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EX-31.A - RULE 13A-14(A) CERTIFICATION - PULTEGROUP INC/MI/exhibit31aceocertification.htm
EX-31.B - RULE 13A-14(A) CERTIFICATION - PULTEGROUP INC/MI/exhibit31bcfocertification.htm
EX-32 - CERTIFICATION PURSUANT TO 18 UNITED STATES CODE SECTION 1350 - PULTEGROUP INC/MI/exhibit32-certification930.htm

______________________________________________________________________________________________________

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, 2015

or

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

Commission File Number 1-9804 

PULTEGROUP, INC.
(Exact name of registrant as specified in its charter) 
MICHIGAN
 
38-2766606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3350 Peachtree Road NE, Suite 150
Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (404) 978-6400

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  [X]   NO  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  [X]   NO  [ ]

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

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

Number of shares of common stock outstanding as of October 16, 2015: 349,137,143 ______________________________________________________________________________________________________

1


PULTEGROUP, INC.
INDEX

 
 
Page
No.
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
PART II
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements

PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
 
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
(Note)
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
734,153

 
$
1,292,862

Restricted cash
25,942

 
16,358

House and land inventory
5,240,932

 
4,392,100

Land held for sale
85,130

 
101,190

Land, not owned, under option agreements
102,548

 
30,186

Residential mortgage loans available-for-sale
270,658

 
339,531

Investments in unconsolidated entities
41,509

 
40,368

Other assets
637,962

 
513,032

Intangible assets
113,440

 
123,115

Deferred tax assets, net
1,549,304

 
1,720,668

 
$
8,801,578

 
$
8,569,410

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable, including book overdrafts of $50,947 and $32,586 in 2015 and 2014, respectively
$
372,498

 
$
270,516

Customer deposits
241,047

 
142,642

Accrued and other liabilities
1,373,910

 
1,343,774

Income tax liabilities
50,906

 
48,722

Financial Services debt
107,508

 
140,241

Term loan
500,000

 

Senior notes
1,584,104

 
1,818,561

 
4,229,973

 
3,764,456

Shareholders' equity
4,571,605

 
4,804,954

 
$
8,801,578

 
$
8,569,410


Note: The Condensed Consolidated Balance Sheet at December 31, 2014 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


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
Home sale revenues
$
1,464,131

 
$
1,551,226

 
$
3,795,366

 
$
3,885,703

Land sale revenues
3,649

 
10,047

 
27,651

 
24,558

 
1,467,780

 
1,561,273

 
3,823,017

 
3,910,261

Financial Services
38,967

 
33,452

 
97,319

 
89,544

Total revenues
1,506,747

 
1,594,725

 
3,920,336

 
3,999,805

 
 
 
 
 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
Home sale cost of revenues
1,118,874

 
1,195,369

 
2,913,299

 
2,976,665

Land sale cost of revenues
3,301

 
3,539

 
21,992

 
15,382

 
1,122,175

 
1,198,908

 
2,935,291

 
2,992,047

Financial Services expenses
24,602

 
22,623

 
67,909

 
48,058

Selling, general and administrative expenses
159,361

 
147,136

 
450,793

 
521,791

Other expense, net
23,826

 
2,406

 
29,962

 
25,561

Interest income
(504
)
 
(1,205
)
 
(2,458
)
 
(3,431
)
Interest expense
203

 
210

 
598

 
625

Equity in earnings of unconsolidated entities
(2,192
)
 
(281
)
 
(4,464
)
 
(7,483
)
Income before income taxes
179,276

 
224,928

 
442,705

 
422,637

Income tax expense
71,507

 
84,383

 
176,643

 
165,393

Net income
$
107,769

 
$
140,545

 
$
266,062

 
$
257,244

 
 
 
 
 
 
 
 
Per share:
 
 
 
 
 
 
 
Basic earnings
$
0.31

 
$
0.37

 
$
0.74

 
$
0.68

Diluted earnings
$
0.30

 
$
0.37

 
$
0.73

 
$
0.67

Cash dividends declared
$
0.08

 
$
0.05

 
$
0.24

 
$
0.15

 
 
 
 
 
 
 
 
Number of shares used in calculation:



 
 
 
 
Basic
350,147

 
373,531

 
359,236

 
376,097

Effect of dilutive securities
3,225

 
3,761

 
3,273

 
3,723

Diluted
353,372

 
377,292

 
362,509

 
379,820




See accompanying Notes to Condensed Consolidated Financial Statements.


