchase agreement with Comerica Bank.

 

   

In September 2009, Pulte Mortgage entered into a master repurchase agreement with JPMorgan Chase Bank, N.A., which provides for loan purchases of up to $70 million, subject to certain sublimits. The repurchase agreement expires on September 29, 2010. The repurchase agreement contains various affirmative and negative covenants, including the following financial covenants: (i) the leverage ratio should not exceed 10.0 to 1.0, computed as of the end of each calendar month; (ii) the minimum adjusted tangible net worth computed as of the end of each calendar month shall not be less than $57.0 million; (iii) the minimum special current ratio computed as of the end of each calendar month shall not be less than 1.05 to 1.0; (iv) liquidity shall be greater than or equal to 3% of actual total assets, as defined within the repurchase agreement; (v) the available warehouse facility under the repurchase agreement should constitute no more than 50% of Pulte Mortgage’s aggregate available warehouse facilities; (vi) for each of the quarters ending September 30, 2009, and December 31, 2009, Pulte Mortgage’s negative net income before taxes shall not be more than $3.0 million; (vii) commencing with the quarter ending March 31, 2010, Pulte Mortgage shall not permit its net income before taxes, for such quarter and each calendar quarter thereafter, to be less than $1; (viii) the maximum warehouse capacity ratio shall not exceed 20.0 to 1.0, computed as of the end of each calendar month; and (ix) Pulte Mortgage shall originate no more than 20% of its total loan originations in any calendar month through wholesale or broker originations.

CTX Mortgage Company LLC (“CTX Mortgage”), which was acquired with the Centex merger, also has a master repurchase agreement in place with JP Morgan Chase Bank, N.A. dated October 30, 2008 providing for advances of up to $50 million, subject to certain sublimits. The repurchase agreement expires on January 31, 2010 and contains various affirmative and negative covenants. As of September 30, 2009, CTX Mortgage received a waiver of a financial covenant related to the repurchase agreement related to the quarterly loss covenant for the quarter ended September 30, 2009. The Company is in the process of transitioning all loan origination production to Pulte Mortgage and expects to complete this transition by December 31, 2009. Accordingly, the Company does not intend to replace the CTX Mortgage repurchase agreement upon its expiration.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

11. Commitments and contingencies

Loan origination liabilities

The Company’s mortgage operations have established liabilities for anticipated losses associated with mortgage loans originated and sold to investors that may result from certain borrower early payment defaults or loans that have not been underwritten in accordance with the investor guidelines. In the normal course of business, the Company’s mortgage operations also provide limited indemnities for certain loans sold to the investors. The Company establishes the liabilities for such anticipated losses based upon, among other things, historical loss rates, current trends in loan originations, and the geographic location of the underlying collateral. Effective with the Centex merger, the Company assumed loan origination liabilities totaling $52.6 million. Also during 2009, the Company has experienced a significant increase in actual and anticipated losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to the Company. Changes in these liabilities are as follows ($000’s omitted):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Liabilities, beginning of period

   $ 11,525      $ 1,483      $ 3,240      $ 2,107   

Provision for losses

     11,473        541        23,597        437   

Settlements

     (4,150     (519     (7,989     (1,039

Liabilities assumed with Centex merger

     52,615        —          52,615        —     
                                

Liabilities, end of period

   $ 71,463      $ 1,505      $ 71,463      $ 1,505   
                                

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 September 30, 2009 and December 31, 2008, the Company had recorded $229.4 million and $15.3 million, respectively, in accrued liabilities for outstanding CDD obligations. The increase in the liability as of September 30, 2009 related to CDD obligations for certain communities acquired with the Centex merger.

Surety bonds

In the normal course of business, the Company posts surety bonds: (1) pursuant to certain performance related obligations, (2) as security for certain land option purchase agreements of Homebuilding, and (3) under various insurance programs. In addition, the Company is subject to approximately $1.6 billion of surety bonds related to certain construction obligations of Centex’s previous commercial construction business, which was sold by Centex on March 30, 2007. The Company estimates that less than $200 million of work remains to be performed on these commercial construction projects. No event has occurred that has led the Company to believe that these bonds will be drawn upon. Additionally, the purchaser of the Centex commercial construction business has indemnified the Company against potential losses relating to such surety bond obligations. As additional security, the Company has purchased for its benefit a back-up indemnity provided by a financial institution with an investment grade credit rating. The obligation of such financial institution under the back-up indemnity is limited to $400 million and terminates in 2016, if not previously terminated by the Company.

