PHM 06/30/2015 10-Q

______________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 17, 2015: 352,790,013 ______________________________________________________________________________________________________

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)
 
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
(Note)
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
460,361

 
$
1,292,862

Restricted cash
17,174

 
16,358

House and land inventory
4,888,560

 
4,392,100

Land held for sale
88,513

 
101,190

Land, not owned, under option agreements
98,264

 
30,186

Residential mortgage loans available-for-sale
269,544

 
339,531

Investments in unconsolidated entities
40,232

 
40,368

Other assets
561,034

 
513,032

Intangible assets
116,665

 
123,115

Deferred tax assets, net
1,617,609

 
1,720,668

 
$
8,157,956

 
$
8,569,410

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable, including book overdrafts of $40,935 and $32,586 in 2015 and 2014, respectively
$
290,436

 
$
270,516

Customer deposits
217,315

 
142,642

Accrued and other liabilities
1,292,321

 
1,343,774

Income tax liabilities
48,774

 
48,722

Financial Services debt
119,271

 
140,241

Senior notes
1,583,580

 
1,818,561

 
3,551,697

 
3,764,456

 
 
 
 
Shareholders' equity
4,606,259

 
4,804,954

 
 
 
 
 
$
8,157,956

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
Home sale revenues
$
1,243,077

 
$
1,246,462

 
$
2,331,235

 
$
2,334,477

Land sale revenues
6,460

 
8,527

 
24,002

 
14,511

 
1,249,537

 
1,254,989

 
2,355,237

 
2,348,988

Financial Services
30,754

 
31,198

 
58,352

 
56,093

Total revenues
1,280,291

 
1,286,187

 
2,413,589

 
2,405,081

 
 
 
 
 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
Home sale cost of revenues
953,280

 
952,692

 
1,794,425

 
1,781,295

Land sale cost of revenues
5,312

 
6,832

 
18,691

 
11,843

 
958,592

 
959,524

 
1,813,116

 
1,793,138

Financial Services expenses
20,767

 
22,114

 
43,308

 
25,436

Selling, general and administrative expenses
130,119

 
229,767

 
291,431

 
374,655

Other expense, net
4,998

 
9,324

 
6,134

 
23,155

Interest income
(856
)
 
(1,115
)
 
(1,955
)
 
(2,226
)
Interest expense
208

 
203

 
395

 
416

Equity in earnings of unconsolidated entities
(1,164
)
 
(1,311
)
 
(2,271
)
 
(7,202
)
Income before income taxes
167,627

 
67,681

 
263,431

 
197,709

Income tax expense
64,303

 
25,801

 
105,136

 
81,010

Net income
$
103,324

 
$
41,880

 
$
158,295

 
$
116,699

 
 
 
 
 
 
 
 
Per share:
 
 
 
 
 
 
 
Basic earnings
$
0.28

 
$
0.11

 
$
0.43

 
$
0.31

Diluted earnings
$
0.28

 
$
0.11

 
$
0.43

 
$
0.30

Cash dividends declared
$
0.08

 
$
0.05

 
$
0.16

 
$
0.10

 
 
 
 
 
 
 
 
Number of shares used in calculation:



 
 
 
 
Basic
361,009

 
376,072

 
363,863

 
377,410

Effect of dilutive securities
3,232

 
3,592

 
3,297

 
3,703

Diluted
364,241

 
379,664

 
367,160

 
381,113




See accompanying Notes to Condensed Consolidated Financial Statements.


4

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
103,324

 
$
41,880

 
$
158,295

 
$
116,699

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

 
21

 
42

 
61

Other comprehensive income
21

 
21

 
42

 
61

 
 
 
 
 
 
 
 
Comprehensive income
$
103,345

 
$
41,901

 
$
158,337

 
$
116,760





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
620

 
6

 
7,216

 
—

 
—

 
7,222

Stock issuances, net of cancellations
442

 
4

 
7,419

 
—

 
—

 
7,423

Dividends declared
—

 
—

 
8

 
—

 
(58,235
)
 
(58,227
)
Share repurchases
(15,702
)
 
(157
)
 
—

 
—

 
(321,909
)
 
(322,066
)
Share-based compensation
—

 
—

 
10,233

 
—

 
—

 
10,233

Excess tax benefits (deficiencies) from share-based awards
—

 
—

 
(1,617
)
 