4


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000’s omitted)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
107,769

 
$
140,545

 
$
266,062

 
$
257,244

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in value of derivatives
21

 
21

 
63

 
82

Other comprehensive income
21

 
21

 
63

 
82

 
 
 
 
 
 
 
 
Comprehensive income
$
107,790

 
$
140,566

 
$
266,125

 
$
257,326





See accompanying Notes to Condensed Consolidated Financial Statements.


5



PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted, except per share data)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Retained
Earnings
 
Total
Shares
 
$
 
Shareholders' Equity, January 1, 2015
369,459

 
$
3,695

 
$
3,072,996

 
$
(690
)
 
$
1,728,953

 
$
4,804,954

Stock option exercises
888

 
9

 
10,362

 

 

 
10,371

Stock issuances, net of cancellations
431

 
4

 
7,419

 

 

 
7,423

Dividends declared

 

 
8

 

 
(86,304
)
 
(86,296
)
Share repurchases
(21,641
)
 
(216
)
 

 

 
(442,522
)
 
(442,738
)
Share-based compensation

 

 
13,556

 

 

 
13,556

Excess tax benefits (deficiencies) from share-based awards

 

 
(1,790
)
 

 

 
(1,790
)
Net income

 

 

 

 
266,062

 
266,062

Other comprehensive income

 

 

 
63

 

 
63

Shareholders' Equity, September 30, 2015
349,137

 
$
3,492

 
$
3,102,551

 
$
(627
)
 
$
1,466,189

 
$
4,571,605

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity, January 1, 2014
381,300

 
$
3,813

 
$
3,052,016

 
$
(795
)
 
$
1,593,918

 
$
4,648,952

Stock option exercises
554

 
5

 
6,029

 

 

 
6,034

Stock issuances, net of cancellations
(42
)
 

 

 

 

 

Dividends declared

 

 
72

 

 
(56,761
)
 
(56,689
)
Share repurchases
(8,034
)
 
(80
)
 

 

 
(155,060
)
 
(155,140
)
Share-based compensation

 

 
10,586

 

 

 
10,586

Excess tax benefits (deficiencies) from share-based awards

 

 
(660
)
 

 

 
(660
)
Net income

 

 

 

 
257,244

 
257,244

Other comprehensive income

 

 

 
82

 

 
82

Shareholders' Equity, September 30, 2014
373,778

 
$
3,738

 
$
3,068,043

 
$
(713
)
 
$
1,639,341

 
$
4,710,409



See accompanying Notes to Condensed Consolidated Financial Statements.

6


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
266,062

 
$
257,244

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Deferred income tax expense
171,364

 
164,460

Depreciation and amortization
33,719

 
28,864

Share-based compensation expense
20,139

 
21,290

Equity in earnings of unconsolidated entities
(4,464
)
 
(7,483
)
Distributions of earnings from unconsolidated entities
2,594

 
4,824

Loss on debt retirements

 
8,584

Other non-cash, net
13,170

 
8,211

Increase (decrease) in cash due to:
 
 
 
Restricted cash
(13,293
)
 
(689
)
Inventories
(835,276
)
 
(384,571
)
Residential mortgage loans available-for-sale
68,381

 
49,600

Other assets
(132,195
)
 
(12,802
)
Accounts payable, accrued and other liabilities
160,803

 
74,102

Income tax liabilities
2,184

 
(9,799
)
Net cash provided by (used in) operating activities
(246,812
)
 
201,835

Cash flows from investing activities:
 
 
 
Change in restricted cash related to letters of credit
3,710

 
48,401

Capital expenditures
(34,049
)
 
(41,888
)
Cash used for business acquisition

 
(77,469
)
Other investing activities, net
9,959

 
1,360

Net cash provided by (used in) investing activities
(20,380
)
 
(69,596
)
Cash flows from financing activities:
 
 
 
Financial Services borrowings (repayments)
(32,733
)
 
(34,070
)
Proceeds from debt issuance
500,000

 

Repayments of debt
(238,520
)

(250,631
)
Borrowings under revolving credit facility
125,000

 

Repayments under revolving credit facility
(125,000
)
 

Stock option exercises
10,371

 
6,034

Share repurchases
(442,738
)
 
(155,140
)
Dividends paid
(87,897
)
 
(56,944
)
Net cash provided by (used in) financing activities
(291,517
)
 
(490,751
)
Net increase (decrease) in cash and equivalents
(558,709
)
 
(358,512
)
Cash and equivalents at beginning of period
1,292,862

 
1,580,329

Cash and equivalents at end of period
$
734,153

 
$
1,221,817

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
(20,304
)
 
$
(23,236
)
Income taxes paid (refunded), net
$
740

 
$
(1,054
)
See accompanying Notes to Condensed Consolidated Financial Statements.