Litigation

The Company is involved in various litigation incidental to its continuing business operations. Management does not believe that this litigation will have a material adverse impact on the results of operations, financial position, or cash flows of the Company.

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

12. Subsequent events

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was enacted into law. The Act amended Section 172 of the Internal Revenue Code to allow net operating losses realized in either tax year 2008 or 2009 to be carried back up to five years (previously limited to a two-year carryback). This change will allow the Company and certain of its subsidiaries to carry back 2009 taxable losses to prior years and receive refunds of previously paid Federal income taxes. Based on the Company’s projected taxable losses for 2009, the Company anticipates that such refunds should be in excess of $450 million. The ultimate amount of such refunds realized is dependent on a variety of factors, including the Company’s actual taxable losses for 2009, which are not yet completed and may vary significantly from the Company’s current expectations.

The Act also extended and expanded the current homebuyer tax credit until April 30, 2010. While the ultimate impact of this legislation is not yet determinable, the Company believes that it could have a stimulative impact on the demand for new housing.

 

13. Supplemental Guarantor information

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

 

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PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2009

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
    Consolidated
Pulte Homes, Inc.
     Pulte
Homes, Inc.
   Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     

ASSETS

           

Cash and equivalents

   $ —      $ 1,136,554      $ 380,069      $ —        $ 1,516,623

Restricted cash

     —        23,707        10,788        —          34,495

Unfunded settlements

     —        15,799        (675     —          15,124

House and land inventory

     —        5,626,278        4,538        —          5,630,816

Land held for sale

     —        93,193        —          —          93,193

Land, not owned, under option agreements

     —        203,525        —          —          203,525

Residential mortgage loans available-for-sale

     —        —          225,798        —          225,798

Investments in unconsolidated entities

     1,348      65,878        3,388        —          70,614

Goodwill

     —        1,394,965        —          —          1,394,965

Intangible assets, net

     —        193,823        —          —          193,823

Other assets

     33,079      713,840        79,909        —          826,828

Income taxes receivable

     39,082      —          —          —          39,082

Deferred income tax assets

     10,711      (64     26,940        —          37,587

Investments in subsidiaries and intercompany accounts, net

     7,920,938      3,065,518        3,954,385        (14,940,841     —  
                                     
   $ 8,005,158    $ 12,533,016      $ 4,685,140      $ (14,940,841   $ 10,282,473
                                     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Accounts payable, customer deposits, accrued and other liabilities

   $ 130,258    $ 1,737,657      $ 472,047      $ —        $ 2,339,962

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

     —        —          63,590        —          63,590

Income tax liabilities

     285,596      —          —          —          285,596

Senior notes

     4,279,915      —          —          —          4,279,915
                                     

Total liabilities

     4,695,769      1,737,657        535,637        —          6,969,063

Equity:

           

Equity attributable to Pulte Homes, Inc.

     3,309,389      10,791,338        4,149,503        (14,940,841     3,309,389

Noncontrolling interests

     —        4,021        —          —          4,021
                                     

Total equity

     3,309,389      10,795,359        4,149,503        (14,940,841     3,313,410
                                     
   $ 8,005,158    $ 12,533,016      $ 4,685,140      $ (14,940,841   $ 10,282,473
                                     

 

35


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2008

($000’s omitted)

 

     Unconsolidated    Eliminating
Entries
    Consolidated
Pulte Homes, Inc.
     Pulte
Homes, Inc.
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    

ASSETS

             

Cash and equivalents

   $ —      $ 1,288,200    $ 367,064    $ —        $ 1,655,264

Unfunded settlements

     —        11,191      797        11,988

House and land inventory

     —        4,196,488      4,801      —          4,201,289

Land held for sale

     —        164,954      —        —          164,954

Land, not owned, under option agreements

     —        171,101      —        —          171,101

Residential mortgage loans available-for-sale

     —        —        297,755      —          297,755

Investments in unconsolidated entities

     1,348      127,541      5,997      —          134,886

Intangible assets, net

     —        102,554      —        —          102,554

Other assets

     11,296      508,852      74,950      —          595,098

Income taxes receivable

     373,569      —        —        —          373,569

Investments in subsidiaries and intercompany accounts, net

     5,874,166      1,818,530      4,711,055      (12,403,751     —  
                                   
   $ 6,260,379    $ 8,389,411    $ 5,462,419    $ (12,403,751   $ 7,708,458
                                   

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Liabilities:

             

Accounts payable, customer deposits, accrued and other liabilities

   $ 127,761    $ 821,342    $ 389,177    $ —        $ 1,338,280

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

     —        —        237,560      —          237,560

Income tax liabilities

     130,615      —        —        —          130,615

Senior notes

     3,166,305      —        —        —          3,166,305
                                   

Total liabilities

     3,424,681      821,342      626,737      —          4,872,760

Equity:

             

Equity attributable to Pulte Homes, Inc.

     2,835,698      7,568,069      4,835,682      (12,403,751     2,835,698

Noncontrolling Interests

     —        —        —        —          —  
                                   

Total equity

     2,835,698      7,568,069      4,835,682      (12,403,751     2,835,698
                                   
   $ 6,260,379    $ 8,389,411    $ 5,462,419    $ (12,403,751   $ 7,708,458
                                   

 

36


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended September 30, 2009

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
   Consolidated
Pulte Homes, Inc.
 
     Pulte
Homes, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 1,053,787      $ —        $ —      $ 1,053,787   

Land sale revenues

     —          3,004        —          —        3,004   
                                       
     —          1,056,791        —          —        1,056,791   

Financial Services

     —          2,508        31,795        —        34,303   
                                       
     —          1,059,299        31,795        —        1,091,094   
                                       

Homebuilding Cost of Revenues

           

Home cost of revenues

     —          1,080,256        —          —        1,080,256   

Land cost of revenues

     —          12,492        —          —        12,492   
                                       
     —          1,092,748        —          —        1,092,748   

Financial Services expenses

     595        1,823        40,503        —        42,921   

Selling, general and administrative expenses

     24,315        167,754        29,469        —        221,538   

Other expense (income), net

     47,402        41,899        518        —        89,819   

Interest income

     —          (1,602     (212     —        (1,814

Interest expense

     433        —          (2     —        431   

Intercompany interest

     61,465        (61,465     —          —        —     

Equity loss (income) from unconsolidated entities

     —          2,812        1,358        —        4,170   
                                       

Loss before income taxes and equity in income of subsidiaries

     (134,210     (184,670     (39,839     —        (358,719

Income tax expense (benefit)

     376        4,935        (2,643     —        2,668   
                                       

Loss before equity income (loss) from subsidiaries

     (134,586     (189,605     (37,196     —        (361,387

Equity in income (loss) from subsidiaries

     (226,801     (35,176     (152,191     414,168      —     
                                       

Net loss

   $ (361,387   $ (224,781   $ (189,387   $ 414,168    $ (361,387
                                       

 

37


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the nine months ended September 30, 2009

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
   Consolidated
Pulte Homes, Inc.
 
     Pulte
Homes, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 2,272,231      $ —        $ —      $ 2,272,231   

Land sale revenues

     —          7,785        —          —        7,785   
                                       
     —          2,280,016        —          —        2,280,016   

Financial Services

     —          6,831        66,719        —        73,550   
                                       
     —          2,286,847        66,719        —        2,353,566   
                                       

Homebuilding Cost of Revenues

           

Home cost of revenues

     —          2,703,085        —          —        2,703,085   

Land cost of revenues

     —          24,760        —          —        24,760   
                                       
     —          2,727,845        —          —        2,727,845   

Financial Services expenses

     944        4,962        86,390        —        92,296   

Selling, general and administrative expenses

     54,012        385,400        30,948        —        470,360   

Other expense (income), net

     31,501        37,069        1,837        —        70,407   

Interest income

     (1     (6,722     (1,266     —        (7,989

Interest expense

     1,347        —          (2     —        1,345   

Intercompany interest

     177,553        (177,553     —          —        —     

Equity loss from unconsolidated entities

     —          53,240        3,956        —        57,196   
                                       

Loss before income taxes and equity in income of subsidiaries

     (265,356     (737,394     (55,144     —        (1,057,894

Income tax expense (benefit)

     3,724        10,955        (6,903     —        7,776   
                                       

Loss before equity income (loss) from subsidiaries

     (269,080     (748,349     (48,241     —        (1,065,670

Equity in income (loss) from subsidiaries

     (796,590     (42,028     (591,879     1,430,497      —     
                                       

Net loss

   $ (1,065,670   $ (790,377   $ (640,120   $ 1,430,497    $ (1,065,670
                                       

 

38


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the three months ended September 30, 2008

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
   Consolidated
Pulte Homes, Inc.
 