—

 
—

 
(1,617
)
Net income
—

 
—

 
—

 
—

 
158,295

 
158,295

Other comprehensive income
—

 
—

 
—

 
42

 
—

 
42

Shareholders' Equity, June 30, 2015
354,819

 
$
3,548

 
$
3,096,255

 
$
(648
)
 
$
1,507,104

 
$
4,606,259

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity, January 1, 2014
381,300

 
$
3,813

 
$
3,052,016

 
$
(795
)
 
$
1,593,918

 
$
4,648,952

Stock option exercises
532

 
5

 
5,784

 
—

 
—

 
5,789

Stock issuances, net of cancellations
(68
)
 
(1
)
 
1

 
—

 
—

 
—

Dividends declared
—

 
—

 
—

 
—

 
(37,979
)
 
(37,979
)
Share repurchases
(5,311
)
 
(53
)
 
—

 
—

 
(103,658
)
 
(103,711
)
Share-based compensation
—

 
—

 
8,874

 
—

 
19

 
8,893

Excess tax benefits (deficiencies) from share-based awards
—

 
—

 
(660
)
 
—

 
—

 
(660
)
Net income
—

 
—

 
—

 
—

 
116,699

 
116,699

Other comprehensive income
—

 
—

 
—

 
61

 
—

 
61

Shareholders' Equity, June 30, 2014
376,453

 
$
3,764

 
$
3,066,015

 
$
(734
)
 
$
1,568,999

 
$
4,638,044



See accompanying Notes to Condensed Consolidated Financial Statements.

6

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
158,295

 
$
116,699

Adjustments to reconcile net income to net cash flows provided by (used in)
      operating activities:
 
 
 
Deferred income tax expense
103,059

 
85,028

Depreciation and amortization
21,853

 
18,904

Share-based compensation expense
14,654

 
16,797

Equity in earnings of unconsolidated entities
(2,271
)
 
(7,202
)
Distributions of earnings from unconsolidated entities
1,500

 
4,777

Loss on debt retirements
—

 
8,584

Other non-cash, net
10,090

 
6,649

Increase (decrease) in cash due to:
 
 
 
Restricted cash
(4,526
)
 
(726
)
Inventories
(485,676
)
 
(249,861
)
Residential mortgage loans available-for-sale
70,123

 
64,672

Other assets
(57,054
)
 
(15,709
)
Accounts payable, accrued and other liabilities
(21,202
)
 
38,539

Income tax liabilities
52

 
(12,869
)
Net cash provided by (used in) operating activities
(191,103
)
 
74,282

Cash flows from investing activities:
 
 
 
Distributions from unconsolidated entities
906

 
7,577

Investments in unconsolidated entities
—

 
(9
)
Net change in loans held for investment
9,634

 
(6,791
)
Change in restricted cash related to letters of credit
3,710

 
(28,166
)
Proceeds from the sale of property and equipment
400

 
98

Capital expenditures
(23,115
)
 
(33,021
)
Net cash provided by (used in) investing activities
(8,465
)
 
(60,312
)
Cash flows from financing activities:
 
 
 
Financial Services borrowings (repayments)
(20,970
)
 
(47,158
)
Other borrowings (repayments)
(237,994
)
 
(240,133
)
Stock option exercises
7,222

 
5,789

Share repurchases
(322,066
)
 
(103,711
)
Dividends paid
(59,125
)
 
(38,152
)
Net cash provided by (used in) financing activities
(632,933
)
 
(423,365
)
Net increase (decrease) in cash and equivalents
(832,501
)
 
(409,395
)
Cash and equivalents at beginning of period
1,292,862

 
1,580,329

Cash and equivalents at end of period
$
460,361

 
$
1,170,934

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
(1,911
)
 
$
(328
)
Income taxes paid (refunded), net
$
(1,685
)
 
$
(2,487
)
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, 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 United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with 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. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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
 
Six Months Ended
June 30,
 
June 30,
2015
 
2014
 
2015
 
2014
Write-off of deposits and pre-acquisition costs
$
1,241

 
$
1,688

 
$
3,110

 
$
3,152

Loss on debt retirements (Note 5)
—

 
—

 
—

 
8,584

Amortization of intangible assets
3,225

 
3,275

 
6,450

 
6,550

Miscellaneous, net
532

 
4,361

 
(3,426
)
 