7

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)





1. Summary of significant accounting policies

Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common stock trades on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have 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 U.S. generally accepted accounting principles ("GAAP") 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 U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission ("SEC").

Other expense, net

Other expense, net consists of the following ($000’s omitted): 
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2015
 
2014
 
2015
 
2014
Write-off of deposits and pre-acquisition costs
$
522

 
$
1,391

 
$
3,633

 
$
4,543

Loss on debt retirements (Note 5)

 

 

 
8,584

Amortization of intangible assets
3,225

 
3,258

 
9,675

 
9,808

Miscellaneous, net (a)
20,079

 
(2,243
)
 
16,654

 
2,626

 
$
23,826

 
$
2,406

 
$
29,962

 
$
25,561


(a)
Miscellaneous, net includes a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 9).


8

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares outstanding, adjusted for unvested shares (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 stock options, unvested restricted shares and restricted share units, and other potentially dilutive instruments. Any stock 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. Our earnings per share excluded 4.2 million and 4.4 million potentially dilutive instruments, including stock options, unvested restricted shares and restricted share units for the three and nine months ended September 30, 2015, respectively, and 7.1 million and 7.2 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units for the three and nine months ended September 30, 2014, respectively.    

In accordance with ASC 260 "Earnings Per Share", the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. 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. Our outstanding restricted share awards, restricted share units, and deferred shares are considered participating securities. The following table presents the earnings per common share (000's omitted, except per share data):
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
107,769

 
$
140,545

 
$
266,062

 
$
257,244

Less: earnings distributed to participating securities
(181
)
 
(124
)
 
(554
)
 
(386
)
Less: undistributed earnings allocated to participating securities
(516
)
 
(820
)
 
(1,169
)
 
(1,362
)
Numerator for basic earnings per share
$
107,072

 
$
139,601

 
$
264,339

 
$
255,496

Add back: undistributed earnings allocated to participating securities
516

 
820

 
1,169

 
1,362

Less: undistributed earnings reallocated to participating securities
(512
)
 
(812
)
 
(1,158
)
 
(1,349
)
Numerator for diluted earnings per share
$
107,076

 
$
139,609

 
$
264,350

 
$
255,509

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic shares outstanding
350,147

 
373,531

 
359,236

 
376,097

Effect of dilutive securities
3,225

 
3,761

 
3,273

 
3,723

Diluted shares outstanding
353,372

 
377,292

 
362,509

 
379,820

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.37

 
$
0.74

 
$
0.68

Diluted
$
0.30

 
$
0.37

 
$
0.73

 
$
0.67



9

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net.

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. No such VIEs required consolidation at either September 30, 2015 or December 31, 2014 because we determined that we were not the VIE's primary beneficiary. Separately, certain land option agreements represent financing arrangements, even though we generally have no obligation to pay the remaining purchase price under the option agreement. As a result, we recorded $102.5 million and $30.2 million at September 30, 2015 and December 31, 2014, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities.

The following provides a summary of our interests in land option agreements as of September 30, 2015 and December 31, 2014 ($000’s omitted): 
 
September 30, 2015
 
December 31, 2014
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Land, Not
Owned,
Under
Option
Agreements
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Land, Not
Owned,
Under
Option
Agreements
Land options with VIEs
$
87,804

 
$
1,098,008

 
$
32,305

 
$
56,039

 
$
891,506

 
$
12,533

Other land options
88,475

 
1,020,588

 
70,243

 
71,241

 
999,079

 
17,653

 
$
176,279

 
$
2,118,596

 
$
102,548

 
$
127,280

 
$
1,890,585

 
$
30,186


Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. In accordance with ASC 825, “Financial Instruments”, we use the fair value option to record residential mortgage loans available-for-sale. Election of the fair value option for these loans 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. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.”

Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment.  Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. At September 30, 2015 and December 31, 2014, residential mortgage loans available-for-sale had an aggregate fair value of $270.7 million and $339.5 million, respectively, and an aggregate outstanding principal balance of $259.7 million and $327.4 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $1.1 million and $(0.3) million for the three months ended September 30, 2015 and 2014, respectively, and $0.3 million and $1.3 million for the nine months ended September 30, 2015 and 2014. These changes in fair value were substantially offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages were $23.4 million and $18.0 million for the three months ended September 30, 2015 and 2014, respectively,

10

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



and $57.2 million and $48.4 million for the nine months ended September 30, 2015 and 2014, respectively, and have been included in Financial Services revenues.