     Pulte
Homes, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 1,508,825      $ —        $ —      $ 1,508,825   

Land sale revenues

     —          12,964        —          —        12,964   
                                       
     —          1,521,789        —          —        1,521,789   

Financial Services

     —          4,131        32,307        —        36,438   
                                       
     —          1,525,920        32,307        —        1,558,227   
                                       

Homebuilding Cost of Revenues

           

Home cost of revenues

     —          1,599,064        —          —        1,599,064   

Land cost of revenues

     —          27,910        —          —        27,910   
                                       
     —          1,626,974        —          —        1,626,974   

Financial Services expenses

     531        1,686        24,131        —        26,348   

Selling, general and administrative expenses

     17,491        158,909        23,950        —        200,350   

Other expense (income), net

     3        1,874        221        —        2,098   

Interest income

     (71     (4,274     (2,017     —        (6,362

Interest expense

     717        11        (5     —        723   

Intercompany interest

     56,127        (56,127     —          —        —     

Equity loss from unconsolidated entities

     —          1,407        1,280        —        2,687   
                                       

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

     (74,798     (204,540     (15,253     —        (294,591

Income tax expense (benefit)

     (8,247     (152     (5,805     —        (14,204
                                       

Income (loss) before equity in income of subsidiaries

     (66,551     (204,388     (9,448     —        (280,387

Equity in income (loss) of subsidiaries

     (213,836     4,947        (178,990     387,879      —     
                                       

Net loss

   $ (280,387   $ (199,441   $ (188,438   $ 387,879    $ (280,387
                                       

 

39


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the nine months ended September 30, 2008

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
   Consolidated
Pulte Homes, Inc.
 
     Pulte
Homes, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      

Revenues

           

Homebuilding

           

Home sale revenues

   $ —        $ 4,460,393      $ —        $ —      $ 4,460,393   

Land sale revenues

     —          39,973        —          —        39,973   
                                       
     —          4,500,366        —          —        4,500,366   

Financial Services

     —          11,300        107,571        —        118,871   
                                       
     —          4,511,666        107,571        —        4,619,237   
                                       

Homebuilding Cost of Revenues

           

Home cost of revenues

     —          4,981,387        —          —        4,981,387   

Land cost of revenues

     —          160,979        —          —        160,979   
                                       
     —          5,142,366        —          —        5,142,366   

Financial Services expenses

     1,611        5,243        76,126        —        82,980   

Selling, general and administrative expenses

     57,645        509,018        31,472        —        598,135   

Other expense (income), net

     1,594        12,428        1,652        —        15,674   

Interest income

     (75     (12,484     (7,377     —        (19,936

Interest expense

     2,139        57        (17     —        2,179   

Intercompany interest

     158,231        (158,231     —          —        —     

Equity loss (income) from unconsolidated entities

     —          (1,895     2,608        —        713   
                                       

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

     (221,145     (984,836     3,107        —        (1,202,874

Income tax expense (benefit)

     (18,086     (52,391     2,551        —        (67,926
                                       

Income (loss) before equity in income of subsidiaries

     (203,059     (932,445     556        —        (1,134,948

Equity in income (loss) of subsidiaries

     (931,889     19,107        (860,351     1,773,133      —     
                                       

Net loss

   $ (1,134,948   $ (913,338   $ (859,795   $ 1,773,133    $ (1,134,948
                                       

 

40


Table of Contents

PULTE HOMES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

13. Supplemental Guarantor information (continued)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2009

($000’s omitted)

 

     Unconsolidated     Eliminating
Entries
    Consolidated
Pulte Homes, Inc.
 
     Pulte
Homes, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     

Net cash provided by (used in) operating activities

   $ 138,095      $ 74,664      $ 117,752      $ —        $ 330,511   
                                        

Distributions from unconsolidated entities

     —          3,393        —          —          3,393   

Investments in unconsolidated entities

     —          (28,451     —          —          (28,451

Dividends received from subsidiaries

     3,359        —          —          (3,359     —     

Investment in subsidiaries

     (19,135     (10,306  </