4,869

 
$
4,998

 
$
9,324

 
$
6,134

 
$
23,155


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 4.3 million and 4.5 million potentially dilutive instruments, including stock options, unvested

8
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



restricted shares and restricted share units for the three and six months ended June 30, 2015, respectively, and 7.1 million and 7.3 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units for the three and six months ended June 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
 
Six Months Ended
June 30,
 
June 30,
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
103,324

 
$
41,880

 
$
158,295

 
$
116,699

Less: earnings distributed to participating securities
(185
)
 
(130
)
 
(373
)
 
(263
)
Less: undistributed earnings allocated to participating securities
(475
)
 
(159
)
 
(647
)
 
(546
)
Numerator for basic earnings per share
$
102,664

 
$
41,591

 
$
157,275

 
$
115,890

Add back: undistributed earnings allocated to participating securities
475

 
159

 
647

 
546

Less: undistributed earnings reallocated to participating securities
(471
)
 
(157
)
 
(641
)
 
(540
)
Numerator for diluted earnings per share
$
102,668

 
$
41,593

 
$
157,281

 
$
115,896

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic shares outstanding
361,009

 
376,072

 
363,863

 
377,410

Effect of dilutive securities
3,232

 
3,592

 
3,297

 
3,703

Diluted shares outstanding
364,241

 
379,664

 
367,160

 
381,113

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.28

 
$
0.11

 
$
0.43

 
$
0.31

Diluted
$
0.28

 
$
0.11

 
$
0.43

 
$
0.30


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.


9
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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 June 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 $98.3 million and $30.2 million at June 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 June 30, 2015 and December 31, 2014 ($000’s omitted): 
 
June 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
$
68,152

 
$
1,115,067

 
$
35,270

 
$
56,039

 
$
891,506

 
$
12,533

Other land options
78,922

 
1,091,393

 
62,994

 
71,241

 
999,079

 
17,653

 
$
147,074

 
$
2,206,460

 
$
98,264

 
$
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 June 30, 2015 and December 31, 2014, residential mortgage loans available-for-sale had an aggregate fair value of $269.5 million and $339.5 million, respectively, and an aggregate outstanding principal balance of $264.5 million and $327.4 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.9) million and $0.8 million for the three months ended June 30, 2015 and 2014, respectively, and $(0.8) million and $1.6 million for the six months ended June 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 $17.6 million and $17.5 million for the three months ended June 30, 2015 and 2014, respectively, and $33.8 million and $30.5 million for the six months ended June 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 June 30, 2015 and December 31, 2014, we had aggregate interest rate lock commitments of $259.9 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

10
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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 extend an interest rate lock to 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 June 30, 2015 and December 31, 2014, we had unexpired forward contracts of $462.0 million and $371.0 million, respectively, and whole loan investor commitments of $26.4 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 location in the Condensed Consolidated Balance Sheets is summarized below ($000’s omitted):
 
 
June 30, 2015
 
December 31, 2014
 
Other Assets
 
Other Liabilities
 
Other Assets
 
Other Liabilities
Interest rate lock commitments
$
5,753

 
$
512

 
$
4,313

 
$
65

Forward contracts
3,534

 
315

 
79

 
3,653

Whole loan commitments
146

 
70

 
31

 
619

 
$
9,433

 
$
897

 
$
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.

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 July 2015, the FASB approved delaying the effective date by one year. As a result, ASU 2014-09 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.


11
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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): 
 
June 30,
2015
 
December 31,
2014
Homes under construction
$
1,375,837

 
$
1,084,137

Land under development
2,802,464

 
2,545,049

Raw land
710,259

 
762,914

 
$
4,888,560

 
$
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):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Interest in inventory, beginning of period
$
166,887

 
$
225,619

 
$
167,638

 
$
230,922

Interest capitalized
31,296

 
31,455

 
62,099

 
66,768

Interest expensed
(33,799
)
 
(46,471
)
 
(65,353
)
 
(87,087
)
Interest in inventory, end of period
$
164,384

 
$
210,603

 
$
164,384

 
$
210,603


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):
 
June 30,
2015
 
December 31,
2014
Land held for sale, gross
$
95,742

 
$
108,725

Net realizable value reserves
(7,229
)
 