Derivative instruments and hedging activities

We are exposed to market risks from commitments to lend, movements in interest rates, and canceled 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). At September 30, 2015 and December 31, 2014, we had aggregate interest rate lock commitments of $335.2 million and $146.1 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we 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. We evaluate the creditworthiness of these transactions through our normal credit policies.

In order to reduce risks associated with our loan origination activities, we use other derivative financial instruments, principally cash forward placement contracts on mortgage-backed securities and whole loan investor commitments, to economically hedge the interest rate lock commitment. We enter into these derivative financial instruments based upon our portfolio of interest rate lock commitments and residential mortgage loans available for sale. We do not enter into any derivative financial instruments for trading purposes.

Forward contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price that may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we execute an interest rate lock with a loan applicant until the time the loan is sold to an investor. We also use whole loan investor commitments, which are obligations of the investor to buy loans at a specified price within a specified time period. At September 30, 2015 and December 31, 2014, we had unexpired forward contracts of $502.4 million and $371.0 million, respectively, and whole loan investor commitments of $57.5 million and $63.5 million, respectively. Changes in the fair value of interest rate lock commitments and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on interest rate lock commitments (and residential mortgage loans available-for-sale) are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 75 days.

The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):
 
 
September 30, 2015
 
December 31, 2014
 
Other Assets
 
Other Liabilities
 
Other Assets
 
Other Liabilities
Interest rate lock commitments
$
11,131

 
$
109

 
$
4,313

 
$
65

Forward contracts
219

 
4,931

 
79

 
3,653

Whole loan commitments
26

 
433

 
31

 
619

 
$
11,376

 
$
5,473

 
$
4,423

 
$
4,337


New accounting pronouncements

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-04, "Receivables - Troubled Debt Restructurings by Creditors" ("ASU 2014-04"), which clarifies when an in-substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. We adopted ASU 2014-04 on January 1, 2015 and the adoption did not have a material impact on our financial statements.

11

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", which delayed the effective date by one year. As a result, the standard is effective for us for fiscal and interim periods beginning January 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact that the standard will have on our financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-11, "Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" ("ASU 2014-11"), which makes limited amendments to ASC 860, "Transfers and Servicing." The ASU requires entities to account for repurchase-to-maturity transactions as secured borrowings, eliminates accounting guidance on linked repurchase financing transactions, and expands disclosure requirements related to certain transfers of financial assets. We adopted ASU 2014-11 on January 1, 2015 and the adoption did not have a material impact on our financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, "Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on our financial statements.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"), which amends the consolidation requirements in ASC 810, primarily related to limited partnerships and VIEs. ASU 2015-02 is effective for us beginning January 1, 2016. We do not anticipate the adoption of ASU 2015-02 to have a material impact on our financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” ("ASU 2015-03"), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of a debt discount. The guidance is effective for us beginning January 1, 2016. We currently present deferred financing costs within Other assets. Accordingly, the adoption of the new guidance will result in the reclassification of debt issuance costs as an offset to Senior notes in the Company’s condensed consolidated balance sheets, which we do not expect to be material to our financial statements.

2. Inventory and land held for sale

Major components of inventory were as follows ($000’s omitted): 
 
September 30,
2015
 
December 31,
2014
Homes under construction
$
1,605,529

 
$
1,084,137

Land under development
2,871,263

 
2,545,049

Raw land
764,140

 
762,914

 
$
5,240,932

 
$
4,392,100


We capitalize interest cost into inventory during the active development and construction of our communities. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is recorded based on the timing of home closings. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):

12

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Interest in inventory, beginning of period
$
164,384

 
$
210,603

 
$
167,638

 
$
230,922

Interest capitalized
28,006

 
32,025

 
90,105

 
98,793

Interest expensed
(36,609
)
 
(52,286
)
 
(101,962
)
 
(139,373
)
Interest in inventory, end of period
$
155,781

 
$
190,342

 
$
155,781

 
$
190,342


Land held for sale

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic
operating plans or are zoned for commercial or other development. Land held for sale was as follows ($000’s omitted):
 
September 30,
2015
 
December 31,
2014
Land held for sale, gross
$
92,040

 
$
108,725

Net realizable value reserves
(6,910
)
 
(7,535
)
Land held for sale, net
$
85,130

 
$
101,190

3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
Northeast:
 
Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania,
Rhode Island, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Texas:
 
Texas
North:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Northern California, Ohio, Washington
Southwest:
 
Arizona, Nevada, New Mexico, Southern California

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments. Evaluation of segment performance is generally based on income before income taxes. 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 our Annual Report on Form 10-K for the year ended December 31, 2014.

13

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Northeast
$
182,547

 
$
185,559

 
$
430,881

 
$
480,495

Southeast
282,051

 
253,895

 
713,090

 
668,660

Florida
247,528

 
251,486

 
659,330

 
647,146

Texas
203,319

 
216,837

 
566,307

 
595,975

North
355,070

 
426,165

 
936,712

 
949,757

Southwest
197,265

 
227,331

 
516,697

 
568,228

 
1,467,780

 
1,561,273

 
3,823,017

 
3,910,261

Financial Services
38,967

 
33,452

 
97,319

 
89,544

Consolidated revenues
$
1,506,747

 
$
1,594,725

 
$
3,920,336

 
$
3,999,805

 
 
 
 
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
Northeast (c)
$
13,208

 
$
28,568

 
$
38,065

 
$
65,873

Southeast
45,708

 
42,230

 
110,203

 
105,974

Florida
49,046

 
55,931

 
121,585

 
132,541

Texas
26,035

 
33,730

 
73,313

 
87,952

North
38,065

 
61,599

 
77,645

 
129,699

Southwest
23,838

 
40,812

 
63,589

 
93,198

Other homebuilding (a)
(30,989
)
 
(48,819
)
 
(71,104
)
 
(234,178
)
 
164,911

 
214,051

 
413,296

 
381,059

Financial Services (b)
14,365

 
10,877

 
29,409

 
41,578

Consolidated income before income taxes
$
179,276

 
$
224,928

 
$
442,705

 
$
422,637


(a)
Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Other homebuilding also included: reserve reversals of $5.7 million and $32.6 million for the three and nine months ended September 30, 2015, respectively, resulting from a legal settlement (see Note 9); losses on debt retirements totaling $8.6 million for the nine months ended September 30, 2014 (see Note 5); a charge totaling $84.5 million to increase insurance reserves for the nine months ended September 30, 2014 (see Note 9); and costs associated with the relocation of our corporate headquarters totaling $1.9 million and $7.1 million for the three and nine months ended September 30, 2014, respectively.
(b)
Financial Services included an $18.6 million reduction in loan origination liabilities for the nine months ended September 30, 2014 (see Note 9).
(c)
Northeast includes a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 9).
 

14

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



 
Operating Data by Segment
 
($000's omitted)
 
September 30, 2015
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
224,242

 
$
258,427

 
$
125,117

 
$
607,786

 
$
726,388

Southeast
230,791

 
335,065

 
116,728

 
682,584

 
739,296

Florida
241,991

 
482,604

 
138,397

 
862,992

 
990,493

Texas
213,574

 
283,422

 
102,071

 
599,067

 
658,298

North
401,963

 
590,831

 
122,367

 
1,115,161

 
1,239,610

Southwest
269,079

 
718,839

 
131,819

 
1,119,737

 
1,261,564

Other homebuilding (a)
23,889

 
202,075

 
27,641

 
253,605

 
2,843,281

 
1,605,529

 
2,871,263

 
764,140

 
5,240,932

 
8,458,930

Financial Services

 

 

 

 
342,648

 
$
1,605,529

 
$
2,871,263

 
$
764,140

 
$
5,240,932

 
$
8,801,578

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
184,974

 
$
266,229

 
$
106,077

 
$
557,280

 
$
659,224

Southeast
147,506

 
304,762

 
117,981

 
570,249

 
605,067

Florida
150,743

 
350,016

 
112,225

 
612,984

 
717,531

Texas
134,873

 
250,102

 
91,765

 
476,740

 
528,392

North
280,970

 
478,665

 
137,044

 
896,679

 
996,908

Southwest
166,056

 
698,513

 
163,421

 
1,027,990

 
1,113,592

Other homebuilding (a)
19,015

 
196,762

 
34,401

 
250,178

 
3,527,731

 
1,084,137

 
2,545,049

 
762,914

 
4,392,100

 
8,148,445

Financial Services

 

 

 

 
420,965

 
$
1,084,137

 
$
2,545,049

 
$
762,914

 
$
4,392,100

 
$
8,569,410

 
(a)
Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.
 