(7,535
)
Land held for sale, net
$
88,513

 
$
101,190


12
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Northeast
$
137,181

 
$
153,920

 
$
248,334

 
$
294,936

Southeast
245,250

 
232,217

 
431,038

 
414,765

Florida
208,740

 
205,368

 
411,802

 
395,660

Texas
185,489

 
204,297

 
362,988

 
379,138

North
309,816

 
282,581

 
581,642

 
523,592

Southwest
163,061

 
176,606

 
319,433

 
340,897

 
1,249,537

 
1,254,989

 
2,355,237

 
2,348,988

Financial Services
30,754

 
31,198

 
58,352

 
56,093

Consolidated revenues
$
1,280,291

 
$
1,286,187

 
$
2,413,589

 
$
2,405,081

 
 
 
 
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
Northeast
$
15,330

 
$
19,809

 
$
24,857

 
$
37,304

Southeast
39,871

 
38,265

 
64,495

 
63,744

Florida
39,315

 
42,254

 
72,539

 
76,610

Texas
24,487

 
31,240

 
47,278

 
54,222

North
26,475

 
37,360

 
39,580

 
68,100

Southwest
20,597

 
23,824

 
39,751

 
52,386

Other homebuilding (a)
(8,435
)
 
(134,179
)
 
(40,113
)
 
(185,359
)
 
157,640

 
58,573

 
248,387

 
167,007

Financial Services (b)
9,987

 
9,108

 
15,044

 
30,702

Consolidated income before income taxes
$
167,627

 
$
67,681

 
$
263,431

 
$
197,709


(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: a reserve reversal of $26.9 million resulting from a legal settlement for the three and six months ended June 30, 2015; losses on debt retirements totaling $8.6 million for the six months ended June 30, 2014; a charge totaling $84.5 million to increase insurance reserves for the three and six months ended June 30, 2014; and costs associated with the relocation of our corporate headquarters totaling $3.7 million and $5.7 million for the three and six months ended June 30, 2014, respectively.
(b)
Financial Services included an $18.6 million reduction in loan origination liabilities for the six months ended June 30, 2014.
 

14
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



 
Operating Data by Segment
 
($000's omitted)
 
June 30, 2015
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
226,696

 
$
249,388

 
$
136,046

 
$
612,130

 
$
711,873

Southeast
200,265

 
353,262

 
94,985

 
648,512

 
694,403

Florida
191,166

 
464,515

 
131,019

 
786,700

 
908,413

Texas
180,329

 
274,441

 
85,605

 
540,375

 
601,040

North
332,948

 
548,565

 
99,888

 
981,401

 
1,101,250

Southwest
221,631

 
722,448

 
134,224

 
1,078,303

 
1,197,475

Other homebuilding (a)
22,802

 
189,845

 
28,492

 
241,139

 
2,601,545

 
1,375,837

 
2,802,464

 
710,259

 
4,888,560

 
7,815,999

Financial Services
—

 
—

 
—

 
—

 
341,957

 
$
1,375,837

 
$
2,802,464

 
$
710,259

 
$
4,888,560

 
$
8,157,956

 
 
 
 
 
 
 
 
 
 
 
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):
 
June 30,
2015
 
December 31,
2014
Investments in joint ventures with debt non-recourse to PulteGroup
$
25,163

 
$
26,488

Investments in other active joint ventures
15,069

 
13,880

Total investments in unconsolidated entities
$
40,232

 
$
40,368

 
 
 
 
Total joint venture debt
$
24,841

 
$
25,849

 
 
 
 
PulteGroup proportionate share of joint venture debt:
 
 
 
Joint venture debt with limited recourse guaranties
$
45

 
$
283

Joint venture debt non-recourse to PulteGroup
11,328

 
11,341

PulteGroup's total proportionate share of joint venture debt
$
11,373

 
$
11,624


We recognized income from unconsolidated joint ventures of $1.2 million and $1.3 million during the three months ended June 30, 2015 and 2014, respectively, and $2.3 million and $7.2 million during the six months ended June 30, 2015 and 2014, respectively. During the six months ended June 30, 2015 and 2014, we received distributions of $2.4 million and $12.4 million, respectively.