15

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



4. Investments in unconsolidated entities

We participate in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes. A summary of our joint ventures is presented below ($000’s omitted):
 
September 30,
2015
 
December 31,
2014
Investments in joint ventures with debt non-recourse to PulteGroup
$
24,412

 
$
26,488

Investments in other active joint ventures
17,097

 
13,880

Total investments in unconsolidated entities
$
41,509

 
$
40,368

 
 
 
 
Total joint venture debt
$
16,387

 
$
25,849

 
 
 
 
PulteGroup proportionate share of joint venture debt:
 
 
 
Joint venture debt with limited recourse guaranties
$
215

 
$
283

Joint venture debt non-recourse to PulteGroup
6,769

 
11,341

PulteGroup's total proportionate share of joint venture debt
$
6,984

 
$
11,624


We recognized income from unconsolidated joint ventures of $2.2 million and $0.3 million during the three months ended September 30, 2015 and 2014, respectively, and $4.5 million and $7.5 million during the nine months ended September 30, 2015 and 2014, respectively. During the nine months ended September 30, 2015 and 2014, we received distributions of $3.7 million and $12.4 million, respectively.

The timing of cash flows relating to a joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved by the joint venture, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial loss exposure related to joint ventures is unlikely to exceed our combined investment and limited recourse guaranty totals.


5. Debt

Our senior notes are summarized as follows ($000’s omitted):
 
September 30,
2015
 
December 31,
2014
5.25% unsecured senior notes due June 2015 (a)
$

 
$
236,452

6.50% unsecured senior notes due May 2016 (a)
463,829

 
462,009

7.625% unsecured senior notes due October 2017 (b)
122,819

 
122,752

7.875% unsecured senior notes due June 2032 (a)
299,272

 
299,239

6.375% unsecured senior notes due May 2033 (a)
398,696

 
398,640

6.00% unsecured senior notes due February 2035 (a)
299,488

 
299,469

Total senior notes – carrying value (c)
$
1,584,104

 
$
1,818,561

Estimated fair value
$
1,662,206

 
$
1,952,774


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


16

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Debt retirement

In June 2015, we retired $238.0 million of senior notes at their scheduled maturity date. During the nine months ended September 30, 2014, we retired prior to their scheduled maturity dates senior notes totaling $245.7 million and recorded losses related to these transactions totaling $8.6 million. Losses on debt repurchase transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense, net.
 
Revolving credit facility

In July 2014, we entered into a senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in July 2017.  The Revolving Credit Facility provides for maximum borrowings of $500.0 million and contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.0 billion, subject to certain conditions and availability of additional bank commitments.  The Revolving Credit Facility also provides for the issuance of letters of credit that reduce available borrowing capacity under the Revolving Credit Facility and may total no more than the greater of: (i) 50% of the size of the facility or (ii) $300.0 million in the aggregate. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined.  At September 30, 2015, we had no borrowings outstanding and $196.9 million of letters of credit issued under the Revolving Credit Facility.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum tangible net worth, a minimum interest coverage ratio, and a maximum debt to capitalization ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2015, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Term loan
On September 30, 2015, we entered into a senior unsecured $500.0 million term loan agreement (the “Term Loan”) with an initial maturity date of January 3, 2017, which can be extended at our option up to 12 months. The interest rate on the Term Loan may be based on either LIBOR or a base rate plus an applicable margin, as defined. Borrowings are interest only with the principal being due at the maturity date and are guaranteed by certain of our wholly-owned subsidiaries. The Term Loan contains customary affirmative and negative covenants for loans of this type, including the same financial covenants as under the Revolving Credit Facility. As of September 30, 2015, we were in compliance with all covenants.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $21.7 million at September 30, 2015 and $22.3 million at December 31, 2014. These notes have maturities ranging up to six years, are collateralized by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders. In September 2015, Pulte Mortgage entered into an amended and restated Repurchase Agreement that extended the effective date to September 2016. The maximum aggregate commitment under the Repurchase Agreement was initially set at $175.0 million, increases to $200.0 million on December 1, 2015, decreases to $175.0 million on January 19, 2016, and increases again to $200.0 million on July 29, 2016. The purpose for the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $107.5 million and $140.2 million outstanding under the Repurchase Agreement at September 30, 2015 and December 31, 2014, respectively, and was in compliance with all of its covenants and requirements as of such dates.


17

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



6. Shareholders’ equity

During the nine months ended September 30, 2015, we declared cash dividends totaling $86.3 million and repurchased 21.2 million shares under our repurchase authorization for a total of $433.7 million. At September 30, 2015, we had remaining authorization to repurchase $304.8 million of common shares. During the nine months ended September 30, 2014, we declared cash dividends totaling $56.7 million and repurchased 7.7 million shares under our repurchase authorization for a total of $147.8 million.

Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. During the nine months ended September 30, 2015 and 2014, employees surrendered shares valued at $9.0 million and $7.2 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

7. Income taxes

Our effective tax rate for both the three and nine months ended September 30, 2015 was 39.9%, compared to 37.5% and 39.1% respectively, for the same periods in 2014. In these periods, our effective tax rate exceeded the federal statutory tax rate due to a number of factors, including state income taxes, changes to the valuation allowance related to deferred tax assets, tax law changes or other circumstances that impact the value of deferred tax assets, and changes in unrecognized tax benefits.

The accounting for deferred taxes is based upon estimates of future results.  Differences between estimated and actual results could result in changes in the valuation of deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.  During the nine months ended September 30, 2015 and 2014, we recorded adjustments to deferred tax assets resulting from certain states enacting tax law changes along with internal reorganizations. The estimated impact of such changes was recorded to income tax expense during the respective periods.

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At September 30, 2015 and December 31, 2014, we had $33.2 million and $32.9 million, respectively, of gross unrecognized tax benefits and $17.5 million and $17.3 million, respectively, of related accrued interest and penalties. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $15.0 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements.

We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statutes of limitation for our major tax jurisdictions generally remain open for examination for tax years 2004 to 2015.


18

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



8. 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.

Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted): 
Financial Instrument
 
Fair Value
Hierarchy
 
Fair Value
September 30,
2015
 
December 31,
2014
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
Residential mortgage loans available-for-sale
 
Level 2
 
$
270,658

 
$
339,531

Interest rate lock commitments
 
Level 2
 
11,022

 
4,248

Forward contracts
 
Level 2
 
(4,712
)
 
(3,574
)
Whole loan commitments
 
Level 2
 
(407
)
 
(588
)
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
House and land inventory
 
Level 3
 
$
1,262

 
$
13,925

 
 
 
 
 
 
 
Disclosed at fair value:
 
 
 
 
 
 
Cash and equivalents (including restricted cash)
 
Level 1
 
$
760,095

 
$
1,309,220

Financial Services debt
 
Level 2
 
107,508

 
140,241

Term loan
 
Level 2
 
500,000

 

Senior notes
 
Level 2
 
1,662,206

 
1,952,774


Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for 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. Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain 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 non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

The carrying amounts of cash and equivalents, Financial Services debt, the Term Loan, and the Revolving Credit Facility approximate their fair values due to their short-term nature and floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $1.6 billion and $1.8 billion at September 30, 2015 and December 31, 2014, respectively.

19

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



9. Commitments and contingencies

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If a loan is determined to be faulty, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S. Most requests received to date relate to make-whole payments on loans that have been foreclosed. Requests undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment.

In the first quarter of 2014, we reduced our loan origination liabilities by $18.6 million based on settlements of various pending repurchase requests combined with then current conditions. Given the ongoing volatility in the mortgage industry, changes in values of underlying collateral over time, and other uncertainties regarding the ultimate resolution of these claims, actual costs could differ from our current estimates. Changes in these liabilities were as follows ($000's omitted):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Liabilities, beginning of period
$
58,238

 
$
62,707

 
$
58,222

 
$
124,956

Reserves provided and adjustments
81

 

 
220

 
(18,604
)
Payments
(23
)
 
(1,991
)
 
(146
)
 
(45,636
)
Liabilities, end of period
$
58,296

 
$
60,716

 
$
58,296

 
$
60,716


Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $196.9 million and $1.0 billion, respectively, at September 30, 2015, and $212.1 million and $1.0 billion, respectively, at December 31, 2014. In the event any such letter of credit or surety bond is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.