The timing of cash obligations under 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):
 
June 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)
463,222

 
462,009

7.625% unsecured senior notes due October 2017 (b)
122,797

 
122,752

7.875% unsecured senior notes due June 2032 (a)
299,261

 
299,239

6.375% unsecured senior notes due May 2033 (a)
398,677

 
398,640

6.00% unsecured senior notes due February 2035 (a)
299,623

 
299,469

Total senior notes – carrying value (c)
$
1,583,580

 
$
1,818,561

Estimated fair value
$
1,659,964

 
$
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 six months ended June 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 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 million in the aggregate. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate or Base Rate plus an applicable margin, as defined.  At June 30, 2015, we had no borrowings outstanding and $193.4 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 June 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.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $22.3 million at both June 30, 2015 and 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 2014, Pulte Mortgage entered into an amendment to the Repurchase Agreement that extended the effective date to September 2015 and established a borrowing capacity of $150.0 million. The capacity reduced to $99.8 million in February 2015 and increased again to $150.0 million in June 2015. The purpose for the change in capacity during the term of the agreement is to lower associated fees during seasonally low volume periods when the additional capacity is unnecessary. 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 $119.3 million and $140.2 million outstanding under the Repurchase Agreement at June 30, 2015 and December 31, 2014, respectively, and was in compliance with all of its covenants and requirements as of such dates.

6. Shareholders’ equity

During the six months ended June 30, 2015, we declared two cash dividends of $0.08 per common share each for a total of $58.2 million and repurchased 15.3 million shares under our repurchase authorization for a total of $313.0 million. At June 30, 2015, we had remaining authorization to repurchase $425.4 million of common shares. During the six months ended June 30, 2014, we declared two cash dividends of $0.05 per common share each for a total of $38.0 million and repurchased 5.0 million shares under our repurchase authorization for a total of $97.6 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 six months ended June 30, 2015 and 2014, employees surrendered shares valued at $9.0 million and $6.1 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

17
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



7. Income taxes

Our effective tax rate is affected by a number of factors, including changes to the valuation allowance related to our deferred tax assets, tax law changes or other circumstances that impact the value of our deferred tax assets, and changes in our unrecognized tax benefits. For the six months ended June 30, 2015 and 2014, our effective tax rate exceeded our blended statutory tax rate due to the effects of these factors.

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 our 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 six months ended June 30, 2015 and 2014, we recorded adjustments to our deferred tax assets resulting from changes in our prospective effective tax rate resulting from certain states enacting changes to tax laws along with other factors. 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 both June 30, 2015 and December 31, 2014, we had $32.9 million of gross unrecognized tax benefits and $17.3 million 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 $14.7 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 of the 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
June 30,
2015
 
December 31,
2014
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
Residential mortgage loans available-for-sale
 
Level 2
 
$
269,544

 
$
339,531

Interest rate lock commitments
 
Level 2
 
5,241

 
4,248

Forward contracts
 
Level 2
 
3,219

 
(3,574
)
Whole loan commitments
 
Level 2
 
76

 
(588
)
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
House and land inventory
 
Level 3
 
$
2,590

 
$
13,925

 
 
 
 
 
 
 
Disclosed at fair value:
 
 
 
 
 
 
Cash and equivalents (including restricted cash)
 
Level 1
 
$
477,535

 
$
1,309,220

Financial Services debt
 
Level 2
 
119,271

 
140,241

Senior notes
 
Level 2
 
1,659,964

 
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, 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 June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Liabilities, beginning of period
$
58,226

 
$
102,972

 
$
58,222

 
$
124,956

Reserves provided and adjustments
81

 
—

 
139

 
(18,604
)
Payments
(69
)
 
(40,265
)
 
(123
)
 
(43,645
)
Liabilities, end of period
$
58,238

 
$
62,707

 
$
58,238

 
$
62,707


The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. In 2011, the bank notified us that it had been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions, which included $162 million of loans originated by Centex's mortgage subsidiary. The plaintiffs seek unspecified compensatory and/or rescissory damages on behalf of persons who purchased the securities. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. We cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company. We are aware of six other RMBS transactions with similar indemnity provisions that include an aggregate $116 million of loans originated by Centex's mortgage subsidiary, and we are not aware of any current or threatened legal proceedings regarding those transactions.