20

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Litigation and regulatory matters

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

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

On September 14, 2012, Applecross Club Operations (“Applecross”) filed a complaint for breach of contract and promissory estoppel in Applecross v. Pulte Homes of PA, et al.  The complaint alleged that we induced Applecross to purchase a golf course from us in 2010 by promising to build over 1,000 residential units in a planned community located outside Philadelphia, Pennsylvania.  On September 28, 2015, the jury in the case found in favor of Applecross and awarded damages in the amount of $20.0 million.  We believe we have meritorious defenses and have filed post-trial motions seeking to, among other things, overturn the jury verdict.  If unsuccessful, we plan to appeal the award.  However, in light of the jury’s verdict, we recorded a reserve of $20.0 million in the three months ended September 30, 2015, which is reflected in other expense, net.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Warranty liabilities, beginning of period
$
54,502

 
$
61,986

 
$
65,389

 
$
63,992

Reserves provided
12,575

 
12,375

 
32,586

 
33,036

Payments
(14,316
)
 
(12,674
)
 
(45,793
)
 
(34,586
)
Other adjustments
1,773

 
(222
)
 
2,352

 
(977
)
Warranty liabilities, end of period
$
54,534

 
$
61,465

 
$
54,534

 
$
61,465



21

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage generally requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omissions, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates comprise a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

Our recorded reserves for all such claims totaled $702.5 million and $710.2 million at September 30, 2015 and December 31, 2014, respectively, the vast majority of which relates to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 73% and 72% of the total general liability reserves at September 30, 2015 and December 31, 2014, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

During the three and nine months ended September 30, 2015, we recorded reserve reversals of $5.7 million and $32.6 million, respectively, resulting from a legal settlement. During the three months ended June 30, 2014, we recorded additional reserves totaling $84.5 million, which were primarily driven by estimated costs associated with siding repairs in certain previously completed communities that, in turn, impacted actuarial estimates for potential future claims. These adjustments are reflected in "Reserves provided, net" in the below table. Adjustments to reserves are recorded in the period in which the change in estimate occurs. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs. Costs associated with our insurance

22

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
700,133

 
$
746,446

 
$
710,245

 
$
668,100

Reserves provided, net
14,021

 
21,385

 
20,467

 
137,666

Payments
(11,670
)
 
(33,168
)
 
(28,228
)
 
(71,103
)
Balance, end of period
$
702,484

 
$
734,663

 
$
702,484

 
$
734,663


10. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by each of our 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.


23

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



 CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2015
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$

 
$
688,224

 
$
45,929

 
$

 
$
734,153

Restricted cash

 
24,942

 
1,000

 

 
25,942

House and land inventory

 
5,240,932

 

 

 
5,240,932

Land held for sale

 
84,096

 
1,034

 

 
85,130

Land, not owned, under option
       agreements

 
102,548

 

 

 
102,548

Residential mortgage loans available-
       for-sale

 

 
270,658

 

 
270,658

Investments in unconsolidated entities
88

 
36,955

 
4,466

 

 
41,509

Other assets
26,073

 
516,775

 
95,114

 

 
637,962

Intangible assets

 
113,440

 

 

 
113,440

Deferred tax assets, net
1,541,759

 
13

 
7,532

 

 
1,549,304

Investments in subsidiaries and
       intercompany accounts, net
5,222,327

 
286,642

 
6,100,670

 
(11,609,639
)
 

 
$
6,790,247

 
$
7,094,567

 
$
6,526,403

 
$
(11,609,639
)
 
$
8,801,578

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
       accrued and other liabilities
$
83,632

 
$
1,715,283

 
$
188,540

 
$

 
$
1,987,455

Income tax liabilities
50,906

 

 

 

 
50,906

Financial Services debt

 

 
107,508

 

 
107,508

Term loan
500,000

 





 
500,000

Senior notes
1,584,104

 

 

 

 
1,584,104

Total liabilities
2,218,642

 
1,715,283

 
296,048

 

 
4,229,973

Total shareholders’ equity
4,571,605

 
5,379,284

 
6,230,355

 
(11,609,639
)
 
4,571,605

 
$
6,790,247

 
$
7,094,567

 
$
6,526,403

 
$
(11,609,639
)
 
$
8,801,578



24

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2014
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
7,454

 
$
1,157,307

 
$
128,101

 
$

 
$
1,292,862

Restricted cash
3,710

 
1,513

 
11,135

 

 
16,358

House and land inventory

 
4,391,445

 
655

 

 
4,392,100

Land held for sale

 
100,156

 
1,034

 

 
101,190

Land, not owned, under option
       agreements

 
30,186

 

 

 
30,186

Residential mortgage loans available-
       for-sale

 

 
339,531

 

 
339,531

Securities purchased under agreements to resell
22,000

 

 
(22,000
)
 

 

Investments in unconsolidated entities
74

 
36,126

 
4,168

 

 
40,368

Other assets
34,214

 
421,145

 
57,673

 

 
513,032

Intangible assets

 
123,115

 

 

 
123,115