20
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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 $193.4 million and $999.1 million, respectively, at June 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 bonds are 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.

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.

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Warranty liabilities, beginning of period
$
57,401

 
$
61,632

 
$
65,389

 
$
63,992

Reserves provided
11,170

 
11,881

 
20,011

 
20,661

Payments
(14,648
)
 
(10,837
)
 
(31,477
)
 
(21,912
)
Other adjustments
579

 
(690
)
 
579

 
(755
)
Warranty liabilities, end of period
$
54,502

 
$
61,986

 
$
54,502

 
$
61,986



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 $700.1 million and $710.2 million at June 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 June 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 months ended June 30, 2015, we recorded a reserve reversal of $26.9 million 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

22
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



costs could differ significantly from estimated costs. Costs associated with our insurance programs are classified within selling, general, and administrative expenses.

Changes in these liabilities were as follows ($000's omitted):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Balance, beginning of period
$
720,767

 
$
664,411

 
$
710,245

 
$
668,100

Reserves provided, net
(9,386
)
 
101,427

 
6,446

 
116,281

Payments
(11,248
)
 
(19,392
)
 
(16,558
)
 
(37,935
)
Balance, end of period
$
700,133

 
$
746,446

 
$
700,133

 
$
746,446


10. Supplemental Guarantor information

All of our 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.


23
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



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

 
$
403,725

 
$
56,636

 
$
—

 
$
460,361

Restricted cash
—

 
3,974

 
13,200

 
—

 
17,174

House and land inventory
—

 
4,888,410

 
150

 
—

 
4,888,560

Land held for sale
—

 
87,479

 
1,034

 
—

 
88,513

Land, not owned, under option
       agreements
—

 
98,264

 
—

 
—

 
98,264

Residential mortgage loans available-
       for-sale
—

 
—

 
269,544

 
—

 
269,544

Investments in unconsolidated entities
84

 
35,848

 
4,300

 
—

 
40,232

Other assets
24,532

 
466,360

 
70,142

 
—

 
561,034

Intangible assets
—

 
116,665

 
—

 
—

 
116,665

Deferred tax assets, net
1,609,795

 
13

 
7,801

 
—

 
1,617,609

Investments in subsidiaries and
       intercompany accounts, net
4,671,339

 
729,467

 
6,024,707

 
(11,425,513
)
 
—

 
$
6,305,750

 
$
6,830,205

 
$
6,447,514

 
$
(11,425,513
)
 
$
8,157,956

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
       accrued and other liabilities
$
67,137

 
$
1,558,523

 
$
174,412

 
$
—

 
$
1,800,072

Income tax liabilities
48,774

 
—

 
—

 
—

 
48,774

Financial Services debt
—

 
—

 
119,271

 
—

 
119,271

Senior notes
1,583,580

 
—

 
—

 
—

 
1,583,580

Total liabilities
1,699,491

 
1,558,523

 
293,683

 
—

 
3,551,697

Total shareholders’ equity
4,606,259

 
5,271,682

 
6,153,831

 
(11,425,513
)
 
4,606,259

 
$
6,305,750

 
$
6,830,205

 
$
6,447,514

 
$
(11,425,513
)
 
$
8,157,956



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

Deferred tax assets, net
1,712,853

 
15

 
7,800

 
—

 
1,720,668

Investments in subsidiaries and
       intercompany accounts, net
4,963,831

 
967,032

 
6,359,441

 
(12,290,304
)
 
—

 
$
6,744,136

 
$
7,228,040

 
$
6,887,538

 
$
(12,290,304
)
 
$
8,569,410

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
       accrued and other liabilities
$
71,874

 
$
1,514,954

 
$
170,104

 
$
—

 
$
1,756,932

Income tax liabilities
48,747

 
(25
)
 
—

 
—

 
48,722

Financial Services debt
—

 
—

 
140,241

 
—

 
140,241

Senior notes
1,818,561

 
—

 
—

 
—

 
1,818,561

Total liabilities
1,939,182

 
1,514,929

 
310,345

 
—

 
3,764,456

Total shareholders’ equity
4,804,954

 
5,713,111

 
6,577,193

 
(12,290,304
)
 
4,804,954

 
$
6,744,136

 
$
7,228,040

 
$
6,887,538

 
$
(12,290,304
)
 
$
8,569,410